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

                                   FORM 10-KSB
(Mark One)
[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
     OF 1934
                  For the fiscal year ended December 31, 1997

                                       OR

[ ]  TRANSITION  REPORT  PURSUANT  TO SECTION  13 or 15(d) OF THE  SECURITIES
     EXCHANGE ACT OF 1934
         For the transition period from                to
                                        --------------    --------------

                        Commission File Number 000-21909

                      PIRANHA INTERACTIVE PUBLISHING, INC.
                 (Name of small business issuer in its charter)

          Nevada                                          86-0779928
(State or other jurisdiction of                (IRS Employer Identification No.)
 incorporation or organization)

                 1839 West Drake, Suite B, Tempe, Arizona 85283
                    (Address of principal executive offices)

                                  602-491-0500
                           (Issuer's telephone number)

      Securities registered under Section 12(b) of the Exchange Act: None

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

                                 TITLE OF CLASS
                                 --------------
                          Common Stock, $.001 par value
             Units, each consisting of one share of Common Stock
                             and one Class A Warrant
                                Class A Warrants

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

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

     Issuer's revenues for the year ended December 31, 1997 were $125,864.

As of March 25, 1998,  the aggregate  market value of the Common Stock (based on
the closing bid price as quoted on Nasdaq Small Cap Market on that date) held by
non-affiliates of the Registrant was approximately $3,000,000.

As of March 25,  1998,  the  number of  outstanding  shares of the  Registrant's
Common Stock was 3,200,000.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None
<PAGE>
                      PIRANHA INTERACTIVE PUBLISHING, INC.

                                   FORM 10-KSB

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                                                                            Page
                                                                            ----
PART I
         Item 1.   Description of Business..................................  1

         Item 2.   Description of Property..................................  7

         Item 3.   Legal Proceedings........................................  7

         Item 4.   Submission of Matters to a Vote of Security Holders......  8

PART II
         Item 5.   Market for Common Equity and Related Stockholders
                   Matters..................................................  8

         Item 6.   Management's Discussion and Analysis of Financial
                   Condition and Results of Operations......................  9

         Item 7.   Financial Statements..................................... 11

         Item 8.   Changes In and Disagreements with Accountants on
                   Accounting and Financial Disclosure...................... 11

PART III
         Item 9.   Directors, Executive Officers and Compliance with
                   Section 16(a) of the Exchange Act........................ 12

         Item 10.  Executive Compensation................................... 13

         Item 11.  Securities Ownership of Certain Beneficial Owners
                   and Management........................................... 15

         Item 12.  Certain Relationships and Related Transactions........... 16

PART IV
         Item 13.  Exhibits, and Reports on Form 8-K........................ 17

SIGNATURES ................................................................. 18

FINANCIAL STATEMENTS........................................................ F-1

<PAGE>
                                     PART I.

ITEM 1. DESCRIPTION OF BUSINESS

FORWARD LOOKING STATEMENTS

This Report contains certain "forward-looking statements",  including statements
regarding,  among other items, the Company's  growth strategy,  future sales and
anticipated  trends in the  Company's  business.  Actual  results  could  differ
materially  from  these  forward-looking  statements  as a result of a number of
factors,   including,   but  not  limited  to,  the  Company's  early  stage  of
development,  intense  competition  in  various  aspects  of its  business,  the
seasonal  nature of its business,  its dependence on third party authors and key
personnel,  risks  associated  with  bringing its software  titles to market and
other factors described in the Company's  documents filed from time to time with
the U.S. Securities and Exchange Commission.

GENERAL

Piranha  Interactive  Publishing,  Inc. (the  "Company")  publishes  interactive
multimedia  software products  providing  education and entertainment as well as
reference and personal productivity titles for the home personal computer ("PC")
market.  The Company  generally  licenses  software  programs being developed by
independent  third party  developers.  The Company  then directs and assists the
developers in finishing the programs according to its  specifications,  imprints
and  duplicates  the programs in a media format,  packages them in a proprietary
manner, and markets and distributes the finished products under the Piranha name
as well as proprietary titles whenever possible.  Pursuant to license agreements
with these  developers,  the Company pays a royalty  based upon the sales of the
product and in most instances pays an up-front advance and/or guaranteed minimum
royalty payment.

Since the release of its first title in August  1995,  the Company has  licensed
and marketed 13 titles under its own label as well as 13 titles under  affiliate
relationships  with two  third  party  publishers  pursuant  to  revenue-sharing
agreements.  The Company  currently has executed  license  agreements  for three
additional  titles which have not yet been  released.  To date,  the Company has
published all of its titles in computer compact disc read-only memory ("CD-ROM")
format.  In the future,  the Company may distribute its products in other media,
such  as  digital  versatile  disc  ("DVD"),   on-line   information   services,
television-based  formats,  telephone  and cable  networks and direct  broadcast
satellite, if market acceptance of such formats becomes widespread.

The Company intends to continue to focus its product  offerings on "edutainment"
titles,  which combine  entertainment and educational  content,  games and other
content  titles which it  determines to have market  potential.  The Company has
published titles in various categories, including entertainment, early childhood
education, reference, and personal productivity. The Company currently sells its
products  to  retailers  and  distributors  through  its own  direct  sales  and
marketing  efforts  and  those  of its  agents.  The  Company  has  distribution
agreements with several large national software distributors as well as a number
of other smaller and specialty  distributors.  The Company  currently places its
product with a number of the largest  software  retailers  (in terms of software
sales volume) in the United States.

The Company  intends to expand its operations  and product line by  establishing
strategic  partnerships  and acquiring  other software  publishers or developers
when  appropriate.  In addition,  the Company  believes there are many companies
with one or two  attractive  products but a limited  number of total products or
marketing  resources,  which may be attractive  candidates for acquisition.  The
Company intends to pursue these  opportunities to enhance its product portfolio,
but there can be no assurance that any acquisition  will be  consummated,  or if
consummated, will successfully generate additional revenues for the Company. The
Company does not currently have any plans, agreements or understandings, binding
or non-binding, to enter into any potential business combination.

                                       1
<PAGE>

On September  23,  1997,  the Company  completed a public  offering of 1,600,000
units, each consisting of one share of common stock and one Class A warrant,  at
a price to the public of $5.00 per unit. The net proceeds of the offering to the
Company, after deducting all associated costs, were approximately $6,400,000.

The Company's  management team has worked closely  together for the past four to
seven years and all have prior software publishing  experience.  The Company was
incorporated  in Arizona on November  14, 1994 and  reincorporated  in Nevada on
November 22, 1996.  Its corporate  headquarters  are located at 1839 West Drake,
Suite B, Tempe,  Arizona 85283, and its telephone number is (602) 491-0500.  The
Company's website address is http://www.piranhainteractive.com. This website and
its contents are expressly not incorporated by reference in this report.

INDUSTRY OVERVIEW

The consumer software market has grown dramatically over the past few years as a
result of several  major  trends,  including the  increasing  installed  base of
multimedia PCs in the home, as well as the increasing multimedia capabilities of
PCs and demand for a greater number of high quality,  affordably priced software
applications.  In  addition,  the  proliferation  of  on-line  networks  and the
Internet  has created new  opportunities  for the  consumer  software  industry,
including  simultaneous  on-line  game  playing by users in multiple  locations,
additional  promotional techniques including on-line distribution of "shareware"
(free limited versions of software titles), and direct on-line marketing,  sales
and distribution to end users.

As demand for  consumer  software  has grown  with  improvements  in  multimedia
technology,  consumers have also grown more  sophisticated in their expectations
for  software,  requiring  increasingly  easy  to  use,  content-rich  products.
Furthermore,  competition  has  continued  to  increase  among new and  existing
multimedia  software  publishers,  resulting  in  increased  price  pressure and
competition  for limited retail shelf space.  As this trend  continues,  it will
become  increasingly  important for software  publishers  to create  significant
brand name recognition,  establish strong retail  relationships and consistently
publish high-quality software at affordable prices to consumers.

PRODUCTS

NEW PRODUCTS.

From the  Company's  inception in November  1994 through the date of the initial
public offering, which was completed on September 23, 1997, the Company released
seven software  titles under the Piranha name.  Since the offering,  the Company
has executed license agreements for eight new titles, two of which were released
in the  fourth  quarter  of 1997 and four of which  were  released  in the first
quarter of 1998. The Company is continually evaluating other titles submitted to
it by independent  developers as part of its ongoing product selection  process.
The following table sets forth all Company titles released since the date of the
completion of the  Company's  offering,  and other titles the Company  currently
plans to release in 1998, grouped by product category:

NEW PRODUCTS                                               RELEASE DATE
------------                                               ------------

EDUTAINMENT

Air Blocks [tm]                                            November 1997

This  multimedia  program allows players of all ages to
build  realistic  3-D images using  colorful,  animated
building   blocks   and  a   variety   of   vivid   3-D
environments.   The  program  is  designed  to  enhance
imagination, creativity and spatial awareness.

                                       2
<PAGE>

Redshift [tm] 3                                            March 1998

This  multimedia  desktop  planetarium  program  is the
latest   version  of   Redshift,   winner  of  numerous
international  awards.  The program  allows amateur and
expert  astronomers  to locate  more  than one  million
objects throughout the universe,  featuring  multimedia
presentations,  computer  simulations and comprehensive
reference  information.  The  Company  has  launched  a
website, located at  http://www.redshift3.com,  devoted
to promoting this title.  This website and its contents
are  expressly  not  incorporated  by reference in this
report.

