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                                   FORM 10-K

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                               ----------------

                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934

                   For the Fiscal Year Ended: March 31, 2000

                       Commission File Number:333-78957

                               ----------------

                         TVN Entertainment Corporation
            (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                            <C>
                  Delaware                                       95-4138203
       (State or other jurisdiction of                        (I.R.S. Employer
       incorporation or organization)                       Identification No.)
</TABLE>

                           2901 West Alameda Avenue
                               Burbank, CA 91505
         (Address of principal executive offices, including zip code)

       Registrant's telephone number, including area code: 818-526-5000

       Securities registered pursuant to Section 12(b) of the Act: None

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

                                     None
                               (Title of class)

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

  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the 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]

  As of March 31, 2000. the number of outstanding shares of the registrant's
Common Stock was 173,350.

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                         TVN ENTERTAINMENT CORPORATION

                REPORT FOR THE FISCAL YEAR ENDED MARCH 31, 2000

                               TABLE OF CONTENTS

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                                                                           Page
                                                                           ----
                                     PART I

 <C>        <S>                                                            <C>
 ITEM 1.    BUSINESS....................................................     1
 ITEM 2.    PROPERTIES..................................................    11
 ITEM 3.    LEGAL PROCEEDINGS...........................................    12
 ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........    12

                                    PART II

 ITEM 5.    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....    13
 ITEM 6.    SELECTED HISTORICAL FINANCIAL DATA..........................    13
 ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
             AND RESULTS OF OPERATIONS..................................    15
 ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..    37
 ITEM 8.    CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....    38
 ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
             AND FINANCIAL DISCLOSURE...................................    38

                                    PART III

 ITEM 10.   EXECUTIVE OFFICERS AND DIRECTORS............................    39
 ITEM 11.   EXECUTIVE COMPENSATION......................................    42
 ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
             MANAGEMENT.................................................    45
 ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............    46

                                    PART IV

 ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM      49
             8-K........................................................
</TABLE>
<PAGE>

                                    PART I

Item 1. Business

TVN Entertainment Corporation

  TVN Entertainment Corporation (TVN) was founded in 1987 by current Chairman
and Chief Executive Officer, Stuart Z. Levin, to provide satellite delivered
pay-per-view movies and events to owners of large home satellite dishes.
During the past fiscal year, our principal business was to offer TVN Digital
Cable Television Service (DCTV Service), which was launched in 1997 to provide
digital television programming and related transactional services to cable
operators utilizing newly developed digital cable technology. Our DCTV Service
combined our own digital delivery system with programming content and
transactional support services to enable cable operators to expand the number
of channels and programs they could offer their subscribers, without the need
to rewire or significantly upgrade their existing analog cable systems.

Products and services

 Digital Cable Television Service

  Our DCTV Service has enabled cable operators to substantially enhance the
variety and quality of programming choices offered by them during fiscal year
2000, through a more efficient use of their cable transmission capacity, by
utilizing cable industry standard digital compression and encryption
technology that allows eight or more digital channels to be delivered via one
analog channel. Through long-standing relationships with the major and leading
independent film studios and sports, special event and adult content
distributors, developed in connection with our analog direct-to-home satellite
pay-per-view (PPV) movie and event service, we were able to offer a broad
range of popular PPV programming in a digital format to cable operators and
their subscribers.

  Our DCTV Service has enabled smaller cable operator affiliates to expand the
number of video channels they could offer their digital subscribers from 60
analog video channels to over 100 combined digital and analog channels. During
fiscal year 2000, our typical TVN Digital Cable Television programming package
provided the following services:

  . up to 32 digital channels of pay-per-view movies and events;

  . a channel showing previews of currently offered films and coming
    attractions;

  . adult programming;

  . 40 CD quality digital music channels from DMX, a leading provider of
    digital music services to cable operators for distribution to their
    subscribers;

  . the TV Guide interactive on screen program guide which displays
    comprehensive program listings, including each system's analog channels
    and local broadcasts, and provides parental control;

  . access to new digital basic and additional premium channels selected by
    the cable operator; and

  . continued access to the system's existing analog cable and local
    channels.

  DCTV support services provided by us for the cable operator include:

  . automated ordering and authorization of pay-per-view movies and events;

  . customer service and billing;

  . engineering and marketing support;

  . studio licensing and fee administration; and

  . the installation of equipment at the cable operator's plant that is
    capable of receiving television programming in digital format.

                                       1
<PAGE>

  The typical monthly fee which has been charged by the cable operator to
subscribers for this digital programming package has generally been sufficient
to cover (i) the monthly DCTV Fee paid to us by the cable operator and (ii)
the amortized cost of their deployed digital television set-top cable boxes.
Revenues generated from orders for our pay-per-view movies and events have
been shared by us and the cable operator based on a percentage of the pay-per-
view revenue billed to subscriber.

  Our DCTV Service has combined a digital delivery system with programming
content and support services to enable cable operators to offer a digital
programming package to their subscribers and it has provided cable operators
with:

  Content. Our typical DCTV programming package has featured a large selection
of content, including multiple channels of video and audio programming as well
as an interactive on-screen program guide.

  Automated ordering and authorization. We have provided automated ordering
and authorization as required to process large volumes of pay-per-view orders.
Such authorization, known as conditional access, is the process by which
subscribers' television set-top cable boxes are authorized by our digital
operations center to receive our encrypted pay-per-view movie or event
programming for at least one full showing.

  Customer service. Our customer service facilities have allowed cable
operators to meet the customer service demands that accompany the increased
capabilities of our DCTV Service. Subscriber orders for pay-per-view movies
and events were received electronically through either automatic telephone
number identification or the television set-top cable box. Cable subscriber
inquiries and large home satellite dish subscriber inquiries have been handled
by our call centers. Large home satellite dish subscriber inquiries have been
handled for us by Ticketmaster.

  Billing, reporting and subscriber management. The billing, reporting and
subscriber management system we have used during this fiscal year was
developed by CSG Systems and was enhanced in conjunction with us specifically
to support our DCTV Service. We billed for some pay-per-view orders via
subscribers' authorized credit cards, which reduced billing costs and bad debt
during this year. For cable operators that wanted to provide pay-per-view
service for subscribers who do not have or do not wish to use a credit card,
we billed subscribers for pay-per-view orders via a separate pay-per-view
bill. We also delivered pay-per-view billing data to each cable operator that
wished to include this information on the regular monthly bill sent to
subscribers. The billing software provided detailed management and marketing
reports which we believe have been valuable to our cable operator customers.

  Engineering support. As part of our DCTV Service we committed to facilitate
rapid service implementation. During fiscal year 2000 we generally were able
to have this Service operational in a cable system within 90 days, by
arranging for the delivery, testing and installation of preconfigured digital
equipment at the cable operator's facility. Either we or our subcontractors'
personnel completed and tested the installation, and remained on site until
the digital equipment became fully operational.

  Marketing. We assisted cable operators during fiscal year 2000 to create
programming packages and related advertising and marketing campaigns in an
effort to maximize penetration, pay-per-view purchase rates and revenues from
our DCTV Service. Working with the Friedland, Jacobs advertising agency, we
developed a "Go Digital" campaign which provided cable operators with a
package of marketing materials designed to increase the number of their
digital subscribers. In addition, we contributed to their cooperative
advertising and marketing of our DCTV Service.

  Studio licensing and fee administration. We have long-standing relationships
with all the major and leading independent film studios and key sports,
special events and adult programming distributors. These relationships have
been essential to obtain the popular programming that would drive subscriber
demand for digital pay-per-view movies and events. In addition, we provided a
single source of digital programming for cable operators, the breadth and
quality of which has been valuable to cable operators because together they
offered the potential for increased penetration and pay-per-view purchases.

                                       2
<PAGE>

 Benefits of DCTV Service for cable operators

  We have required our cable operator affiliates to agree to multi-year
agreements to offer our DCTV Service, during which the cable operator has
agreed to pay us a monthly fee per digital subscriber based on achieving
certain subscriber penetration rates and/or for agreeing to carry a greater
number of channels of our pay-per-view offerings. For cable operators who did
not wish to obtain all of our digital services, we offered our services on an
"a la carte" basis, the fees for which were determined according to the
services to be provided.

  To receive our DCTV Service, cable subscribers must have a DCII compatible
television set-top cable box, which has cost our cable operator affiliates
approximately $300 each. The monthly charge paid by subscribers for the
digital programming package has generally been sufficient to cover the cable
operator's amortized cost of DCII television set-top cable boxes over the term
of our standard cable operator agreement. The digital equipment required at a
cable operator's facility to receive DCTV Service has typically cost the cable
operator approximately $50,000. For cable systems serving in excess of 5,000
subscribers, we have generally agreed that for so long as the agreement
remains in effect, we would make monthly payments to the operator
approximating the cable operator's monthly financing payments on 80% of the
cost of such digital equipment. We have assumed no obligations, however, to
third-party non-manufacturer financing entities.

 Benefits of DCTV Service for cable subscribers

  Our DCTV Service has provided and continues to provide "near-video-on-
demand" capability, the primary attribute of which is that pay-per-view movies
have multiple start times, at brief intervals. Subscribers have ordered pay-
per-view films either by telephone using our automated number identification
system or through the DCII television set-top cable box using the built in
impulse pay-per-view purchase system. Movie start times are a function of how
many channels are dedicated to telecasting a particular movie and the running
time of that movie. For instance, if a two-hour movie is telecast in digital
format on four channels, it could start every 30 minutes on one of those
channels. In contrast, during fiscal 2000, our analog signal pay-per-view
movies have started approximately every two hours. A disadvantage of near-
video-on-demand service is the inability to "pause" the program to allow for a
brief delay in viewing the movie, and than have it restart at the scene at
which the pause occurred. This disadvantage is eliminated by video-on-demand
service. See "--Recent Developments--Video-on-Demand business overview."

 Pay-Per-View Feeds Service

  We also offered and continue to offer digital satellite feeds of pay-per-
view movies and events as our PPV Feeds Service to larger cable systems,
transmitting all of our programming from two PanAmSat satellites that receive
and transmit video and audio signals electronically. Our Pay-Per-View Feeds
Service transmits to cable systems the same digital PPV movies, sports and
special events offered with our DCTV Service.

  During fiscal year 2000, we marketed our Pay-Per-View Feeds Service to
larger cable systems that did not require all of our digital services, but
could benefit from our single source distribution of pay-per-view content. Our
Pay-Per-View Feeds Service allowed cable systems to avoid the significant
capital investment required for processing, storage, scheduling and delivery
of digital pay-per-view programming, and generated cash flow at little
incremental cost to us.

                                       3
<PAGE>

 Marquee Mix Service

  Our Marquee Mix Service (a subset of our PPV Feeds Service) transmits the
same PPV hit movies and events which cable operators received in digital
format and then converted to analog format for delivery to their subscribers.
With our DCTV, PPV Feeds and Marquee Mix Services, we shared with the cable
operator revenues generated by cable subscribers' purchases of our digitally
transmitted pay-per-view movies and events.

 Digital signal technology

  In systems which have offered either our Pay-Per-View Feeds Service or
Marquee Mix Service during fiscal year 2000, the cable operator has been
responsible for distributing, authorizing and billing its subscribers for
their pay-per-view orders. On a monthly basis, the cable operator provided us
with a report of gross pay-per-view revenue and remitted the portion payable
to us. While our Pay-Per-View Feeds Service helped us to establish
relationships with certain large cable operators who own multiple systems,
this did not lead, as we had planned, to their implementation of our DCTV
Service. We believe our VOD Service will be attractive to certain of these
cable operators. See "--Recent Developments--Video-on-Demand business
overview")

 Cable operator agreements for PPV services

  During fiscal year 2000, we operated under agreements with cable operators
for our DCTV, Pay-Per-View Feeds and Marquee Mix Services. At our fiscal year
end, approximately 29,000 cable customers had subscribed to our DCTV Service.
At June 15, 2000, our DCTV Service was offered by sixty (60) cable operators,
our Pay-Per-View Feeds Service was offered by five (5) cable operators, and
our Marquee Mix Service was offered by sixteen (16) cable operators.

  We also provided a customized digital programming package for one multi-
system cable operator (MSO) that also carries the in Demand pay-per-view movie
service in twenty-one (21) of its systems, serving an aggregate of 2.4 million
subscribers. This customized package includes pay-per-view movies and events
that are differentiated from those offered by inDemand, as well as the Spice
and Playboy adult programming channels.

  Our digital cable television strategy had been to become a leading
independent provider of digital pay-per-view programming and services to cable
operators, and expand our cable operator base by entering into long-term
agreements with cable operators to maximize the number of subscribers who had
access to our digital cable programming and services.

 Large home satellite dish business

  During fiscal year 2000, we continued to operate our satellite transmitted
direct-to-home, multi-channel pay-per-view movie and event analog signal
programming service for the large home satellite dish market.

  During this fiscal year, General Instrument marketed its new 4DTV technology
receivers, designed by it to serve as a digital/analog replacement for
existing analog large dish receivers. This new digital receiver would allow
large dish home satellite owners to receive:

  . unencrypted analog and digital signals;

  . analog signals encrypted in a cable industry standard technology called
    VideoCipher II Plus; and

  . digitally compressed signals encrypted in cable industry standard DCII
    Technology.

  Large dish home satellite owners equipped with 4DTV receivers could receive
more programming, in digital format, than that offered by direct broadcast
small dish satellite services. Both General Instrument and we expected a
significant portion of the existing large dish home satellite base to acquire
4DTV receivers and access these new digital channels. We were the sole
provider during this fiscal year of pay-per-view movies licensed from the
major and leading independent studios, for service to both the analog large
dish home satellite market

                                       4
<PAGE>

and the large dish home satellite owners equipped with 4DTV digital receivers.
However, a large scale switch by such large dish owners to 4DTV receivers did
not take place. See "--Recent Developments--Post year end transition."

 Home shopping services

  In January 1999, we acquired substantially all of the assets of the Panda
Shopping Network, using our digital infrastructure and delivery system to
offer home shopping programming as a live, on-air home televised shopping
channel specializing in the offer and sale of merchandise such as jewelry,
watches and precious metal collectible coins. The television commerce industry
has long been dominated by two established competitors: The Home Shopping
Network and the QVC Network. We also competed during this fiscal year 2000
with ValueVision, another broadly distributed television commerce company.
Additionally, we had to compete with other companies which sold consumer goods
on the Internet, and generally with traditional store and catalogue retailers.
In the television home shopping market, we sought to compete on the basis of
the breadth and quality of merchandise selection, price and customer service,
but were largely unsuccessful. See "--Recent developments--Discontinued
operations."

 Media time sales

  In July 1999, we acquired substantially all of the assets of the Guthy-
Renker Television Network (GRTV) to reach an expanded audience for our home
shopping and other programming. Following our acquisition of these assets we
operated the GRTV business which acquires media time from cable operators and
programmers, service providers and television broadcasters, and resells such
time in packages to direct response infomercial and product sales companies.

 Video-on-Demand service

  Video-on-Demand (VOD) Service offers cable subscribers the ability to order,
start, pause, rewind and fast forward video programming on demand. In
conjunction with several manufacturers of specialized digital computer
servers, we have developed our own VOD digital content delivery, management
and scheduling service (VOD Service) for cable operators who install a digital
server at their head-end facility to store and deliver the PPV content we
transmit. Along with this digital PPV content, we also offer management
services for use in conjunction with digital servers acquired and utilized by
the cable operator. In April 2000, we began to devote substantially greater
resources to this product offering. See "--Recent developments--Video-on-
Demand business overview."

 Future products and services

  During fiscal year 2001, we plan to leverage our various core capabilities,
services and infrastructure to provide electronic commerce services via a
multi-featured Internet website (named "Netsmart"), which is owned and
operated by our affiliate, Netsmart, Inc., a corporation currently controlled
by Chromazone, LLC. Chromazone, LLC is a limited liability corporation
majority (currently 64.4%) owned by us, with the remaining equity interest
owned by an unrelated entity, Digital Evolution, L.P., a limited partnership.
The Netsmart website and related online service was co-developed during fiscal
year 2000 and the current fiscal year, by Chromazone and Citicorp Electronic
Services, Inc. (e-Citi), a unit of Citigroup Corporation. Chromazone LLC, was
formed to develop and license e-commerce engine software and related
interactive applications. Under the terms of Chromazone's limited liability
operating agreement, we made an initial capital contribution of $50,000, we
contributed an additional $2,900,000, and we are required to make further
capital contributions only upon the unanimous vote of all members. We have
allocated profits and losses according to our ownership percentage and have
the right, together with the other 35.6% owner, to appoint a majority of its
board of directors. We anticipate that Chromazone may perform consulting and
software development services to create one or more Internet portal sites and
integrate them to effect consumer transactions via the Internet and digital
cable platforms. We are currently beta testing the Netsmart site, and expect
it to launch during fiscal 2001.

                                       5
<PAGE>

  We expect Netsmart to offer a wide range of consumer oriented electronic
commerce services, including Internet service provider, browser and hosting
services for affinity and affiliate partners, and home banking, finance, home
shopping, digital music, healthcare information and consulting, and other
consumer features and applications. The development stage of the Netsmart
business has been funded equally by Chromazone LLC and eCiti pursuant to an
agreement between those entities whereby eCiti has the right to receive for
its cash and in-kind contributions to Netsmart, Inc., an equity interest
therein equal to that of Chromazone, upon obtaining approval for such
transaction from the office of Controller of the Currency (OCC), the
application for which is currently pending before that U.S. regulatory agency.

  In June 1999, we acquired a majority equity interest in New Media Network,
Inc. (NMN), a start-up company formed to distribute music that would be
downloaded from the Internet in digital format, and to offer such music and
other entertainment products at retail locations and via the Internet. We
purchased Series B Preferred Stock of NMN representing approximately 60% of
its outstanding capital stock, for $6.0 million in cash and services,
including satellite transmission services. We have the right to appoint a
majority of NMN's board of directors and limited rights to register our shares
of its stock with the Securities and Exchange Commission. NMN is currently
positioning itself as a business-to-business provider of digital music and
other entertainment content.

  We acquired and own a minority equity interest in Decision Support Systems,
Inc., a development stage formed in fiscal 2000 to provide healthcare-related
content and services to consumers via the Internet, broadband platforms and
other delivery mediums.

  We have been seeking to leverage our core competencies into new Internet and
interactive services. Our strategy is to remain at the forefront of
implementing the newest technologies and systems that enable us to deliver and
manage digital content and services. Our digital delivery system can also be
enhanced to provide additional programming and interactive services via the
Internet as they become technologically feasible and economically attractive,
including high speed Internet connectivity, telephony and related services.

  Prior to fiscal year end 2000, we began to create a business plan to utilize
our existing digital infrastructure and the core capabilities we developed for
our DCTV and PPV Feeds businesses, to develop a new business named Digital
Content Express (DCX), to provide services and products for the delivery and
management of digital content. See "--Recent developments--Digital Content
Express business overview."

Programming

 Pay-per-view movies

  We have licensed and continue to license our pay-per-view movies from the
major and leading independent film studios, selected on a movie-by-movie
basis. To maximize the viewing audience for their films, the studios have not
granted exclusive pay-per-view rights to movies in the U.S. market. Major
Hollywood movies have usually been released simultaneously to all participants
in the pay-per-view market, typically 45 to 55 days after they are released to
the home video market, and approximately six months before they are released
to premium pay subscription movie programmers such as HBO and Showtime.

  The typical movie license fee arrangement entitles the film studio to
receive 50% of pay-per-view revenues from major films, and 40% to 50% from
less popular films, without minimum guarantees. During fiscal year 2000, some
studios experimented with earlier pay-per-view release windows for certain
movies in return for minimum subscriber purchases guarantees from pay-per-view
programmers, which in general, were well below the subscriber purchase rates
that we had previously experienced with our large dish home satellite market,
so we took advantage of these early window opportunities with minimal risk.

  We select our movie programming based on a variety of factors, the most
important of which has been box office gross revenue, followed by the
availability of other film releases in the pay-per-view window, potential
appeal to our subscriber base and the desired mix of content aired on our
channels at any given time.

                                       6
<PAGE>

 Sports and special events

  We obtained during fiscal 2000 nonexclusive rights to telecast special pay-
per-view events such as championship boxing and wrestling matches, live
concerts, martial arts matches, rodeos and other sports and entertainment
events. We have strong relationships with all the major boxing and wrestling
promoters, and promoters of other sports events, major live concerts and
specialty programming.

 ESPN Game Plan

  During fiscal 2000, we continued to retransmit ESPN GamePlan college
football programming and also performed for ESPN certain transmission and
authorization services for the 1999 college football season for a fee paid to
us by ESPN. During the 1999 college football season, we also transmitted and
distributed a digital version of ESPN GamePlan to the cable market and to
large home satellite dish owners who purchased 4DTV digital reception
equipment, for which we received satellite programming transmission service
fees from ESPN and a share of the subscription and pay-per-day revenues
derived therefrom.

 Playboy and Spice Channels

  The Spice Channel, formerly called AdulTVision, was distributed by us during
fiscal 2000 to our large dish home satellite subscribers and to certain of our
cable affiliates. Spice featured non-rated adult movie content created by the
Playboy Entertainment Group, and was available in analog signal format for
$6.99 per day, or on a monthly or quarterly subscription basis. We were the
exclusive distributor of the Spice Channel in the large dish satellite market,
for which we received a substantial share of the subscription and pay-per-day
revenues. We also transmitted and distributed a digital format version of
Spice and the Playboy Channel, to the cable market and to large home satellite
dish owners who had purchased digital reception equipment, for which we have
received satellite programming transmission fees and a substantial share of
the subscription and pay-per-day revenues generated thereby.

 Guthy-Renker

  We maintained during fiscal 2000 and continue to maintain our long-standing
relationship with Guthy-Renker Corporation (GRC), the leading company engaged
in direct response "infomercial" home shopping, to transmit its home shopping
"infomercials." We have been responsible for satellite transmission of this
programming, telecast in both analog and digital formats. For our services, we
receive monthly fees from GRC.

 The National Football League

  During fiscal 2000, we maintained a close working relationship with the NFL
to provide NFL Sunday Ticket programming solely to the large home satellite
dish market. For the 1999 NFL Season, we provided the NFL with the use of up
to ten of our satellite programming transponders for transmission of the NFL
Sunday Ticket, which provided subscribers access to all of the regular season
Sunday afternoon NFL games for a per season price of approximately $159. The
satellite transponders that transmitted our programming were uniquely
attractive to the NFL because they were contiguously located on a single, well
positioned satellite, enabling subscribers to use their satellite remote
control to easily click from one NFL game to another. We preempted our regular
movie programming during the hours covered by our NFL agreement. In addition
to payments for satellite transponder use during the 1999 NFL season and
distribution fees earned from subscription sales to the NFL Sunday Ticket
programming package, we also benefited from promotional commercials for our
PPV movies inserted during NFL games, also airing at the conclusion of NFL
game telecasts.

                                       7
<PAGE>

Marketing and sales

 Marketing to cable operators

  Our marketing efforts during fiscal 2000 were focused on highlighting the
financial and operational advantages to cable operators of implementing our
DCTV Service. These marketing efforts largely consisted of participation in
industry conferences and trade shows, trade advertising and direct contacts
with cable operators. To assist in marketing our digital cable programming and
services, we also developed a database of the cable systems operating
throughout the United States, the details of which included the number of
subscribers served by each discrete system, type of billing system used,
current hardware vendor, channel capacity and addressability. This data was
supplemented with available knowledge of the cable operator's strategic goals
and competitive issues required to formulate proposals as to how our digital
cable services might best meet the needs of a particular cable operator. Such
proposals were expected to draw from the spectrum of our PPV services, ranging
from our DCTV Service for smaller cable systems to our Pay-Per-View Feeds
Service for larger systems.

 Marketing to cable subscribers

  As part of our DCTV Service, during fiscal 2000 we offered a complete
marketing package for cable operators, to assist them in developing effective
marketing campaigns for promoting our digital programming package to their
subscribers. It had been our experience that a direct mail campaign alone
could generate subscriptions for DCTV Service from approximately 5% of a
system's subscriber base, so we developed a comprehensive marketing plan using
all media for what we believed would yield more effective and rapid subscriber
penetration. The marketing plan included a demographic and competitive
analysis, with specific marketing recommendations for type of media and
duration.

  We also assisted our cable operator affiliates to tailor their programming
packages and advertising and marketing campaigns, in an effort to increase the
number of subscribers and the number of their pay-per-view purchases. We
consulted during fiscal year 2000 with many of our cable operators affiliates
on the design, marketing and introduction of digital programming packages for
their subscribers. Our goal was to obtain a 12% higher DCTV Service
penetration rate and two pay-per-view purchases per subscriber per month
within twelve months of launch. Our "Go Digital" campaign, developed with the
Friedland, Jacobs Agency, promoted our DCTV Service in 30 and 60 second video
spots shown on existing analog cable channels, with direct marketing materials
targeted at subscribers most likely to sign up for a digital programming
package and become frequent buyers of our pay-per-view movie and event
offerings. After an affiliate's launch of our DCTV Service, our branded print
ads, many of which highlighted specific, popular pay-per-view movies and
events, were designed to increase subscriber penetration and purchase rates.
We also contributed to their cooperative advertising and marketing.

  Cable operators who signed up through fiscal 2000 for our DCTV Service
received our launch marketing kit, which included:

  . Newspaper advertisements (customizable, camera-ready ad slicks);

  . 30 and 60 second cross-channel video spots and direct response materials
    appropriate for;

  . Telemarketing scripts;

  . Subscriber channel line-up cards;

  . Radio scripts, message on-hold scripts, Weather Channel crawl scripts and
    billing messages;

  . Monthly programming promotions;

  . Press releases; and

  . Customer leave-behinds introducing TVN Digital Cable Television.

  Because the increased penetration rates and buys expected as a result of
these marketing efforts did not materialize, we have redirected our marketing
efforts to the delivery of our VOD Service. See "--Recent developments--Video-
on-Demand business strategy."

                                       8
<PAGE>

Technology and operations

 Network operations

  We have developed a sophisticated technical digital infrastructure
comprising in-house production, storage, digital processing and satellite
transmission capabilities. Our programming originates from a facility located
at our Network Operations Center, which is then transmitted to our satellite
transponders from an immediately adjacent facility. Our digital production,
transmission and monitoring facilities were custom built to our specifications
by Four Media Company (4MC), which was recently acquired by Liberty Media
Corp. 4MC employees operate these facilities for us, under our direction and
control.

  These production facilities are dedicated to us, while the transmission
facility is used for us and other 4MC clients. We own and operate the digital
processing equipment. Our Network Operations Center maintains backup power and
redundant equipment on site, with brief uninterrupted power supply from
commercial batteries and then from a diesel powered generator sufficient for
continuous operation thereafter.

  Studio provided film masters are digitally processed, then stored in a
digital server for automated playback at multiple start times, which minimizes
the number and cost of playback units and personnel required to transmit this
content. Our proprietary automated management and scheduling software system
(ADONISS), allows all digital content, whether our own or our customers', to
be transmitted, scheduled, managed and exhibited by our customers or their end
users as desired.

 Satellite transmission

  We currently transmit our programming content via transponders (signal
transmitters) leased on two (2) PanAmSat satellites, Galaxy IIIR and Galaxy X,
both of which have desirable geostationary orbital positions with transmission
coverage of the continental United States. Prior to April 2000, we transmitted
our programming content from fourteen transponders on the Galaxy IIIR and
Galaxy IX satellites, after which the transponder leases were amended to
reduce the number of transponders we lease from fourteen to seven. We
currently transmit our digital pay-per-view programming from five transponders
on the Galaxy X satellite, and our analog programming from two transponders on
the Galaxy IIIR satellite.

Competition

  Our competitors during fiscal 2000 included a broad range of companies
engaged in communications and home entertainment, including small dish, high
power direct broadcast satellite operators and programming providers, wired
and wireless cable operators, broadcast television networks, home video
companies featuring videocassette and digital video disk technologies, as well
as companies which developed and began to market new in-home entertainment
technologies, such as the video-on-demand service marketed by a company named
DIVA. As expected, competition increased substantially as a result of these
and other new digital products and services, as well as from the unanticipated
rapid increase in cable industry consolidations and alliances. We primarily
competed against other providers of digital pay-per-view programming,
including cable and satellite programmers. We competed on the basis of, among
other things, the breadth and quality, price, performance and convenience of
our programming and services. The only available alternative for cable
operators that wished to offer digital services similar to those provided by
small dish satellite operators was a satellite transmitted digital programming
delivery service commonly known as "HITS," a name derived from the acronym for
"Headend-In-The-Sky." Certain telephone companies also announced digital
programming initiatives and have made significant investments to become
digital television providers.