Skybase [tm]                                               March 1998

This multimedia  program allows users to design,  build
and explore their own International Space Station using
the   same   forty   modules   planned   for  the  real
International  Space  Station.  This  3-D  program  was
developed  with the help of NASA,  the  European  Space
Agency and Russian space  authorities.  The Company has
launched       a       website,        located       at
http://www.skybase-iss.com,  devoted to promoting  this
title.  This website and its contents are expressly not
incorporated by reference in this report.

Planetary Missions [tm]                                    March 1998

This multimedia space exploration  program allows users
to navigate the solar  system and explore  planets in a
scientifically   designed  flight   simulator   through
photography,  video and 3-D illustrations.  The program
includes  360  degree  views of planet  surfaces  using
video and images from  actual  missions,  and  animated
lectures  on all the planets in the solar  system.  The
Company   has   launched   a   website,    located   at
http://www.planetarymissions.com,  devoted to promoting
this title. This website and its contents are expressly
not incorporated by reference in this report.

Ancient Origins [tm]                                       March 1998

Users travel through the roots of  civilization in this
illustrated, interactive guide to ancient history. This
multimedia program covers over fifty cultures, spanning
20,000    years   using    interactive    archeological
expeditions,   realistic  3-D  constructions  of  major
sites, pictorial essays, musical re-creations and more.
The  Company  has   launched  a  website,   located  at
http://ancientorigins.com,  devoted to  promoting  this
title.  This website and its contents are expressly not
incorporated by reference in this report.

ENTERTAINMENT

Extreme Tactics [tm]                                       Scheduled for Second
                                                           Quarter of 1998
Players attempt to gain control of a futuristic  planet
in this 3-D tactical  war  simulation.  Players  choose
vehicle designs,  artificial  intelligence,  strategies
and tactics as they play  against the computer or other
players through the internet or network connections.

                                       3
<PAGE>
Morpheus [tm]                                              Scheduled for Second
                                                           Half of 1998
A player's  adventure  begins as an arctic explorer who
becomes  separated  from his party while  attempting to
solve the mystery of his father's disappearance in this
multimedia  adventure  game. The program allows players
to  explore  a  wide   variety  of  3-D   environments,
accompanied  by sound and action video,  as they search
for clues and traverse between dreams and awakenings in
the explorers mind.

Dead Reckoning [tm]                                        Scheduled for Second
                                                           Half of 1998
In this 3-D action  game,  the user will  battle to the
death  in a fight  to save  the  human  race.  The game
features   15   alien   battle    arenas,    artificial
intelligence and multiplayer  internet game capability.
The  Company  has   launched  a  website,   located  at
http://www.deadreck.com, devoted to generating consumer
interest in and anticipation of this game. This website
and its  contents are  expressly  not  incorporated  by
reference in this report.

PRODUCT DEVELOPMENT.

The  Company's   strategy  is  generally  to  license  software   programs  from
independent  software  developers.  The  Company  believes  that  this  strategy
minimizes the financial risks associated with in-house  research and development
activities and capitalizes upon the pool of creative, quality products currently
produced by independent  developers.  A number of the best selling entertainment
software  titles in the United  States  during  recent  years were  developed by
small,  independent  developers  and were licensed to software  publishers.  The
Company  uses a  variety  of forums  to  identify  high  quality,  completed  or
substantially  completed  software programs produced by independent  developers.
Independent  developers  generally  lack the sales,  marketing and  distribution
resources  offered by the Company and necessary to introduce their products into
the  retail  marketplace.  The  Company  has also  designed  one title  with the
assistance of consultants  which it then  subcontracted to independent  software
programmers  for  development.  The Company may follow the same  procedure  with
additional  future titles.  Although all of the Company's  current products were
developed by independent  developers,  the Company may fund in-house development
at some time in the future if management deems it advisable.

SALES AND MARKETING

CUSTOMERS.

The Company sells its products to distributors,  directly to certain  retailers,
and  direct  to  consumers   through  the   internet.   Currently,   the  retail
merchandisers   of  certain  of  the   Company's   products   include   computer
"superstores",  such as CompUSA and Computer City,  national and regional retail
stores, such as Best Buy, mass merchandisers,  corporate resellers,  direct mail
accounts,  consumer electronic stores, warehouse clubs and office supply stores.
The  Company  also  distributes  its  products  through  several of the  largest
national  distributors,  including Ingram Micro,  Navarre,  and Tech Data, which
have access to  desirable  retail  accounts.  By making its  products  available
through a number of large distributors,  the Company believes it is able to fill
retailers'  orders more quickly and increase the name recognition of the Company
and its products.  The retail software market is intensely  competitive in terms
of shelf space and promotional  support.  Although the Company  believes that it
will  continue to secure  adequate  shelf  space and  promotional  support  from
retailers of its products,  the competition for such access is intense and there
can be no assurance that the Company will be successful in this regard.

For the year ended  December 31, 1997,  four customers  comprised  approximately
30%, 19%, 18% and 17%, respectively, of the Company's net sales.

                                       4
<PAGE>

INTELLECTUAL PROPERTY LICENSES AND DISTRIBUTION AGREEMENTS

SOFTWARE LICENSES.

Each of the Company's software products to date has been authored by third party
developers  which create each  program's  "source code", a unique set of program
instructions  which are  translated  into  machine  language  and executed by an
end-user's computer.  Once created, each program's source code is proprietary in
nature and is generally the property of the developer.

The Company's licenses for the software contained in its multiple CD-ROM Piranha
Packs are  generally  non-exclusive  and  generally of short  duration,  to date
ranging  from one to two years.  The  Company  is  currently  in the  process of
liquidating  two of the multiple  CD-ROM Piranha Packs (Piranha Pack - Something
for Everyone and Academic Edge Piranha Pack),  both which were launched in 1995.
The license for the third  multiple  CD-ROM  Piranha Pack will expire on May 20,
1999.

The  Company's   licenses  for  the  software   contained  in  its   standalone,
individually  packaged  titles are  generally  exclusive  licenses  within their
territory,  with two to six year  terms and  varying  expiration  dates  through
February 2004.  The Company is currently in the process of liquidating  existing
inventory of two of the standalone  individually  packaged titles  (Majestic and
Treasured  Tales  Presents  Alice's  Adventures  in  Wonderland)  as well as all
remaining  inventory of the 13 titles  published under affiliate  relationships,
all of  which  titles  were  launched  in  1995.  None of the  licenses  for the
Company's  standalone,  individually  packaged  titles will expire in 1998.  The
Company's exclusive license  arrangements may, however,  become non-exclusive or
terminate if the Company does not satisfy certain performance criteria,  such as
selling a minimum  amount of units or paying a minimum  amount of royalties.  In
February  1998,  the  Company's   license  for  the  title   Syn-Factor   became
non-exclusive  when  product  sales  failed  to  satisfy  the  required  minimum
threshold.  Some  of  the  Company's  licenses  have  become,  or  will  become,
non-exclusive with the passage of specified time periods.  The Company generally
does not own the source  code to the  software  contained  in  licensed  titles;
however,  the license agreements  generally provide that the Company exclusively
owns the  proprietary  packaging and the names that it chooses for such software
programs. The Company does not, however, own the trademark to the names Redshift
[tm] or Extreme  Tactics [tm].  Those  trademarks are owned by the developers of
those products.

The Company  has paid  advances  against  royalties  for all but two  individual
titles licensed to date and anticipates that it will likely pay advances against
royalties for most future individual titles in order to obtain desirable content
and technology. Significant advances may be required in order to obtain products
with the features  required to be competitive in the current  computer  software
market. The Company is required to supply technical support to the end users for
all published individual titles to date and anticipates that it will be required
to supply technical support for all such future titles as well.

DISTRIBUTION AGREEMENTS.

The Company's  distribution  agreements generally permit the distributor to sell
the Company's products on a non-exclusive basis for a limited term. Distributors
are not generally  required to purchase any minimum  amount of products from the
Company,  and are entitled to make  purchases at prices at least as favorable as
those at which the Company sells comparable products to other  distributors.  In
addition,  most of these  agreements  permit the  distributor  to return  unsold
products and require the Company to indemnify the  distributor  against  certain
intellectual  property and product design related  liabilities.  Generally,  the
distribution agreements require the distributors to pay the Company for products
purchased  within  a  specified  period  of  time;  however,   two  distribution
agreements  with  significant  distributors  permit such  distributors  to delay
payment  until  product  is  sold  by  the  distributor  to  retail   customers.
Consequently,  the Company  incurs  longer  delays in cash receipts for products
distributed through these channels. The Company's  distribution  agreements also
permit  distributors to apply credits against  invoices for certain  advertising
and marketing efforts associated with the Company's products.

                                       5
<PAGE>

MANUFACTURING

All of the Company's titles are currently pressed,  reproduced,  and packaged at
third party fulfillment  houses. The Company's printed materials are produced by
third party vendors that ship such materials  directly to the fulfillment  house
for product assembly and packaging.  The Company places orders with such vendors
for production of completed  products in amounts  specified by the Company based
upon forecasted  sales.  Most products are shipped  directly to distributors and
retailers  by the  fulfillment  houses.  As  demand  for  fulfillment  houses is
greatest in the third and fourth quarters due to publishers  building  inventory
for holiday  sales,  an  unanticipated  delay in the  manufacture  of  products,
particularly  during  the fourth  quarter,  could  result in a material  adverse
effect on the  Company's  financial  condition  and results of  operations.  The
Company currently utilizes two fulfillment houses.

Generally,  the  Company  is  obligated  to pay its  vendors  within  30 days of
shipment,  although  the  Company's  customers'  payment  cycles  are often much
longer,  generally from between 90 to 120 days. Previously,  this discrepancy in
payment cycles has resulted in  inconsistent  cash flows for the Company,  which
condition  may  recur in the  future.  The  Company  does  not have  contractual
agreements with any of its outside vendors, including its fulfillment houses. As
a result,  the outside vendors are not committed to provide services or products
to the Company when the Company may require such  services or products,  and the
Company may not be able to seek  indemnification  from its vendors for potential
product liability or other manufacturing defects.

COMPETITION

SOFTWARE INDUSTRY

The consumer  software  industry is intensely  competitive  and subject to rapid
change.  The Company believes that the principal  competitive  factors affecting
the markets for its titles include content,  quality, brand recognition,  price,
marketing,  distribution,  access  to  shelf  space  and  critical  reviews.  In
addition,  consumer  demand for  particular  software  products may be adversely
affected by the increasing number of competitive  products from which to choose,
making it  difficult  to predict  the  Company's  future  success in  publishing
packaged software  products for the retail market.  Rapid changes in technology,
product  obsolescence  and advances in computer  hardware require the Company to
develop or acquire new products and to enhance its existing products on a timely
basis. The Company's  marketplace has recently experienced a greater emphasis on
on-line  and  internet  related  services,  and  content  tailored  for this new
delivery  vehicle.  To the extent that demand increases for on-line products and
content, the demand for the Company's existing product format may decline.

The consumer  multimedia  market is highly  fragmented with products  offered by
many vendors.  The Company's  products  compete directly with those of large and
established  software  companies,  such as GT Interactive,  Broderbund,  and The
Learning Company, as well as a large number of small independent publishers like
the  Company.  Most of these  competitors  have  greater  financial,  technical,
marketing,  sales  and  customer  support  resources,  as well as  greater  name
recognition  and access to customers than the Company.  Due to the low technical
and economic barriers to entry into the multimedia  software market, the Company
anticipates  facing  additional  competition from an increasing number of small,
privately-held competitors. In addition, many large companies with sophisticated
product  marketing and technical  abilities and financial  resources that do not
presently compete with the Company may enter the multimedia  software market. To
the extent that  competitors,  as a result of their  purchasing  capacity,  have
greater access to financial and other resources or achieve a performance,  price
or  distribution  advantage,  the  Company's  business and results of operations
could be adversely  affected.  Furthermore,  the Company  anticipates that there
will be consolidation of the consumer  multimedia market around a smaller number
of vendors who may be better  positioned  and have greater  resources to compete
than the Company.  The Company will also face increased  competition as it seeks
to deliver  multimedia  content through other new media,  such as the World Wide
Web, the Internet and on-line proprietary services.

There is no  assurance  that the  Company  will have the  resources  required to
respond to market or  technological  changes or to compete  successfully  in the
future.
                                       6
<PAGE>

RETAIL SHELF SPACE

The competition for shelf space in retail stores is intense.  To the extent that
the number of consumer software products and computer platforms increases,  this
competition  for shelf space may further  intensify.  At present,  the Company's
products  constitute a small percentage of a retailer's sales volume,  and there
can be no assurance  that  retailers  will provide the  Company's  products with
adequate levels of shelf space and promotional  support.  Increased  competition
could result in loss of shelf space for, and reduction in  sell-through  of, the
Company's  products at retail stores, as well as significant price  competition,
any of which could adversely affect the Company's  business,  operating  results
and financial condition.

Due to increased  competition  for limited  retail  shelf space and  promotional
resources,  retailers and  distributors are increasingly in a better position to
negotiate favorable terms of sale,  including price discounts and product return
policies,  as well as cooperative  market  development  funds.  Retailers  often
require  software  publishers to pay fees in exchange for preferred shelf space.
Larger publishers and distributors  will likely have a competitive  advantage in
this regard to the extent they have greater financial  resources and negotiating
leverage.

DISTRIBUTION CHANNELS

Competition  for access to  distributors,  as well as for retail shelf space and
inclusion in OEM sales programs is intense. In addition,  the type and number of
distribution  channels  is  increasing  to  include   non-traditional   software
retailers such as book, music, video, magazine, toy, gift, convenience, drug and
grocery store chains.  Additionally,  as technology changes, the type and number
of distribution channels will further change and new types of competitors,  such
as cable or telephone  companies,  and new  distribution  channels are likely to
emerge.  These new distribution  channels may include delivery of software using
on-line  services  or  the  Internet.   Even  within  traditional   channels  of
distribution  for consumer  software  products there has been rapid change among
distributors, including consolidations and financial difficulties. These factors
affecting   distribution   channels  are  likely  to  increase  competition  and
negatively  affect  the  Company's  business  and  results of  operations.  With
increasing  concentration  in the  traditional  channels  of  distribution,  the
Company's  customers have increased  leverage in negotiating  favorable terms of
sale,  including price  discounts and product return  policies.  In addition,  a
number of the Company's larger competitors have attempted, with some success, to
enter into  exclusive  software  distribution  arrangements  with certain retail
outlets.  If the occurrence of these  exclusive  arrangements  increases and the
Company is not able to offer a  competitive  product  line or  arrangement,  the
Company's operating results may be negatively impacted.

EMPLOYEES

As of March 1997, the Company employed  eighteen total  employees,  seventeen of
whom are full-time  employees.  None of the employees are  represented  by labor
unions. The Company believes its relations with its employees are good.

ITEM 2. DESCRIPTION OF PROPERTY

The Company subleases its principal offices in Tempe, Arizona, which are used to
house all of its operations,  including marketing,  sales and all administrative
operations. The 4,750 square foot facility is subleased pursuant to an agreement
containing a four-year term which expires in November 1999. The Company believes
that its facilities are adequate for its current and foreseeable operations over
the next 12 months.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any pending or threatened  legal  proceedings that
it believes will have a material impact on the Company's business.

                                       7
<PAGE>

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

None.

                                    PART II.

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The  Company's  Units,  Common  Stock and A  Warrants  are  traded on the Nasdaq
SmallCap  Market  System  under  the  symbols   "PRANU",   "PRAN"  and  "PRANW",
respectively.  As of March 25,  1998,  there  were  approximately  19 holders of
record of the Company's  Common Stock.  The Company has not paid cash  dividends
and does not anticipate doing so in the foreseeable future.

The following  sets forth the high and low closing sales prices,  as reported by
the Nasdaq Small Cap Market  System,  in dollars per unit,  share or warrant for
all quarters since the Company's initial public offering.

                            Units      Common Stock       A Warrants
                        -----------     ------------     ------------
Quarter Ended:          High    Low     High     Low     High     Low
                        ----    ---     ----     ---     ----     ---
Sept. 30, 1997
  (beginning 9/18/97)   5.13    4.00    5.00     3.50    1.25    0.84
Dec. 31, 1997           5.06    1.75    4.00     1.50    1.13    0.50

The above  quotations  reflect  inter-dealer  prices,  without  retail  mark-up,
mark-down or commission and may not represent actual transactions.

USE OF PROCEEDS FROM REGISTERED SECURITIES

On September 18, 1997, the Company's  Registration  Statement on Form SB-2 (File
No. 333-18605) (the "Form SB-2"), was declared effective by the U.S.  Securities
and  Exchange  Commission.  The Form SB-2 was  prepared  in  connection  with an
initial public  offering by the Company of 1,600,000  units,  each consisting of
one share of common stock and one Class A Warrant.  The units and the components
thereof  were each  separately  tradable  upon  issuance.  Each  Class A Warrant
entitles  the holder to purchase one share of the  Company's  Common Stock at an
exercise price of $6.50 at any time prior to September 18, 2002. The offering of
units  pursuant to the Form SB-2  commenced on September 18, 1997 and terminated
September 23, 1997,  the date on which all of the units were sold.  The offering
was  underwritten  by D.H. Blair  Investment  Banking Corp. on a firm commitment
basis.  The units were  offered  to the public at a price of $5.00 per unit,  or
$8,000,000 in the aggregate for all 1,600,000  units offered,  all of which were
sold as of the date the offering terminated.

During the period  commencing  September 18, 1997 and  terminating  December 31,
1997 (the  "Post-Effective  Period"),  the Company's actual expenses incurred in
connection with the issuance and distribution of the units  registered  pursuant
to the Form  SB-2  equaled  approximately  $1,600,000  in the  aggregate,  which
consisted of the following: (i) $760,000 in aggregate underwriting discounts and
commissions,  (ii) $240,000 in expenses paid to or for the underwriter and (iii)
$600,000 in other expenses.  None of the $600,000 in other expenses consisted of
direct or indirect payments to the Company's officers,  directors, holders of at
least  10% of any  class  of  the  Company's  outstanding  securities  or  other
affiliates (collectively "Affiliates").

After deducting the foregoing  expenses,  the offering resulted in approximately
$6,400,000 in net proceeds to the Company. During the Post-Effective Period, the
Company used  approximately  $2,245,000 of the net proceeds for the repayment of
indebtedness,  approximately  $220,000 toward  acquisition of software programs,
and approximately  $800,000 for working capital.  Approximately $60,000 was paid

                                       8
<PAGE>

to affiliates for payment of accrued salaries.  The preceding  discussion of the
Company's use of net proceeds reflects  reasonable  estimates of amounts paid by
the Company.  The  Company's  use of proceeds  from the  offering,  as described
herein,  does not  represent  a  material  change  from  that  described  in the
prospectus included in the Form SB-2.