  During this period, we also competed with companies offering digital
programming direct-to-the-home via various types of small dish satellite
systems. These small satellite dishes offered consumers the appeal of
significantly expanded channel capacity, with features such as an interactive
on-screen program guide, digital pictures without the signal disruption often
seen in analog video, CD quality digital music channels and many channels of
movies and sports available on a pay-per-view basis. Several well capitalized
small satellite dish companies pose a substantial threat to cable operators by
expanding their subscriber base, including large

                                       9
<PAGE>

numbers of cable subscribers. Thus, DirecTV, owned by Hughes Electronics, was
the first all-digital small dish satellite company. Two other small dish
satellite companies are currently in operation during the past fiscal year:
EchoStar, which markets its small dish digital television service under the
"Dish Network" brand name, and USSB, whose small satellite dish programming
service operates in tandem with DirecTV for part of the year (it was acquired
during our fiscal 2000 by DirectTV), offering premium subscription programming
such as multiple HBO and Showtime channels. A medium size satellite dish
service, PrimeStar, was also acquired during fiscal 2000 by DirecTV. During
most of this period, local programming was generally unavailable through small
satellite dishes; however, legislation facilitating the ability of small dish
satellite companies to include local broadcasts as part of their digital
programming services enabled them to provide certain local broadcasts in
designated regions.

Intellectual property and proprietary rights

  We consider our proprietary software and interfaces, ADONISS management and
scheduling system, automatic telephone number identification ordering system,
trademarks, logos, copyrights, know-how, advertising, promotion design and
artwork to be of substantial value and importance to our business. We rely on
a combination of trade secret, copyright and trademark laws, confidentiality
and nondisclosure agreements and other such arrangements to protect our
proprietary rights and confidential information. Our success depends in part
on our ability to maintain protection for our proprietary information, to
preserve our trade secrets and confidential information and to operate without
infringing the proprietary rights of third parties. See "Factors affecting
operating results--We rely on a combination of trade secret, copyright and
trademark laws, confidentiality and nondisclosure agreements and other such
arrangements to protect our proprietary rights and confidential information.
The loss of our proprietary rights or confidential information would have an
adverse effect on our competitiveness and the value of our business assets."

Recent developments

 Discontinued operations

  By the end of fiscal 2000, we decided to discontinue operations of our live
on-air home shopping division, which included the assets acquired as the Panda
Shopping Network. In June 2000, we implemented our plan to discontinue the on-
air home shopping business, laying off substantially all of such employees,
terminating its relationships with its vendors and suppliers, and
discontinuing its use of certain GIIIR transponders which were returned to
PanAmSat, the lessor of such transponders. The remaining assets of this
division may be sold if an appropriate, qualified buyer can be found. An
accounting charge has been taken for these discontinued operations.

 Post year end transition

  In July 2000, we also began developing a plan to (i) scale back
significantly the operations of its Digital Cable Television (DCTV) division,
(ii) discontinue entirely its analog C-band large home satellite dish
business, and (iii) refocus and redeploy these assets and core capabilities
for use in our Video-on-Demand and newly developed Digital Content Express
(DCX) businesses.

 Video-on-Demand business overview

  Video-on-Demand (VOD) is a subset of the broader Content-on-Demand market,
which includes products such as Subscription Video-on-Demand, News-on-Demand
and various syndication products. These products all require content to be
loaded onto geographically-dispersed servers, which can then be accessed by
the end-user customer. This service allows consumers to view video content
through their cable systems with full VCR functionality (i.e., the ability to
start, pause, rewind, fast-forward, etc., whenever they wish). Providing this
service requires the ability to distribute professional grade digital video
content to cable head-ends and other VOD operators in a highly secure manner,
and to manage the real-time distribution of this content as required by the
customer. The distribution, monitoring and management of such content are
among our core competencies.

                                      10
<PAGE>

  We will initially focus its VOD efforts on the cable and pay television
industries as its primary target customer markets. It is currently conducting
a VOD trial with a major multi-system cable operator (MSO), is in negotiations
with several other cable MSOs for potential commercial VOD deployment, and has
responded to a technical request-for-proposal from a cable MSO buying
consortium. We are also currently in preliminary discussions with prospects in
other industry segments, including cable overbuilders, Digital Subscriber Line
(DSL) operators and other telecommunications service providers.

 Digital Content Express business overview

  We are currently in the process of re-positioning our resources and assets
for our new Digital Content Express (DCX) business, whose primary goal is to
be a leading system for the delivery and management of digital content. With
our DCX Service, customers such as movie studios, television and Internet
programmers and other content originators and distributors, will be able to
send content to us in any format and have us convert it to digital format for
shipment by us anywhere in the world.

  Our existing integrated, end-to-end content management and delivery
capabilities are sufficient to offer this service within the United States,
but providing global coverage will require additional satellite transponder
capacity. Regardless of the geographic points of delivery, the Company's
sophisticated ADONISS Content Management System allows all content deliveries
to be remotely controlled, scheduled and managed from the Company's Burbank,
California Digital Network Operations Center. Content will remain within our
transmission system end-to-end, thereby facilitating content security and
reliability.

  With the significant investments we have made over the past five years to
develop the technology, experienced personnel and infrastructure required to
manage and distribute professional grade digital content, we believe we are
uniquely positioned to provide our DCX services across the following
categories: (i) delivery of professional grade digital content suitable for
the emerging VOD market, (ii) digital content rights and management, and (iii)
using our existing satellite network to provide instant delivery of digitized
content to cable head-ends, DSL central offices, Internet Service Provider
"POPS", multi-theater cinemas and other distribution points. Our satellite-
based transmission network can effect point-to-multipoint distribution of
digital content in a secure, encrypted and cost-efficient manner. Our
proprietary ADONISS System and Secure Satellite Transmission (SST) network are
the key components underlying our provision of DCX services. In addition to
our distribution and content management capabilities, we will utilize our
expertise for the conversion of content to a digital format and the secure
storage of such content, irrespective of customer hardware platforms.

  We believe that the optimal approach to developing a broad DCX business
requires that we initially focus on content delivery for Video-on-Demand and
related services such as digital content preparation and storage, which we
plan to deliver either to cable head-ends or directly to end-user consumers.
We have contracted to provide our DCX management integration and monitoring
services for two affiliates in which we own an equity interest: (i) Netsmart,
Inc., the above described online service operator which will provide an
Internet "transportal" focused on serving affinity and affiliate groups, and
(ii) New Media Network, Inc. (NMN), which plans to launch as a business-to-
business supplier of digital music and other entertainment content to online
and traditional retailers.

Employees

  As of March 31, 2000, we had 256 employees, including 20 in sales and
marketing, 195 in operations and 23 in finance, legal and administration. As
of June 30, 2000, we had reduced the size of our staff to 177 employees,
largely as a result of the discontinuance of our home shopping business. See
"Business--Recent developments--Discontinued operations. None of our employees
is currently represented by a labor union. We believe that our relationship
with our employees is good.

Item 2. Properties

  We lease approximately 63,346 square feet of office space in the Los Angeles
area. The terms of these leases expire at various times through 2005.

                                      11
<PAGE>

Item 3. Legal Proceedings

  On December 13, 1999, we were served with a lawsuit filed in California
state court by TV/COM International, Inc., a company with which we entered
into memoranda of understanding (MOU) concerning (i) it obtaining a Digicipher
II encryption technology license from General Instrument and (ii) its
obligation to utilize such license for the manufacture of Digicipher II
encryption compatible television set-top cable boxes for us, once TV/COM
demonstrated its ability to do so in quantity and to our specifications. The
lawsuit alleges breach of contract, fraud and negligent misrepresentation
along with several related causes of action and asks the court to award
specific damages up to $25 million as well as other unspecified damages and
costs. We filed a demurrer which questioned the legal sufficiency of the
complaint. The court granted our demurrer and gave TV/Com leave to file an
amended complaint, which they did. We demurred again and the court denied this
demurrer. We answered the complaint on July 3, 2000, at which time we also
filed a cross-complaint against TV/Com. We believe that the claims asserted in
the lawsuit are not meritorious and we have retained counsel to provide a
vigorous defense and to pursue our cross complaint against TV/COM.

  In addition, we have been party to other legal and administrative
proceedings related to claims arising from our operations in the normal course
of business. On the advice of counsel, we believe we have adequate legal
defenses and believe that the ultimate outcome of these actions will not have
a material adverse effect on our consolidated financial position, results of
operations or cash flows.

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

  Not applicable.

                                      12
<PAGE>

                                    PART II

Item 5. Market for Common Equity and Related Stockholder Matters

  There is no market for our capital stock. We have not paid any dividends
since our inception and do not intend to pay cash dividends on our capital
stock in the foreseeable future. We anticipate that we will retain all future
earnings, if any, for use in our operations and expansion of the business. In
addition, the terms of the Indenture will restrict our ability to pay
dividends on, or make distributions in respect of, our capital stock.

Item 6. Selected Historical Financial Data

  The following selected historical financial data of TVN Entertainment
Corporation as of March 31, 1999 and 2000 and for each of the three years in
the period ended March 31, 2000 have been derived from the TVN Entertainment
Corporation financial statements and notes thereto that have been audited by
PricewaterhouseCoopers LLP, independent accountants, whose report thereon is
included elsewhere in this Report. The following selected historical financial
data as of March 31, 1996, 1997 and 1998 and for each of the two years in the
period ended March 31, 1997 have been derived from the audited TVN
Entertainment Corporation financial statements not included herein. The
following data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the financial statements and the notes thereto and the other
financial information included elsewhere in this Report. A substantial portion
of our revenues generated prior to the fiscal year ended March 31, 1999, have
been generated by our C-Band large satellite dish business. Our historical
expenses have been generated by the C-Band large satellite dish business but
have also included substantial operating expenses, lease payments and capital
investments to develop our digital cable programming and services business,
which was launched in late 1997.

<TABLE>
<CAPTION>
                                           Year Ended March 31,
                               ------------------------------------------------
                                 1996      1997      1998      1999      2000
                               --------  --------  --------  --------  --------
                                  (in thousands, except per share data)
<S>                            <C>       <C>       <C>       <C>       <C>
Statement of Operations Data:
Revenue......................  $ 33,001  $ 33,380  $ 30,545  $ 36,681  $ 54,190
Operating expenses:
  Cost of
   revenue(1)(exclusive of
   depreciation shown
   separately below).........    28,767    18,812    20,426    29,184    44,648
  Selling....................     8,612     5,998     7,067    14,012    12,890
  General and
   administrative............     3,937     5,061     5,619     8,267    18,042
  Depreciation and
   amortization(1)...........     1,384    10,534    11,984    12,211    14,210
  Goodwill amortization......      (803)     (803)     (100)      --      2,349
                               --------  --------  --------  --------  --------
Total operating expenses.....    41,897    39,602    44,996    63,674    92,139
                               --------  --------  --------  --------  --------
Loss from operations.........    (8,896)   (6,222)  (14,451)  (26,993)  (37,949)
Interest expense.............     2,248    13,908    15,163    34,162    44,246
Interest income..............       (15)      (63)     (223)   (6,473)   (5,583)
Other (income) and expense...       (10)       54       471       (84)        5
Loss from equity
 investments.................       --        --        --        --      2,400
                               --------  --------  --------  --------  --------
Loss before extraordinary
 gain........................   (11,119)  (20,121)  (29,862)  (54,598)  (79,017)
Extraordinary gain...........       --      2,454       --      1,113    19,972
                               --------  --------  --------  --------  --------
Net loss from continuing
 operations..................  $(11,119) $(17,667) $(29,862) $(53,485) $(59,045)
Loss from discontinued
 operations..................       --        --        --       (278)  (13,688)
                               --------  --------  --------  --------  --------
Net loss.....................  $(11,119) $(17,667) $(29,862) $(53,763) $(72,733)
                               --------  --------  --------  --------  --------

Per Share Data:
Net loss per share applicable
 to common stockholders......  $    (17) $ (6,001) $   (272) $   (355) $   (469)
Weighted average common
 shares......................   663,443     2,944   110,237   152,517   155,827
</TABLE>

                                      13
<PAGE>

<TABLE>
<CAPTION>
                                         Year Ended March 31,
                            --------------------------------------------------
                              1996      1997      1998      1999       2000
                            --------  --------  --------  ---------  ---------
                                (in thousands, except per share data)
<S>                         <C>       <C>       <C>       <C>        <C>
Other Data:
EBITDA(4).................  $ (8,315) $  3,509  $ (2,567) $ (14,782) $ (21,390)
Capital expenditures(5)...       342       182       308      2,620      4,031
Ratio of earnings to fixed
 charges(6)...............       --        --        --         --         --
Net cash used for
 operating activities.....    (3,646)   (2,937)  (26,258)   (35,353)   (57,261)
Net cash provided by (used
 for) investing
 activities...............      (342)     (169)   (2,141)   (68,393)    25,066
Net cash provided by (used
 for) financing
 activities...............     3,921     3,516    44,432    171,291    (25,656)

Balance Sheet Data:
Cash and cash
 equivalents..............  $    355  $    765  $ 16,798  $  84,343  $  26,492
Restricted cash...........       --        --      1,833      1,903      1,981
Restricted investments....       --        --        --      65,218     33,375
Property and equipment,
 net......................    70,359   105,271    93,769     84,997     90,395
Total assets..............    74,637   109,072   116,740    254,725    178,493
Total debt:
  Senior notes due
   2008(2)................       --        --        --     186,798    156,358
  Notes payable(3)........    23,406    33,506    32,287     15,666     25,820
  Capitalized leases......    68,688   105,316   100,859     95,703    100,943
Series B redeemable
 preferred stock..........       --        --     52,616     53,047     53,445
Total stockholders'
 deficit(2)...............   (39,533)  (57,187)  (87,165)  (127,176)  (199,587)
</TABLE>
--------
(1) Until February 1996, transponder costs were incurred pursuant to operating
    leases and were reported as cost of revenue. Since then, such lease
    agreements have met the criteria for capitalization and the related costs
    have been recognized as depreciation and interest expense.

(2) Senior Notes due 2008 and total stockholders' deficit reflect the value
    ascribed to the warrants issued in connection with the notes which result
    in additional debt discount that will be amortized as interest expense
    using the effective interest method over the period that the notes are
    outstanding.

(3) Notes Payable does not include Contingent Notes Payable totaling
    approximately $30.3 million. Interest on the Contingent Notes Payable
    accrues at a rate of prime plus 1%. The timing of the repayment of the
    Contingent Notes Payable is uncertain and subject to events outside our
    control.

(4) EBITDA consists of loss before extraordinary gain, depreciation,
    amortization, net interest expense and other (income) expense. It is a
    measure commonly used in the media industry. EBITDA, and the trends
    depicted by it, are used by our management and may be used by investors to
    evaluate our operating results independent of the timing of operating cash
    flows and costs associated with our investing and financing activities. In
    evaluating EBITDA, investors should consider the financial impact of our
    capital commitments and financial obligations and their related effect on
    our financial condition, results of operations and cash flows. It is not
    intended to represent cash flows or results of operations in accordance
    with GAAP for the periods indicated, may not be comparable to similarly
    titled measures presented by other companies and could be misleading
    unless all companies and analysts calculate EBITDA in the same manner.

(5) Capital expenditures exclude acquisitions financed through notes payable
    and capitalized leases of $70.5 million, $45.3 million, $175,000 and $14.3
    million in fiscal 1996, fiscal 1997, fiscal 1998 and fiscal 2000,
    respectively.

(6) In calculating the ratio of earnings to fixed charges, "earnings" consist
    of net loss before fixed charges. Fixed charges consist of interest
    expense, including such portion of rental expense that is attributed to
    interest. Our earnings were insufficient to cover fixed charges for these
    periods. The amount of the deficiencies were $11.1 million, $20.1 million,
    $29.9 million, $54.6 million and $76.6 million for each of the five years
    in the period ended March 31, 2000.

                                      14
<PAGE>

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations

  The following discussion of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and the related notes thereto included elsewhere in this Report.
This discussion contains forward-looking statements the accuracy of which
involves risks and uncertainties. Our actual results could differ materially
from those anticipated in the forward-looking statements for many reasons
including, but not limited to, those discussed in "Factors Affecting Operating
Results" and elsewhere in this Report. We disclaim any obligation to update
information contained in any forward-looking statement.

Overview

  Our company provides a wide variety of new television programming and
services that we deliver in digital format to cable operators for their
subscribers using existing cable infrastructure. Our TVN Digital Cable
Television service enables cable operators to substantially enhance the
variety and quality of programming choices through a more efficient use of
their cable transmission capacity by utilizing recent industry technology that
compresses eight or more digital channels onto one analog channel. We have
marketed our TVN Digital Cable Television service primarily to smaller and
medium size cable systems, including smaller systems owned by large cable
operators, which lack the scale, funding, technical or administrative
resources to economically implement a full offering of digital programming on
their own. For larger cable system affiliates that do not require all of the
features of our TVN Digital Cable Television service, we deliver our digital
satellite feeds of pay-per-view movies and events, known as our Pay-Per-View
Feeds Service, which includes our Marquee Mix service, a three channel service
that cable operators receive in digital format and convert to analog format at
their facilities for subsequent delivery to their subscribers. We launched our
digital cable programming and services business in late 1997.

  Our efforts have historically focused on providing national satellite pay-
per-view and related services to large satellite dish owners. Revenues from
our home satellite dish services totaled approximately $22.6 million, $17.2
million and $14.0 million for the years ended March 31, 1998, 1999 and 2000,
respectively.

  In June 1999, we acquired 60% of the fully diluted equity of New Media
Network, Inc., a start-up company that is developing and plans to deploy a
system utilizing state-of-the-art digital downloading technology to deliver
and sell entertainment products such as music, movies and games.

  In July 1999, we acquired substantially all of the assets of the Guthy-
Renker Television Network, Inc., a media buying business. Upon closing, we
placed those assets into GRTV Network, Inc., our wholly owned subsidiary. The
GRTV Network purchases primarily remnant time from cable operators and
packages that time for resale to infomercial programmers and other users of
broadcast media time. The infomercial programming is either broadcast via our
satellite transponders or sent to cable operators via videotape for insertion
into their video transmission.

  In January 1999, we acquired substantially all of the assets of Panda
Shopping Network ("PSN"), a live televised home shopping network and
discontinued our operation of this business in June 2000.

  Our business plan contemplates that a substantial portion of future revenues
will be generated by our Video-On-Demand business and our Digital Content
Express business. Video-on-Demand (VOD) is a subset of the broader Content-on-
Demand market, which includes products such as Subscription Video-on-Demand,
News-on-Demand and various syndication products. These products all require
content to be loaded onto geographically-dispersed servers, which can then be
accessed by the end-user customer. This service allows consumers to view video
content through their cable systems with full VCR functionality (i.e., the
ability to start, pause, rewind, fast-forward, etc., whenever they wish).
Providing this service requires the ability to distribute professional grade
digital video content to cable head-ends and other VOD operators in a highly
secure manner, and to manage the real-time distribution of this content as
required by the customer. The distribution, monitoring and management of such
content are among our core competencies.

                                      15
<PAGE>

  We are also currently in the process of re-positioning ourself for our new
Digital Content Express (DCX) business, whose primary goal is to be a leading
system for the delivery and management of digital content, including Video-on-
Demand. With our DCX Service, customers such as movie studios, television and
Internet programmers and other content originators and distributors, will be
able to send content to us in any format and have us convert it to digital
format for shipment by us anywhere in the world.

  Our existing integrated, end-to-end content management and delivery
capabilities are sufficient to offer this service within the United States,
but providing global coverage will require additional satellite transponder
capacity. Regardless of the geographic points of delivery, the Company's
sophisticated ADONISS Content Management System allows all content deliveries
to be remotely controlled, scheduled and managed from the Company's Burbank,
California Digital Network Operations Center. Content will remain within our
transmission system end-to-end, thereby facilitating content security and
reliability.

  Our Video-On-Demand business and our Digital Content Express business have
not commercially launched and have generated no revenues to date. We believe
that our future ability to service our indebtedness and to achieve
profitability is dependent upon our success in generating substantial revenues
from our Video-on-Demand and Digital Content Express businesses. We expect to
continue experiencing negative operating margins and EBITDA while our Video-
on-Demand and Digital Content Express businesses are being marketed to cable
systems and content originators and distributors. The continued roll out of
our Video-on-Demand and Digital Content Express businesses requires
significant capitalized lease payments for satellite transmitter capacity and
operating expenditures, in particular selling expenses, a large portion of
which will be expended before any revenue is generated. We have experienced
negative operating cash flows and significant losses as we have marketed our
historical businesses. These losses will likely continue until we can
establish a customer base of cable systems and content originators and
distributors that will generate revenue sufficient to cover our costs.

 Revenue

  Revenues from our digital cable programming and services are directly
related to the number of subscribers in cable systems offering either our TVN
Digital Cable Television service or our Pay-Per-View Feeds Service. Revenues
are derived primarily from monthly fees per subscriber, from the sale of pay-
per-view programming to TVN Digital Cable Television subscribers, and
purchases by subscribers in cable systems offering our Pay-Per-View Feeds
Service. Revenues from our digital cable programming and services totaled
approximately $40,000, $10.9 million and $16.0 million for the years ended
March 31, 1998, 1999 and 2000, respectively.

  TVN Digital Cable Television subscriber revenue consists of a monthly fee
charged per digital subscriber to the cable operator. A portion of this fee
may be rebated to the cable operator based on achieving certain subscriber
penetration rates or if the cable system operator agrees to carry a greater
number of channels of our pay-per-view offerings. Pay-per-view revenues are
derived from programming orders by TVN Digital Cable Television subscribers.
We remit a percentage of the pay-per-view revenue to the cable operator and
the content provider. Pay-per-view orders are generally paid for by credit
card with revenue recognized once the programming is viewed. Revenue from the
Pay-Per-View Feeds Service is based on a percentage of the cable operators'
gross revenue generated by the purchase of our pay-per-view movies and events
by their subscribers. Cable operators provide us with monthly reports
detailing pay-per-view purchases by their subscribers for the prior month and
remit our share of the revenue with such report.

  We realize revenue from both our TVN Digital Cable Television service and
our Pay-Per-View Feeds Service pursuant to long-term agreements with cable
operators. We recognize revenues under our cable operator agreements only when
our TVN Digital Cable Television service or Pay-Per-View Feeds Service is
successfully integrated and operating and customer billing commences.
Accordingly, the recognition of revenues will lag the announcement of a new
cable operator agreement by at least the time necessary to install the
service, generally 90 days, and to achieve a meaningful number of subscribers
and/or number of pay-per-view purchases.

  Revenue from our home satellite dish service are derived from pay-per-view
programming orders by large home satellite dish owners who subscribe to our
service. Revenue is recognized once the programming is viewed.

                                      16
<PAGE>

  Satellite transmission service revenue is generated upon the sale of
satellite transmitter capacity to our internal business units and to third
party programmers. Satellite transmission revenue is recognized as the
services are rendered and intercompany sales are eliminated upon
consolidation.

  Media time sales are generated by sales of media time to infomercial
programmers, and are related to the number of cable subscribers that can
potentially view our customers' programming. Programmers pay either a fixed
rate in advance or a percentage of the sales generated by their programming,
with revenue recognized as the programming is aired.

 Operating expenses

  Operating expenses consist of Cost of Revenue, Selling, General and
Administrative, Depreciation and Amortization, and Amortization of Intangible
Assets expenses. Historically, a large portion of our expenses have been
generated by the large satellite dish business, but have also included
substantial operating expenses, lease payments and capital investments to
develop our digital cable programming and services business, which was
launched in the third quarter of fiscal 1998.

  Cost of revenue. Cost of revenue for our TVN Digital Cable Television
service and Pay-Per-View Feeds Service primarily consists of program license
fees, payments to cable operators, satellite transmission and playback service
fees, per-subscriber authorization fees for cable television set-top cable box
authorization control, communications charges related to orders for pay-per-
view movies and events, and salaries and related expenses of engineering and
field operations personnel. License fees for pay-per-view programming are
payable to content providers under the terms of our license agreements and
generally vary between 30% and 88% of revenue depending on the type of content
and the mode of distribution. Payments to cable operators represent the
percentage of pay-per-view revenue shared with operators who have entered into
TVN Digital Cable Television service agreements and vary by individual
agreement. Satellite transmission services are purchased from an outside
vendor pursuant to an agreement that provides for a flat monthly fee. With
respect to television set-top cable box authorization to enable the box to
receive a pay-per-view movie or event, a fee to maintain access control per
television set-top cable box is payable to the licensor of the operative
software pursuant to its license agreement with us. Cost of revenue related to
our digital cable programming and services totaled approximately $2.9 million,
$19.6 million and $24.8 million, for the years ended March 31, 1998, 1999 and
2000, respectively. A substantial portion of cost of revenue for our TVN
Digital Cable Television service and Pay-Per-View Feeds Service will vary
directly with revenues:

  . subscriber pay-per-view buy rates increase causing us to incur program
    license fees and access control charges related to orders for pay-per-
    view movies and events;

  . we are required to hire additional engineering and field operations
    personnel in connection with the growth of our digital cable programming
    and services business; and

  . according to the mix of services provided and their respective costs.

  Cost of revenue for the home satellite dish service consists primarily of
program license fees, uplink service fees and playback service fees.

  Cost of revenue for the satellite transmission service consist primarily of
uplink and playback service fees, as the cost for the satellite transmitters
has been capitalized pursuant to capitalized leases.

  Cost of revenue for media time sales primarily consists of the cost of
airtime purchased from cable operators. The cost of airtime varies by hour and
generally varies directly with revenue.

  Selling. Selling expenses for TVN Digital Cable Television service and Pay-
Per-View Feeds Service consisted of customer acquisition costs, billing
expenses, customer service expenses, and salaries and related expenses of our
marketing personnel. Customer acquisition costs include expenses associated
with our marketing campaign to cable systems, and co-op advertising and
marketing efforts with affiliated cable systems. These expenses were required
to acquire new customers and related revenues but were discretionary and will
be decreased as a result of management's decision to scale back significantly
the operations of our Digital Cable Television division. See "Business--Recent
developments--Post year end transition."

                                      17
<PAGE>

  Implementing our TVN Digital Cable Television service required cable
operators to acquire digital equipment for their facilities and digital
television set-top boxes for their subscribers. The new digital receiving
equipment required at an operator's facility to receive TVN Digital Cable
Television cost the operator approximately $50,000. For systems serving in
excess of 5,000 subscribers, we generally agreed to make monthly financing
payments to the operator which approximate the operator's monthly financing
payments on 80% of the digital equipment cost for so long as the affiliation
agreement remains in effect.

  Billing expenses consisted of subscriber maintenance fees and remittance
processing fees, which vary directly with revenue. Customer service expenses
consist of payroll for call center representatives and telephone charges for
customer calls. To the extent that our subscriber base increases or decreases,
the required costs to support such subscribers would change correspondingly.

  Selling expenses for our home satellite dish service consisted of
advertising expenses, billing expenses, customer service expenses, and
salaries and related expenses of our marketing personnel.

  We incur minimal selling expenses to generate satellite transmission service
revenue and media time sales.

  General and administrative. General and administrative expenses consist of
executive and administrative staff compensation, office expenses and
professional fees. General and administrative expenses cover a broad range of
the costs of our operations including corporate functions such as
administration, finance, legal, human resources and facilities.

  Depreciation and amortization. Depreciation and amortization expenses
consist of depreciation on our capitalized programming transmitter leases and
depreciation on equipment necessary for our digital services and are fixed
with respect to revenue. Generally, depreciation is calculated using the
straight-line method over the useful lives of the associated assets, which
range from 5 to 10 years.

  Amortization of intangible assets. Amortization of intangible assets
includes the amortization of technology and goodwill acquired through our
acquisitions.

  Interest income and expense. Interest income will continue to be earned by
investing the proceeds from the issuance of equity and debt securities until
such proceeds are needed to fund our operating expenditures, particularly such
expenses incurred in connection with the continued roll out of our digital
cable programming and services business. Interest income is expected to be
highly variable over time. Interest expense will consist primarily of interest
accruing under the notes, capitalized leases and other outstanding
indebtedness.