ITEM 6. MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF FINANCIAL  CONDITION  AND
        RESULTS OF OPERATIONS

This Report contains certain "forward-looking statements",  including statements
regarding,  among other items, the Company's  growth strategy,  future sales and
anticipated  trends in the  Company's  business.  Actual  results  could  differ
materially  from  these  forward-looking  statements  as a result of a number of
factors,   including,   but  not  limited  to,  the  Company's  early  stage  of
development,  intense  competition  in  various  aspects  of its  business,  the
seasonal  nature of its business,  its dependence on third party authors and key
personnel,  risks  associated  with  bringing its software  titles to market and
other factors described in the Company's  documents filed from time to time with
the U.S.  Securities  and  Exchange  Commission.  In light  of these  risks  and
uncertainties,  there can be no assurance that the  forward-looking  information
contained in this document will in fact transpire or prove to be accurate.

OVERVIEW

The Company  publishes  interactive  multimedia  software  products for the home
personal computer ("PC") market with an emphasis on "edutainment"  titles, which
combine entertainment and educational content, as well as games and other titles
which it  determines  to have  market  potential.  The  Company  was  founded in
November  1994  and  has  published  titles  in  several  categories,  including
entertainment,  early childhood education,  reference and personal productivity.
The Company's  management team has worked closely  together for the past four to
seven years and all have prior software publishing experience.  During its first
year of  operations,  the  Company's  primary  focus was  devoted to  developing
infrastructure  and obtaining titles for  publication.  The Company's first four
titles were  published in the fall of 1995.  Thereafter,  the Company  published
only one  title in 1996 as a result of its  working  capital  deficiency  during
1996, which continued through the closing date of its initial public offering on
September 23, 1997. As a result,  the Company's  1997 net sales were  materially
hampered by its  inability to ship  quantities  of products to satisfy  customer
demand  and to  acquire,  launch  and  market new  products.  In  addition,  the
Company's  planned launch of the 3-D action game,  DEAD  RECKONING,  was delayed
from 1997 to 1998 due to extended development requirements.  These factors had a
material adverse effect on 1997 revenues and  profitability.  Consequently,  the
Company  believes that the comparisons  below in "Results of Operations" may not
be meaningful or representative of future results.

On September  23,  1997,  the Company  completed a public  offering of 1,600,000
units, each consisting of one share of common stock and one Class A warrant,  at
a price to the public of $5.00 per unit. The net proceeds of the offering to the
Company, after deducting all associated costs, were approximately $6,400,000.

The Company's  initial public offering closed seven days prior to the end of the
third quarter of 1997,  and as a result,  the Company was not positioned to take
any meaningful advantage of acquiring,  marketing and shipping certain titles in
time for the  holiday  buying  season.  The  home  education  and  entertainment
software business is highly seasonal. Typically, revenues are highest during the
third and fourth  calendar  quarters (which includes the holiday buying season),
decline in the first  calendar  quarter  and are  lowest in the second  calendar
quarter. This seasonal pattern is due primarily to the increased demand for home
education and  entertainment  software titles during the year-end holiday buying
season.

Notwithstanding these developments, the Company released two new titles, REVENGE
OF THE TOYS and AIR BLOCKS, in the fourth quarter of 1997 and executed a license
agreement  with Maris  Multimedia,  Ltd. to publish  four  educational  software
titles,  including the sequel to the popular REDSHIFT  astronomy series,  all of
which were released in the first  quarter of 1998. To date in 1998,  the Company
has also  executed  license  agreements  for the  strategy  game title,  EXTREME
TACTICS  and the  adventure  game  title,  MORPHEUS,  planned for release in the

                                       9
<PAGE>

second quarter and second half of 1998, respectively.  The 3-D action game, DEAD
RECKONING,  will  also be  launched  in the  second  half of  1998 in  order  to
strategically  market  that title for the 1998  fourth  quarter  holiday  buying
season.  The  launch of DEAD  RECKONING  was  previously  planned  for the first
quarter of 1998.

RESULTS OF OPERATIONS

COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996

NET SALES

The Company's net sales for the year ended December 31, 1997 were $125,864 which
represents a $298,946 or 70% decrease from the year ended December 31, 1996. Net
sales for 1997 and 1996 were adversely affected by the Company's working capital
deficiency.  This  deficiency  prevented  the  Company  from  shipping  existing
products in a timely manner and in sufficient quantities to meet customer demand
and from acquiring, launching and marketing new products.

GROSS LOSS

The Company experienced a gross loss of $(72,832) during the year ended December
31,  1997 as  compared  to a gross  profit of  $134,835  during  the year  ended
December 31,  1996.  Cost of goods sold  increased  from 68% of net sales during
1996 to 158% of net sales during  1997.  The gross loss during 1997 is primarily
attributable to  insufficient  sales to offset the cost of goods sold as well as
costs  associated  with the  write-down of older  inventory and certain  prepaid
royalties.

The Company  anticipates  improved gross profit margins in the future  primarily
due to higher sales volumes of new and future titles.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling,  general and  administrative  expenses  increased 93% to  approximately
$1,955,000 during the year ended December 31,1997,  compared with  approximately
$1,012,000  during the year ended  December 31, 1996. The increase was primarily
attributable  to the hiring of additional  personnel and the Company's  expanded
product  acquisition  and marketing  efforts  related to new and future products
during  1997.  The  Company   anticipates  that  future  selling,   general  and
administrative  expenses  will  increase in the  aggregate  as the Company  adds
personnel,   launches  new  products  and  expands  its  marketing  efforts  and
distribution  channels.  Management  expects,  however,  that such expenses will
decrease as a percentage  of net sales as the  Company's  revenues  from product
sales increase.

INTEREST EXPENSE

Interest  expense  increased  to  approximately  $394,000  during the year ended
December 31, 1997, as compared to  approximately  $35,000  during the year ended
December,  31 1996.  The increase is due primarily to the  amortization  expense
associated  with deferred  financing  costs and interest  expense related to the
bridge  notes  issued by the  Company in the fourth  quarter of 1996,  and other
notes payable  issued  during 1997.  All of these notes were repaid in September
1997 out of proceeds from the initial public offering.

Due to the above,  the  Company had a net loss for the year ended  December  31,
1997 of  $(2,377,295)  or $(2.86)  per share,  compared to pro forma net loss of
$(834,874) or $(2.11) per share for the year ended December 31, 1996.

FINANCIAL CONDITION

The Company's  primary  source of liquidity  during 1997 was cash generated from
the issuance of various  notes  payable and the sale of securities in connection
with the Company's initial public offering.

                                       10
<PAGE>

The  Company's  cash and  cash  equivalent  balance  totaling  $2,933,752  as of
December 31, 1997,  is invested  primarily in an  investment  grade money market
fund in order to fund immediate cash needs.

The Company's  long-term debt consists primarily of notes payable to officers in
the aggregate  amount of $40,207,  including  interest,  which are due August 1,
1999.

In recent periods,  the Company's  expenditures have substantially  exceeded its
revenues.  The Company's cash used in operating activities was $2,264,716 during
1997, while revenues for the same period were $125,864.  The Company anticipates
that its  expenses  will  continue  to  increase  as it  attempts  to expand its
business by acquiring new products and  increasing  sales and marketing  efforts
and other operations. The Company expects to continue to incur losses until such
time as it is able to sell a  sufficient  volume  of  products  at  prices  that
provide adequate gross profit to cover operating  costs.  The Company's  working
capital requirements will depend upon numerous factors, including payment cycles
for its shipped products,  credit  arrangements with suppliers,  the scale-up of
its sales and  marketing  resources,  acquisition  of new products and the terms
upon which such  products are  acquired,  competitive  factors  including  costs
associated with obtaining  adequate levels of retail shelf space,  and marketing
activities.

Generally,  the  Company  is  obligated  to pay its  vendors  within  30 days of
shipment,  although  the  Company's  customers'  payment  cycles  are often much
longer,  generally from between 90 to 120 days. Previously,  this discrepancy in
payment  cycles has  resulted in  inconsistent  cash flows and  reduced  working
capital for the Company, which condition may recur in the future.

The Company does not currently  have a credit  facility or other  commitment for
additional financing. The Company may require additional financing in the future
to further expand its product offerings or to make strategic acquisitions. There
can be no assurance that such additional  financing will be available,  or that,
if  available,  such  financing  will be  obtainable  on terms  favorable to the
Company or its stockholders.

OTHER MATTERS

YEAR 2000 COMPUTER ISSUE

As with other organizations, some of the computer applications which the Company
uses for its internal business  operations were originally designed to recognize
calendar  years by their last two  digits.  Calculations  performed  using these
truncated  fields  would not work  properly  with  dates  from the year 2000 and
beyond. The Company has assessed the direct impact of the Year 2000 issue on its
business  and has  determined  that it will not have a  material  impact  on its
business, operations or financial condition.

ITEM 7. FINANCIAL STATEMENTS

The financial  statements and schedules are included herewith commencing on page
F-1.

ITEM 8. CHANGES IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
        FINANCIAL DISCLOSURE

None.

                                       11
<PAGE>
                                    PART III.

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company as of March 25, 1998 were as
follows:

Timothy M. Brannan      40  President, Chief Executive Officer and Chairman of
                            the Board of Directors
Keith P. Higginson      34  Vice President, Chief Financial Officer and Director
J. Wade Stallings, II   37  Vice President, General Counsel and Director
Douglas M. Brannan      32  Vice President, Sales
Wyndi D. Ballard        28  Vice President, Marketing and Public Relations
Ian D. Berman           42  Director
Michael D. Flink        37  Director

TIMOTHY M. BRANNAN. Mr. Brannan has served as President, Chief Executive Officer
and Chairman of the Board of the Company since its  inception in November  1994.
Mr.  Brannan   served  as  Executive  Vice  President  for  Software   Marketing
Corporation  ("SMC"),  a privately held software  publisher,  from November 1991
until October 1994.  Mr. Brannan served as Executive Vice President for Automap,
Inc. ("Automap"),  also a privately held publisher of interactive software, from
November 1991 until June 1993. Mr.  Brannan  attended  Arizona State  University
where he studied Business and Marketing.

KEITH P. HIGGINSON. Mr. Higginson has served as Vice President,  Chief Financial
Officer and a Director of the Company since its inception in November 1994. From
January 1993 until October 1994,  Mr.  Higginson  served as Controller  for SMC.
From January 1993 until June 1993,  Mr.  Higginson  also served as Controller of
Automap. Mr. Higginson received a Bachelor's Degree in Accounting from San Diego
State University.

J. WADE  STALLINGS,  II. Mr.  Stallings  has served as Vice  President,  General
Counsel and a Director of the Company since its inception in November 1994. From
February  through  October  1994,  Mr.  Stallings  served as Vice  President and
General Counsel to SMC. Prior thereto,  Mr. Stallings was the Coordinator of the
Office of Properties for the Baha'i World Center,  an  international  non-profit
organization  from February 1990 until February 1994. Mr.  Stallings  received a
Bachelor's  Degree in  Management  from the  University  of Alabama  and a Juris
Doctor Degree from Washington and Lee University School of Law.

DOUGLAS M.  BRANNAN.  Mr.  Brannan has served as Vice  President,  Sales for the
Company since October  1995.  Prior  thereto,  Mr.  Brannan  served as Director,
Western  Sales for Softkey  International  (subsequently  renamed  The  Learning
Company), a publicly traded software company,  from September 1994 until October
1995.  From January 1992 until  September  1994, Mr. Brannan was Vice President,
Sales, for SMC. In addition,  from January 1992 until June 1993, Mr. Brannan was
Director of Sales for  Automap.  Mr.  Brannan  received a  Bachelor's  Degree in
Health Science from San Diego State University.

WYNDI D. BALLARD.  Ms. Ballard has served as Vice President,  Marketing & Public
Relations  for the Company  since April 1995.  From November 1994 to April 1995,
Ms. Ballard  served as Director of Public  Relations for SC&T  International,  a
publicly traded corporation  developing and marketing sound enhancement products
for the personal  computer and video game markets.  From June 1991 until October
1994,  Ms.  Ballard  served as  Director  of Public  Relations  and  Director of
Marketing for SMC. In addition,  from June 1991 to June 1993, Ms. Ballard served
as Director of Public Relations and Marketing for Automap.  Ms. Ballard attended
University  of Wyoming  and  Phoenix  College  where she  studied  Business  and
Marketing.

IAN D. BERMAN. Mr. Berman became a director of the Company in September 1997. In
1991, Mr. Berman co-founded Frost & Berman  Incorporated,  an investment banking
and financial  advisory  consulting firm. Since that time, Mr. Berman has served
as  Managing   Director  for  the  firm,   which  focuses   exclusively  on  the
entertainment  and education  software  industry.  From 1985 to 1991, Mr. Berman

                                       12
<PAGE>

served as a Senior Manager with the Capital  Markets Group for Touche Ross. From
1983 to 1985, Mr. Berman served as a Senior Analyst with Salomon Brothers,  Inc.
Mr. Berman is a Certified Public  Accountant and received a Bachelor of Commerce
Degree in  Accounting  and a Master's  Degree in Finance from the  University of
Witwatersrand University (Johannesburg).

MICHAEL D. FLINK.  Mr. Flink became a director of the Company in September 1997.
Since  October  1997,  Mr.  Flink  has  served  as  General  Manager  for  Levin
Consulting.  From October  1995 until  September  1997,  Mr. Flink served as the
Senior Vice President,  Merchandising & Advertising  for  Communication  EXPO, a
communication  products superstore.  From January 1994 until September 1995, Mr.
Flink  served  as  Vice   president  of  Computer  City,  a  division  of  Tandy
Corporation,  where he was  responsible for all  merchandising,  advertising and
strategic planning  functions for the computer and software retailer.  From 1992
through December 1993, Mr. Flink served as Consumer Brand and Product Management
Consultant  to IBM.  From 1990 through  1992,  Mr. Flink served as President and
Chief Operating  Officer of R&R  Electronics and Appliance,  a regional chain of
consumer  electronics  and appliance  superstores.  From 1978 through 1990,  Mr.
Flink served in various  management  capacities with Tandy  Corporation's  Radio
Shack  division.  Mr. Flink  received a Bachelor of Arts in  Communication  from
North Carolina State University.

Messrs.  Douglas M.  Brannan  and  Timothy M.  Brannan  are  brothers.  No other
Directors or Officers are related by blood or marriage.

CLASSIFIED BOARD

Pursuant to the Company's  Articles of  Incorporation  and Bylaws,  the Board of
Directors  is  divided  into  three  classes,  as  nearly  equal in number as is
feasible.  Each class  serves for a term of three  years,  and  election  of the
classes is  staggered  so that one class is  elected  each  year.  The  Director
serving in Class III,  which class term expires in 2000,  is Timothy M. Brannan.
The Directors  serving in Class II, which class term expires in 1999,  are Keith
P. Higginson and Michael D. Flink,  and the Directors  serving in Class I, which
class term expires in 1998, are J. Wade Stallings,  II and Ian D Berman.  At the
Company's 1998 Annual Meeting of Stockholders,  stockholders  will vote to elect
Class I of the Board.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Based solely upon a review of such reports furnished to the Company, the Company
believes  that all  reports  required to be filed by each person who served as a
director, officer or was a beneficial owner of more than 10% of any class of the
Company's equity  securities  during the year ended December 31, 1997 were filed
on a timely basis.

ITEM 10. EXECUTIVE COMPENSATION

The following  table sets forth the  compensation  received for the three fiscal
years ended  December 31, 1997, by the Company's  Chief  Executive  Officer (the
"Named  Executive  Officer").  No executive  officer of the Company  received in
excess of $100,000 during that period.

                           Summary Compensation Table

                                            Annual Compensation (1)
                                           -------------------------
                                           Year    Salary     Bonus
                                           ----    ------     -----
Timothy M. Brannan, Chairman, President    1997    $75,000    $4,142
                                           1996     50,250     1,083
                                           1995     12,926         0
----------
(1)  The Company was not formed  until  November  14, 1994 and no salaries  were
     paid until October 1995.  Effective  November 1, 1996,  Mr.  Brannan became
     subject to an  employment  agreement  pursuant  to which he is  compensated
     thereafter at an annual base rate of $75,000.

Mr.   Brannan  did  not  receive  any  other  annual   compensation,   long-term
compensation  or other  compensation  during the  Company's  fiscal  years ended
December 31, 1997, 1996 or 1995.

                                       13
<PAGE>

DIRECTORS' COMPENSATION

Directors are not currently  compensated  for their services in that capacity or
for serving on  committees  but are  reimbursed  for their  reasonable  expenses
incurred in connection with serving as Directors. Non-employee Directors serving
on the Company's  Board received an initial grant of options to purchase  10,000
shares of Common  Stock in  September  1997 and may  receive  additional  future
options at the discretion of the Board.

INDEMNIFICATION AND LIMITATION OF LIABILITY

The  Company's  Articles  of  Incorporation  and Bylaws  require  the Company to
indemnify each of its Officers and Directors against  liabilities and reasonable
expenses  incurred  in  any  action  or  proceeding,   including   stockholders'
derivative  actions, by reason of such person being or having been an Officer or
Director of the Company,  or of any other corporation for which he or she serves
as such at the request of the Company, to the fullest extent permitted by Nevada
law. Pursuant to Nevada law, the Company has adopted  provisions in its Articles
of  Incorporation  and Bylaws that  eliminate,  to the fullest extent  available
under Nevada law, the personal  liability of its  Directors  and Officers to the
Company or its  stockholders  for monetary  damages  incurred as a result of the
breach of their duty of care. These provisions neither limit the availability of
equitable remedies nor eliminate  Directors' or Officers' liability for engaging
in  intentional  misconduct  or fraud,  knowingly  violating a law or unlawfully
paying a distribution.

The Company has been  advised  that it is the  position of the  Commission  that
insofar as the  foregoing  provision  may be invoked to disclaim  liability  for
damages  arising  under the  Securities  Act, such  provision is against  public
policy as expressed in the Securities Act and is therefore unenforceable.

EMPLOYMENT AGREEMENTS

Effective  November 1, 1996,  the Company  entered  into  three-year  employment
agreements  with its senior  executive  officers,  Timothy M. Brannan,  Keith P.
Higginson,  J. Wade Stallings,  II, Douglas M. Brannan and Wyndi D. Ballard. The
agreements provide for base salaries of $75,000,  $65,000,  $65,000, $65,000 and
$50,000 for Mr. Timothy M. Brannan, Mr. Higginson, Mr. Stallings, Mr. Douglas M.
Brannan and Ms.  Ballard,  respectively,  subject to review at least annually by
the Board of Directors.  The executives may receive bonuses at the discretion of
the Board.  The Company may  unilaterally  terminate the agreements for "Cause,"
which includes (i)  conviction of a felony or (ii) failure to diligently  cure a
specified deficiency in the executive's performance within 30 days.