 Income taxes and net operating loss carryforwards

  As a result of projected operating losses and the potential inability to
recognize a benefit for deferred income tax assets, we do not foresee
recording a provision for income tax expense in the near term. As of March 31,
2000, we had federal and state net operating loss carryforwards of
approximately $207 million and $91 million, respectively, which expire at
various times in varying amounts beginning in the years 2004 and 2000,
respectively. However, due to the provisions of Section 382, Section 1502 and
certain other provisions of the Internal Revenue Code of 1986, as amended, the
utilization of a portion of the net operating loss carryforwards may be
limited. In addition, we are also subject to certain state income tax
provisions which may also limit the utilization of net operating loss
carryforwards for state income tax purposes.

  Section 382 of the Code provides annual restrictions on the use of net
operating loss carryforwards, as well as other tax attributes, following
significant changes in ownership of a corporation's stock, as defined in the
Code. Investors are cautioned that future events beyond our control could
reduce or eliminate our ability to utilize the tax benefits of our net
operating loss carryforwards. Future ownership changes under Section 382 could
further restrict the use of the net operating loss carryforwards. In addition,
the Section 382 limitation could reduce available net operating loss
carryforwards to zero if we fail to satisfy the continuity of business
enterprise requirement for the two-year period following an ownership change.

                                      18
<PAGE>

Results of Operations

  The table below sets forth for the periods indicated certain data regarding
expenses expressed as a percentage of total revenues:

<TABLE>
<CAPTION>
                                                         Year Ended
                                                          March 31,
                                                     -----------------------
                                                     1998     1999     2000
                                                     -----   ------   ------
   <S>                                               <C>     <C>      <C>
   Revenue.......................................... 100.0%   100.0%   100.0%
   Operating expenses:
     Cost of revenue (exclusive of depreciation
      shown separately below).......................  66.9     79.6     82.4
     Selling........................................  23.1     38.2     23.8
     General and administrative.....................  18.4     22.5     33.3
     Depreciation and amortization..................  39.2     33.3     26.2
     Amortization of intangible assets..............  (0.3)     --       4.3
                                                     -----   ------   ------
   Total operating expenses......................... 147.3    173.6    170.0
                                                     -----   ------   ------
   Loss from continuing operations.................. (47.3)   (73.6)   (70.0)
   Interest expense.................................  49.6     93.1     81.6
   Interest income..................................  (0.7)   (17.6)   (10.3)
   Loss from equity investments.....................   --       --       4.4
   Other (income) and expense.......................   1.5      (.2)      .1
                                                     -----   ------   ------
   Loss before extraordinary gain................... (97.8)  (148.9)  (145.8)
   Extraordinary gain...............................   0.0      3.0     36.9
   Loss from discontinued operations of PSN.........   --       0.8     14.2
   Estimated loss on disposal of PSN................   --       --      11.1
                                                     -----   ------   ------
   Net loss......................................... (97.8)% (146.7)% (134.2)%
                                                     =====   ======   ======
</TABLE>

 Fiscal Year Ended March 31, 2000 Compared with Fiscal Year Ended March 31,
1999

  Revenue. Total revenue increased $17.5 million, or 47.7%, to $54.2 million
in the fiscal year ended March 31, 2000 from $36.7 million in fiscal year
ended March 31, 1999. Revenue generated by our Digital Cable Television
service increased approximately $5.1 million to $16.0 million in fiscal 2000
from $10.9 million in fiscal 1999. Approximately $3.1 million of the increase
was generated by sales of the Marquee Mix service, which the Company
distributed for only nine of the twelve months ended March 31, 1999. The
remainder of the increase in revenue for this business unit is attributable to
an increase in the average number of Digital Cable Television service and Pay-
Per-View Feeds service subscribers in fiscal 2000 versus fiscal 1999. Home
satellite services revenue decreased $3.1 million or 18.3% to $14.0 million in
fiscal 2000 from $17.2 million in fiscal 1999. Nearly all of the decrease is
attributable to a decrease in pay-per-view movie revenue, due primarily to a
decline in the average number of active home satellite dish subscribers per
month during fiscal 2000 as compared to fiscal 1999. Satellite transmission
service revenue decreased $5.3 million, or 62.2%, to $3.2 million in fiscal
2000 from $8.6 million in fiscal 1999. The decrease is primarily attributable
to revenue generated by sales of satellite transmitter time to the Panda
Shopping Network and the Guthy-Renker Television Network in fiscal 1999 that
were not replaced by sales of satellite transmitter time to other third
parties in fiscal 2000. These decreases were offset by approximately
$20.5 million in media time sales generated by the GRTV Network and $435,000
in other operating revenues generated by New Media Network in fiscal 2000. We
had not commenced operation of these entities as of March 31, 1999.

 Operating Expenses

  Cost of Revenue. Cost of revenue increased $15.5 million, or 53.0%, to $44.6
million in fiscal 2000 from $29.2 million in fiscal 1999 and, as a percentage
of revenue, increased to 82.4% in fiscal 2000 from 79.6% in fiscal 1999. The
increase as a percentage of revenue is primarily attributable to the decrease
in satellite services

                                      19
<PAGE>

revenue in fiscal 2000 as the cost to deliver these services are largely fixed
with respect to revenue. The increase as a percentage of revenue was offset by
the distribution of lower margin services by the GRTV Network, as compared to
the programming services provided by Digital Cable Television service and our
home satellite dish service. Cost of revenues for the GRTV Network was
approximately 61.3% of revenues for this business unit in fiscal 2000. We had
not acquired our interest in the GRTV Network as of March 31, 1999.

  Selling. Selling expenses decreased $1.1 million, or 8.0%, to $12.9 million
in fiscal 2000 from $14.0 million in fiscal 1999 and, as a percentage of
revenue, decreased to 23.8% in fiscal 2000 from 38.2% in fiscal 1999. The
decrease as a percentage of revenue is primarily due to $20.5 million in
revenue generated by the GRTV Network as selling expenses for this business
unit was approximately 20.5% of revenue as compared to 34.4% and 35.7% of
revenue for our Digital Cable Television service and home satellite dish
service, respectively. In addition, selling expenses for our Digital Cable
Television service decreased approximately $1.9 million in fiscal 2000 and, as
a percentage of revenue for the business unit, decreased to 34.4% in fiscal
2000 from 62.4% in fiscal 1999 and is primarily attributable to a decrease in
on-air marketing expenditures.

  General and Administrative. General and administrative expenses increased
$9.8 million, or 118.3%, to $18.0 million in fiscal 2000 from $8.3 million in
fiscal 1999 and, as a percentage of revenue, increased to 33.3% for fiscal
2000 from 22.5% for fiscal 1999. The increase as a percentage of revenue is
primarily attributable to (i) approximately $4.2 million in general and
administrative expenses incurred by New Media Network, our start-up music
retailing venture, which generated only $435,000 in revenue during fiscal
2000, (ii) a decrease in revenue generated by our large home satellite dish
service, the Digital Cable Television service and the satellite transmission
service totaling approximately $3.4 million, (iii) approximately $700,000 in
severance benefits paid to an executive upon his resignation and (iv)
approximately $458,000 in compensation expense recognized in connection with
the cancellation of the executive's options to purchase shares of the
Company's common stock and the cancellation of the executive's Put Right.

  Depreciation and Amortization. Depreciation and amortization increased $2.0
million, or 16.4%, to $14.2 million in fiscal 2000 from $12.2 million in
fiscal 1999 and, as a percentage of revenue, decreased to 26.2% in fiscal 2000
from 33.3% in fiscal 1999. The decrease as a percentage of revenue is due to
an increase in revenue for fiscal 2000 as depreciation is a fixed expense. The
$2.0 million increase is attributable to amortization and depreciation
recorded on assets acquired since March 31, 1999, including the assets of GRTV
Network and New Media Network.

  Amortization of intangible assets. Amortization of intangible assets totaled
$2.3 million in fiscal 2000 as compared to zero in fiscal 1999 and, as a
percentage of revenue, increased to 4.3% in fiscal 2000. The increase is
attributable to the amortization of goodwill and acquired technology generated
upon the acquisition of our interests in the Guthy-Renker Television Network
and New Media Network.

  Interest Expense/Interest Income. Interest expense increased $10.1 million,
or 29.5%, to $44.2 million in fiscal 2000 from $34.2 million in fiscal 1999.
Approximately $1.6 million of the increase reflects interest incurred to
finance the acquisition of our interests in GRTV Network and New Media
Network. The balance of the increase reflects interest expense recognized on
the senior notes that we issued on July 29,1998. Interest income decreased
$890,000 or 13.7%, to $5.6 million in fiscal 2000 from $6.5 million in fiscal
1999. The decrease is attributable to declining operating cash balances during
fiscal 2000.

  Loss from equity investments. During fiscal 2000, we recorded a loss from
equity investments totaling $2.4 million which included $2.1 million
representing our share of the operating losses of Netsmart, an online service
operator which will provide an Internet "transportal" focused on serving
affinity and affiliate groups.

  Extraordinary gain. During fiscal 2000, the Company realized an
extraordinary gain of $20.0 million upon the repurchase of approximately $33.9
million of our 14% Senior Notes due 2008. During fiscal 1999, $1.1 million of
the Company's obligation for the use of satellite transmitter service through
February 1996 was forgiven upon early extinguishment of the remaining debt.

                                      20
<PAGE>

  Loss from discontinued operations of PSN/Estimated loss on disposal of
PSN. In June 2000, the Company ceased operations of PSN and closed the
division. We reflected the operations of PSN as a discontinued operation. We
incurred a loss from discontinued operations of PSN of $7.7 million for fiscal
2000 and $278,000 for fiscal 1999. We included the estimated loss on disposal
of PSN of $6.0 million for fiscal 2000.

  Provision for Income Taxes. As a result of net losses and our inability to
recognize a benefit for its deferred income tax assets, we did not record a
provision for income taxes in fiscal 2000 or fiscal 1999.

 Fiscal Year Ended March 31, 1999 Compared with Fiscal Year Ended March 31,
1998

  Revenue. Total revenue increased $6.1 million, or 20.1%, to $36.7 million in
fiscal 1999 from $30.5 million in fiscal 1998. The increase in total revenue
was primarily attributable to $10.3 million in revenues generated in fiscal
1999 by the Marquee Mix Service and $989,000 generated by the sale of
transponder time to third parties. The Marquee Mix Service had not launched
prior to the end of fiscal 1998. The increase was offset by a $5.5 million
decrease in pay-per-view programming revenue and programming package revenues
generated by our large home satellite dish subscribers. The decrease is
primarily attributable to a decline in the number of active large home
satellite dish subscribers.

 Operating Expenses

  Cost of Revenue. Cost of revenue increased $8.8 million, or 42.9%, to $29.2
million in fiscal 1999 from $20.4 million in fiscal 1998 and, as a percentage
of revenue, increased to 79.6% in fiscal 1999 from 66.9% in the fiscal year
ended March 31, 1998. The increase as a percentage of revenue is primarily due
to an $8.8 million increase in program license fees generated by our Marquee
Mix Service. License fees payable to content providers for programming
distributed by our Marquee Mix service are approximately 85% of revenue as
compared to 57% of revenue for the large home satellite dish service. The
increase was also due to increases in the cost of uplink and playback services
and additional operations payroll resulting from the launch of our digital
cable programming and services, partially offset by a decrease resulting from
non-recurring transponder costs incurred in fiscal 1998.

  Selling. Selling expenses increased $6.9 million, or 98.3%, to $14.0 million
in fiscal 1999 from $7.1 million in fiscal 1998 and, as a percentage of
revenue, increased to 38.2% in fiscal 1999 from 23.1% in fiscal 1998. The
increase as a percentage of revenue is primarily due to an increase in
advertising agency fees, trade advertising, on-air marketing costs, and sales
department payroll, all associated with the roll out of our digital cable
programming and services.

  General and Administrative. General and administrative expenses increased
$2.7 million, or 48.2%, to $8.3 million in fiscal 1999 from $5.6 million in
fiscal 1998 and, as a percentage of revenue, increased to 22.5% in the fiscal
1999 from 18.4% in fiscal 1998. The increase as a percentage of revenue is
primarily due to additional payroll costs associated with the infrastructure
required to support our digital cable programming and services and to a non-
recurring period of free rent in fiscal 1998.

  Depreciation and Amortization. Depreciation and amortization increased
$227,000 or 1.9%, to $12.2 million in fiscal 1999 from $12.0 million in fiscal
1998. The increase reflects depreciation expense recognized on assets acquired
in fiscal 1999.

  Amortization of Intangible Assets. Negative goodwill arising from the
acquisition of our company from our predecessor limited partnership was fully
amortized in fiscal 1998.

  Interest Expense and Interest Income. Interest expense increased $19.0
million, or 125.3%, to $34.2 million in fiscal 1999 from $15.2 million in
fiscal 1998. The increase reflects interest expense recognized on the senior
notes that were issued during fiscal 1999. Interest income increased to $6.5
million in fiscal 1999 from $223,000 in fiscal 1998. The increase reflects
interest earned on the invested proceeds from the senior notes.

                                      21
<PAGE>

  Provision for Income Taxes. As a result of net losses and our inability to
recognize a benefit for our deferred income tax assets, we did not record a
provision for income taxes in fiscal 1999 or fiscal 1998.

  Extraordinary Gain. During fiscal 1999, $1.1 million of our obligation for
transponder service was forgiven upon the early extinguishment of an $8.1
million note payable previously due December 31, 1998. No extraordinary items
were recognized by us in fiscal 1998.

 Liquidity and Capital Resources

  We have been funded through a combination of equity, debt and lease
financing. As of March 31, 2000, we had current assets of $57.1 million,
including $26.5 million of cash and cash equivalents and current liabilities
of $60.6 million, resulting in working capital deficit of $3.5 million. We
invest excess funds in short-term, interest bearing investment grade
securities until such funds are needed to fund the capital expenditure and
operating needs of our business.

  Since inception, we have incurred operating losses and as of March 31, 2000,
have a total deficit of $199.6 million. Our cash on hand and amounts expected
to be available through financing arrangements may not provide sufficient
funds necessary for us to fund our operating deficits beyond September 2000.
There can be no assurance, however, that we will not require additional
capital sooner than anticipated. We are making efforts to reduce expenses and
may take steps to raise additional capital in order to allow us to fund our
operating deficits for a longer period. We are unable, however, to predict the
precise amount of future capital that we will require and we cannot be certain
that additional financing will be available to us on acceptable terms or at
all.

 Cash Used For Operating Activities

  Our operating activities used $26.3 million, $35.4 million and $57.3 million
in fiscal 1998, fiscal 1999 and fiscal 2000, respectively. Cash used for
operations is primarily due to net losses of $29.9 million, $53.8 million and
$72.7 million in fiscal 1998, fiscal 1999 and fiscal 2000, respectively,
partially offset by non-cash expenses, such as depreciation and amortization,
gain on redemption of senior notes, and net loss from discontinued operations
and other changes in working capital items such as accounts receivable,
accrued liabilities and license fees payable. We expect to continue to
generate negative cash flows from operating activities as we market and deploy
our Digital Content Express services.

 Cash Provided By and Used For Investing Activities

  Cash used for investing activities was $2.1 million and $68.4 million in
fiscal 1998 and fiscal 1999, respectively. Cash used for investing activities
in fiscal 1999 included approximately $76.7 million to purchase a portfolio of
U.S. government securities out of the net proceeds of the senior notes as
security for the notes and $11.5 million in proceeds from maturities of
restricted investments. Cash provided by investing activities for continuing
operations was $25.2 million for fiscal 2000 and included $31.8 million in
proceeds from the maturities of restricted investments that were purchased as
security for the senior notes. These proceeds were offset by $3.2 million used
for equity investments. Our capital expenditures (including assets acquired
under capitalized leases and through the issuance of debt) were $483,000, $2.6
million and $17.5 million for fiscal 1998, fiscal 1999 and fiscal 2000,
respectively.

 Cash Used For Financing Activities

  Cash provided by financing activities was $44.4 million and $171.3 million
in fiscal 1998 and fiscal 1999 respectively. Cash provided by financing
activities in fiscal 1998 includes $45.0 million in proceeds from an equity
financing made by PGI II, an affiliate of Morgan Stanley Dean Witter, and $4.5
million in proceeds from debt financings from a vendor and certain of our
stockholders, offset by $4.5 million in repayments for notes payable. Cash
provided by financing activities for fiscal 1999 included $193.3 million in
net proceeds from the senior notes offset by $5.6 million in repayments of
capitalized leases and $16.4 million in repayments of notes payable. Cash used
for financing activities was $25.7 million in fiscal 2000 and included $11.8
million used to repurchase $33.9 million in senior notes due 2008, $8.1
million in repayments of capitalized leases and $7.1 million in repayments of
notes payable.

                                      22
<PAGE>

Factors Affecting Operating Results

We anticipate that our existing capital and cash from operations may be
inadequate to satisfy our capital requirements beyond September 2000.

  Our cash on hand and amounts expected to be available through vendor
financing arrangements may not provide sufficient funds necessary for us to
expand our digital content businesses, new or existing, as currently planned
and to fund our operating deficits beyond September 2000. We cannot be
certain, however, that we will not require additional capital sooner than
currently anticipated. In addition, we are unable to predict the precise
amount of future capital that we will require and whether additional financing
will be available to us on acceptable terms or at all. Our inability to obtain
required financing could significantly reduce the value of our business assets
and impair our ability to continue the normal operation of our business.
Consequently, we could be required to significantly reduce or suspend our
operations, seek a merger partner, sell the business, seek additional
financing or sell additional securities on terms that are highly dilutive to
our stockholders.

We have substantial existing debt and may incur substantial additional debt
which could adversely affect our financial health and prevent us from
fulfilling our obligations under the notes.

  We have borrowed a significant amount of funds. As of March 31, 2000, we had
outstanding indebtedness of approximately $324.6 million and a stockholders'
deficit of approximately $199.6 million. We cannot be certain that our
operations will generate sufficient cash flow to pay our obligations,
including our obligations on the notes issued by us in our 1998 debt financing
("the notes"). Earnings were inadequate to cover fixed charges by the amount
of $54.6 million and $76.6 million, for the years ended March 31, 1999 and
March 31, 2000, respectively. The degree to which we have borrowed funds could
have important consequences. For example, it could:

  . make it more difficult for us to satisfy our obligations with respect to
    the notes and to satisfy our obligations under other indebtedness;

  . increase our vulnerability to general adverse economic and cable industry
    conditions, including interest rate fluctuations;

  . require us to dedicate a substantial portion of our cash flow from
    operations to payments on our indebtedness, which will reduce our funds
    available for working capital, capital expenditures, acquisitions of
    additional systems and other general corporate requirements;

  . limit our flexibility in planning for, or reacting to, changes in our
    business and the cable industry generally;

  . place us at a competitive disadvantage compared to our competitors that
    have proportionately less debt;

  . limit our ability to borrow additional funds, if we need them, due to
    applicable financial and restrictive covenants in our indebtedness; and

  . increase our interest expenses above current levels due to increases in
    interest rates, since much of our borrowings are and will continue to be
    at variable rates of interest; and

  . limit our ability to redeem the notes in the event of a change of
    control.

  We may also incur additional indebtedness to finance the continued
development, commercial deployment and expansion of our businesses and for
funding operating losses or to take advantage of unanticipated opportunities.

                                      23
<PAGE>

We will require a significant amount of cash to service our indebtedness, and
our ability to generate cash depends on many factors beyond our control.

  We expect that we will continue to generate substantial operating losses and
negative cash flow for at least the next several years. Our ability to make
scheduled payments on our debt, including the notes, will depend upon, among
other things:

  . our ability to achieve significant and sustained growth in cash flow;

  . the rate of and successful commercial deployment of our digital content
    products and services;

  . the market acceptance, subscriber demand, rate of utilization and pricing
    for our digital content products and services;

  . our future operating performance; and

  . our ability to complete additional financings.

  Each of these factors is, to a large extent, subject to economic, financial,
competitive and other factors, most of which are beyond our control. We cannot
be certain that we will be successful in developing and maintaining a level of
cash flow from operations and financings sufficient to permit us to pay the
principal, premium, if any, and interest on our indebtedness, including the
notes. If we are unable to generate sufficient cash flow from operations and
financings to service our indebtedness, including the notes, we may have to
reduce or delay the deployment of our digital cable programming and services
or restructure or refinance our indebtedness. We cannot be certain that any of
these actions or any additional debt or equity financings could be
accomplished on satisfactory terms, if at all, in light of our high leverage,
or that they would yield sufficient proceeds to service and repay our
indebtedness, including the notes. Any failure by us to satisfy our
obligations with respect to the notes at maturity or prior thereto would
constitute a default under the indenture and could cause a default under
agreements governing our other indebtedness. In the event of default, the
holders of our indebtedness would have enforcement rights, including the right
to accelerate our debt and the right to commence an involuntary bankruptcy
proceeding against us. Accordingly, upon any default, insolvency, bankruptcy
or similar situation, we may have only limited assets remaining after paying
the prior claims of our secured creditors and may be unable to repay the
notes.

We have incurred net losses in every fiscal year since inception. We may be
unable to become profitable, or to be so consistently.

  We experienced net losses of $29.9 million, $53.8 million and $72.7 million
in fiscal 1998, fiscal 1999 and fiscal 2000, respectively. These net losses
are attributable to the significant costs incurred to develop, market and
implement our TVN Digital Cable Television business plan and to develop,
install and integrate our digital programming and services. We expect that net
losses will continue and increase for the foreseeable future as we plan to
continue to incur substantial sales and marketing expenses to build our
customer base and make substantial capitalized lease payments for our
satellite transponders. We have not achieved profitability on a quarterly or
annual basis, and we anticipate that we will continue to incur net losses for
at least the next several years. We also expect to continue to incur
significant product development and administrative expenses. We cannot be
certain that any of our business strategies will be successful or that
significant revenues or profitability will ever be achieved or, if they are
achieved, that they can be consistently sustained or increased on a quarterly
or annual basis in the future.

Our existing capital and cash from operations may be inadequate to satisfy
obligations resulting from the discontinuance of certain of our business
units.

  We have discontinued or scaled back certain businesses and operations,
resulting in the layoff of a significant number of employees and the
termination or renegotiation of existing affiliate contracts, written and
oral, with vendors, suppliers and affiliates. We have taken certain accounting
charges therefor on our financial

                                      24
<PAGE>

statements, but we may incur substantial additional liabilities, costs and
expenses in connection with the (i) shutdown or reduced operations of such
businesses, (ii) layoff of employees and (iii) termination and/or
renegotiation of existing contracts. We cannot be certain that the additional
funds currently anticipated for such obligations will be available to us as
and when needed. This may result in claims being asserted by such employees,
vendors, suppliers and/or affiliates, which could lead to litigation against
us, or the commencement of an involuntary bankruptcy proceeding, if we are
unable to satisfy such obligations as they come due.

We are a holding company for our subsidiaries and will depend on our
subsidiaries for repayment of the notes.

  The notes are our obligations exclusively. As separate and distinct legal
entities, our subsidiaries have no obligation to pay any amounts due under the
notes or to make any distributions or other payments to us to enable us to
repay the notes. We anticipate that in the future a significant portion of our
operations will be conducted through our direct and indirect subsidiaries. Our
cash flow and, consequently, our ability to repay our indebtedness, including
the notes, may therefore depend in part upon our subsidiaries making payments
of dividends, distributions, loans or other payments to us.

  We anticipate that our subsidiaries may become parties to financing
arrangements, including secured financing arrangements. Such financing
arrangements will likely restrict our subsidiaries' ability to pay dividends
or distributions, or make loans or other payments to us.

  Because our subsidiaries are not guarantors of the notes, holders of the
notes will not have any direct claim on assets of any of our subsidiaries in
the event of our liquidation or reorganization. The indenture permits us to
make substantial investments in our subsidiaries. However, unless we make
loans or extend credit to our subsidiaries, our only claim, and consequently
the only claim of holders of the notes, to the assets of our subsidiaries
would be through our equity. Our equity claim and any claim of holders of our
notes would be effectively subordinated to all of our subsidiaries'
indebtedness and liabilities, including trade payables and subordinated debt.
Even if we do extend credit to our subsidiaries, our claims could be
subordinated to other indebtedness of our subsidiaries. The indenture permits
our subsidiaries to incur substantial additional indebtedness.

The notes are unsecured and will be effectively subordinated to secured debt.

  The notes are unsecured and therefore will be effectively subordinated to
any secured indebtedness we incur with respect to the assets securing such
indebtedness. The indenture permits us and our subsidiaries to incur secured
indebtedness to finance, among other things, the acquisition of equipment,
inventory and network assets. The holders of secured indebtedness will have
claims against the assets that constitute their collateral which will be prior
to the claims of unsecured creditors, including holders of the notes. The
prior claims of secured creditors could adversely effect the holders of the
notes in any of the following events:

  . in the event of default under other indebtedness or the indenture, any
    holders of our secured indebtedness would have certain rights to
    repossess, foreclose upon and sell the assets securing that indebtedness;

  . in the event that we became subject to bankruptcy, liquidation,
    dissolution, reorganization or similar, the holders of our secured
    indebtedness will be entitled to receive proceeds from the sale and other
    distributions in respect of their collateral prior to payments to other
    creditors, including holders of the notes;

  . to the extent that the collateral is insufficient to repay all of our
    secured indebtedness, the holders of our secured indebtedness would have
    a claim for any shortfall that would rank equally in priority with the
    notes.

  Accordingly, upon any default, insolvency, bankruptcy or similar situation,
we may have only limited assets remaining after paying the prior claims of our
secured creditors and may be unable to repay the notes.

                                      25
<PAGE>

The indenture governing the notes contains restrictions and limitations which
could significantly impact our ability to operate our business and repay the
notes.

  The indenture governing the notes contains a number of significant covenants
that, among other things, restrict our ability and the ability of our
subsidiaries:

  . to pay dividends or distributions to our shareholders;

  . to dispose of assets or merge;

  . to incur or guarantee additional indebtedness;

  . to redeem or repurchase our equity or subordinated debt;

  . our subsidiaries' ability to issue equity;

  . to create liens;

  . to enter into certain kinds of transactions; and

  . to make certain investments or acquisitions, particularly with our
    stockholders and affiliates.

  The ability to comply with these provisions may be affected by events beyond
our control. The breach of any of these covenants will result in an event of
default under the indenture.

Our historical financial information largely reflects losses sustained from
our digital cable programming and service business, so it may be of limited
use in predicting the future financial results from our new businesses.

  Our current business plans will result in significant changes in our
financial performance. The historical financial information included herein
for the fiscal years ending 1996 to 1999 primarily reflects our large home
satellite dish and digital cable television businesses. The historical
financial information for the fiscal years ended 1999 and 2000 does not fully
reflect the many significant changes in our financial results that will occur
as a result of the launch of our digital content delivery and video-on-demand
products and services, nor the changes that will occur in our funding and
operations in connection with the such launch and roll-out. The continued roll
out of these new products and services requires significant operating
expenditures, particularly marketing expenses, a large portion of which are
expended before any revenue is generated. We plan to significantly increase
our operating expenses to expand our sales and marketing operations, broaden
our digital content and video-on-demand products and services, develop new
distribution channels, fund greater levels of research and development and
establish additional strategic alliances. We have experienced, and expect to
continue experiencing, negative cash flows and significant losses while we
continue to market these new products and services to establish a sufficient
revenue generating customer base, end users and other customers. We cannot be
certain that we will be able to successfully roll out these new products and
services or establish a sufficient customer base.

Our operations are influenced by many factors we cannot fully control. This
may cause our quarterly financial results to vary significantly in the future.

  Factors which can cause our quarterly results to fluctuate include, but are
not limited to:

  . failure to add customers for our new digital content products and
    services;

  . customer expenditures and other costs relating to the expansion and
    penetration of their respective digital content offerings;

  . failure to maintain our affiliates for our existing DCTV and PPV Feeds
    businesses;

  . seasonal trends in home entertainment;

  . the mix of satellite delivered digital content products and services sold
    and the distribution channels for those products and services;

                                      26
<PAGE>

  . with respect to our planned digital content delivery and management
    business, our ability to react quickly to changing customer trends and
    the need for some categories of such products and services;

  . the general expansion of the digital content transmission and business-
    to-business categories of services;

  . general economic conditions; and

  . specific economic conditions in the digital content, video-on-demand,
    digital cable television, Internet and related industries.

  Additionally, as a strategic response to a changing competitive environment,
we may elect from time to time to make pricing, service, product, marketing or
acquisition decisions that could reduce our revenues and our quarterly
financial results.

  Moreover, because our expense levels in any given quarter are based, in
part, on management's expectations regarding future contracts for these new
products and services and the revenue to be derived therefrom, if such
revenues are below expectations, the effect on our operating results may be
magnified by our inability to adjust spending in a timely manner to compensate
for a revenue shortfall. The extent to which expenses are not subsequently
followed by increased revenues would reduce our operating results and could
seriously impair our business. As a result of these and other factors, we
believe that period to period comparisons of our operating results may not be
meaningful and should not be relied upon as an indication of future
performance. Due to all of the foregoing factors, it is likely that in one or
more future quarters, our operating results may be below the expectations of
analysts and investors, which could cause the value of the notes to fall.