In the event the Company  terminates the executive's  employment during the term
of the agreement  without  Cause,  or in the event the executive  terminates the
agreement  for "Good  Reason" (as  defined in the  agreements),  which  includes
certain changes in the executive's duties or a change in control of the Company,
the  Company  shall  pay to  such  executive  (i)  his/her  salary  through  the
termination  date plus any accrued but unpaid  bonuses and (ii) with  respect to
executives  other than  Timothy M.  Brannan,  a severance  payment  equal to the
executive's then current annual salary and an amount equal to the average of all
bonuses  paid  to  the  executive  in  the  three  years  immediately  preceding
termination, which the Company has the option to pay over one year. With respect
to Timothy M.  Brannan,  the  severance  payment would be equal to two times his
then  current  annual  salary and an amount  equal to the average of all bonuses
paid to him in the three  years  immediately  preceding  termination,  which the
Company has the option to pay over two years.  In  addition,  the  Company  must
maintain  until  the  first  to  occur  of (i)  the  executive's  attainment  of
substitute  employment  or (ii) two  years  from the  date of  termination  with
respect to Timothy M.  Brannan  and one year from the date of  termination  with
respect to the other  executives,  the executive's  benefits under the Company's
benefit  plans to which the executive and his/her  eligible  beneficiaries  were
entitled  immediately  prior  to the  date  of  termination.  If  the  executive
requests, the Company must also assign to the executive any assignable insurance
policy on the life of the  executive  owned by the Company and at the end of the
period of coverage. If the executive is terminated for Cause or if the executive
terminates  his/her  employment  other than for Good Reason,  the Company's only
obligation is to pay the executive  his/her base salary and accrued vacation pay

                                       14
<PAGE>
through the date of termination. If any of the executives are terminated without
Cause or resign for Good Reason  following  a change in control of the  Company,
the  executive  is  entitled  to two  years'  severance  compensation  including
benefits until obtaining alternate employment.

If the executive is  incapacitated  due to physical or mental illness during the
term of his/her employment, the agreements provide that the Company shall pay to
the executive a lump sum equal to the  executive's  then current base salary and
the average of all bonuses paid to the  executive  in the three years  preceding
the date of  termination  due to illness.  If the executive  dies during his/her
employment,  his/her salary  through the date of his/her death,  any accrued but
unpaid  bonuses and any benefits  payable  pursuant to the Company's  survivor's
benefits  insurance and other  applicable  programs and plans then in effect are
payable to his/her estate.

If the executive's employment is terminated, the Company has agreed to indemnify
the  executive  for  claims  and  expenses   associated  with  certain  personal
guarantees,  if any, made by the  executive.  The Company also has agreed to use
its best  efforts to secure  the  release of any such  personal  guarantees.  In
addition,  the Company has agreed to indemnify the  executive  against all costs
incurred in enforcing  his/her rights under the agreement  following a change in
control of the Company.

ITEM 11. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  following  table  sets  forth,  as of March 2,  1997,  certain  information
concerning the beneficial  ownership of the Company's  Common Stock, by (i) each
Director, (ii) the Named Executive Officer ,(iii) all beneficial owners of 5% or
more of the Company's  outstanding common stock, and (iv) all executive officers
and Directors of the Company as a group, and their  percentage  ownership of all
shares of Common Stock outstanding.
                                               Common Stock
                                          ------------------------
                                          Number of          % of
Name (1)                                  Shares (2)         Class
--------                                  ----------         -----
Timothy M. Brannan (3)                    1,600,000           50.0
Keith P. Higginson (4)                      306,836            9.6
J. Wade Stallings, II                       306,836            9.6
Douglas M. Brannan                          173,055            5.4
Wyndi D. Ballard                            173,055            5.4
Ian D. Berman (5)                            10,000              *
Michael D. Flink (5)                         10,000              *
All Executive Officers and Directors
 as a group (7 persons) (3)(6)            1,620,000           50.3
----------
* Less than 1.0%

(1)  Except as otherwise noted, each of the parties listed above has sole voting
     and  investment  power over the  securities  listed.  The  address  for all
     Officers and  Directors of the Company is 1839 West Drake,  Suite B, Tempe,
     Arizona 85283.
(2)  Includes  certain shares subject to escrow as follows:  Timothy M. Brannan,
     337,347  shares;  Keith P. Higginson,  individually,  117,461 shares and as
     trustee,  117,461 shares; J. Wade Stallings, II, 234,921 shares; Douglas M.
     Brannan, 132,495 shares; Wyndi D. Ballard, 132,495 shares.
(3)  Includes (i) 887,653 shares subject to a Voting Trust  Agreement,  of which
     Timothy M. Brannan is Voting Trustee, and (ii) 271,730 shares subject to an
     Irrevocable  Proxy Agreement,  of which Timothy M. Brannan is proxy holder.
     Except as disclosed  herein,  Mr. Brannan  expressly  disclaims  beneficial
     interest in any of such shares. See "-- Voting Trust Agreement."
(4)  Includes  153,418 shares held by a trust of which Mr.  Higginson is trustee
     and has  sole  voting  power,  but in  which he  disclaims  any  beneficial
     interest.
(5)  Represents  vested options to purchase up to 10,000 shares of Common Stock.
(6)  Includes vested options to purchase up to 20,000 shares of Common Stock.

                                       15
<PAGE>

VOTING TRUST AGREEMENT

Nine  stockholders  of the Company  owning an aggregate  of 1,600,000  shares of
Common  Stock,  which  represents  50% of the total  outstanding  voting  power,
entered into a Voting Trust Agreement and an Irrevocable Proxy Agreement ("Proxy
Agreement") in November 1996. Of the 1,600,000  shares,  1,225,000 shares (which
shares have been placed in escrow),  are subject to a Voting Trust  Agreement or
held directly by the voting trustee, and 375,000 shares are subject to the Proxy
Agreement or held  directly by the proxy holder.  All 1,600,000  shares also are
subject to 13-month Lock-Up Agreements.

Timothy M. Brannan,  the President and Chairman of the Company, is designated as
both the trustee of the Voting  Trust  Agreement  and the proxy holder under the
Proxy Agreement, and is empowered to vote all shares subject to the Voting Trust
Agreement and the Proxy  Agreement  with respect to any matter subject to a vote
by the  Company's  stockholders.  Such  matters  include  voting in favor of the
election of himself as a Director  and an Officer of the Company and in favor of
ratification  or approval of acts of himself as a Director and an Officer in the
conduct of  business  affairs of the  Company,  and other acts  relating  to the
Company,  including, but not limited to, dissolution,  liquidation,  a merger or
consolidation  of the Company or the sale of all, or  substantially  all, of its
assets. By virtue of the Voting Trust Agreement and Proxy Agreement, Mr. Brannan
effectively controls 50% of the total voting power of the Company.

The  agreement of the  stockholders  to deposit their shares in the Voting Trust
and to grant their proxy under the Proxy  Agreement is irrevocable for 13 months
following the date of the initial public  offering.  Thereafter,  parties to the
Proxy Agreement may withdraw their  respective  shares on ten days prior written
notice to the Trustee if they sell them to third parties.  Parties to the Voting
Trust  Agreement may also withdraw their shares on ten days prior notice if such
shares are not then subject to the Escrow Agreement.  The Voting Trust Agreement
and the Proxy Agreement both terminate upon the earliest of five years, the date
on which Mr.  Brannan  ceases to be an  employee  of the  Company  or resigns as
Trustee or Proxy Holder,  as  applicable,  or dies, or upon  termination  of the
Voting Trust Agreement or the Proxy Agreement by the unanimous written agreement
of the holders of the shares  (other  than  Timothy M.  Brannan)  subject to the
Voting Trust Agreement or the Proxy Agreement, as applicable.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Effective  November 1, 1996,  the  Company  entered  into three year  employment
agreements  with  Messrs.  Timothy  M.  Brannan,  Keith P.  Higginson,  J.  Wade
Stallings,  II and Douglas M. Brannan, each an executive officer of the Company.
These  agreements  provide for a base salary of  $75,000,  $65,000,  $65,000 and
$65,000, respectively, to be paid by the Company to such employees.

On December 4, 1996, the Company  reimbursed  Timothy M. Brannan,  the Company's
President,  in the amount of $67,805 for certain business  expenses  incurred by
Mr. Brannan.

                                       16
<PAGE>

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

No.    Description
---    -----------
3.1   Articles of Incorporation (1)
3.2   Bylaws (1)
4.1   Form of Certificate for Common Stock (1)
4.2   Form of Class A Warrant (1)
4.5   Form of Unit Purchase Option (1)
4.8   Irrevocable  Proxy  Agreement, dated  November  13,  1996,  among  certain
      stockholders of the Registrant (1)
4.9   Form of Warrant Agreement (1)
4.10  Form of Amended and Restated  Escrow  Agreement  between the Company,  the
      Escrow Agent, and certain stockholders of the Company (1)
9.1   Voting  Trust  Agreement, dated  November 13, 1996,  among  certain
      stockholders of the Company (1)
10.1  Form of Employment Agreement between Registrant and Executive Officers (1)
10.2  1996 Stock Option Plan (1)
10.3  Software  Distribution  Agreement  between Tech Data and Registrant, dated
      September 23, 1996 (1)
10.4  Computer Software  Distribution  Agreement  between  Navarre  Corporation
      and Registrant, dated January 8, 1996 (1)
10.5  Ingram Micro Start-up Agreement between Ingram Micro, Inc. and Registrant,
      dated March 11, 1996 (1)
10.6  Vendor Agreement between Registrant and American Software and Hardware
      Distributors, Inc., dated April 23, 1996 (1)
10.10 Lease  Agreement  between  Registrant and Phoenix Newspapers, Inc., dated
      December 15, 1995 (1)
10.11 Merger and Acquisition Agreement between Registrant and D.H. Blair
      Investment Banking Corp., dated November 27, 1996 (1)
27.1  Financial Data Schedule
----------
(1)  Incorporated by reference from the Company's Registration Statement on Form
     SB-2 (File No. 333-18605), declared effective on September 18, 1997.

(b) REPORTS ON FORM 8-K

No reports on Form 8-K were filed during the last quarter of fiscal 1997.


                                       17
<PAGE>
                                   SIGNATURES

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

PIRANHA INTERACTIVE PUBLISHING, INC.


/s/ Timothy M. Brannan                                            March 30, 1998
---------------------------
    Timothy M. Brannan
    Chief Executive Officer

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

     Signature                          Title                          Date
     ---------                          -----                          ----

/s/ Timothy M. Brannan       Chief Executive Officer and          March 30, 1998
--------------------------   Chairman of the Board of Directors
    Timothy M. Brannan       (Principal Executive Officer)


/s/ Keith P. Higginson       Vice President, Chief Financial      March 30, 1998
--------------------------   Officer (Principal Financial and
    Keith P. Higginson       Accounting Officer, Director)


/s/ J. Wade Stallings, II    Vice President, General Counsel      March 30, 1998
--------------------------   (Director)
    J. Wade Stallings, II








                                       18
<PAGE>

                          INDEX TO FINANCIAL STATEMENTS

                                                                         Page
                                                                         ----

Report of Independent Accountants                                         F-2

Financial Statements:

    Balance Sheet as of December 31, 1997                                 F-3

    Statements of Operations for the years ended December 31, 1997
      and 1996                                                            F-4

    Statements of Stockholders' Equity (Deficit) for the years
      ended December 31, 1997 and 1996                                    F-5

    Statements of Cash Flows for the years ended December 31, 1997
      and 1996                                                            F-6

Notes to Financial Statements                                             F-7



                                      F-1
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
Piranha Interactive Publishing, Inc.

We  have  audited  the  accompanying   balance  sheet  of  Piranha   Interactive
Publishing,  Inc.  (the  "Company")  as of December  31,  1997,  and the related
statements of operations,  stockholders' equity (deficit) and cash flows for the
years ended  December  31, 1997 and 1996.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of Piranha Interactive Publishing,
Inc. as of December 31,  1997,  and the results of its  operations  and its cash
flows  for the years  ended  December  31,  1997 and 1996,  in  conformity  with
generally accepted accounting principles.

/s/ COOPERS & LYBRAND L.L.P.
-------------------------------
COOPERS & LYBRAND L.L.P.

Phoenix, Arizona
February 16, 1998


                                      F-2
<PAGE>

                      PIRANHA INTERACTIVE PUBLISHING, INC.
                                  BALANCE SHEET
                                DECEMBER 31, 1997

                                     ASSETS
Current assets:
  Cash and cash equivalents                                         $ 2,933,752
  Accounts receivable, net of allowance for returns of
    $16,300 and doubtful accounts of $5,000                              36,900
  Inventories                                                           140,008
  Prepaid expenses                                                      360,620
                                                                    -----------
            Total current assets                                      3,471,280

Property and equipment, net                                              99,383
Other assets                                                              4,400
                                                                    -----------
            Total assets                                            $ 3,575,063
                                                                    ===========

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                                  $   159,042
  Accrued payroll                                                        18,469
  Other accrued liabilities                                              34,152
                                                                    -----------
            Total current liabilities                                   211,663

Notes payable - officers                                                 40,207
Other liabilities                                                         8,468
                                                                    -----------
            Total liabilities                                           260,338

Commitments (Note 11)

Stockholders' equity:
  Preferred stock, $.001 par value; 5,000,000
   shares authorized; no shares issued and outstanding
  Common stock, $.001 par value; 20,000,000 shares authorized;
    3,200,000 shares issued and outstanding                               3,200
  Additional paid-in capital                                          5,901,339
  Accumulated deficit                                                (2,589,814)
                                                                    -----------
            Total stockholders' equity                                3,314,725
                                                                    -----------
            Total liabilities and stockholders' equity              $ 3,575,063
                                                                    ===========

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

                                      F-3
<PAGE>
                      PIRANHA INTERACTIVE PUBLISHING, INC.
                            STATEMENTS OF OPERATIONS
                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996


                                                  December 31,      December 31,
                                                      1997              1996
                                                  ------------      ------------
Net sales                                         $   125,864       $   424,810
Cost of goods sold                                    198,696           289,975
                                                  -----------       -----------
  Gross profit (loss)                                 (72,832)          134,835
Selling, general and administrative expenses        1,954,733         1,011,790
                                                  -----------       -----------
  Loss from operations                             (2,027,565)         (876,955)
Other income (expense):
  Interest income                                      44,047                --
  Interest expense                                   (393,777)          (35,383)
                                                  -----------       -----------
                                                     (349,730)          (35,383)

  Net loss                                        $(2,377,295)      $  (912,338)
                                                  ===========       ===========

Basic and diluted loss per share                  $     (2.86)
                                                  ===========
Shares used in computing net loss per
  common share                                        830,890
                                                  ===========
Pro forma net loss data (unaudited):
  Loss before income taxes                                          $  (912,338)
  Pro forma income tax benefit                                           77,464
                                                                    ===========
  Pro forma net loss                                                $  (834,874)
                                                                    ===========

Pro forma net loss per common share (unaudited)                     $     (2.11)
                                                                    ===========
Shares used in computing pro forma net loss
     per common share                                                   395,565
                                                                    ===========


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

                                      F-4
<PAGE>
                      PIRANHA INTERACTIVE PUBLISHING, INC.
                   STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
                                       Common Stock      Additional     Retained
                                    ------------------    Paid-in       Earnings
                                      Shares    Amount    Capital       (Deficit)      Total
                                      ------    ------    -------       ---------      -----
<S>                                <C>        <C>       <C>          <C>           <C>
Balance, January 1, 1996            1,781,972   $1,782   $    3,741   $   161,939   $   167,462

Distributions to stockholders              --       --           --       (45,000)      (45,000)
Repurchase common stock              (181,972)    (182)        (382)       (5,182)       (5,746)
Reclassification of S Corporation
 accumulated deficit                       --       --     (588,062)      588,062            --
Issuance of warrants                       --       --       75,000            --        75,000
Issuance of stock options                  --       --       18,600            --        18,600
Net loss                                   --       --           --      (912,338)     (912,338)
                                   ----------   ------   ----------   -----------   -----------
Balance, December 31, 1996          1,600,000   $1,600   $ (491,103)  $  (212,519)  $  (702,022)

Sale of 1,600,000 Units (Note 10)   1,600,000    1,600    6,020,325            --     6,021,925
Issuance of unit purchase option           --       --      353,600            --       353,600
Issuance of stock options                  --       --       18,517            --        18,517
Net loss                                   --       --           --    (2,377,295)   (2,377,295)
                                   ==========   ======   ==========   ===========   ===========
 Balance, December 31, 1997         3,200,000   $3,200   $5,901,339   $(2,589,814)  $ 3,314,725
                                   ==========   ======   ==========   ===========   ===========
</TABLE>



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




                                      F-5
<PAGE>

                      PIRANHA INTERACTIVE PUBLISHING, INC.
                             STATEMENT OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

                                                      December 31,  December 31,
                                                          1997          1996
                                                      ------------  ------------
Cash flows from operating activities:
Net loss                                              $(2,377,295)   $ (912,338)
Adjustments to reconcile net loss to net cash
  used in operating activities:
  Depreciation                                             24,643        14,975
  Amortization                                            255,175        26,212
  Interest on notes payable - officers                      3,781         3,426
  Reserve for obsolescence                                 61,236        39,494
  Issuance of stock options for services                   18,517        18,600
Net changes in current assets and liabilities:
  Accounts receivable                                     (32,480)      133,244
  Inventory                                               (63,437)      (34,182)
  Prepaid expenses                                       (256,073)      (96,459)
  Accounts payable                                         90,079      (179,089)
  Accrued liabilities                                      13,847        33,774
  Other liabilities                                        (2,709)        7,633
                                                      -----------    ----------
    Net cash used in operating activities              (2,264,716)     (944,710)
                                                      -----------    ----------
Cash flow used in investing activities:
  Purchase property and equipment                         (52,753)      (60,686)
  Increase in other assets                                     --          (320)
                                                      -----------    ----------
    Net cash used in investing activities                 (52,753)      (61,006)
                                                      -----------    ----------
Cash flows from financing activities:
  Proceeds from accounts and notes payable - officers      22,000        63,309
  Proceeds from notes payable                             605,000     1,724,979
  Proceeds from initial public offering                 7,240,000            --
  Payments related to initial public offering            (735,511)     (128,965)
  Repayment of accounts and notes payable - officers      (22,000)     (127,416)
  Principal payments on notes payable                  (2,105,000)     (224,979)
  Payment of debt acquisition costs                            --      (205,950)
  Repurchase of common stock                                   --        (5,746)
  Distributions to stockholders                                --       (45,000)
                                                      -----------    ----------
    Net cash provided by financing activities           5,004,489     1,050,232
                                                      -----------    ----------

Net increase in cash and cash equivalents               2,687,020        44,516
Cash and cash equivalents, beginning of year              246,732       202,216
                                                      -----------    ----------
Cash and cash equivalents, end of year                $ 2,933,752    $  246,732
                                                      ===========    ==========

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

                                      F-6
<PAGE>
                      PIRANHA INTERACTIVE PUBLISHING, INC.
                          NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND OPERATIONS:

Piranha Interactive Publishing, Inc. (the "Company") was incorporated in Arizona
on November 14, 1994.  The Company  publishes  interactive  multimedia  software
products  for the home  personal  computer  ("PC")  market  with an  emphasis on
"edutainment"  titles which combine  entertainment and educational  content,  as
well as games  and other  content  titles  which it  determines  to have  market
potential.  The Company  produces its products  generally by licensing  software
programs being developed by independent third party developers,  imprinting them
in media format, duplicating, packaging, marketing and distributing them.