If we fail to achieve a significant customer base for our new digital content
delivery and video-on-demand products and services, we may be unable to cover
our costs or to repay the notes.

  The continued roll out of our digital content delivery and video-on-demand
products and services requires significant operating expenditures, in
particular selling expenses, a large portion of which will be expended before
any revenue is generated. We have experienced, and expect to continue
experiencing, negative cash flows and significant losses while we continue to
market our digital cable television programming and services and it remains
unlikely that we will establish a customer base of cable operators and their
subscribers that will generate revenue sufficient to cover these costs. We
cannot be certain that we will be able to successfully roll out our new
digital content delivery and video-on-demand products and services or
establish a sufficient VOD customer base therefor, or that we will generate
significant revenues from our digital cable programming, video-on-demand, or
electronic commerce products and services. If we fail to adequately address
any of these risks, it could harm our business, financial condition and
results of operations.

  Until late 1997, our efforts focused on providing national satellite pay-
per-view and related services to large home satellite dish owners, however,
since then we have devoted an increasing percentage of our personnel and
financial resources, and will need to continue to devote some more resources,
to the our digital cable television business, the related transactional
services and delivery systems, and our electronic commerce products and
services. Although our digital cable programming and services launched in late
1997, it has thus far generated only modest revenues. In fiscal 2000, $16.0
million of our total revenues were derived from our digital cable programming
and services. We believe that our future ability to service our indebtedness
including the notes, and to achieve profitability, is dependent upon our
success in generating substantial revenues from our new digital content
delivery and video-on-demand products and services. We expect to continue
experiencing negative operating margins and EBITDA while our Video-on-Demand
and Digital Content Express businesses are being marketed to cable systems and
content originators and distributors.

                                      27
<PAGE>

Because our new Digital Content Express and Video-on-Demand products and
services must succeed in markets new to us, we may encounter difficulties
achieving the level of revenue we have forecast for these businesses.

  These new products and services will need to find acceptance in new and
newly evolving markets. We expect to expend and will continue to expend
substantial sums for our sales and marketing efforts to promote customer and
subscriber awareness of our Digital Content Express (DCX) and Video-on-Demand
(VOD) products and services. The digital content delivery and VOD markets are
new, but rapidly evolving. Therefore, it is difficult to predict the rate at
which these markets will grow, if at all. If these markets fail to grow, or
grow more slowly than anticipated, our sales will be lower than expected and
our operating results will be harmed. Even if the markets do grow, we cannot
be certain that these products and services will realize market acceptance or
will meet the technical or other requirements of cable operators or their
subscribers. The failure of our DCX or VOD Services to gain market acceptance
would cause our sales to be lower than expected and seriously harm our
business prospects.

  Our marketing efforts to date with regard to our DCX and VOD products and
services have involved identifying specific market segments that we believe
will be the most receptive to these products and services. We cannot be
certain that we have correctly identified these markets or that our DCX and/or
VOD products and services will adequately address the needs of these markets.
Broad commercialization of our digital cable programming and services will
require us to overcome significant market development hurdles, many of which
may not currently be foreseen. See "Business--Recent developments."

Our success will depend in large part on our ability to sign long-term
agreements with cable operators to implement our Video-on-Demand Service and
with digital content distributors to utilize our DCX products and services.

  To date, we have entered into agreements with only two affiliates in which
we have an equity interest for our DCX services and we do not yet have an
agreement with a cable operator, or other entity, for delivery of our VOD
products and services. Our ability to obtain additional agreements will depend
upon, among other things, the successful commercial deployment of our DCX
products and services pursuant to our initial agreements and our ability to
demonstrate that our digital VOD programming and services are reliable and
more attractive to cable operators and their subscribers than alternative VOD
services. We cannot be certain that we will be able to enter into new
agreements with non-affiliated customers or that the ongoing economic
viability of our DCX or VOD products and services will be successfully
demonstrated.

  We do not set the prices charged by cable operators to their subscribers for
VOD service or for the pay-per-view movies and events so delivered. The level
at which such prices are set may adversely affect the number of subscribers
and/or the rate at which subscribers purchase VOD delivered pay-per-view
movies or events. Therefore, we cannot be certain that we will be able to
achieve projected rates of return. The market for digital VOD programming and
services is new, and our VOD Service is only one possible means available to
cable operators for providing pay-per-view movies and events in the home.
Although we believe that our new VOD Service offers a comprehensive and
economically viable digital cable solution, we cannot be certain that we will
be successful in obtaining a sufficient number of cable operators or other
distributors of VOD programming and services who are willing:

  . to be early adopters of new technology rather than waiting for widespread
    industry implementation;

  . to risk subscriber dissatisfaction if the removal of existing analog
    channels is required to accommodate new digital VOD channels that will
    only be available to digital subscribers and not to the system's entire
    subscriber base;

  . to bear the costs of purchasing new digital television set-top cable
    boxes and installing and supporting required receiving equipment at their
    facilities; or


                                      28
<PAGE>

  . to sign and remain party to long-term agreements with us for our digital
    VOD programming and services, including an arrangement to share revenue
    from pay-per-view movie and event buys.

  Our failure to enter into or to sustain additional long-term agreements with
cable operators or other distributors of digital cable television and/or VOD
programming and services, and/or their lack of acceptance of such programming
and services, would harm our operating results and our ability to achieve
sufficient cash flow to service our indebtedness, including the notes. See
"Business--Recent developments--Video-on-Demand business overview."

Selling and installing our Video-on-Demand service may require lengthy sales
and implementation cycles, with delays that could cause actual revenue and
earnings to be less than expected.

  The decision by a cable or other VOD operator to deploy our VOD service is
often viewed as an important and strategic decision that may require us to
engage in a lengthy sales cycle. During this process, we will provide a
significant level of explanation to prospective cable and other VOD operators
regarding the use and benefits of our digital VOD programming and services to
cable and other VOD operators and their respective subscribers. Additionally,
the sales cycle can be delayed by the size of the transaction and prospective
implementation costs including purchasing, installing and maintaining new
digital television set-top cable boxes, installing and supporting required
digital server and related equipment at the operator's facility, as well as
the potential complexity of financing or other arrangements. The cable
operator's implementation of our VOD service involves a significant commitment
of resources over an extended period of time which may lead prospective
operators to defer indefinitely the decision to implement our VOD service or
to delay implementation despite having agreed to do so. For these and other
reasons, the sales and customer implementation cycles are subject to
significant delays over which we have little or no control. Delay in the sale
or implementation of even a limited number of our VOD system installations
would reduce our operating results and could harm our business prospects. See
"Business--Recent developments--Video-on-Demand business overview."

Because we expect cable operator agreements to generate a significant portion
of our Video-on-Demand revenue, the loss or deferral of even a small number of
agreements could cause our operating results to vary significantly.

  We expect that a significant portion of our future VOD revenues will be
generated from long-term agreements with cable operators. A delay in
generating or recognizing revenue from a limited number of these agreements
could cause significant variations in our operating results and could result
in further operating losses. We expect to recognize revenues under our cable
operator agreements only when our VOD Service is successfully integrated and
operating and subscriber billing by the operator commences. Accordingly, the
recognition of revenues will lag the announcement of a new cable operator
agreement by at least the time necessary to install the VOD Service and to
achieve a meaningful number of subscribers and/or the rate at which
subscribers purchase pay-per-view movies or events offered in a VOD format. We
expect that the number and timing of such cable operator agreements and the
effect of anticipated lagging revenues, all of which are difficult to
forecast, may cause significant fluctuations in our operating results,
particularly on a quarterly basis.

Because we expect our agreements with digital content originators and
distributors to generate a significant portion of our Digital Content Express
and management service revenue, the loss or deferral of even a small number of
agreements could cause our operating results to vary significantly.

  We expect that a significant portion of our future DCX content delivery and
management service revenues will be generated from long-term agreements with
digital content originators, programmers and distributors. A delay in
generating or recognizing revenue from a limited number of these agreements
could cause significant variations in our operating results and could result
in further operating losses. We expect to recognize revenues under our such
agreements only when our DCX products and services are successfully integrated
and operating. Accordingly, the recognition of revenues will lag the
announcement of a new agreement by at least the time necessary to implement
the specific DCX service and to achieve a meaningful number of customers. We
expect that the number and timing of such agreements and the effect of any
lagging revenues, all of which are difficult to forecast, may cause
significant fluctuations in our operating results, particularly on a quarterly
basis.

                                      29
<PAGE>

We will operate in highly competitive markets and will face intense
competition from existing and potential competitors, which could limit our
ability to gain market share.

  Our competitors for DCX and VOD products and services include a broad range
of companies engaged in communications and home entertainment, including small
dish satellite services and programming providers, wired and wireless cable
operators, Internet operators, television programmers, music, entertainment
and other digital content distributors, broadcast television networks, home
video companies featuring videocassette and digital video disk hard drive
recording and playback technologies, as well as companies developing new in-
home entertainment technologies, such as the video-on-demand service being
marketed by DIVA Systems Corporation. We expect that competition will increase
substantially as a result of these and other new products and services, as
well as from industry consolidations and alliances. As a result, we may be
unable to achieve our sales and market share goals. In addition, we expect
that an increasingly competitive environment may result in price reductions
that could reduce profit margins and cause loss of market share. We cannot be
certain that we will be able to compete successfully with new or existing
competitors or that competitive pressures will not reduce our revenues and
operating results. See "Business--Competition."

Because we are significantly smaller than most cable and telecommunication
companies and other distributors of digital content, we may lack the financial
and other resources to obtain sufficient market share.

  We expect to encounter a number of challenges in competing with large cable
and telephone companies and other distributors of digital content that
generally have large installed subscriber bases and significant investments
in, and access to, competitive programming sources. In addition, these large
companies have the financial and technological resources to create their own
digital content delivery and management services and/or VOD services,
including delivery of per-per-view movies in a VOD format. We also face the
risk that the current trend of industry consolidation will continue with the
result that smaller and medium size cable and telephone company operators
and/or content distributors that might otherwise become our customers will be
acquired by large companies. Currently, the most likely available alternative
for cable operators that wish to offer digital services similar to those
provided by small satellite dish is a digital programming delivery service
known as DIVA. Certain telephone companies have also announced initiatives and
have made significant investments to become digital television providers. We
cannot be certain that we will be able to compete effectively against (i)
DIVA, cable or telephone companies, or other companies that provide digital
cable television programming and services in a VOD format, or (ii) other
digital content delivery and management systems or distributors. Moreover, we
cannot be certain that large cable and/or telephone companies developing their
own digital tiers of programming will not offer such services to our target
markets.

Because small dish satellite companies may introduce digital Video-on-Demand
programming and services to viewers, we may emerge from this initial phase of
introducing such television programming with only a limited market share.

  We compete with companies offering digital television programming direct-to-
the-home via various small dish satellite systems. Increased competition by
small dish satellite companies could lower our profit margins and reduce our
market share. Small satellite dishes offer consumers the appeal of
significantly expanded channel capacity, features such as an interactive on-
screen program guide, digital pictures without the signal disruption often
seen in analog video, CD quality digital music channels and many channels of
movies and sports available on a pay-per-view basis. Several well capitalized
small dish satellite companies pose a substantial threat to cable operators.
DirecTV, owned by Hughes Electronics, was the first all-digital small dish
satellite service. Two other satellite small dish services are currently in
operation: EchoStar, which markets its digital television service under the
"Dish Network" brand name and USSB, which formerly had its own small satellite
dish programming service, is now owned by and is operated in tandem with
DirecTV offering premium subscription programming such as multiple HBO and
Showtime channels. A former medium sized satellite dish service, PrimeStar,
was also acquired by DirecTV, and is no longer in service. During the past
fiscal year, local programming has generally unavailable through small dish
satellite services; however, recently enacted legislation has facilitated the
ability of small dish satellite companies to include local broadcasts in their
digital programming services and

                                      30
<PAGE>

that service is now available from DirecTV and the Dish Network in certain
markets. Given small dish satellite systems' ability to market directly to
viewers, these companies may be better positioned to introduce new digital
television programming and services. Because they have large subscriber bases,
small dish satellite companies may also be able to devote significantly
greater resources to the development and marketing of new competitive products
and services.

If our relationships with our programming providers falter, we may not be able
to obtain sufficient popular programming to offer to cable, telephone and
other television distribution systems and their subscribers, and our revenues
would fall.

  We depend on all the major and many independent movie studios to provide us
with hit movies that appeal to mass audiences. Our current pay-per-view movie
programming is obtained largely through on-going, unwritten arrangements that
have no specific renewal provisions. We also have relationships with the
Playboy Entertainment Group, supplier of the Spice pay-per-view adult movie
service and the Playboy Channel that we distribute, ESPN, for our ESPN
GamePlan college football programming packages, and Guthy-Renker, creator of
direct response television "infomercials" which sell various products direct
to the viewer, including self-improvement tapes and home exercise equipment.
We cannot be certain that any of our existing relationships will continue,
that we would be able to obtain or develop substitute programming or that such
substitute programming would be comparable in quality or profitability to our
existing programming. Because our ability to succeed in the digital VOD
television market will depend on our ability to continue obtaining desirable
programming and successfully market it to cable, telephone and other
television distribution operators and their subscribers, the termination of
any of our existing programming relationships could significantly reduce our
sales and operating results. See "Business--Programming."

If we cannot deliver programming to our customers and their subscribers within
time periods which may be advertised, our revenue will fall and our ability to
offer our programming and services will be harmed.

  Our failure to deliver VOD television programming within the time periods
which may be advertised, whether or not within our control, could result in
dissatisfied subscribers and in lost orders for content which otherwise could
have been sold. Dissatisfied cable, telephone and other television
distribution operators and their subscribers may no longer choose to utilize
our digital VOD programming and services, which could reduce our current and
future revenue. Although we maintain insurance against business interruption,
we cannot be certain that such insurance will be adequate to protect us from
significant loss in these circumstances, or that a major catastrophe such as
an earthquake or other natural disaster would not result in a prolonged
interruption of our business. In particular, our digital operations center is
located in the Los Angeles area, which has in the past and will in the future
experience significant, destructive seismic activity that could damage or
destroy the operations center. In addition, our ability to make deliveries to
subscribers within the time periods advertised depends on a number of factors,
some of which are outside of our control, including equipment or software
failure and our inability to provide programming to cable subscribers due to
service outages experienced by cable systems that comprise our distribution
network. See "--The loss of even a limited number of our satellite
transmitters, and our Galaxy IX transmitters in particular, could prevent us
from offering our digital cable programming and services and harm our results
of operations." and "Business--Technology and operations."

The loss of even a limited number of our satellite transmitters, and our
Galaxy X satellite transmitters in particular, could prevent us from offering
our digital programming and services and harm our results of operations.

  We transmit our, and will transmit others', programming and other digital
content via our transponders leased on two PanAmSat satellites, Galaxy IIIR
and Galaxy X, both of which have desirable geostationary orbital positions
with transmission coverage of the continental United States. Our failure to
maintain sufficient, well-located satellite transponder capacity would impair
our ability to offer our digital VOD programming and services and would harm
our results of operations. We cannot be certain that we will be able to obtain
replacement

                                      31
<PAGE>

transponder capacity on terms acceptable to us or at all. If either satellite
was destroyed or became inoperable prior to the expiration of our lease, we
would need to obtain replacement satellite transponder capacity. We cannot be
certain that such replacement capacity will be available when required or, if
available, that it will be on terms acceptable to us. The satellites now used
by us are also subject to the risks of all satellites, including damage or
destruction by space debris, military actions or acts of war, anti-satellite
devices, electrostatic storms, solar flares, loss of location or other
extraterrestrial events. In addition, satellite signal transponders may
malfunction or become inoperative in the ordinary course as a result of faulty
operation or latent faults in design or construction. If, for these or any
other reason, we were unable to transmit our programming on one or more of our
satellite transponders, our revenues and operating results would fall and our
business could be seriously harmed.

Because we rely on PanAmSat satellites for transmission of all our programming
and other digital content, we could lose substantial revenue if PanAmSat were
unable to meet our needs.

  Our relationship with PanAmSat is important to our business. We could lose
substantial revenue if PanAmSat were unable for any reason to satisfy our
satellite transmission commitments, or if any of these transmissions failed to
satisfy our quality requirements. In the event that we were unable to continue
to use our PanAmSat satellite capacity or obtain comparable replacement
satellite capacity via PanAmSat, we would have to identify, qualify and
transition deliveries to an acceptable alternative satellite transmission
vendor. This identification, qualification and transition process could take
six months or longer, and we cannot be certain that an alternative satellite
transmission vendor would be available to us or be in a position to satisfy
our delivery requirements on a timely and cost effective basis. See
"Business--Technology and operations."

Because we rely on Motorola (as successor by acquisition to General
Instrument) for technology and services which may be essential to our ongoing
Digital Cable Television and Video-On-Demand businesses, some of which are
available only from Motorola. We might be unable to operate our business if
Motorola fails to meet our expectations or if these technologies and services
are no longer available to us.

  We are dependent on Motorola, which recently acquired General Instrument,
for services needed to turn on and off the showings of cable operators' pay-
per-view movies and events ordered by their subscribers, and for the continued
development and standardization of equipment and the analog and digital cable
transmission technologies, known as DCII technology, that is used by the cable
industry. Our relationship with Motorola, to whom we owe substantial sums of
money for digital and other equipment purchased by us, includes not only the
use of its DCII technology and encoding equipment to digitally process our
programming, but also includes its manufacture and supply of DCII cable system
equipment and television set-top cable boxes that are important to the
successful deployment of our VOD Service. We have no written agreement with
Motorola for the provision of its services to cable operators to turn on and
off their showings of the pay-per-view movies and events we plan to transmit
in VOD format, for which they are the only provider. If cable operators were
unable to continue to receive these services from Motorola on acceptable
terms, they would have no other readily available alternative. If Motorola
were unable for any reason to meet cable operators' deployment needs,
development schedule or delivery commitments with respect to either cable
system equipment or television set-top cable boxes, we would be unable to meet
our revenue goals and our operating results would be harmed. If we are unable
to continue to obtain and use their DCII technology, we would have to
identify, qualify and transition digital processing to an acceptable
alternative vendor. This identification, qualification and transition process
could take a very long time, at least six months or more, and we cannot be
certain that an alternative vendor would be available to us or be in a
position to satisfy our delivery requirements on a timely and cost effective
basis. See "Business--Products and services" and "--Technology and
operations."

We depend on technology and services provided by third parties. If we were
unable to access these technologies and services, our ability to operate our
business would be impaired and our results of operations would be harmed.

  Our technical infrastructure features in-house production, storage and
digital processing, encryption and other outsourced services supervised by our
personnel. Our revenue and our ability to offer our DCX and VOD

                                      32
<PAGE>

products and services would be harmed if our service providers were unable for
any reason to meet our scheduling or delivery requirements or if any of our
uplink transmissions failed to satisfy customer quality requirements. For
instance, our replay, editing and satellite transmission uplink facilities
were custom built to our specifications and continue to be operated by Four
Media Company, a video editing and facilities service and management company,
which owns and operates those facilities for our use under a renewable service
agreement. Four Media Company was recently acquired by Liberty Media Corp. If
we are unable to continue relying on Four Media Company's operational
expertise and technology, we would have to identify, qualify and transition
such operations to an acceptable alternative vendor or perform such operations
ourselves. This identification, qualification and transition process could
take six months or longer, and we cannot be certain that we could perform
these services or that an alternative vendor would be available to us or be in
a position to satisfy our requirements on a timely and cost effective basis.
See "Business--Technology and operations."

Because we rely on third party vendors to provide us with transactional
services, the inability of these vendors to meet our requirements could
prevent us from providing our services cost effectively, or at all.

  Our ability to collect our revenue and our results of operations would be
harmed if our third party vendors were unable for any reason to meet our
transactional service commitments, service management requirements or customer
service quality requirements to our cable operator customers. We contract with
CSG Systems, Inc. to provide customer billing and subscriber management
services. These systems and resources are part of the transactional services
that we offer with our TVN Digital Cable Television. If we are unable to
continue using these systems and technological resources, we would have to
identify, qualify and transition such operations to an acceptable alternative
vendor or arrange for in-house operations. This identification, qualification
and transition process could take six months or longer, and we cannot be
certain that we could perform such functions or that an alternative vendor
would be available to us or be in a position to satisfy our requirements on a
timely and cost effective basis. See "Business--Products and services" and "--
Technology and operations."

  In addition, we rely on the services of a credit card processor, telephone
service providers and shipping companies. Should we lose or experience
interruptions in the services of any of these service providers, we may not be
able to replace these providers and our revenues and results of operations
could suffer.

The market for electronic delivery of home television entertainment and
digital content is characterized by rapidly changing technology. As a result,
our digital Video-on-Demand and Digital Content Express products and services
may become outdated.

  Our future success and ability to remain competitive will depend in
significant part upon the technological quality of our VOD and DCX products
and processes relative to those of our competitors, and our ability to both
develop new and enhanced products and services and to introduce products and
services at competitive prices in a timely and cost effective fashion. We
cannot be certain that our technological development will remain competitive.

  We rely substantially on third party vendors for the continued development
of these technologies. We cannot be certain that our vendors will be able to
develop technologies in a manner that meets our needs and those of our
customers and subscribers. The failure to implement these technologies or to
obtain licenses on favorable economic terms from other vendors, individually
or in combination, could impair our prospects for future growth. We cannot be
certain that we will be successful in identifying, developing, contracting for
the manufacture, and marketing of product enhancements or new services or
programming that are responsive to technological change, that we will not
experience difficulties that could delay or prevent the successful
development, introduction and marketing of these products or services or that
our new products and product enhancements will adequately meet the challenges
of emerging technologies, the requirements of the marketplace and achieve
market acceptance. Delays in commercial availability of new products and
services and enhancements to existing products and services may result in
customer dissatisfaction and delay or loss of revenue, and our operating
results could decline. See "Business--Technology and operations."

                                      33
<PAGE>

If our digital signals are pirated, we could lose substantial revenue.

  While we use digital and analog encryption systems designed by Motorola's
predecessor, General Instrument, to minimize the risk of signal piracy, we
could lose substantial revenue if signal piracy were to become widespread. The
General Instrument encryption system that we use is based on the use of cards
inserted into the television set-top cable box, which can be changed
periodically to thwart commercial piracy efforts. In addition, electronic
countermeasures can be transmitted over the cable system at any time in an
effort to counter some types of piracy. However, we cannot be certain that
this encryption technology, electronic countermeasures and other efforts
designed to prevent signal piracy will be effective. Moreover, we cannot be
certain that future technological developments will not render our anti-piracy
features less effective or completely useless. Any significant piracy of our
programming would substantially reduce our revenues and harm our results of
operations. See "Business--Technology and operations."

We rely on a combination of trade secret, copyright and trademark laws,
confidentiality and nondisclosure agreements and other such arrangements to
protect our proprietary rights and confidential information. The loss of our
proprietary rights or confidential information would harm our competitiveness
and reduce the value of our business assets.

  We consider our software, management scheduling system, telephone ordering
system, trademarks, logos, copyrights, know-how, advertising, and promotion
design and artwork to be of substantial value and importance to our business.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy or obtain and use information that we regard as
proprietary. We cannot be certain that the steps taken by us to protect our
proprietary information will prevent misappropriation of such information and
such protection may not preclude competitors from developing confusingly
similar brand names or promotional materials, technology, or developing
products and services similar to ours. In addition, the laws of some foreign
countries do not protect our proprietary rights to the same extent as do the
laws of the United States. While we believe that our proprietary software,
trademarks, copyrights, advertising and promotion design and artwork do not
infringe upon the proprietary rights of third parties, we cannot be certain
that we will not receive future communications from third parties asserting
that our software, systems, trademarks, copyrights, advertising and promotion
design and artwork infringe, or may infringe, on the proprietary rights of
third parties. Any such claims, with or without merit, could be time
consuming, require us to enter into royalty arrangements or result in costly
litigation and diversion of management personnel. We cannot be certain that
any necessary licenses can be obtained or that, if obtainable, can be obtained
on terms acceptable to us. Our failure or inability to develop non-infringing
technology or license necessary proprietary rights on a timely basis and in a
cost-effective manner would harm our business. See "Business--Intellectual
property and proprietary rights."

Rapid growth of either of our Video-on-Demand or Digital Content Express
businesses could place a significant strain on our managerial, operational and
financial resources and on our internal systems and controls.

  We cannot be certain that we would have adequate resources to effectively
manage rapid growth of our VOD and/or DCX businesses, and our inability to do
so could increase our costs and harm our business. Our financial and
management controls, reporting systems and procedures are constrained by
limited resources. Although some new controls, systems and procedures have
been implemented, our growth, if any, will depend on our ability to continue
to implement and improve operational, financial and management information and
control systems on a timely basis, together with maintaining effective cost
controls. Further, we will be required to manage multiple relationships with
various customers and other third parties. We cannot be certain that our
systems, procedures or controls will be adequate to support our operations or
that our management will be able to successfully offer our services and
implement our business plan. See "--If we fail to attract and retain qualified
management, sales, operations, marketing and technology personnel, our ability
to meet our business goals will be impaired and our financial condition and
results of operations will suffer."

                                      34
<PAGE>

If we fail to attract and retain qualified management, sales, operations,
marketing and technology personnel, our ability to meet our business goals
will be impaired and our financial condition and results of operations will
suffer.

  In particular, our success depends on the continued contributions of Stuart
Z. Levin, our Chairman and Chief Executive Officer, and other senior level
sales, operations, marketing, technology, financial and legal officers. Our
business plan was developed in large part by these senior level officers and
requires skills and knowledge they possess in order to implement. In addition,
our products and technologies are complex and we are substantially dependent
upon the continued service of our existing engineering personnel. We intend to
hire a significant number of additional sales, support, marketing, operations
and research and development personnel in 1999 and beyond. Competition for
qualified personnel is intense, and we cannot be certain that we will be able
to attract, assimilate, train or retain additional highly qualified personnel
in the future. If we are unable to hire and retain such personnel,
particularly those in key positions, our business prospects may be harmed and
our results of operations may suffer.

A substantial portion of our revenues to date have been generated by pay-per-
view fees paid by subscribers to our satellite transmitted analog programming
for the large home satellite dish market and to our digital cable television
programming for the cable market. These revenues have not been sustainable.

  Revenues from our large home satellite dish business substantially declined
in fiscal 1998, in fiscal 1999, in fiscal 2000 and will be de minimus in
fiscal 2001 since we plan to discontinue that business. Revenue from our
digital cable television programming business will likely decline in fiscal
2001 because we have been repositioning that business so our historical
revenues therefrom may not be sustainable. The digital television home
entertainment business faces severe competition from competing forms of
content delivery, including digital content transmitted via small satellite
dishes and the Internet, and has not experienced growth as projected.

We may be unable to successfully integrate any new companies, products or
technologies we acquire.

  We have made and may continue to make investments in and provide funding for
complementary companies, products and/or technologies. If we fail to
successfully integrate these purchases with our existing operations, our
ongoing business could be disrupted, the attention of our management and other
employees may be diverted from other important projects, and our expenses may
increase. In June 1999, we acquired a majority interest in New Media Network,
a start-up company involved in the digital delivery of music via the Internet
and retail locations. In July 1999, we acquired substantially all of the
assets of the Guthy-Renker Television Network, and we have operated that
business since then. It purchases media time from cable operators and
programmers, service providers and television broadcasters and resells such
time in packages to direct response infomercial and product sales companies.
Such acquisitions may result in difficulty integrating personnel and
operations. In addition, key personnel of the acquired businesses may decide
not to continue to work for us. If we make other types of acquisitions, we
could have difficulty assimilating the acquired technology, products or
personnel into our operations.

Morgan Stanley Dean Witter has significant influence over us, and may have an
interest in pursuing actions adverse to the interests of the holders of the
notes.

  Decisions concerning our operations or financial structure may present
conflicts of interest between the owners of capital stock and the holders of
the notes. For example, the holders of capital stock may have an interest in
pursuing acquisitions, divestitures, financings or other transactions that, in
their judgment, could enhance their equity investment, even though such
transactions might involve risks to the holders of the notes. Princes Gate
Investors II and its affiliates own 89.3% of our Series B Preferred Stock,
which ownership represents 54.8% of our outstanding voting capital stock on an
as-converted basis or 44.4% of the voting capital stock on an as-converted,
diluted basis including currently outstanding options and warrants exercisable
for voting capital stock. The general partners of Princes Gate Investors II
(PGI) and Morgan Stanley, our investment banker, are both wholly owned
subsidiaries of Morgan Stanley Dean Witter, and several of our directors

                                      35
<PAGE>

are employees of Morgan Stanley and/or PGI. As a result of these
relationships, Princes Gate Investors II, Morgan Stanley Dean Witter and its
affiliates have, and will continue to have, significant influence over our
management policies and our corporate affairs. See "Certain Relationships and
Related Transactions" and "Security Ownership of Certain Beneficial Owners and
Management."

Our certificate of incorporation requires us, upon demand, to redeem all of
the outstanding shares of our Series B Preferred Stock in August 2002. We may
be unable to satisfy this requirement, and our creditworthiness, business
condition and value of our equity could be harmed as a result.

  Our certificate of incorporation requires us, upon demand, to redeem all of
the outstanding shares of our Series B Preferred Stock in August 2002, the
mandatory redemption date, for $54.4 million, unless such shares of Series B
Preferred Stock have previously been converted into our common stock at the
option of the holders thereof, or automatically converted upon our initial
public offering. Notwithstanding this requirement, the terms of the notes
significantly limit a redemption by us from available cash, but will permit us
to redeem the Series B Preferred Stock with the proceeds of an equity
financing. If we fail to redeem the Series B Preferred Stock, we would
continue to be in breach under our certificate of incorporation from the
redemption date until the date of a refinancing, if any. Although a breach of
this type has been excluded from the cross default provisions of the notes, it
may trigger default provisions in other financial instruments to which we may
then be a party. We cannot be certain that holders of Series B Preferred Stock
will not take legal action against us in an attempt to enforce their
redemption right, demand that we renegotiate the terms of the Series B
Preferred Stock or sell additional equity to finance the redemption. Although
these actions may not directly effect the notes, they may harm our financial
condition and have a dilutive effect on the interests of our equity holders. A
substantial majority of our Series B Preferred Stock is held by Princes Gate
Investors II. See "Certain Relationships and Related Transactions" and
"Security Ownership of Certain Beneficial Owners and Management."

The notes are subject to original issue discount tax treatment and may be
subject to high-yield discount obligation tax rules.

  The notes will be treated as issued with original issue discount for U.S.
federal income tax purposes, so that holders of the notes generally will be
required to include amounts in gross income for U.S. federal income tax
purposes in advance of receipt of the cash payments to which the income is
attributable. Furthermore, the notes may be subject to the high yield discount
obligation rules, which will defer and may, in part, eliminate our ability to
deduct for U.S. federal income tax purposes the original issue discount
attributable to the notes. Accordingly, our after-tax cash flow might be less
than if the original issue discount on the notes was deductible when it
accrued.

  If a bankruptcy case were commenced by or against us under the Bankruptcy
Code of 1978, as amended, after the issuance of the notes, the claim of a note
holder with respect to the principal amount thereof may be limited to an
amount equal to the sum of:

  . the initial offering price and

  . that portion of the original issue discount that is not deemed to
    constitute "unmatured interest" for purposes of the bankruptcy code.

  Any original issue discount that was not amortized as of the date of any
such bankruptcy filing would constitute "unmatured interest."

Our obligations under the notes may be diminished if the transfer of the notes
was fraudulent or made us insolvent.

  Under applicable provisions of the federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if, at the time we issued the
notes or made any payment in respect of the notes, either:

  (1) we received less than reasonably equivalent value or fair consideration
for such issuance; and

  . we were insolvent or were rendered insolvent by such issuance; or

                                      36
<PAGE>

  . were engaged or about to engage in a business or transaction for which
    our assets constituted unreasonably small capital; or

  . intended to incur, or believed that we would incur, debts beyond our
    ability to pay our debts as they matured; or

  (2) we issued the notes or made any payment thereunder with intent to
hinder, defraud or delay any of our creditors, then our obligations under some
or all of the notes could be voided or held to be unenforceable by a court or
could be subordinated to claims of other creditors, or the note holders could
be required to return payments already received.

  In particular, if we caused a subsidiary to pay a dividend in order to
enable us to make payments in respect of the notes, and such transfer were
deemed a fraudulent transfer, the holders of the notes could be required to
return the payment.

  The measure of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine
whether a fraudulent transfer has occurred. Generally, however, we would be
considered insolvent if:

  . the sum of our debts, including contingent liabilities, was greater than
    all of our assets at a fair valuation; or

  . we had unreasonably small capital to conduct our business; or

  . the present fair salable value of our assets were less than the amount
    that would be required to pay the probable liability on our existing
    debts, including contingent liabilities, as they become absolute and
    mature.

  We believe that we will not be insolvent at the time of or as a result of
the issuance of the notes, that we will not engage in a business or
transaction for which our remaining assets constitute unreasonably small
capital, and that we will not incur debts beyond our ability to pay such debts
as they mature. We cannot assure you, however, that a court passing on such
questions would agree with our analysis.

  Under certain circumstances, our subsidiaries will be required to guarantee
our obligations under the indenture and the notes. If any subsidiary enters
into such a guarantee, and bankruptcy or insolvency proceedings are initiated
by or against that subsidiary within 90 days or, possibly, one year, after
that subsidiary issued a guarantee or after that subsidiary incurred
obligations under its guarantee in anticipation of insolvency, then all or a
portion of the guarantee could be avoided as a preferential transfer under
federal bankruptcy or applicable state law. In addition, a court could require
holders of the notes to return all payments made within any such 90 day or,
possibly, one year, period as preferential transfer.

Applicable bankruptcy law is likely to impair the trustee's right to foreclose
upon the pledged securities.

  The right of the trustee under the indenture and the pledge agreement
relating to the notes to foreclose upon and sell the pledged securities upon
the occurrence of an event of default on the notes is likely to be
significantly impaired by applicable bankruptcy law if a bankruptcy or
reorganization case were to be commenced by or against us or one of our
subsidiaries. Under applicable bankruptcy law, secured creditors such as the
holders of the notes are prohibited from foreclosing upon or disposing of a
debtor's property without prior bankruptcy court approval.

Item 7(a). Quantitative and Qualitative Disclosures About Market Risk

  We are exposed to minimal market risks. Sensitivity of results of operations
to these risks is managed by maintaining a conservative investment portfolio,
which is comprised solely of highly-rated, short-term investments. We do not
hold or issue derivative, commodity instruments or other financial instruments
for trading purposes.


                                      37
<PAGE>

  We are exposed to interest rate risk, as additional financing may be
periodically utilized primarily to fund operating expenses and capital
expenditures. The interest rate that we may be able to obtain on financings
will depend on market conditions at that time and may differ from the rates we
have secured in the past.

Item 8. Consolidated Financial Statements and Supplementary Data

  The information required by this item is listed in Item 14 of Part IV of this
report.

Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure

  Not applicable.

                                       38
<PAGE>

                                   PART III

Item 10. Executive Officers and Directors

  Our executive officers and directors and their ages as of March 31, 2000 are
as follows:

<TABLE>
<CAPTION>
 Name                      Age Position
 ----                      --- --------
 <C>                       <C> <S>
 Stuart Z. Levin..........  52 Chairman of the Board of Directors and Chief
                                Executive Officer
 Arthur Fields............  62 Senior Executive Vice President, General
                                Counsel, Chief Administrative Officer, Director
                                and Secretary
 Linda Blazy..............  45 Senior Vice President, Satellite Marketing
 Leo I. Bluestein, Ph.D...  63 Chief Technical Officer
 Anthony Ciesniewski......  55 Vice President, Network Operations & Engineering
 Richard Colletto.........  47 Vice President, Programming
 John McWilliams..........  37 Senior Vice President, Finance
 Stephen C. Rockabrand....  50 Senior Vice President
 Dom Stasi................  57 Vice President, Technology Development
 Gregory A. Thomas........  35 Chief Operating Officer of GRTV Network, Inc.
 James P. Riley...........  38 Senior Vice President, Business Development
 S. Robert Levine, M.D....  45 Director
 Stephen R. Munger........  42 Director
 Martin A. Pasetta........  67 Director
 David R. Powers..........  32 Director
 Jerome H. Turk...........  56 Director
 James M. Wilmott.........  36 Director
 Thomas A. Clayton........  33 Director
</TABLE>

  Stuart Z. Levin founded TVN in 1987 and served as President and Chief
Executive Officer from then to September 1997. In September 1997, Mr. Levin
became Chairman of the Board of Directors and Chief Executive Officer. Prior
to joining TVN, Mr. Levin founded and operated a company that delivered
satellite-fed pay television and pay per view programming to hotels and
apartment complexes from 1980 to 1984. In 1984, Mr. Levin began work on the
initial plan for TVN.

  Arthur Fields, a co-founder of TVN, joined us in January 1989 as Senior
Executive Vice President, General Counsel and Chief Administrative Officer.
Prior to joining TVN, Mr. Fields was a partner at the law firm of Ervin, Cohen
& Jessup in Beverly Hills, California. Mr. Fields received a B.S. in Pharmacy
from Columbia University and a J.D. from Loyola Law School.

  Linda Blazy joined TVN in 1991 as Vice President, Marketing, Sales &
Creative Services. From November 1995 to September 1997, Ms. Blazy served as
our Senior Vice President, Marketing, Sales & Creative Services. In September
1997, Ms. Blazy became our Senior Vice President, Consumer Marketing and in
March 1999 became our Senior Vice President, Satellite Marketing. Prior to
joining TVN in 1991, Ms. Blazy held a number of marketing and management
positions in the home video industry. Ms. Blazy received a B.S. in Marketing
from Arizona State University.

  Anthony Ciesniewski joined TVN in August 1998 as Vice President, Network
Operations & Engineering. He oversees all aspects of our Digital Network
Operations Center, including day-to-day staff management and the
implementation of such technical functions as compression, encryption, access
control, automated ordering and transactional services. Mr. Ciesniewski joined
TVN from Kelly Broadcasting Co. in Sacramento, where he had been Director of
Engineering since August 1996. From September 1997 through March 1998, he was
Consulting Engineer for Ziff-Davis Publishing, where he designed their digital
cable television broadcast facility in San Francisco. From March 1986 through
August 1996 he was Vice President, Engineering & Operations for Fox Tape, a
division of 20th Century Fox. Mr. Ciesniewski won a 1994 Emmy Award for
Technical Team/Studio

                                      39
<PAGE>

for "NFL on Fox." He belongs to the Society of Broadcast Engineers, the
Academy of Television Arts & Sciences, and the Society of Motion Picture and
Television Engineers.

  Leo I. Bluestein joined TVN on a full-time basis in April 1996 as Chief
Technical Officer. From April 1989 to April 1996, Dr. Bluestein was a
consultant to us and a number of other companies in the areas of encryption
and conditional access technology. Dr. Bluestein was a Vice President with
responsibilities in the Government Systems and VideoCipher divisions of M/A-
Com Linkabit, Inc., a subsidiary of M/A Com, Inc., a diversified electronics
company, and was a director of the Advanced Technology Group at Oak
Industries, Inc., a pay television product company. Dr. Bluestein received a
B.S. in Electrical Engineering from the College of the City of New York, and
an M.S. in Electrical Engineering and a Ph.D. in Electrical Engineering from
Columbia University.

  Rick Colletto joined TVN in January 1998 as Vice President, Programming and
is responsible for overseeing the programming and scheduling of our digital
and analog channels. Prior to joining TVN, Mr. Colletto was Director, Video-
On-Demand for Time Warner, Inc.'s Full Service Network in Orlando, Florida
from May 1994 to December 1997. Mr. Colletto served as Marketing Director of
Oceanic Cable, a Hawaiian affiliate of Time Warner from December 1992 to May
1994. Mr. Colletto received a B.A. in Communications from the University of
Hawaii.

  John McWilliams joined TVN in December 1994 as Controller and was named Vice
President, Finance in November 1995. In August 1998, Mr. McWilliams was named
Senior Vice President, Finance and is responsible for our accounting,
financial reporting and financial planning systems, overseeing risk management
and administering our employee benefit plans. Mr. McWilliams was an
independent consultant from July 1993 to December 1994. From September 1992 to
July 1993, Mr. McWilliams was the Controller for Action Pay-Per-View, a
national PPV network. Mr. McWilliams received a B.S. in Accounting from the
University of Tennessee, Knoxville, and was certified as a public accountant
in California in 1990.

  Stephen C. Rockabrand joined TVN in January 1996 as Senior Vice President,
Programming and New Business Development and in January 1998 became our Senior
Vice President, New Business Development. In September 1998, Mr. Rockabrand
was named Senior Vice President for live and special event programming. From
1990 to January 1996, Mr. Rockabrand served as Vice President, Pay Television,
Ancillary Markets and New Technologies at Paramount Pictures Corporation, a
motion picture and television studio.

  Dom Stasi joined TVN in December 1998 as Vice President, Technology
Development and is responsible for developing video and data applications for
use in video-on-demand and interactive systems. Prior to joining TVN, Mr.
Stasi spent seven years as an engineering executive with TCI and its Liberty
Media program networks. From July 1997 to October 1998, Mr. Stasi was Vice
President, Engineering and Operations for Your Choice TV. From October 1994 to
July 1997, Mr. Stasi served as Vice President, Network Video Services for the
Technology Ventures division, and from June 1993 to October 1994, Mr. Stasi
was Vice President, Technology and Operations for Request TV. Mr. Stasi holds
an engineering degree from the State University of New York, and is a member
of the NCTA Engineering Committee, the Society of Cable Telecommunications
Engineers, and the Society of Motion Picture and Television Engineers.

  Gregory A. Thomas joined TVN in July 1999 as Chief Operating Officer of GRTV
Network, Inc. when we acquired substantially all the assets of Guthy-Renker
Television Network. Mr. Thomas became Chief Operating Officer of Guthy-Renker
Television Network, a satellite-delivered direct response marketing company,
in 1998. In 1994, Mr. Thomas founded Coast to Coast Media, LLC, a time buying
service for infomercials to service his own productions. Mr. Thomas served as
President of Coast to Coast from 1994 until Coast to Coast was acquired by
Guthy-Renker Television Network in 1998. Mr. Thomas holds a Bachelor's Degree
in History from the University of California at Los Angeles.

  James P. Riley joined TVN in July 1999 as Senior Vice President, Business
Development and is responsible for sales, marketing, and business development
of TVN's digital services. From January 1997 through July 1999,

                                      40
<PAGE>

Jim served as Vice President of GRTV Networks, a national direct response
marketing service owned by Guthy-Renker Corporation. From September 1998
through January 1997, Riley held several roles at E! Entertainment Television,
including VP Cable Distribution and VP of Broadband Technologies. Riley is a
member of the CTAM Interactive Television Committee and holds a Bachelor's
Degree in Mass Communications and Philosophy from Fordham University.

  S. Robert Levine, M.D. has been a member of TVN's Board of Directors since
October 1990. In March of 1983, Dr. Levine established the Cardiac Health and
Rehabilitation Program at New York's Mount Sinai Medical Center and served as
its director until October 1986. In November 1996, Dr. Levine was named
Chairman of the Progressive Policy Institute's "Health Priorities Project."
Dr. Levine also recently completed a three year term as a member of the
National Institute of Health's National Institute of Diabetes, Digestive and
Kidney Diseases Advisory Council, and he currently serves as Chairman of the
Clinical Affairs Advisory Board for the Juvenile Diabetes Foundation
International, the world's largest non-profit, non-governmental funder of
diabetic research ($120 million in FY 2001). Dr. Levine is also Chairman of
Decision Support Systems, Inc., a development-stage healthcare content
services company. Dr. Levine received a BS in Human Development and Nutrition
from Cornell University in 1975 and an M.D., summa cum laude, from Loyola-
Stritch School of Medicine in 1979.

  Stephen R. Munger has been a member of TVN's Board of Directors since
December 1997. Mr. Munger is a Managing Director and co-head of the Mergers,
Acquisitions and Restructuring Department of Morgan Stanley. From September
1997 through September 1999, Mr. Munger was President of PG Investors II,
Inc., the general partner of Princes Gate Investors II, L.P. Mr. Munger joined
Morgan Stanley in 1988 and served in various capacities prior to being named
Managing Director in 1993. Mr. Munger is also a member of the Board of
Directors of ImpSat Fiber Networks, Inc. Mr. Munger received a B.A. in
Government from Dartmouth College and an M.B.A. from The Wharton School.

  Martin A. Pasetta has been a member of TVN's Board of Directors since
October 1988. Mr. Pasetta retired from a 42 year career as a director and
producer of television specials and programs, including 17 years directing the
Academy Awards from 1972 to 1989. Mr. Pasetta produced and directed Inaugural
Galas for Presidents Carter and Reagan, in addition to the first U.S.
satellite television entertainment broadcast. Mr. Pasetta received an Honorary
Doctorate in Fine Arts from the University of Santa Clara.

  David R. Powers has been a member of our Board of Directors since September
1997. Since March 2000, Mr. Powers has been a Managing Director of Gramercy
Communications Partners, a private equity firm specializing in communications
investing. Mr. Powers was in the Private Investment Department of Morgan
Stanley, becoming a Principal in December 1998 and a Vice President of PG
Investors II, Inc., the general partner of Princes Gate Investors II, L.P. in
1996. From August 1992 to May 1994 Mr. Powers was an Associate in the Mergers,
Acquisitions and Restructuring Department and has served in various other
capacities at Morgan Stanley since 1989. Mr. Powers received a B.A. in
Mathematics and Economics from Amherst College.

  Jerome H. Turk has been a member of TVN's Board of Directors since October
1998. Mr. Turk has been retired since January 1997. From November 1994 to
December 1996, Mr. Turk was a member of the Board of Directors of Fitzgeralds
Gaming Corporation, most recently as Chairman of the Board. From September
1985 to October 1988, Mr. Turk worked for Oppenheimer & Co., most recently as
a Managing Director. Mr. Turk received a B.B.A. from Adelphi University and a
J.D. from Brooklyn Law School. Mr. Turk is a certified public accountant and a
member of the bar in the State of New York.

  James M. Wilmott has been a member of TVN's Board of Directors since April
2000. Mr. Wilmott is a Principal of Morgan Stanley Dean Witter and Deputy Head
of the Private Investment Department. Since joining Morgan Stanley Dean Witter
in 1986, Mr. Wilmott has worked for extended periods in both London and New
York. Until 1996, he worked on a variety of Merger, Acquisition and
Restructuring transactions involving clients representing a wide range of
industries. Mr. Wilmott has been a member of the Private Investment Department
since 1996. Mr. Wilmott is currently a Vice President of PG Investors III,
Inc., the general partner of Princes Gate Investors III, L.P. Mr. Wilmott
graduated from the University of North Carolina at Chapel Hill with an A.B. in
Economics, and he received his M.B.A. from the Harvard Business School.

                                      41
<PAGE>

  Thomas A. Clayton has been a member of TVN's Board of Directors since April
2000. Mr. Clayton is a Vice President of Morgan Stanley Dean Witter and a
member of the Private Investment Department. Mr. Clayton joined Morgan Stanley
Dean Witter in 1989 and worked for two years in the Mergers, Acquisitions and
Restructuring Department focusing on Media, Telecommunications and Technology
companies. Upon returning to Morgan Stanley Dean Witter in 1995, Mr. Clayton
worked on a variety of Merger, Acquisition and Restructuring transactions,
involving clients representing a wide range of industries. Mr. Clayton has
been a member of the Private Investment Department since 1997. Mr. Clayton is
currently a Vice President of PG Investors III, Inc., the general partner of
Princes Gate Investors III, L.P. In addition, Mr. Clayton is a Vice President
of Morgan Stanley Dean Witter Equity Funding, Inc. Mr. Clayton graduated from
Yale University with a B.A. in History and he received a J.D. from The Yale
Law School.

 Director Compensation

  Members of our Board of Directors do not receive compensation for their
service as directors.

Item 11. Executive Compensation

 Summary of Cash and Certain Other Compensation

  The following table sets forth information concerning the compensation
received for services rendered to us during fiscal 2000 by our Chief Executive
Officer and our four next most highly compensated executive officers whose
total compensation in fiscal 2000 equaled or exceeded $100,000 ("Named
Executive Officers"):

                          Summary Compensation Table

<TABLE>
<CAPTION>
                                                                    Long-Term
                                                                   Compensation
                                                                      Awards
                                        Annual Compensation         Number of
                                 ---------------------------------  Securities
Name and Principal                                  Other Annual    Underlying
Positions                   Year  Salary   Bonus   Compensation(1)  Options(2)
------------------          ---- -------- -------- --------------- ------------
<S>                         <C>  <C>      <C>      <C>             <C>
Stuart Z. Levin............ 2000 $475,205 $200,000     $39,755           --
 Chairman and Chief
  Executive Officer
James B. Ramo(3)........... 2000  253,570  200,000     677,714           --
 President and Chief
  Operating Officer
Arthur Fields.............. 2000  361,249  100,000      80,231           --
 Senior Executive Vice
 President, General
 Counsel, Chief
 Administrative Officer and
 Secretary
Gregory Pasetta(4)......... 2000  258,750   80,000       4,500       150,000
 Senior Vice President
Gregory A. Thomas.......... 2000  124,327  150,000       8,750       150,000
 Chief Operating Officer,
  GRTV Network, Inc.
James P. Riley............. 2000  110,769  100,000       4,800        20,000
 Senior Vice President,
  Business Development
Stephen C. Rockabrand...... 2000  180,000   10,000         --            --
 Senior Vice President
</TABLE>
--------
(1) Represents car allowance and employer paid premiums for life insurance
    policies.

(2) These shares are subject to stock options granted under the 1996 Stock
    Option Plan. See Table entitled "Option Grants in Last Fiscal Year" for an
    explanation of the vesting provisions of such stock options.

(3) Other Annual Compensation for James B. Ramo also includes payment of our
    obligation pursuant to his employment agreement upon Mr. Ramo's
    resignation in September 1999.

(4) Effective December 31, 1999, Gregory Pasetta accepted a position as
    President and Chief Operating Officer of Netsmart, Inc. and is consulting
    to TVN.

                                      42
<PAGE>

  The following table sets forth certain information for the fiscal year ended
March 31, 2000 with respect to options granted to the Named Executive
Officers.

                       Option Grants in Last Fiscal Year

<TABLE>
<CAPTION>
                                     Individual Grants
                         -----------------------------------------
                                                                        Potential
                                                                    Realizable Value
                                                                    at Assumed Annual
                                  % of Total                         Rates of Stock
                                   Options                         Price Appreciation
                                  Granted to  Exercise             for Option Term(1)
                         Options Employees in Price Per Expiration -------------------
Name                     Granted Fiscal Year    Share      Date       5%        10%
----                     ------- ------------ --------- ---------- --------- ---------
<S>                      <C>     <C>          <C>       <C>        <C>       <C>
Stuart Z. Levin.........     --       --          --          --         --        --
James B. Ramo(2)........     --       --          --          --         --        --
Arthur Fields...........     --       --          --          --         --        --
Gregory Pasetta(3)...... 150,000     18.5%     $11.00    11/09/09  2,687,676 4,279,675
Gregory A. Thomas....... 100,000     12.3%     $11.00    11/09/09  1,791,784 2,853,117
Gregory A. Thomas.......  50,000      6.2%     $11.00     1/01/10    895,892 1,426,558
James P. Riley..........  20,000      2.5%     $11.00     11/9/09    358,357   570,623
Stephen C. Rockabrand...     --       --          --          --         --        --
</TABLE>
--------
(1) Amounts represent hypothetical gains that could be achieved for the
    respective options if exercised at the end of the option term. The assumed
    5% and 10% rates of stock price appreciation are mandated by the Rules of
    the Securities and Exchange Commission and do not represent our estimate
    or projection of future Common Stock price. Actual gains, if any, on stock
    option exercises are dependent on our future financial performance,
    overall conditions and the option holder's continued employment through
    the vesting period and option term. This table does not take into account
    any appreciation in the fair market value of the Common Stock from the
    date of grant to the date of this Report, other than the columns
    reflecting assumed rates of appreciation of 5% and 10%.

(2)  James B. Ramo resigned as director and as President and Chief Operating
     Officer in September 1999.

(3) Effective December 31, 1999, Gregory Pasetta accepted a position as
    President and Chief Operating Officer of Netsmart, Inc. and is consulting
    to TVN.

  The following table sets forth certain information with respect to the
number and value of stock options held by each Named Executive Officer as of
March 31, 2000.

  Aggregate Option Exercises in Fiscal 2000 and Option Values as of March 31,
                                     2000

<TABLE>
<CAPTION>
                                                      Number of Securities      Value of Unexercised
                           Number                    Underlying Unexercised     In-the-Money Options
                          of Shares                 Options at March 31, 2000   at March 31, 1999(2)
                          Acquired       Value      ------------------------- -------------------------
Name                     on Exercise Realized($)(1) Exercisable Unexercisable Exercisable Unexercisable
----                     ----------- -------------- ----------- ------------- ----------- -------------
<S>                      <C>         <C>            <C>         <C>           <C>         <C>
Stuart Z. Levin.........      --           --         679,187      212,520    $7,945,004   $1,494,993
James B. Ramo...........      --           --             --           --            --           --
Arthur Fields...........      --           --         366,667       33,333     4,300,000          --
Gregory Pasetta.........      --           --         100,000      200,000     1,075,000          --
Gregory A. Thomas.......      --           --          33,333      116,667           --           --
James P. Riley..........      --           --          13,333        6,667           --           --
Stephen C. Rockabrand...      --           --          83,333       16,667       895,830      170,837
</TABLE>
--------
(1) "Value Realized" is calculated on the basis of the fair market value of
    the Common Stock on the date of exercise minus the exercise price, despite
    the fact that none of such shares have been sold.

(2) Based upon the fair market value of $11.00 per share as of the fiscal year
    end minus the exercise price.

(3)  In connection with his resignation as a director and as President and
     Chief Operating Officer, we paid Mr. Ramo approximately $1.9 million in
     connection with the cancellation of options to purchase 599,775 shares of
     the Company's common stock previously granted to Mr. Ramo, as well as the
     satisfaction of other equity participation provisions arising under his
     employment agreement.

                                      43
<PAGE>

Benefit Plans

  1996 Stock Option Plan. Our 1996 Stock Option Plan (the "1996 Option Plan")
was adopted by the Board of Directors and approved by the stockholders in
January 1996. In August 1997, the Board and the stockholders approved an
increase in the number of shares reserved under the 1996 Option Plan by
600,000 shares for a total of 3,000,000 shares of Common Stock. In April 1999,
the Board approved the reservation of an additional 993,899 shares under the
1996 Option Plan, subject to stockholder approval. The 1996 Option Plan
provides for grants of incentive stock options to our employees (including
officers and employee directors) and nonstatutory stock options to our
employees, directors and consultants. The purpose of the 1996 Option Plan is
to attract and retain the best available personnel and to encourage stock
ownership by our employees, officers and consultants in order to give them a
greater personal stake in our success. The 1996 Option Plan is administered by
the Board of Directors, which determines optionees and the terms of options
granted, including the exercise price, number of shares subject to the option
and the exercisability thereof.

  As of March 31, 2000, 73,250 shares of Common Stock had been issued upon the
exercise of options granted under 1996 Option Plan, options to purchase
2,642,707 shares of Common Stock at a weighted average exercise price of $2.89
per share were outstanding and 1,277,942 shares remained available for future
grant.

  The term of an option granted under the 1996 Option Plan is stated in the
option agreement. The terms of options granted under the 1996 Option Plan
generally may not exceed ten years, and in the case of an incentive option or
nonstatutory option granted to an optionee who, at the time of grant, owns
stock representing more than 10% of our outstanding capital stock, the term of
such option may not exceed five years. Options granted under the 1996 Option
Plan generally vest and become exercisable as set forth in the option
agreement. In general, no option may be transferred by the optionee other than
by will or the laws of descent or distribution, and each option may be
exercised, during the lifetime of the optionee, only by such optionee. An
optionee whose relationship with us or any related corporation ceases for any
reason (other than by death or permanent and total disability) may exercise
options in the 90 day period following such cessation, unless such options
terminate or expire sooner (or for nonstatutory options, later), by their
terms, but only to the extent the option had vested on such date of cessation.
In the event of death or total and permanent disability, the option may be
exercised in the twelve month period following the date of death or total and
permanent disability unless such options terminate or expire sooner (or for
nonstatutory options, later), but only to the extent the option had vested on
the date of death or disability.

  In the event we merge with or into another corporation, all outstanding
options may either be assumed or an equivalent option may be substituted by
the surviving entity or, if such options are not assumed or substituted, such
options shall become exercisable as to all of the shares subject to the
options, including shares as to which they would not otherwise be exercisable.
In the event that options become exercisable in lieu of assumption or
substitution, the Board of Directors shall notify optionees that all options
shall be fully exercisable for a period of 15 days, after which such options
shall terminate.

  The Board of Directors determines the exercise price of options granted
under the 1996 Option Plan at the time of grant, provided that the exercise
price of all incentive stock options must be at least equal to the fair market
value of the shares on the date of grant. With respect to any participant who
owns stock possessing more than 10% of the voting rights of our outstanding
capital stock, the exercise price of any incentive stock option or any
nonstatutory stock option granted must equal at least 110% of the fair market
value on the grant date. The consideration for exercising any incentive stock
option or any nonstatutory stock option may consist of cash, check, promissory
note, delivery of already-owned shares of our Common Stock subject to certain
conditions, a reduction in the amount of any Company liability to an optionee
or any combination of the foregoing methods of payment or such other
consideration or method of payment to the extent permitted under applicable
law. No incentive stock options may be granted to a participant, which, when
aggregated with all other incentive stock options granted to such participant,
would have an aggregate fair market value in excess of $100,000 becoming
exercisable in any calendar year. The 1996 Option Plan will terminate in
January 2006, unless sooner terminated by the Board of Directors.


                                      44
<PAGE>

Limitation of Liability and Indemnification Matters

  As permitted by the Delaware General Corporation Law, we have included in
our Certificate of Incorporation a provision to eliminate the personal
liability of our directors for monetary damages for breach or alleged breach
of their fiduciary duties as directors, subject to certain exceptions. In
addition, our Bylaws provide that we are required to indemnify our officers
and directors under certain circumstances, including those circumstances in
which indemnification would otherwise be discretionary, and we are required to
advance expenses to our officers and directors as incurred in connection with
proceedings against them for which they may be indemnified. We believe that
our charter provisions are necessary to attract and retain qualified persons
as directors and officers. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers or persons
controlling us pursuant to the foregoing provisions, we have been informed
that, in the opinion of the Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable. At
present, we are not aware of any pending or threatened litigation or
proceeding involving any of our directors, officers, employees or agents in
which indemnification would be required or permitted.

Item 12. Security Ownership of Certain Beneficial Owners and Management

  The following table sets forth certain information regarding the beneficial
ownership of our capital stock as of March 31, 2000, as adjusted to give
effect to the transactions contemplated in this Report, (i) by each of our
directors and each of the Named Executive Officers, (ii) by all directors and
executive officers as a group, and (iii) by each person who is known by us to
own beneficially more than 5% of our Common Stock on an as-converted basis.

<TABLE>
<CAPTION>
                                               Number of Number of   Percent
                                               Shares of Shares of  Ownership
                                                Common   Preferred  of Voting
Beneficial Owner                                 Stock     Stock     Stock(1)
----------------                               --------- ---------  ---------
<S>                                            <C>       <C>        <C>
Entities affiliated with Princes Gate
 Investors II, L.P.(2)........................       --  10,857,338   54.8%
 1585 Broadway
 New York, New York 10036
Storie Partners, L.P..........................       --     946,563    4.8
 1 Bush Street, Suite 1350
 San Francisco, California 94104
Stuart Z. Levin(3)............................   855,677    938,398    8.7
James B. Ramo.................................       --         --     --
Arthur Fields(4)..............................   400,000    397,307    3.9
Gregory Pasetta(5)............................   100,000        --      *
Gregory A. Thomas(6)..........................    33,333        --      *
James P. Riley(7).............................    13,333        --      *
Stephen C. Rockabrand(8)......................    86,667        --      *
S. Robert Levine, M.D.........................       --   3,332,835   16.8
Stephen R. Munger(2)..........................       --  10,857,338   54.8
Martin A. Pasetta(9)..........................       --     352,883    1.8
David R. Powers...............................       --         --      *
Jerome H. Turk................................       --     172,102     *
James M. Wilmott(2)...........................       --  10,857,338   54.8
Thomas A. Clayton(2)..........................       --  10,857,338   54.8
All directors and executive officers as a
 group (18 persons)(10)....................... 1,741,842 16,050,863   82.9
</TABLE>
--------
 * Less than 1%.

(1) Applicable percentage of ownership is based on 173,350 shares of Common
    Stock and 19,654,671 shares of Preferred Stock outstanding as of March 31,
    2000, together with applicable options and warrants for each stockholder.
    Beneficial ownership is determined in accordance with the rules of the
    Securities and Exchange Commission. Except as indicated in the footnotes
    to this table and pursuant to applicable community property laws, the
    stockholder named in the table has sole voting and investment power with
    respect to the

                                      45
<PAGE>

      shares set forth opposite such stockholder's name. Shares of Common Stock
      or Preferred Stock subject to options or warrants that are presently
      exercisable or exercisable within 60 days of March 31, 2000, are deemed
      to be beneficially owned by the person holding such options for the
      purpose of computing the percentage of ownership of such person but are
      not treated as outstanding for the purpose of computing the percentage of
      any other person.

 (2)  Includes an aggregate of 8,797,318 shares of Series B-1, B-3 and B-4
      Preferred Stock held by Princes Gate Investors II, L.P., an aggregate of
      592,812 shares of Series B-1, B-3 and B-4 Preferred Stock held by Acorn
      Partnership II, L.P., an aggregate of 586,883 shares of Series B-1, B-3
      and B-4 Preferred Stock held by PGI Investments Limited, an aggregate of
      293,442 shares of Series B-1, B-4 and B-4 Preferred Stock held by Gregor
      von Opel and an aggregate of 586,883 shares of Series B-1, B-3 and B-4
      Preferred Stock held by Investor Investments AB. Mr. Wilmott, Mr. Munger
      and Mr. Clayton, all of whom are directors of TVN and are also employees
      of Morgan Stanley, an affiliate of Princes Gate Investors II, L.P. Each
      disclaims beneficial ownership of the shares held by these funds.

 (3)  Includes 266,196 shares of Series A Preferred Stock held by Mr. Levin's
      former wife over which Mr. Levin exercises voting power but as to which
      Mr. Levin disclaims beneficial ownership. Includes 755,577 shares of
      Common Stock which may be acquired upon exercise of stock options which
      are presently exercisable or will become exercisable within 60 days of
      March 31, 2000.

 (4)  Includes 397,307 shares of Series A Preferred Stock held by the Arthur
      and Soni Fields Family Trust over which Mr. Fields may be deemed to have
      voting and investment power. Includes 400,000 shares of Common Stock
      which may be acquired upon exercise of stock options which are presently
      exercisable or will become exercisable within 60 days of March 31, 2000.

 (5)  Includes 100,000 shares of Common Stock which may be acquired upon
      exercise of stock options which are presently exercisable or will become
      exercisable within 60 days of March 31, 2000.

 (6)  Includes 33,333 shares of Common Stock which may be acquired upon
      exercise of stock options which are presently exercisable or will become
      exercisable within 60 days of March 31, 2000.

 (7)  Includes 13,333 shares of Common Stock which may be acquired upon
      exercise of stock options which are presently exercisable or will become
      exercisable within 60 days of March 31, 2000.

 (8)  Includes 86,667 shares of Common Stock which may be acquired upon
      exercise of stock options which are presently exercisable or will become
      exercisable within 60 days of March 31, 2000.

 (9)  Includes 352,883 shares of Series A Preferred Stock held by the Pasetta
      Family Trust over which Mr. Pasetta may be deemed to have voting and
      investment power.

(10)  Includes 1,641,742 shares of Common Stock which may be acquired upon
      exercise of stock options which are presently exercisable or will become
      exercisable within 60 days of March 31, 2000.

Item 13. Certain Relationships and Related Transactions

Related Party Transactions

  In May 1992, we assumed the obligations of the limited partnership that was
our predecessor in interest including specific obligations to repay funds
advanced to it by certain stockholders including Stuart Z. Levin, our Chairman
and Chief Executive Officer, and S. Robert Levine, M.D., a member of our Board
of Directors. Accordingly, we have Contingent Notes Payable to (i) Stuart Z.
Levin, in the amount of $55,336, including principal and interest accrued
through March 31, 2000; and (ii) S. Robert Levine in the amount of $992,586
including principal and interest accrued through March 31, 2000.

  During the period from fiscal 1993 to fiscal 1999, we have made a series of
advances to Stuart Z. Levin, our Chairman and Chief Executive Officer, and Mr.
Levin has from time to time made periodic repayments toward such advances. As
of March 31, 2000, the outstanding amount of such advances, net of repayments,
aggregated $230,000. Such advances are payable to us upon demand and do not
bear interest.

  In February 1996, we effected a recapitalization pursuant to which each of
the 729,180 shares of then outstanding Common Stock was exchanged for
10.5948568 shares of Series A Preferred Stock. Prior to the recapitalization,
the only outstanding capital stock was Common Stock. The recapitalization and
related exchange of Common Stock for Preferred Stock was not a financing
transaction and did not generate any proceeds to us.


                                      46
<PAGE>

  During the period from June 1996 through November 1996, we issued and sold
convertible promissory notes in the aggregate principal amount of $5.5 million
(the "Convertible Notes") to Storie Partners, L.P., which owns greater than 4%
of our voting securities, and to certain other investors. The Convertible
Notes accrued simple interest at the annual rate of 10% and were convertible
upon the consummation of a qualified equity financing occurring on or before
December 31, 1998 (the "Financing") into shares of capital stock issued in
connection with the Financing. The Convertible Notes were accompanied by
warrants exercisable for the purchase of an aggregate of 500,002 shares of our
capital stock issued in connection with the Financing (the "Debt Financing
Warrants").

  In August 1997, we entered into an agreement (the "Securities Purchase
Agreement") with PGI II and the holders of the Convertible Notes to issue and
sell an aggregate of 5,714,442 shares of Series B-1 Preferred Stock for
$2.6249 per share, 1,290,767 shares of Series B-2 Preferred Stock for $5.8105
per share and warrants exercisable for the purchase of 500,002 shares of
Series B-2 Preferred Stock at a per share price of $5.8105 (the "Series B-2
Warrants"), 2,285,727 shares of Series B-3 Preferred Stock for $6.5625 per
share and 1,428,584 shares of Series B-4 Preferred Stock for $10.4999 per
share.

  Pursuant to the terms of the Securities Purchase Agreement, PGI II was
obligated to purchase all the shares of Series B-1 Preferred Stock and was
granted an option to purchase all of the shares of Series B-3 Preferred Stock
exercisable on or before February 28, 1998 and all of the shares of Series B-4
Preferred Stock exercisable on or before August 29, 1998. In December 1997, we
and PGI II amended the terms of the Securities Purchase Agreement to provide
that PGI II's options to purchase such shares in February 1998 and August 1998
would become absolute obligations in December 1997 and February 1998,
respectively, in consideration for our agreement to issue and sell a greater
number of shares of Series B-3 Preferred Stock and Series B-4 Preferred Stock
at a lower price per share for each such series. Specifically, the December
1997 amendment to the Securities Purchase Agreement obligated PGI II to
purchase 2,857,169 shares of Series B-4 Preferred Stock for $5.25 per share on
or before December 31, 1997 and to purchase 2,285,727 shares of Series B-3
Preferred Stock for $6.5625 per share on or before February 15, 1998. Such
purchases were subsequently consummated by PGI II. PGI II and its affiliates
own more than 5% of our voting securities. Two of our directors, Messrs.
Wilmott and Clayton, are employees of Morgan Stanley, an affiliate of PGI II.

  The 1,290,767 shares of Series B-2 Preferred Stock and the Series B-2
Warrants were issued to the holders of the Convertible Notes and Financing
Warrants. In consideration therefor, all of the Convertible Notes, including
all outstanding principal, were canceled and the Debt Financing Warrants were
exchanged for the Series B-2 Warrants. As a result, 946,563 shares of Series
B-2 Preferred Stock and Series B-2 Warrants exercisable for the purchase of
366,668 shares of Series B-2 Preferred Stock were acquired by Storie Partners,
L.P. On December 31, 1998, Series B-2 Warrants exercisable for 493,336 shares
of Series B-2 Preferred Stock expired unexercised in accordance with their
terms. Series B-2 Warrants exercisable for 6,666 shares of Series B-2
Preferred Stock were exercised prior to December 31, 1998.

Employment Agreements

  Stuart Z. Levin. In August 1997, Stuart Z. Levin, our Chairman of the Board
and Chief Executive Officer entered into an employment agreement with us
pursuant to which he is to receive a base salary of $450,000 for the period
September 1, 1997 through August 31, 1998, $475,000 for the period September
1, 1998 through August 31, 1999, and $500,000 for the period September 1, 1999
through August 31, 2000. The agreement provides for a bonus of $250,000 for
the fiscal year ended March 31, 1998, and for a bonus of $125,000 to $250,000
for the fiscal years ended March 31, 1999 and March 31, 2000. The agreement is
renewable for one additional two-year period at a base salary no less than
110% of Mr. Levin's base salary for the immediately preceding year and with a
minimum annual bonus of not less than $250,000. In connection with the
employment agreement, we also granted Mr. Levin an option to purchase 291,707
shares of Common Stock with an exercise price of $0.75 per share, which vests
20% at the end of the first year and monthly thereafter over the following
four years. The term of the option is ten years and the vesting of the option
is contingent upon Mr. Levin's continued employment with us.

                                      47
<PAGE>

  If we desire to terminate Mr. Levin's employment involuntarily without
cause, we are obligated to pay Mr. Levin his base salary for the shorter of
(i) two years from the date of termination, or (ii) until the agreement
terminates on September 1, 2000. In the event of such termination, we are also
obligated to pay Mr. Levin a minimum annual bonus of $125,000 for the fiscal
year in which such termination occurs.

  Arthur Fields. In August 1997, Arthur Fields, our Senior Executive Vice
President, General Counsel and Chief Administrative Officer entered into an
employment agreement with us pursuant to which he is to receive a base salary
of $350,000 for the period September 1, 1997 through August 31, 1998, $375,000
for the period September 1, 1998 through August 31, 1999, and $400,000 for the
period September 1, 1999 through August 31, 2000. The agreement provides for a
bonus of $125,000 for the fiscal year ended March 31, 1998, and for a bonus of
$62,500 to $125,000 for the fiscal years ended March 31, 1999 and March 31,
2000. The agreement is renewable for one additional two-year period at a base
salary no less than 110% of Mr. Fields' base salary for the immediately
preceding year and with a minimum annual bonus not less than $125,000.

  If we desire to terminate Mr. Fields' employment involuntarily without
cause, we are obligated to pay Mr. Fields his base salary for the shorter of
(i) two years from the date of termination, or (ii) until the agreement
terminates on September 1, 2000. In the event of such termination, we are also
obligated to pay Mr. Fields a minimum annual bonus of $62,500 for the fiscal
year in which such termination occurs.

  Gregory A. Thomas. In July 1999, Gregory A. Thomas, our President and Chief
Operating Officer of our home shopping business, entered into an employment
agreement with us pursuant to which he is to receive a base salary of $200,000
for the period July 1, 1999 through March 31, 2000, $225,000 for the period
April 1, 2000 through March 31, 2001, and $250,000 for the period April 1,
2001 through December 31, 2001. The agreement was amended in January 2000 to
provide for a bonus of up to 200% of the blended average base salary paid to
Mr. Thomas during each fiscal year within the term of the employment
agreement. The agreement provides for a bonus of $300,000 for the fiscal year
ended March 31, 2000. In connection with the employment agreement, we also
granted Mr. Thomas options to purchase 150,000 shares of Common Stock with an
exercise price of $11.00 per share, which vests as follows: 16,667 shares on
December 31, 1999, 16,666 shares on April 1, 2000, 66,667 shares vest 20% at
July 1, 2000 and monthly thereafter over the following four years and
50,000 shares vest 20% at January 1, 2001 and monthly thereafter over the
following four years. The term of the options is ten years and the vesting of
the options are contingent upon Mr. Thomas's continued employment with us.

  James P. Riley. In July 1999, James P. Riley, our Senior Vice President,
Business Development, entered into an employment agreement with us pursuant to
which he is to receive a base salary of $180,000 for the period July 1, 1999
through March 31, 2000 and $189,000 for the period from April 1, 2001 through
December 31, 2001. The agreement provides for a bonus of up to $167,500 for
the period form July 1, 1999 through March 31, 2000 and a bonus of up to
71,000 for the period from April 1, 2000 through March 31, 2001. In connection
with the employment agreement, we also granted Mr. Riley an option to purchase
200,000 shares of Common Stock with an exercise price of $11.00 per share,
which vests as follows: 13,333 shares on March 31, 2000 and 6,667 shares vest
20% at July 1, 2000 and monthly thereafter over the following four years. The
term of the option is ten years and the vesting of the option is contingent
upon Mr. Riley's continued employment with us.

  John McWilliams. In January 1996, John McWilliams, our Senior Vice
President, Finance, entered into a severance agreement with us pursuant to
which he is entitled to receive severance benefits in the form of salary
continuation for six months at his then current salary in the event his
employment is terminated by us for convenience. Mr. McWilliams' current annual
salary is $150,000.

  We believe that all of the transactions set forth above were made on terms
no less favorable than would be obtained for similar services provided to
unrelated third parties. Any future transactions between we and our executive
officers directors and their affiliates will be on terms no less favorable to
us than can be obtained from unaffiliated third parties, and any material
transactions with such persons will be approved by a majority of the
disinterested members of our Board of Directors.

                                      48
<PAGE>

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K

  (a)(1) CONSOLIDATED FINANCIAL STATEMENTS

  The Consolidated Financial Statements, together with the report thereon of
PriceWaterhouseCoopers are set forth on pages F-1-F-25 attached hereto and are
incorporated herein by reference.

<TABLE>
<CAPTION>
                                                                       Page No.
                                                                       --------
<S>                                                                    <C>
TVN Entertainment Corporation:

  Independent Auditors' Report........................................   F-1

  Consolidated Balance Sheets as of March 31, 1999 and 2000...........   F-2

  Consolidated Statements of Operations for the three years ended
   March 31, 2000.....................................................   F-3

  Consolidated Statements of Stockholders' Equity for the three years
   ended March 31, 2000...............................................   F-4

  Consolidated Statements of Cash Flows for the three years ended
   March 31, 2000.....................................................   F-5

  Notes to Consolidated Financial Statements..........................   F-8

  (a)(2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULE

  The following schedule is filed herewith:

<CAPTION>
                                                                       Page No.
                                                                       --------
<S>                                                                    <C>
Schedule II Valuation and Qualifying Accounts.........................   S-1
</TABLE>

  Schedules not listed above have been omitted because the information required
to be set forth therein is not applicable or is included in the Consolidated
Financial Statements or notes thereto.

  (a)(3) EXHIBITS

Exhibit No.

<TABLE>
 <C>   <S>
  1.1* Placement Agreement dated July 24, 1998 by and between TVN and Morgan
        Stanley & Co. Incorporated.

  3.1* Amended and Restated Certificate of Incorporation, as amended, of TVN,
        as currently in effect.

  3.2* Bylaws, as currently in effect.

  4.1* Securityholder Agreement dated as of August 29, 1997 among TVN, Princes
        Gate Investors II, L.P., Storie Partners, L.P., Wenonah Development
        Corp., Jerome H. Turk and Carole Turk Family Trust and PG Investors
        II, Inc. as Agent.

  4.2* Amendment to Securityholders Agreement dated as of December 19, 1997
        among TVN, Princes Gate Investors II, L.P., Storie Partners, L.P.,
        Wenonah Development Corp., Jerome H. Turk and Carole Turk Family Trust
        and PG Investors II, Inc. as Agent.

  4.3* Indenture dated as of July 29, 1998, by and between TVN and The Bank of
        New York, including form of 14% Senior Discount Note Due 2008.

  4.4* Warrant Agreement dated as of July 29, 1998 between TVN and The Bank of
        New York.

  4.5* Warrant registration rights agreement dated as of July 29, 1998 among
        TVN and Morgan Stanley & Co. Incorporated.

  4.6* Specimen 14% Senior Discount Note Due 2008.

  4.7* Notes registration rights agreement dated as of July 29, 1998 between
        TVN and Morgan Stanley & Co. Incorporated.

  5.1* Opinion of Irell & Manella LLP.
</TABLE>

                                       49
<PAGE>

EXHIBIT NO.

<TABLE>
 <C>    <S>
 10.1*+ Transponder Lease Agreement for Galaxy IIIR dated as of October 21,
         1994 between Hughes Communications Galaxy, Inc., and TVN.

 10.2*  Galaxy IIIR Transponder Service Agreement dated October 21, 1994
         between Hughes Communications Satellite Services, Inc. and TVN.

 10.3*+ Transponder Lease Agreement for Galaxy IX dated as of November 29, 1995
         between Hughes Communications Galaxy, Inc., and TVN and First
         Amendment to Galaxy IX Transponder Lease Agreement dated May 10, 1996.

 10.4*  Galaxy IX Transponder Service Agreement dated November 29, 1995 between
         Hughes Communications Satellite Services, Inc. and TVN.

 10.5*  1996 Stock Option Plan and related option agreement, as currently in
        effect.

 10.6*+ Service and License Agreement dated June 9, 1997 between National
         Digital Television, Inc., doing business as Headend in the Sky(R)
         ("HITS") and TVN.

 10.7*  CSG Master Subscriber Management System Agreement dated June 30, 1997
         between CSG Systems, Inc. and TVN.

 10.8*  Employment Agreement entered into between TVN and Stuart Z. Levin

 10.9*  Employment Agreement entered into between TVN and James Ramo.

 10.10* Employment Agreement entered into between TVN and Arthur Fields.

 10.11* Employment Agreement entered into between TVN and Michael Wex.

 10.12* Employment Agreement entered into between TVN and John McWilliams.

 10.14* Employment Agreement entered into between Guthy-Renker Television
         Network, Inc. and Gregory A. Thomas.

 10.15* Assumption of and First Amendment to Employment Agreement between GRTV
         Network, Inc. and Gregory A. Thomas.

 10.16* Series B Preferred Stock Purchase Agreement dated June 30, 1999, by and
         between New Media Network, Inc. and TVN together with all exhibits
         thereto.

 10.17* Agreement for Purchase and Sale of Assets effective January 18, 1999 by
         and among TVN, W&K Pharmacy, Inc., d/b/a PandaAmerica Corp. and Martin
         D. Weiss, together with all exhibits thereto.

 10.18* Asset Acquisition Agreement by and among TVN, GRTV Network, Inc., a
         wholly-owned subsidiary of TVN, Guthy-Renker Corporation, and Guthy-
         Renker Television Network, Inc., dated July 30, 1999, together with
         all exhibits thereto.

 10.19* Organization, Uplink and Post-Production Services Agreement dated May
         28, 1999 by and between 4MC-Burbank, Inc. and TVN Entertainment
         Corporation.

 10.20* Employment Agreement entered into between TVN and Gregory Pasetta.

 21.1*  Subsidiaries of TVN.

 23.1*  Consent of PricewaterhouseCoopers LLP.

 23.2*  Consent of Irell & Manella LLP (Included in Exhibit 5.1).

 24.1*  Power of Attorney.

 25.1*  Statement of Eligibility of Trustee.

 27.1   Financial Data Schedules.

 99.1*  Form of Letter of Transmittal with respect to exchange offer.
</TABLE>

                                       50
<PAGE>

EXHIBIT NO.

<TABLE>
 <C>   <S>
 99.2* Form of Notice of Guaranteed Delivery.
 99.3* Form of Exchange Agent Agreement.
</TABLE>
--------
*  Previously filed.

+  Confidential treatment has been requested for portions of these agreements.
   Omitted portions have been filed separately with the Commission.

  (b) REPORTS ON FORM 8-K

   Not applicable.

  (c) EXHIBITS

  See Item 14(a)(3) above.

  (d) FINANCIAL STATEMENT SCHEDULES

  See Item 14(a)(2) above.

                                      51
<PAGE>

                                  SIGNATURES

  In accordance with the requirements of the Securities Act of 1933, we have
duly caused this Report to be signed on our behalf by the undersigned,
thereunto duly authorized, in the City of Burbank, State of California on July
17, 2000.

                                          TVN Entertainment Corporation

                                                  /s/ Stuart Z. Levin
                                          By: _________________________________
                                                      Stuart Z. Levin
                                                Chairman of the Board, Chief
                                                Executive Officer (Principal
                                                     Executive Officer)

                               POWER OF ATTORNEY

  KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stuart Z. Levin his true and lawful attorney-
in-fact and agent, with full power of substitution and resubstitution, to sign
any and all amendments (including post-effective amendments) to this Annual
Report on Form 10-K and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, or any of them, shall do or cause to be done by virtue hereof.

  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF
OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:

  Pursuant to the requirements of the Securities Act of 1933, as amended, this
Report has been signed by the following persons on behalf of the registrant in
the capacities and on the dates indicated:

<TABLE>
<CAPTION>
             Signature                           Title                 Date
             ---------                           -----                 ----

<S>                                  <C>                           <C>
      /s/ Stuart Z. Levin            Chairman of the Board of      July 17, 2000
____________________________________  Directors and Chief
          Stuart Z. Levin             Executive Officer
                                      (Principal Executive
                                      Officer)

       /s/ Arthur Fields             Senior Executive Vice         July 17, 2000
____________________________________  President, General Counsel,
           Arthur Fields              Chief Administrative
                                      Officer, Director and
                                      Secretary

      /s/ John McWilliams            Senior Vice President,        July 17, 2000
____________________________________  Finance (Principal
          John McWilliams             Financial and Accounting
                                      Officer)

</TABLE>


                                      52
<PAGE>

<TABLE>
<CAPTION>
             Signature                           Title                 Date
             ---------                           -----                 ----
<S>                                  <C>                           <C>
     /s/ Stephen R. Munger           Director                      July 17, 2000
____________________________________
         Stephen R. Munger

      /s/ James M. Wilmott           Director                      July 17, 2000
____________________________________
          James M. Wilmott

     /s/ Thomas A. Clayton           Director                      July 17, 2000
____________________________________
         Thomas A. Clayton
</TABLE>


                                       53
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
TVN Entertainment Corporation:

  In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 49 present fairly, in all material
respects, the financial position of TVN Entertainment Corporation and
subsidiaries (the "Company") at March 31, 1999 and 2000 and the results of
their operations and their cash flows for each of the three years in the
period ended March 31, 2000 in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 14(a)(2) on page 49, presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our
audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.

  The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred recurring losses from
operations and has a net capital deficiency that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.

                                          /s/ PricewaterhouseCoopers LLP

                                          PricewaterhouseCoopers LLP

Los Angeles, California
June 29, 2000

                                      F-1
<PAGE>

                         TVN ENTERTAINMENT CORPORATION

                          CONSOLIDATED BALANCE SHEETS

                    as of March 31, 1999 and March 31, 2000
                       (In thousands, except share data)

<TABLE>
<CAPTION>
                                                            1999       2000
                                                          ---------  ---------
<S>                                                       <C>        <C>
                         ASSETS
Current assets:
  Cash and cash equivalents.............................. $  84,343  $  26,492
  Restricted short-term investments......................    25,909     22,128
  Trade and other accounts receivable, less allowance for
   doubtful accounts of $427 and $184 at March 31, 1999
   and March 31, 2000, respectively......................     5,615      5,971
  Prepaid expenses and other current assets..............     1,463      1,554
  Net assets of PSN......................................       --         951
                                                          ---------  ---------
    Total current assets.................................   117,330     57,096
Restricted cash..........................................     1,903      1,981
Restricted investments...................................    39,309     11,247
Property and equipment, net..............................    84,997     90,395
Intangible assets, net...................................     4,585     11,224
Other assets, net........................................     6,601      6,550
                                                          ---------  ---------
    Total assets......................................... $ 254,725  $ 178,493
                                                          =========  =========

 LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
                  STOCKHOLDERS' DEFICIT

Current liabilities:
  Accounts payable....................................... $   4,496  $   7,341
  Accrued liabilities....................................     9,445     14,298
  License fees payable...................................     8,321     10,305
  Deferred revenue and advances..........................     1,140      2,787
  Accrued interest.......................................     7,284      6,783
  Current portion of capitalized leases..................     7,444     11,276
  Current portion of notes payable.......................     8,228      7,848
                                                          ---------  ---------
    Total current liabilities............................    46,358     60,638
Capitalized leases.......................................    88,259     89,667
Notes payable............................................     7,439     17,972
Senior notes due 2008....................................   186,798    156,358
                                                          ---------  ---------
    Total liabilities....................................   328,854    324,635
                                                          ---------  ---------

Commitments and contingencies............................       --         --

Series B redeemable convertible preferred stock;
 liquidation value: $54,414..............................    53,047     53,445
Stockholders' deficit:
  Series A convertible preferred stock, liquidation
   value: $18,750, 7,600,000 shares authorized; 7,499,900
   shares issued and outstanding at March 31, 1999 and
   March 31, 2000........................................         8          8
  Common stock, $.001 par value, 40,000,000 shares
   authorized; 152,517 and 173,350 shares issued and
   outstanding at March 31, 1999 and March 31, 2000,
   respectively..........................................       --         --
  Additional paid-in-capital.............................    22,747     23,138
  Note receivable from stockholder.......................       --         (69)
  Accumulated deficit....................................  (149,931)  (222,664)
                                                          ---------  ---------
    Total stockholders' deficit..........................  (127,176)  (199,587)
                                                          ---------  ---------
    Total liabilities & stockholders' deficit............ $ 254,725  $ 178,493
                                                          =========  =========
</TABLE>

    The accompanying notes are an integral part of the financial statements.

                                      F-2
<PAGE>

                         TVN ENTERTAINMENT CORPORATION

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                    For the Three Years Ended March 31, 2000
                       (In thousands, except share data)

<TABLE>
<CAPTION>
                                                   1998      1999      2000
                                                 --------  --------  --------
<S>                                              <C>       <C>       <C>
Revenue......................................... $ 30,545  $ 36,681  $ 54,190
Operating expenses:
  Cost of revenue (exclusive of depreciation
   shown separately below)......................   20,426    29,184    44,648
  Selling.......................................    7,067    14,012    12,890
  General and administrative....................    5,619     8,267    18,042
  Depreciation and amortization.................   11,984    12,211    14,210
  Amortization of intangible assets.............     (100)      --      2,349
                                                 --------  --------  --------
Total operating expenses........................   44,996    63,674    92,139
                                                 --------  --------  --------
Loss from operations............................  (14,451)  (26,993)  (37,949)

Interest expense................................   15,163    34,162    44,246
Interest income.................................     (223)   (6,473)   (5,583)
Other (income) and expense......................      471       (84)        5
Loss from equity investments....................      --        --      2,400
                                                 --------  --------  --------
Loss before extraordinary gain..................  (29,862)  (54,598)  (79,017)
Extraordinary gain..............................      --      1,113    19,972
                                                 --------  --------  --------
Net loss from continuing operations.............  (29,862)  (53,485)  (59,045)
Loss from discontinued operations of PSN........                278     7,720
Estimated loss on disposal of PSN...............      --        --      5,968
                                                 --------  --------  --------
Net loss........................................  (29,862)  (53,763)  (72,733)
Accretion of Series B redeemable convertible
 preferred stock................................     (116)     (393)     (398)
                                                 --------  --------  --------
Net loss applicable to common stockholders...... $(29,978) $(54,156) $(73,131)
                                                 ========  ========  ========

Basic and diluted net loss per share applicable
 to common stockholders:
Net loss applicable to common stockholders
 before extraordinary gain...................... $   (272) $   (360) $   (510)
Extraordinary gain..............................      --          7       128
                                                 --------  --------  --------
Net loss applicable to common stockholders from
 continuing operations..........................     (272)     (353)     (382)
Net loss applicable to common stockholders from
 discontinued operations........................      --         (2)      (87)
                                                 --------  --------  --------
Net loss applicable to common stockholders...... $   (272) $   (355) $   (469)
                                                 ========  ========  ========
Weighted average shares.........................  110,237   152,517   155,827
                                                 ========  ========  ========
</TABLE>


    The accompanying notes are an integral part of the financial statements.

                                      F-3
<PAGE>

                         TVN ENTERTAINMENT CORPORATION

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

                    For the Three Years Ended March 31, 2000
                                 (In thousands)

<TABLE>
<CAPTION>
                               Series A
                             Convertible                                      Note
                           Preferred Stock      Common Stock    Additional Receivable
                          ------------------ ------------------  Paid-in      from     Accumulated
                          Outstanding Amount Outstanding Amount  Capital   Stockholder   Deficit     Total
                          ----------- ------ ----------- ------ ---------- ----------- ----------- ---------
<S>                       <C>         <C>    <C>         <C>    <C>        <C>         <C>         <C>
Balance as of March 31,
 1997...................     7,600     $ 8        50      $ --   $ 9,111      $ --      $ (66,306) $ (57,187)
Conversion of preferred
 stock..................      (100)     --       100        --       --         --            --         --
Exercise of stock
 options................       --       --         2        --       --         --            --         --
Accretion of Series B
 redeemable convertible
 preferred stock........       --       --       --         --      (116)       --            --        (116)
Net loss................       --       --       --         --       --         --        (29,862)   (29,862)
                             -----     ---       ---      ----   -------      ----      ---------  ---------
Balance as of March 31,
 1998...................     7,500       8       152        --     8,995        --        (96,168)   (87,165)
Accretion of Series B
 redeemable convertible
 preferred stock........       --       --       --         --      (393)       --            --        (393)
Issuance of warrants in
 connection with senior
 notes..................       --       --       --         --    14,145        --            --      14,145
Net loss................       --       --       --         --       --         --        (53,763)   (53,763)
                             -----     ---       ---      ----   -------      ----      ---------  ---------
Balance as of March 31,
 1999...................     7,500     $ 8       152      $ --   $22,747      $ --      $(149,931) $(127,176)
Accretion of Series B
 redeemable convertible
 preferred stock........       --       --        --        --      (398)       --            --        (398)
Issuance of warrants in
 connection with an
 acquisition............       --       --        --        --       720        --            --         720
Exercise of stock
 options in exchange for
 a note.................       --       --        21        --        69       (69)           --         --
Net loss................       --       --       --         --       --         --        (72,733)   (72,733)
                             -----     ---       ---      ----   -------      ----      ---------  ---------
Balance as of March 31,
 2000...................     7,500     $ 8       173      $ --   $23,138      $(69)     $(222,664) $(199,587)
                             =====     ===       ===      ====   =======      ====      =========  =========
</TABLE>

    The accompanying notes are an integral part of the financial statements.

                                      F-4
<PAGE>

                         TVN ENTERTAINMENT CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                    For the Three Years Ended March 31, 2000
                                 (In thousands)

<TABLE>
<CAPTION>
                                                   1998      1999      2000
                                                 --------  --------  --------
<S>                                              <C>       <C>       <C>
Cash flows from operating activities:
Net loss........................................ $(29,862) $(53,763) $(72,733)
Adjustments to reconcile net loss to net cash
 used for operating activities:
  Net loss from discontinued operations.........      --        278    13,688
  Depreciation and amortization.................   11,984    12,211    14,210
  Amortization of intangible assets.............     (100)      --      2,349
  Provision for doubtful accounts...............      120       753       375
  Debt forgiveness..............................      --     (1,113)      --
  Gain on senior note redemption................      --        --    (19,972)
  Accretion of discount on senior notes.........      --        943     1,675
  Amortization of debt issuance costs...........      --        446       714
  Loss from equity investments..................      --        --      2,400
  Change in assets and liabilities, net of
   acquisition:
    Accounts receivable.........................     (425)   (4,456)      334
    Prepaid expenses and other current assets...   (1,034)      644      (244)
    Other assets................................       35      (197)      866
    Accounts payable............................     (515)     (606)    2,452
    Accrued liabilities.........................      491     5,112       541
    License fees payable........................   (4,279)    1,421     1,984
    Deferred revenue and advances...............   (3,763)     (380)    1,468
    Accrued interest............................    1,090     3,391      (501)
                                                 --------  --------  --------
Net cash used for continuing operations.........  (26,258)  (35,316)  (50,394)
Net cash used for discontinued operations.......      --        (37)   (6,867)
                                                 --------  --------  --------
                                                  (26,258)  (35,353)  (57,261)
                                                 --------  --------  --------

Cash flows from investing activities:
  Restricted cash...............................   (1,833)      (70)      (78)
  Purchases of property and equipment...........     (308)   (2,621)   (3,215)
  Disposals of property and equipment...........      --        --        224
  Purchases of restricted investments...........      --    (76,745)      --
  Proceeds from maturities of restricted
   investments..................................      --     11,528    31,842
  Acquisition of New Media Network, net of cash
   acquired.....................................      --        --       (165)
  Acquisition of GRTV Network, net of cash
   acquired.....................................      --        --       (216)
  Acquisition of Panda Shopping Network, net of
   cash acquired................................      --       (485)       --
  Equity investments............................      --        --     (3,150)
                                                 --------  --------  --------
Net cash provided by (used for) continuing
 operations.....................................   (2,141)  (68,393)   25,242
Net cash provided by (used for) discontinued
 operations.....................................      --        --       (176)
                                                 --------  --------  --------
                                                 $ (2,141) $(68,393) $ 25,066
                                                 ========  ========  ========
</TABLE>

    The accompanying notes are an integral part of the financial statements.

                                      F-5
<PAGE>

                         TVN ENTERTAINMENT CORPORATION

              CONSOLIDATED STATEMENTS OF CASH FLOWS -- (Continued)

                    For the Three Years Ended March 31, 2000
                                 (In thousands)

<TABLE>
<CAPTION>
                                                   1998      1999      2000
                                                  -------  --------  --------
<S>                                               <C>      <C>       <C>
Cash flows from financing activities:
  Net proceeds from issuance of preferred stock.. $45,000  $     39  $    --
  Repurchase of senior notes and warrants........     --        --    (11,763)
  Additions to notes payable.....................   4,500       --      1,301
  Repayments of capitalized leases...............  (4,456)   (5,608)   (8,082)
  Repayments of notes payable....................    (612)  (16,428)   (7,112)
  Exercise of stock options......................     --        --        --
  Net proceeds from issuance of senior notes.....     --    193,288       --
                                                  -------  --------  --------
Net cash provided by (used for) financing
 activities......................................  44,432   171,291   (25,656)
                                                  -------  --------  --------
Net increase (decrease) in cash and cash
 equivalents.....................................  16,033    67,545   (57,851)
Cash and cash equivalents at the beginning of
 year............................................     765    16,798    84,343
                                                  -------  --------  --------
Cash and cash equivalents at the end of year..... $16,798  $ 84,343  $ 26,492
                                                  =======  ========  ========
Supplemental disclosures of cash flow
 information:
Cash paid during the year for:
  Interest....................................... $14,173  $ 30,012  $ 40,997
</TABLE>




    The accompanying notes are an integral part of the financial statements.

                                      F-6
<PAGE>

                         TVN ENTERTAINMENT CORPORATION

              CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)

                   For the Three Years Ended March 31, 2000
                       (In thousands, except share data)

Supplemental schedule of noncash investing and financing activities:

  During 1998, the Company incurred notes payable of $175 for property and
equipment (see note 7).

  Additions to notes payable in 1998 include $1.9 million previously
classified as trade accounts payable and $333 previously classified as accrued
interest (see note 7).

  During 1998, the Company converted notes payable of $7.5 million to Series B
Redeemable Convertible Preferred Stock (see note 11).

  During 1999, the Company completed a private placement of 200,000 Units,
each of which consists of one 14% Senior Note (the "Notes") due 2008 and one
warrant to purchase initially 10.777 shares of the Company's common stock. The
warrants were recorded at a value of $14.1 million and were deducted from the
face value of the Notes (see note 8).

  Additions to other assets in 1999 include $6.7 million of capitalized
closing costs deducted from the proceeds related to the private placement of
the Notes (see note 8).

  During 1999, the Company assumed $3.2 million in net liabilities and forgave
$948 in trade receivables in connection with an acquisition (see note 5).

  During 2000, the Company incurred capital lease obligations totaling $13.3
million and incurred $1.0 million in accrued liabilities for property and
equipment.

  During 2000, the Company incurred a $1.7 million discounted note obligation
and amended warrants valued at $720 and assumed $1.4 million in net
liabilities in connection with the acquisition of its interest in New Media
Network (see note 5).

  During 2000, the Company incurred $10.4 million in discounted note
obligations and acquired $100 in net assets in connection with the acquisition
of GRTV Network (note 5).

  During 2000, the Company incurred $722 in accrued liabilities and $28 in
minority interest liabilities for other assets.

                                      F-7
<PAGE>

                         TVN ENTERTAINMENT CORPORATION

                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                       (In thousands, except share data)

1. Organization and Business

  TVN Entertainment Corporation (the "Company") owns and operates a national,
satellite transmitted, multi-channel, pay-per-view television programming
network, providing analog and digital entertainment programming to C-band
satellite dish owners and to cable system operators and their subscribers. The
Company's analog service currently consists of three channels of programming,
featuring one encrypted pay-per-view channel, one home shopping channel and
one channel utilized for third party programming. The Company's digital
service currently consists of thirty-two encrypted pay-per-view channels, one
unencrypted promotional channel, forty digital music channels, and
complementary transactional services including billing, collection, customer
service, remittance processing and studio license fee administration. Analog
and digital subscribers order movies and events for a pay-per-view fee, using
either an automatic number identification (ANI) phone ordering system or an
electronic impulse store and forward ordering system.

  During 2000, the Company also owned and operated a home shopping television
network, providing an analog and digital home shopping service to subscribers
of cable operators and cable networks and viewers of broadcast networks (see
note 5). The Company discontinued its operation of this business in June 2000
(see note 16).

  The Company also owns and operates a national satellite transmitted
infomercial network, providing airtime on cable systems and broadcast stations
to infomercial program providers.

  The Company was a development stage enterprise from its incorporation in
1987 until March 5, 1991. On March 6, 1991 the Company entered into a limited
partnership, TVN Entertainment L. P. (the "Partnership"), comprised of itself
as a limited partner and two general partners. The Partnership was an
operating entity and was accounted for on the equity basis during the period
from March 6, 1991 to May 15, 1992.

  On May 15, 1992, the Company acquired the general partners' interests in the
Partnership, which was dissolved pursuant to a partnership dissolution
agreement which provided that the Company receive all partnership assets and
assume certain liabilities as of the dissolution date for an effective
purchase price of $1. These liabilities include notes payable to the former
general partners and certain Company stockholders totaling $16.5 million and
$1.1 million respectively. Interest accrues on these obligations at prime plus
1% and totaled $11.8 million and $890, respectively at March 31, 2000.
Repayment of these loans and related accrued interest (collectively the
"Contingent Debt") will be made on a pari passu basis out of available cash
flow as defined in the Restated Limited Partnership Agreement dated March 7,
1991. The dissolution agreement provides that the Company will not make any
distributions or pay any dividends in respect of its capital stock or other
equity interests prior to the payment in full to TVN's former general partners
and will not subordinate these obligations to other debt.

  Because payment of these liabilities is dependent upon available cash flow,
as defined, this debt represents contingent consideration related to the
acquisition of net assets. The Company has had negative operating cash flows
and payment of these liabilities does not appear to be probable at this time.
Accordingly, these amounts have not been recorded as a liability in accordance
with Accounting Principles Board Opinion No. 16, "Business Combinations",
because the outcome of the contingency is not determinable beyond a reasonable
doubt. The Company will record these liabilities when the contingency is
resolved.

  The acquisition of the former general partners' interests is accounted for
under the purchase method of accounting. The purchase method required the
recognition of negative goodwill of $4.0 million which was amortized on a
straight line basis over a five year period.

                                      F-8
<PAGE>

                         TVN ENTERTAINMENT CORPORATION

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


2. Summary of Significant Accounting Policies

 Basis of Presentation

  Since inception, the Company has incurred operating losses. The Company has
a working capital deficit and a total stockholders' deficit of approximately
$3.5 million and $200 million, respectively at March 31, 2000. Management
intends to fund future anticipated losses through the offering of additional
debt and/or equity securities and ultimately, through the attainment of
positive operating cash flows.

  The Company plans to attain positive operating cash flows with the rollout
of its new Digital Content Express service, a system to manage and ship
digital content to multiple distribution points worldwide. Digital Content
Express will include video on demand service, digital content preparation
service and content storage and transmission.

  The ability of the Company to ultimately achieve positive operating cash
flows is uncertain. The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern and do not include
any adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result in the Company being unable to continue as a going concern.

 Consolidation

  The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.

 Use of Estimates

  The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

 Cash, Cash Equivalents and Restricted Cash

  The Company considers all highly liquid temporary investments (money market,
certificates of deposit, commercial paper and government issued securities)
with original maturities of three months or less to be cash equivalents.
Restricted cash consists of amounts held on deposit pursuant to a credit card
processing agreement and amounts on deposit to secure letters of credit.

 Restricted short-term and long-term investments

  Restricted short-term and long-term investments consist of marketable
securities (see note 4) held in custody to fund the next three scheduled
interest payments on the Notes due 2008 (see note 8). The marketable
securities consist principally of federal agency notes with original maturity
dates greater than three months. All marketable securities are classified as
held to maturity securities under the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" and are stated at amortized cost plus accrued
interest.

 Concentration of Credit Risk

  The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and trade receivables.

                                      F-9
<PAGE>

                         TVN ENTERTAINMENT CORPORATION

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  The Company's cash is deposited in major financial institutions, thereby
limiting credit risk. However, the Company's deposits with a single financial
institution as of the respective balance sheet dates exceed the maximum amount
of $100 insured by the FDIC.

  The Company's trade accounts receivable are routinely assessed for
collectability from its pay-per-view subscribers and media time customers. As
a consequence, concentration of credit risk is limited.

 Fair Value of Financial Instruments

  The carrying amount of cash and cash equivalents, short and long-term
investments, accounts receivable, accounts payable, and accrued expenses,
approximate fair values because of the short maturities of these instruments.
The fair value of the Company's notes payable approximates its carrying value
based on current borrowing rates for similar instruments. The fair value of
the Company's senior notes is calculated using quoted market prices (see note
8).

 Equity Investments

  Investments in unconsolidated companies, owned 20% or more, are stated at
cost of acquisition plus the Company's equity in undistributed net income
(loss) since acquisition.

 Property and Equipment

  Property and equipment are stated at cost. Depreciation and amortization is
recorded using the straight-line method over the useful lives, estimated at
between five and seven years for office furniture and equipment, seven years
for digital equipment, and ten years for assets under capitalized leases. Upon
retirement or other disposal, the asset cost and related accumulated
depreciation and amortization are removed from the accounts and the net
amount, less any proceeds, is charged or credited to operations. Repairs and
maintenance are charged to operations when incurred. The carrying value of
property and equipment is periodically reviewed by management, and impairment
losses, if any, are recognized when the expected nondiscounted future
operating cash flows derived from such assets are less than their carrying
value.

 Intangible Assets

  Intangible assets, which represent acquired technology and goodwill,
represent the excess of the purchase price over the fair value of assets
acquired in connection with the acquisitions of Panda Shopping Network
("PSN"), New Media Networks ("NMN") and Guthy-Renker Television ("GRTV"). The
Company amortizes intangible assets on a straight-line basis over the
estimated period of benefit, currently between three and five years. On an
annual basis the Company reviews the recoverability of intangible assets based
primarily upon cash flow forecasts.

 Revenue Recognition

  Programming revenues consist of revenue generated directly from subscribers
and cable operators and are recognized when movies and events are viewed. Fees
paid by cable operators for digital cable television service are recognized as
such services are provided and reduced for estimated rebates earned by cable
operators which achieve certain customer acquisition milestones. Sign-up
revenues in excess of direct costs are recognized over the related customer
usage period for the related service. Merchandising revenues are recognized
when products are shipped, at which point reserves are established for
estimated returns. Revenues received from subscription sales, advances against
merchandising revenue and amounts received from other programmers for
uplink/playback and transponder services are deferred and recognized as
earned.

                                     F-10
<PAGE>

                         TVN ENTERTAINMENT CORPORATION

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  License fees payable to producers are accrued on the basis of the
contractual license terms and are charged to expense as the related revenues
are recorded.

 Research and Development

  Research and development costs are expensed as incurred and totaled $1.2
million and $ 2.5 million during the year ended March 31, 1999 and March 31,
2000, respectively, and are included in general and administrative expenses.
Research and development costs were not significant for the year ended March
31, 1998.

 Advertising

  The Company reports the cost of all advertising as expenses in the period in
which those costs are incurred. The Company shares portions of certain
distributors' advertising expenses through co-op advertising arrangements.

  Advertising expense was $849, $1.4 million and $ 1.0 million for the years
ended March 31, 1998, 1999 and 2000, respectively.

 Stock-based Compensation

  The Company grants incentive stock options for a fixed number of common
shares to employees, with an exercise price equal to or greater than the fair
value of the shares at the date of grant. The Company has elected to measure
compensation expense related to employee stock options in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and has provided the additional required disclosures as if the
fair value based method of accounting, as defined by SFAS No. 123, "Accounting
for Stock-Based Compensation", had been applied.

 Net Loss Applicable to Common Stockholders

  Basic and diluted net loss applicable to common stockholders is computed
using the weighted average number of shares of common stock outstanding.
Common equivalent shares related to stock options, warrants and preferred
stock are excluded from the computation when their effect is antidilutive.

 Income Taxes

  Income tax expense, if any, represents the taxes payable for the year and
the changes during the year in deferred tax assets and liabilities. Deferred
income taxes are determined based on the difference between the financial
reporting and tax bases of assets and liabilities using enacted rates in
effect during the year in which the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.

 Reclassifications

  Certain reclassifications have been made to the prior year financial
statements to conform with the 2000 presentation.

 Comprehensive Income

  Effective April 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. To date, the Company has not had any
transactions that are required to be reported in comprehensive income.

                                     F-11
<PAGE>

                         TVN ENTERTAINMENT CORPORATION

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Segments

  Effective April 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used management for making operating decisions and assessing performance as
the source of the Company's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 did not affect results of operations or financial
position but did affect the disclosure of segment information (see note 15).

3. Concentrations of Business Risk

  The Company leases its transponders from one supplier under the terms of two
ten year capital leases (see note 10). Although there are a limited number of
transponders available for the Company's use in the event of default by this
supplier, management believes that other suppliers could provide similar
transponder service. A change in suppliers, however, could result in less
favorable terms for the service and/or could cause a delay in distribution,
either of which would have an adverse affect on the Company's financial
condition, results of operations and cash flows.

  The Company receives uplink and playback service from one supplier under the
terms of a five year service agreement. While several other suppliers could
provide similar service, an abrupt termination of this service could result in
less favorable terms for the service and/or could cause a delay in
distribution, either of which would have an adverse affect on the Company's
financial condition, results of operations and cash flows.

  The Company receives transaction processing service from one supplier under
the terms of a long term service agreement. While several other suppliers
could provide similar service, an abrupt termination of this service could
result in a billing delay which would have an adverse affect on the Company's
financial condition, results of operations and cash flows.

4. Investments

  Investments are comprised primarily of U.S. Treasury securities with
maturities of up to 3 years and are stated at amortized cost plus accrued
interest. Securities classified on the balance sheet as restricted short-term
and long-term investments have been placed in escrow to fund the next three
scheduled interest payments on the Notes (see note 8) and are invested in
compliance with the Company's bond indenture which restricts the type, quality
and maturity of these investments.

5. Acquisition

  On January 18, 1999, the Company acquired certain assets of the Panda
Shopping Network ("PSN"), a 24 hour home shopping television network, for
aggregate consideration of $500 in cash, the forgiveness of $948 in trade
accounts receivable and the assumption of $3.4 million in net liabilities. The
acquisition has been accounted for as a purchase. The excess of purchase
consideration over net tangible assets acquired of approximately $4.8 million
has been allocated to goodwill which was expensed in connection with the
discontinued operations of PSN (see note 16).

  On June 30, 1999, the Company acquired 60% of the fully diluted equity of
New Media Network, Inc. ("NMN"), a start-up company that is developing and
plans to deploy a system utilizing state-of-the-art digital downloading
technology to deliver and sell entertainment products such as music, movies
and games. The

                                     F-12
<PAGE>

                         TVN ENTERTAINMENT CORPORATION

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

aggregate consideration included a cash commitment totaling $2.0 million, a
commitment to render $4.0 million of Company services to NMN over a three-year
period and an obligation to purchase a portion of the outstanding stock of NMN
for $2.68 million subject to certain conditions. The Company accounted for the
acquisition as a purchase. The excess of purchase consideration over net
tangible assets acquired of approximately $3.3 million has been allocated to
acquired technology and is being amortized over a period of three years.

  In July 1999, the Company acquired from Guthy-Renker Corporation ("GRC")
substantially all of the assets of Guthy-Renker Television Network, Inc.
("GRTV"), a media time buying business and a wholly owned subsidiary of GRC,
for consideration consisting of: (i) $302 in cash; (ii) $4 million payable in
cash per the terms of a promissory note, payable at 6% interest in two equal
annual installments commencing one year from the closing date; (iii) $9 0
million payable in cash or TVN stock per the terms of the promissory note,
payable at 9% interest on the earlier to occur of the fifth anniversary of the
closing date or the consummation of an initial public offering by the Company;
and (iv) a warrant to purchase 200,000 shares of the Company's stock. The
acquisition was accounted for as a purchase. The excess of purchase
consideration, after adjustments to the discount rate on the notes, over net
tangible assets acquired of approximately $10.2 million has been allocated to
goodwill and is being amortized over a period of five years.

  The following summarized unaudited pro forma financial information assumes
the NMN and GRTV acquisition occurred at April 1, 1999.

<TABLE>
<CAPTION>
                                                               March 31,
                                                           ------------------
                                                             1999      2000
                                                           --------  --------
   <S>                                                     <C>       <C>
   Revenue................................................ $ 56,625  $ 60,402
   Loss from operations................................... $(29,523) $(38,558)
   Net loss applicable to common stockholders............. $(58,672) $(74,071)
   Basic and diluted net loss per share applicable to
    common stockholders:
     Net loss applicable to common stockholders........... $(384.69) $(475.34)
     Weighted average shares..............................  152,517   155,827
</TABLE>

6. Property and Equipment

  Property and equipment at March 31, consist of the following:

<TABLE>
<CAPTION>
                                                              1999      2000
                                                            --------  --------
   <S>                                                      <C>       <C>
   Equipment............................................... $ 11,405  $ 16,434
   Assets under capitalized leases.........................  111,052   124,992
   Office furniture and fixtures...........................      372     1,019
                                                            --------  --------
     Total.................................................  122,829   142,445
   Less, accumulated depreciation including capital lease
    amortization of $33,061 and $44,999 at March 31, 1999
    and 2000, respectively.................................  (37,832)  (52,050)
                                                            --------  --------
                                                            $ 84,997  $ 90,395
                                                            ========  ========
</TABLE>

                                     F-13
<PAGE>

                         TVN ENTERTAINMENT CORPORATION

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


7. Notes Payable

  Notes payable at March 31, consist of the following:

<TABLE>
<CAPTION>
                                                             1999     2000
                                                            -------  -------
   <S>                                                      <C>      <C>
   Notes payable collateralized by equipment with a net
    book value of $3,339 at March 31, 2000. Principal and
    interest at 10% payable in eighty four equal
    installments beginning June 1, 1997.................... $ 5,457  $ 4,587
   Notes payable, collateralized by a right to use the
    Company's customer list on a limited basis. Principal
    and accrued interest at 10% was due but unpaid on March
    31, 1999...............................................   5,000    2,500
   Refinanced trade payable. Principal and interest at 10%
    payable monthly in sixty equal installments beginning
    March 31, 1998.........................................   4,290    3,067
   Notes payable. Principal and accrued interest averaging
    7.84% payable in the first quarter of fiscal 2000......     920      --
   Notes payable for $4.0 million less $237 discount.
    Principal and interest at 6% payable in two equal
    installments beginning July 1, 2000....................     --     3,763
   Note payable for $9.0 million less $2.0 million
    discount. Principal and interest at 9% payable on July
    1, 2004, or the consummation of an initial public
    offering, whichever is earlier.........................     --     7,035
   Put right for $2.68 million less $713 discount payable
    on June 30, 2002.......................................     --     1,967
   Other notes payable. Principal and interest payable
    though June 30, 2001...................................     --     2,901
                                                            -------  -------
   Total notes payable..................................... $15,667  $25,820
   Current portion of notes payable........................  (8,228)  (7,848)
                                                            -------  -------
   Total long term notes payable........................... $ 7,439  $17,972
                                                            =======  =======
</TABLE>

  The note payable for $4.6 million represents a refinancing of the purchase
of one video scrambling system and the original financing to purchase five
digital encoding systems and related equipment.

  The notes payable for $2.5 million represent a cash financing for the
Company and will become immediately due and payable in the event that the
Company raises any equity capital or receives any cash infusion outside the
ordinary course of business.

  The refinanced trade payables for $3.1 million represent the Company's
obligations for uplink, playback and other services rendered through August
19, 1997. To the extent that any portion of this obligation is unpaid at the
time of an initial public offering (IPO) by the Company, it shall either be
paid in full upon the closing of an IPO of the Company's stock in excess of
$50 million or converted to equity at a price equal to the IPO price,
concurrently with and as part of such IPO.

  The notes payable for $3.8 million and $7.0 million represent consideration
for the net assets of Guthy-Renker Television Network, Inc. ("GRTV").

  The put right for $2.0 million represents consideration for the Company's
investment in a portion of the outstanding stock of New Media Network, Inc.
("NMN") exercisable by the holder subject to certain conditions.

  The weighted average interest rate on notes payable was 8.32%, 9.87% and
9.23% for the years ended March 31, 1998, 1999 and 2000, respectively.

                                     F-14
<PAGE>

                         TVN ENTERTAINMENT CORPORATION

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Maturities of the Company's notes payable at March 31, are as follows:

<TABLE>
   <S>                                                                   <C>
   2002................................................................. $ 4,938
   2003.................................................................   4,429
   2004.................................................................   1,363
   2005.................................................................   7,242
   Thereafter...........................................................     --
                                                                         -------
                                                                         $17,972
                                                                         =======
</TABLE>

8. Senior Notes due 2008

  In July 1998, the Company completed a private placement of 200,000 Units at
a price of $1,000 per unit, each of which consists of one 14% Senior Note (the
"Notes") due 2008 and one warrant to purchase initially 10,777 shares of the
Company's common stock, $0.001 par value, at an exercise price of $0.01 per
share, subject to adjustment. Interest on the Notes accrues at the rate of 14%
per annum and is payable semiannually in arrears on February 1 and August 1
each year, commencing February 1, 1999. The fair value of the notes using
quoted market prices was $53.1 million at March 31, 2000.

  The Notes are not collateralized except to the extent of the next three
scheduled interest payments (see note 2) and rank equally in right of payment
with all existing and future unsubordinated indebtedness and senior in right
of payment to all existing and future subordinated indebtedness of the
Company. The Indenture contains certain covenants including limitations on
future indebtedness, payments of dividends and other distributions, liens,
transactions with affiliates, mergers and acquisitions, sales of assets and
conditions of borrowing.

  The Notes are redeemable at the option of the Company, in whole or in part,
at any time on or after August 1, 2003, at redemption prices defined by the
Indenture, plus accrued and unpaid interest. In addition, at any time prior to
August 1, 2001, the Company may redeem up to 35% of the aggregate principal
amount of the Notes, with the net proceeds of one or more public equity
offerings at 114% of the principal amount thereof plus accrued interest.

  The Company estimated the fair value of the warrants at $14.1 million which
was recorded as a discount to the face amount of the Notes and is being
amortized as additional interest expense using the effective interest method
over the term of the Notes. The warrants may be exercised at any time
commencing July 1999 and prior to the maturity date of the Notes.

  In October 1999, the Company repurchased $33.9 million of its 14% Senior
Notes due 2008 and 33,850 warrants to purchase 10.777 shares of the Company's
common stock for aggregate consideration of approximately $12.8 million in
cash. The repurchase resulted in the release of approximately $8.9 million of
restricted investments that were held in custody to fund the next four
scheduled interest payments on the repurchased notes. The Company used
existing working capital to fund the repurchase of the notes. The repurchase
also resulted in an extraordinary gain of approximately $20.0 million.

9. Extraordinary Gain

  During fiscal 1999, a portion of the Company's obligation for the use of
transponder service through February 1996 was forgiven upon the early
extinguishments of the remaining debt.

  In October 1999, the Company realized an extraordinary gain of $20.0 million
upon the repurchase of approximately $33.9 million of the Company's 14% Senior
Notes due 2008 (see note 8).

                                     F-15
<PAGE>

                         TVN ENTERTAINMENT CORPORATION

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


10. Commitments and Contingencies

 Capitalized Lease

  In October 1994, the Company entered into a noncancelable capital lease
agreement for eight primary C-Band transponders and one reserve C-Band
transponder commencing February 1996, at escalating rates throughout its term.
The future minimum lease payments are discounted using an interest rate of 12%
over the ten-year lease term. The Company amended the terms of this lease in
April 2000 (see note 16).

  In November 1995, the Company entered into a noncancelable capital lease
agreement for five primary C-Band transponders commencing July 1996, at
escalating rates throughout its term. The future minimum lease payments are
discounted using an interest rate of 12% over the ten-year lease term. The
Company amended the terms of this lease in April 2000 (see note 16).

  In January 1999, the Company assumed certain noncancelable lease obligations
for operating equipment and software upon acquiring the assets of PSN (see
note 5).

  In May 1999, the Company entered into an agreement with Four Media Company
("4MC") to finance the acquisition of equipment and software. The future
minimum lease payments are discounted using an interest rate of 14.71% over
the five year term.

  The future minimum lease payments at March 31, are as follows:

<TABLE>
<CAPTION>
                                                             4MC and
                                                Transponders  Other    Total
                                                ------------ -------  --------
   <S>                                          <C>          <C>      <C>
   2001........................................   $ 19,073   $ 4,173  $ 23,246
   2002........................................     19,913     3,801    23,714
   2003........................................     20,753     3,758    24,511
   2004........................................     21,592     3,682    25,274
   2005........................................     22,432     2,455    24,887
   Thereafter..................................     21,505       --     21,505
                                                  --------   -------  --------
   Total minimum obligations...................    125,268    17,869   143,137
   Less interest...............................    (37,170)   (5,024)  (42,194)
                                                  --------   -------  --------
   Present value of minimum obligations........     88,098    12,845   100,943
   Less current portion........................     (8,977)   (2,299)  (11,276)
                                                  --------   -------  --------
   Long-term obligations at March 31, 2000.....   $ 79,121   $10,546  $ 89,667
                                                  ========   =======  ========
</TABLE>

 Operating Leases

  The Company leases and subleases office space in the Los Angeles area. The
future minimum lease payments on noncancelable obligations for office leases
are as follows:

<TABLE>
   <S>                                                                    <C>
   2001.................................................................. $2,256
   2002..................................................................  1,979
   2003..................................................................  1,672
   2004..................................................................    960
   2005..................................................................    685
                                                                          ------
     Total............................................................... $7,552
                                                                          ======
</TABLE>

  Rent expense was $152, $259 and $2.0 million for the years ended March 31,
1998, 1999 and 2000.

                                     F-16
<PAGE>

                         TVN ENTERTAINMENT CORPORATION

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Commitments

  In June 1997, the Company entered into an agreement to obtain certain
services and a license for digital set-top authorizations of cable affiliate
subscribers. Fees for such services are calculated on a monthly basis at
varying rates throughout the seven year term. The minimum license fee during
the remaining term of the agreement is $1.2 million per year, payable in
advance on or before the first day of each such license term year.

  On May 28, 1999, the Company entered into an agreement with Four Media
Company, ("4MC") to purchase certain uplink, downlink, programming origination
and other services to be rendered to the Company by 4MC commencing on the
execution date of the agreement and continuing through November 30, 2004. The
Company has the right to renew the agreement for two additional two-year
terms. The minimum commitment over the remaining term of the agreement totals
approximately $10.5 million.

  In July 1999, the Company entered into a media access, consulting and
services agreement to purchase $15 million of such services to be rendered by
Guthy-Renker Corporation ("GRC") over a four year period. Such services
include (i) the right to broadcast infomercial programming provided by GRC on
a priority basis, (ii) consulting services regarding product selection,
infomercial production, worldwide operations, merchandising procurement and
order fulfillment, (iii) access to GRC's library of infomercials and (iv) the
availability of products distributed by or through GRC, for distribution by
the Company's home shopping network.

  In September 1999, the Company entered in a business relationship with
Tribute International Corporation ("Tribute") to provide designated content,
applications and portal services for Tribute's products and services. The
Company will buy $2.0 million of Tribute's stock, paid for with an equivalent
amount of the Company's services to be drawn down as needed by Tribute.

  The Company's minimum commitments and contingencies under its employment
agreements aggregated approximately $1.6 million and $0.6 million,
respectively at March 31, 2000.

 Contingencies

  See note 1 for a discussion of the Contingent Debt.

  On December 13, 1999, the Company was served with a lawsuit filed in
California state court by TV/COM International, Inc., a company with which we
entered into memoranda of understanding (MOU) concerning (i) it obtaining a
Digicipher II encryption technology license from General Instrument and (ii)
its obligation to utilize such license for the manufacture of Digicipher II
encryption compatible television set-top cable boxes for us, once TV/COM
demonstrated its ability to do so in quantity and to our specifications. The
lawsuit alleges breach of contract, fraud and negligent misrepresentation
along with several related causes of action and asks the court to award
specific damages of $25 million as well as other unspecified damages and
costs. We have filed a demurrer which questioned the legal sufficiency of the
complaint. The court granted our demurrer and gave TV/Com leave to file an
amended complaint which they did. We demurred again and the court denied our
demurrer. Our answers to the complaint are due on July 3, 2000, at which time
we will also file a cross-complaint against TV/Com. We have scheduled meetings
with TV/Com in an attempt to negotiate a settlement of the lawsuit. We believe
that the claims in the lawsuit are not meritorius and we have retained counsel
to provide a vigorous defense and to pursue our cross complaint.

  The Company's DCTV service has certain agreements with cable operators to
share expenses associated with co-op advertising to acquire new customers.
Since these marketing allowances are based on qualified expenses that must be
pre-approved by the Company, future subscribers in the cable systems and
various launch and eligibility dates, these expenses represent contingent
liabilities and have not been recorded. Total contingent liabilities related
to marketing allowances are estimated at $1.2 million.

                                     F-17
<PAGE>

                         TVN ENTERTAINMENT CORPORATION

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  In addition, the Company has been party to other legal and administrative
proceedings related to claims arising from its operations in the normal course
of business. On the advice of counsel, the Company believes it has adequate
legal defenses and believes that the ultimate outcome of these actions will
not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.

11. Redeemable Convertible Preferred Stock

  At March 31, 1999, the Company had authorized 12,648,107 shares of Series B
Redeemable Convertible Preferred Stock with a par value of $.001 per share,
12,154,771 of which are issued and outstanding. The Series B Preferred was
issued in four subseries, with original liquidation preferences equal to:
$2.7343 per share for the 5,714,442 shares of Series B1 Preferred; $5.8105 per
share for the 1,297,433 shares of Series B2 Preferred; $6.8359 per share for
the 2,285,727 shares of Series B3 Preferred; and $5.4687 per share for
2,857,169 shares of Series B4 Preferred.

  The Series B Preferred is a senior security and shall rank, with respect to
dividends and distribution upon the liquidation, dissolution or winding-up of
the Company, senior to all classes or series of Common Stock and any other
Capital Stock of the Company, including, without limitation, any series of
Preferred Stock hereafter authorized by the Board of Directors and the Series
A Convertible Preferred Stock.

  The Series B Preferred is entitled to dividends, if earned and declared, in
an amount equal to the dividends paid on each share of Common or Series A
Preferred, respectively, multiplied by a fraction equal to the liquidation
preference of each share of Series B Preferred divided by the liquidation
preference of the Series A Preferred or the Common Stock, respectively. The
liquidation preference with respect to the Common Stock shall be deemed to
equal $.001 per share. All such dividends are payable on any date that
dividends are paid on the Common or Series A Preferred.

  The Series B Preferred is convertible, at the option of the holder, into
Common Stock subject to a conversion ratio that may be adjusted from time to
time, as defined by the Certificate of Designations of the Series B Preferred.
The Series B Preferred is not permitted to vote on matters required or
permitted to be voted upon by the stockholders of the Company subject to
certain exceptions.

  The Company is required to redeem the Series B Preferred on August 27, 2002
or, at the option of the holders of the Series B Preferred upon a change of
control of the Company at a price equal to the liquidation preference of the
shares, all as defined in the Certificate of Designations of the Series B
Preferred.

12. Stockholders' Equity

 Common Stock

  In August 1997, the Company's Board of Directors (the "Board") , through an
amendment and restatement of the Company's Certificate of Incorporation,
increased the number of authorized shares of common stock from 10,000,000 to
40,000,000 and increased the number of shares reserved for issuance under its
stock option plan from 2,400,000 to 3,000,000.

 Preferred Stock

  The total number of shares of Preferred Stock that the Company has the
authority to issue is 20,248,107 shares, $.001 par value. The Board of
Directors of the Company is authorized to determine the rights, preferences,
privileges and restrictions granted to or imposed upon any undesignated shares
of Preferred, and to increase or decrease (but not below the number of shares
of any such series then outstanding) the number of

                                     F-18
<PAGE>

                         TVN ENTERTAINMENT CORPORATION

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

shares of any such series subsequent to the issue of shares of that series.
The Board of Directors is authorized to determine the designation and par
value of any series and to fix the number of shares of any series.

 Series A Convertible Preferred Stock

  At March 31, 1999, the Company had authorized 7,600,000 shares of Series A
Preferred Stock, 7,499,900 of which are issued and outstanding. The Series A
Preferred is entitled to noncumulative annual dividends, if earned and
declared, commencing February 28, 1996 at the rate of $.25 per share payable
prior and in preference to any payment or any dividend on the Common Stock.
After dividends in the total amount of $.25 per share on the Series A
Preferred have been declared and paid or set apart in any year, if the Board
of Directors elects to declare additional dividends in that year, such
additional dividends shall be declared equally on the Common and Series A
Preferred, with the holders of the Series A Preferred to receive amounts equal
to the dividends declared on the Common into and to which the Series A is
convertible. The Series A Preferred is convertible, at the option of the
holder, into Common Stock at the rate of one share of Common Stock for each
share of Series A Preferred, has voting rights equal to those of the Common
Stockholders, and votes with the Common Stock. 7,600,000 shares of Common
Stock are reserved for conversion of the Series A Preferred Stock.

 Warrants

  In July 1998, the Company completed a private placement of 200,000 Units at
a price of $1,000 per unit, each of which consists of one 14% Senior Note (the
"Notes") due 2008 and one warrant to purchase initially 10,777 shares of the
Company's common stock, $0.001 par value, at an exercise price of $0.01 per
share, subject to adjustment. The Company estimated the fair value of the
warrants at $14.1 million that was recorded as a discount to the face amount
of the Notes and is being amortized as additional interest expense using the
effective interest method over the term of the Notes. The warrants may be
exercised at any time commencing July 1999 and prior to the maturity date of
the Notes.

  In October 1999, the Company repurchased 33,850 warrants to purchase 10.777
shares each of the Company's common stock for each warrant (see note 8).

  In July 1999, the Company amended and substituted a warrant originally
issued in December 1996, for a warrant to purchase 200,000 shares of Common
Stock. The warrant is exercisable at $0.01 per share and expires on July 1,
2009. The fair value of the warrant has been accounted for as additional
purchase consideration for the Company's acquisition of Guthy-Renker
Television Network, Inc. (see note 5).

 Employee Stock Option Plan

  The Company adopted a stock option plan (the "Plan") in 1996 that provides
for awards to be made in respect to a maximum of 3,941,482 shares of the
Company's Common Stock. Awards may be made as grants of incentive stock
options and nonstatutory stock options. Participants in the Plan who own stock
representing more than 10% of the voting power of all classes of stock at the
date of grant, may be issued an incentive or a nonstatutory stock option
having an exercise price that shall be no less than 110% of the fair market
per share at the date of grant. Participants in the Plan who own stock
representing 10% or less of the voting power of all classes of stock at the
date of grant, may be issued an incentive or a nonstatutory stock option
having an exercise price that shall be no less than 100% of the fair market
per share at the date of grant. Options granted under the Plan vest ratably
over five years and have a maximum term of ten years unless terminated sooner
in accordance with the Plan.

                                     F-19
<PAGE>

                         TVN ENTERTAINMENT CORPORATION

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  The following table summarizes activity under the Plan for the years ended
March 31, 1998, 1999 and 2000:
<TABLE>
<CAPTION>
                                                                      Wgtd. Avg.
                                                                        Exer.
                                                            Shares      Price
                                                           ---------  ----------
   <S>                                                     <C>        <C>
   Outstanding at March 31, 1997.......................... 1,750,000    $ 0.25
   Granted--price greater than fair value.................   891,482      0.75
   Exercised..............................................    (2,000)     0.25
   Canceled...............................................   (28,000)     0.25
                                                           ---------    ------
   Outstanding at March 31, 1998.......................... 2,611,482    $ 0.42
   Granted--price greater than fair value.................    90,000      3.28
   Exercised..............................................       --        --
   Canceled...............................................   (20,000)     0.25
                                                           ---------    ------
   Outstanding at March 31, 1999.......................... 2,681,482    $ 0.52
   Granted--price greater than fair value.................   811,000     11.00
   Exercised..............................................   (20,833)     3.28
   Canceled...............................................  (828,942)     3.13
                                                           ---------    ------
   Outstanding at March 31, 2000.......................... 2,642,707    $ 2.89
                                                           =========    ======
</TABLE>

<TABLE>
<CAPTION>
                                                     1998      1999      2000
                                                   --------- --------- ---------
   <S>                                             <C>       <C>       <C>
   Options exercisable at year end................ 1,207,500 1,755,528 1,804,020
   Options available for future grants............   336,101   266,101 1,225,525
</TABLE>

  The compensation expense associated with the Plan did not result in a
material difference from the reported net loss for the years ended December
31, 1998, 1999, and 2000. The fair value for these awards was estimated at the
date of grant using a minimum value option pricing model with the following
assumptions for 1998, 1999 and 2000 as follows:

<TABLE>
<CAPTION>
                                          Wtd Avg.
                                          Risk Free                     Expected
                                          Interest  Dividend Volatility   Avg.
   Year                                     Rate     Yield     Factor     Life
   ----                                   --------- -------- ---------- --------
   <S>                                    <C>       <C>      <C>        <C>
   1998..................................   6.54%     None      None    5 years
   1999..................................   5.80%     None      None    5 years
   2000..................................   6.34%     None      65%     5 years
</TABLE>

  The effects of applying SFAS No. 123 are not indicative of future amounts
and additional awards in future years are anticipated.

  The following table summarizes information about stock options outstanding
at March 31, 2000:

<TABLE>
<CAPTION>
                            Options Outstanding           Options Exercisable
                    ----------------------------------- -----------------------
                                Wgtd. Avg.
                                 Remaining
       Range of       Number    Contractual Wgtd. Avg.    Number    Wgtd. Avg.
    Exercise Price  Outstanding    Life     Exer. Price Outstanding Exer. Price
    --------------  ----------- ----------- ----------- ----------- -----------
   <S>              <C>         <C>         <C>         <C>         <C>
   $0.25-$0.75.....  1,991,707     6.05       $ 0.32       1,710      $ 0.29
   $3.28...........     20,000     8.16       $ 3.28           9      $ 3.28
   $11.00..........    631,000     9.49       $11.00          85      $11.00
</TABLE>

                                     F-20
<PAGE>

                         TVN ENTERTAINMENT CORPORATION

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


13. Earnings Per Share

  The following table sets forth the computation of basic and diluted net loss
per share applicable to common stockholders for the years ended March 31,
1998, 1999 and 2000:

<TABLE>
<CAPTION>
                                                   1998      1999      2000
                                                 --------  --------  --------
   <S>                                           <C>       <C>       <C>
   Numerator:
     Net loss from continuing operations........ $(29,862) $(53,485) $(59,045)
     Loss from discontinued operations..........      --       (278)  (13,688)
     Accretion of redeemable Series B preferred
      stock.....................................     (116)     (393)     (398)
                                                 --------  --------  --------
     Net loss applicable to common
      stockholders.............................. $(29,978) $(54,156) $(73,131)
                                                 --------  --------  --------
   Denominator:
     Weighted average shares....................  110,237   152,517   155,827
                                                 --------  --------  --------
   Basic and diluted net loss applicable to
    common stockholders:
     Continuing operations...................... $   (272) $   (353) $   (382)
     Discontinued operations....................      --         (2)      (87)
                                                 --------  --------  --------
   Basic and diluted net loss applicable to
    common stockholders......................... $   (272) $   (355) $   (469)
                                                 ========  ========  ========
</TABLE>

  The computation for diluted number of shares excludes preferred stock,
unexercised stock options and warrants which are antidilutive. The numbers of
such shares was 22,959,489, 24,691,553 and 24,287,977 for the years ended
March 31, 1998, 1999 and 2000, respectively.

14. Income Taxes

  As a result of net operating losses, the Company has not recorded a
provision for income taxes. The primary components of temporary differences
which give rise to deferred taxes at March 31, are as follows (in thousands):

<TABLE>
<CAPTION>
                                                               1999      2000
                                                             --------  --------
   <S>                                                       <C>       <C>
   Deferred tax assets:
     Net operating loss carryforward........................ $ 51,347  $ 75,600
     Allowance for doubtful amounts.........................      171       128
     Refinanced trade payables..............................    1,716     1,222
     Accrued license fees...................................    1,664       888
     Accrued interest.......................................      --        340
     Depreciation and amortization..........................      421       --
     Provision for discontinued operations..................      --      2,700
     Other..................................................      329       505
                                                             --------  --------
   Deferred tax asset.......................................   55,648    81,383
     Less: valuation allowance..............................  (55,648)  (80,438)
                                                             --------  --------
     Net deferred tax asset.................................      --        945
   Deferred tax liabilities:
     Depreciation and amortization..........................      --       (945)
                                                             --------  --------
       Net deferred taxes................................... $    --   $    --
                                                             ========  ========
</TABLE>

  Due to the uncertainty surrounding the realization of net operating loss
carryforwards and other net deferred tax assets resulting from continued
operating losses, the Company provided a full valuation allowance against its

                                     F-21
<PAGE>

                         TVN ENTERTAINMENT CORPORATION

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

deferred tax assets. At March 31, 2000, the Company had available federal and
state net operating loss carryforwards of approximately $207 million and $91
million, which begin to expire in the years 2004 and 2000, respectively.
Because the Company experienced a change in ownership during 1998 within the
meaning of Section 382 of the Internal Revenue Code, the Company's ability to
utilize its net operating loss carryforwards may be limited.

15. Operating Segments

  The Company's operating segments are strategic operating units that are
managed separately due to their different products and/or services. The home
satellite dish operating segment markets and sells the Company's home
satellite dish service, an analog pay-per-view delivery system transmitted
directly to C-Band home satellite dish consumers. The digital cable operating
segment markets and sells the Company's Digital Cable Television ("DCTV")
service, a turnkey digital delivery system with programming content, including
up to channels of pay-per-view movies and events, and support services which
enables cable operators to expand their existing channel capacity and PPV
Feeds service, a pay-per-view programming service without support services.
The satellite transmission operating segment markets and sells transponder
capacity and uplinking services to the Company's other operating segments and
to third parties. The media time sales operating segment, GRTV Network, Inc.,
sells media time on its 24-hour broadcast network. The music marketing
services operating segment is a start-up company, New Media Network, Inc.,
that plans to market and sell entertainment products such as music, movies and
games. Panda Shopping Network has been classified as a discontinued operation
and is not included in the revenue and operating losses for the Company's
operating segments as of March 31, 2000 (see note 16).

  The Company's measure of profit or loss for its operating segments reviewed
by the chief operating decision maker and executive management is operating
loss, excluding depreciation and amortization (and also excludes interest and
other income and expense). The chief operating decision maker does not use
asset information.

  Revenue and operating losses for the Company's operating segments as of
March 31, are as follows (in thousands):

<TABLE>
<CAPTION>
                                                   1998      1999      2000
                                                 --------  --------  --------
<S>                                              <C>       <C>       <C>
Revenue:
  Home satellite dish services.................. $ 22,631  $ 17,154  $ 14,015
  Digital cable services........................       40    10,947    15,977
  Satellite transmission services(1)............   23,102    23,119    20,615
  Media time sales..............................      --        --     20,609
  Music marketing services......................      --        --        436
  Intersegment elimination(1)...................  (15,228)  (14,539)  (17,462)
                                                 --------  --------  --------
    Total revenue............................... $ 30,545  $ 36,681  $ 54,190
                                                 ========  ========  ========
Operating profit/(loss):
  Home satellite dish service................... $(10,194) $(12,750) $(12,841)
  Digital cable services........................  (14,343)  (23,396)  (21,741)
  Satellite transmission services(1)............   21,970    21,647    18,587
  Media time sales..............................      --        --        (28)
  Music marketing services......................      --        --     (3,859)
  Intersegment elimination(2)...................      --       (283)   (1,508)
                                                 --------  --------  --------
Operating loss excluding depreciation and
 amortization...................................   (2,567)  (14,782)  (21,390)
Depreciation and amortization...................   11,884    12,211    16,559
                                                 --------  --------  --------
    Operating loss.............................. $(14,451) $(26,993) $(37,949)
                                                 ========  ========  ========
</TABLE>

                                     F-22
<PAGE>

                         TVN ENTERTAINMENT CORPORATION

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

--------
(1) Includes charges to the Company's other operating segments for the use of
    transponder time.

(2) Included charges to PSN for transponder and media time which are included
    in loss from discontinued operations of PSN.

  For the year ended March 31, 1999 and March 31, 2000, one customer accounted
for 26.7% and 23.6% of revenue, respectively. As of March 31, 1999 and March
31, 2000, one customer accounted for 53.7% and 19.8% of accounts receivable,
respectively.

16. Subsequent Events

 Leases

  In April 2000, the Company amended a capital lease agreement by reducing the
number of primary C-Band transponders leased from eight to two, terminating
the lease on the remaining six primary C-Band transponders and on the one
reserve C-Band transponder. In June 2000, the Company amended another capital
lease agreement reducing the number of primary C-Band transponders leased from
five to three, and adding one reserve C-Band transponder and adding one Ku-
Band transponder (see note 11). The following proforma future minimum lease
payments assumes these amendments occurred at March 31, 2000 as follows:

<TABLE>
<CAPTION>
                                                             4MC and
                                                Transponders  Other    Total
                                                ------------ -------  --------
   <S>                                          <C>          <C>      <C>
   2001........................................   $ 10,450   $ 4,173  $ 14,623
   2002........................................     10,620     3,801    14,421
   2003........................................     10,620     3,758    14,378
   2004........................................     10,620     3,682    14,302
   2005........................................     10,620     2,455    13,075
   Thereafter..................................    107,470       --    107,470
                                                  --------   -------  --------
   Total minimum obligations...................    160,400    17,869   178,269
   Less interest...............................    (86,208)   (5,024)  (91,232)
                                                  --------   -------  --------
   Present value of minimum obligations........     74,192    12,845    87,037
   Less current portion........................     (2,089)   (2,299)   (4,388)
                                                  --------   -------  --------
   Long-term obligations at March 31, 2000.....   $ 72,103   $10,546  $ 82,649
                                                  ========   =======  ========
</TABLE>

 Discontinued operations

  In June 2000, the Company decided to cease operations of PSN and close the
segment. The Company has reflected the operations of PSN as a discontinued
operation.

  At March 31, 2000 net assets of PSN consist of the following:

<TABLE>
   <S>                                                                     <C>
   Current assets......................................................... $851
   Property and equipment, net............................................  100
                                                                           ----
     Total net assets..................................................... $951
                                                                           ====
</TABLE>

  PSN generated revenues of $3,131 and $15,813 during the years ended March
31, 1999 and 2000, respectively.

  The Company has included in the estimated loss on disposal in the financial
statements a loss from operations of $1.1 million for the period April 1, 2000
to June 3, 2000, and the estimated loss of $4.8 million for the wind down of
operations. The Company has restated the 1999 financials statements to reflect
a loss from discontinued operations of $278.

                                     F-23
<PAGE>

                                  Schedule II

                       Valuation and Qualifying Accounts

<TABLE>
<CAPTION>
                                                       Additions
                                           ---------------------------------
                         Balance beginning Charged to Costs Charged to other            Balance end
      Description            of period       and Expenses       accounts     Deductions  of period
      -----------        ----------------- ---------------- ---------------- ---------- -----------
<S>                      <C>               <C>              <C>              <C>        <C>
Year ended March 31,
 2000
Allowance for doubtful
 accounts...............       $427              $375                          $(618)      $184

Year ended March 31,
 1999
Allowance for doubtful
 accounts...............       $159              $753                          $(485)      $427

Year ended March 31,
 1998
Allowance for doubtful
 accounts...............       $260              $120                          $(221)      $159
</TABLE>

                                      S-1