On November 22, 1996, the Board of Directors and the stockholders of the Company
approved the reincorporation of the Company from an Arizona S Corporation into a
Nevada C  Corporation,  by means of a merger of the Arizona  corporation  into a
Nevada corporation,  which merger and the reincorporation became effective as of
November 22, 1996. In connection with the merger (i) all  outstanding  shares of
common  stock of the Arizona  corporation  were  exchanged  for shares of common
stock of the Nevada  corporation on an  approximately  242-to-1 basis,  (ii) the
authorized  common  stock  was  increased  and a class of  preferred  stock  was
created,  and (iii) the shares of the  Company's  former  common  stock,  no par
value, were changed into common stock, $.001 par value. The Company's authorized
capital stock now consists of (i) 20,000,000  shares of common stock,  $.001 par
value per share, and (ii) 5,000,000 shares of preferred stock,  $.001 par value.
All  references  to the  number of common  shares  outstanding  and to per share
information  in the  financial  statements  have been  adjusted  to reflect  the
conversion on a retroactive basis.

2. SIGNIFICANT ACCOUNTING POLICIES:

MANAGEMENT'S PLANS

On September 23, 1997,  the Company was  successful  in  completing  its initial
public offering of 1,600,000 units, each consisting of one share of common stock
and one Class A  warrant,  at a price to the  public of $5.00 per unit (see Note
10);  however,  the Company  continues to  experience  difficulty  in generating
sufficient  cash  flows  from  operations.  As a result of its  working  capital
deficiency  prior to the  offering,  the  Company's  net  sales  for  1997  were
materially hampered by its inability to acquire, launch and market new products.
Management  expects  cash flows to improve  and to continue  operations  through
sales, marketing and distribution of eight software titles it has licensed since
the public offering, one title licensed prior to the public offering but not yet
released, and other titles it is currently pursuing.

NEWLY ISSUED ACCOUNTING STANDARD

In June 1997,  the FASB  issued  SFAS No. 130,  Reporting  Comprehensive  Income
("SFAS 130"). This statement  establishes standards for reporting and display of
comprehensive  income  and its  components  (revenues,  expenses  and  gains and
losses) in a full set of financial  statements and becomes  effective for fiscal
years  beginning  after December 15, 1997. The Company  believes the adoption of
this new  standard  will  have no  material  impact on the  Company's  financial
statements.

USE OF ESTIMATES

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

                                      F-7
<PAGE>
                      PIRANHA INTERACTIVE PUBLISHING, INC.
                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

CASH AND CASH EQUIVALENTS

For purposes of the statements of cash flows,  the Company  considers all highly
liquid  investments  with a  maturity  of  three  months  or less at the time of
acquisition to be cash equivalents.

INVENTORIES

Inventories  are stated at the lower of cost or market.  Cost is determined on a
first-in,  first-out  basis.  Inventories  consist  primarily of finished goods,
packaging, supplies and manuals.

PROPERTY AND EQUIPMENT

Property  and  equipment  are  stated  at  cost.  Depreciation  is  provided  on
depreciable assets by the straight-line method over the estimated useful life of
five years,  while  leasehold  improvements  are amortized by the  straight-line
method over the shorter of estimated useful lives or the remaining lease terms.

When items are retired or disposed of, the cost and accumulated  depreciation or
amortization  are removed  from the accounts and any gain or loss is included in
the statements of operations.

ORGANIZATIONAL COSTS

Costs incurred in organizing the Company have been  capitalized and are included
in other assets.  Organizational costs are being amortized over five years using
the straight-line method.

REVENUE RECOGNITION

The  Company   sells  its   products  to   original   equipment   manufacturers,
distributors,  and retailers.  Revenues are recognized  upon delivery except for
sales made to certain distributors where the right of ownership does not pass at
delivery.  In those instances,  revenue  recognition is deferred until resale by
the distributor.  The Company's agreements with distributors and retailers allow
for stock  rotation.  Reserves are provided for stock rotation and returns based
on industry and past  experience.  These reserves are established at the time of
shipment  and  reduce  gross  sales to arrive at net sales as  presented  in the
accompanying  statement  of  operations.  These  reserves  are  reflected  as an
allowance for returns. It is the policy of the Company's customers to offset any
returns as reductions against payments on accounts receivable.

On  occasion,  the  Company  purchases  finished  products  from other  software
publishers for resale to the Company's customers. These purchases are made under
the terms of revenue sharing arrangements.  These transactions are accounted for
as the purchase and resale of inventory.

ROYALTIES

In most  instances  the  Company is  required to pay  royalties  to  independent
software  developers  based upon the sales of the Company's  products.  Up-front
advances of a portion of these royalties may also be required. These prepayments
are capitalized and included in prepaid expenses.  The prepayments are amortized
to cost of goods sold based on net sales. If and when it is determined  sales of
a product  associated  with a prepayment are not going to be sufficient to cover
the prepayment, the prepaid royalties are expensed.

                                      F-8
<PAGE>
                      PIRANHA INTERACTIVE PUBLISHING, INC.
                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

PACKAGE DESIGN COSTS

Package  design costs,  which include  costs  associated  with design of product
boxes and CD-ROM  graphics,  are  expensed  as  incurred,  and are  included  in
selling, general and administrative expenses.

CO-OP ADVERTISING

Co-op advertising  represents credits granted by the Company to its customers to
advertise the Company's products in circulars,  catalogs or other advertisements
sponsored  by the  customer or for  special  shelf  placement  or other types of
in-store promotion. Any such advertising is specifically approved by the Company
and the associated costs are expensed as incurred.

STOCK-BASED COMPENSATION

The  Company  has elected to measure  compensation  expense  related to employee
stock purchase options using Accounting Principles Board Opinion No. 25, and has
provided the necessary pro forma  disclosures  of net loss and loss per share as
if the fair value based method of  accounting,  defined by Financial  Accounting
Standard No. 123, had been applied.

INCOME TAXES

Prior to November 15, 1996, the Company  elected to be treated as a Subchapter S
Corporation for federal income tax purposes.  As such, all tax liability  flowed
through to the individual shareholders. Effective November 15, 1996, the Company
became a C Corporation  and began using the  liability  method for income taxes.
Deferred  income taxes reflect the impact of temporary  differences  between the
amount of assets and liabilities recognized for financial reporting purposes and
such amounts recognized for tax purposes.  Deferred tax balances are adjusted to
reflect  tax  rates,  based on current  tax laws,  that will be in effect in the
years in which the temporary  differences  are expected to reverse.  A valuation
allowance  equal  to the  full  amount  of  the  deferred  tax  asset  has  been
established  because,  in the opinion of management,  it is more likely than not
that the deferred tax asset will not be realized.

RECLASSIFICATIONS

Certain  amounts for the year ended  December  31, 1996 have been  reclassified,
with no effect on net loss, to conform with the  presentation for the year ended
December 31, 1997.

3. CONCENTRATION OF RISK:

Financial  instruments  subject to credit risk consist  primarily of cash,  cash
equivalents,  and accounts receivable. At times, the Company's cash deposited in
financial  institutions  may be in excess of federally  insured  limits.  In the
normal  course  of  business,  the  Company  extends  unsecured  credit  to  its
customers.

Additionally,  the Company has certain sales  concentrations.  As of and for the
years ended December 31, 1997 and 1996, the following concentrations existed:

ACCOUNTS RECEIVABLE

Three customers comprised  approximately 51%, 26% and 11%, respectively,  of the
accounts  receivable balance as of December 31, 1997. Three customers  comprised
approximately 50%, 28% and 17%, respectively, of the accounts receivable balance
as of December 31, 1996.

                                      F-9
<PAGE>

                      PIRANHA INTERACTIVE PUBLISHING, INC.
                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

CUSTOMER SALES

Four customers comprised  approximately 30%, 19%, 18% and 17%, respectively,  of
net sales  for the year  ended  December  31,  1997.  Five  customers  comprised
approximately  21%,  20%, 18%, 11% and 11%,  respectively,  of net sales for the
year ended December 31, 1996.

SALES BY PRODUCT

Four products comprised  approximately 24%, 23%, 22% and 11%,  respectively,  of
net sales  for the year  ended  December  31,  1997.  Three  products  comprised
approximately  43%, 34% and 13%,  respectively,  of net sales for the year ended
December 31, 1996.

4. INVENTORIES:

Inventories consist of the following:
                                                   1997
                                                   ----
   Finished goods                               $ 167,277
     Packaging supplies and manuals                73,462
                                                ---------
                                                  240,739
     Less reserve for obsolescence               (100,731)
                                                ---------
                                                $ 140,008
                                                =========
5. PROPERTY AND EQUIPMENT:

Property and equipment consist of the following:
                                                   1997
                                                   ----
   Office furniture                             $ 10,218
   Office equipment                               30,541
   Computer equipment                             68,771
   Leasehold improvements                         35,504
                                                --------
                                                 145,034
   Less accumulated depreciation                 (45,651)
                                                --------
                                                $ 99,383
                                                ========
6. NOTES PAYABLE - OFFICERS:

As of December 31, 1997, notes payable - officers  consists of  uncollateralized
notes  totaling  $30,000,  bearing  interest at 10%, and due August 1, 1999. The
outstanding  balance of notes payable - officers  includes  accrued  interest of
$10,207.  Interest  expense  for these notes  totaled  $3,781 and $3,426 for the
years ended December 31, 1997 and 1996, respectively.

                                      F-10
<PAGE>

                      PIRANHA INTERACTIVE PUBLISHING, INC.
                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

7.  RELATED PARTY TRANSACTIONS:

On July 1, 1996, the Company entered into a one-year consulting agreement with a
stockholder who is otherwise  unaffiliated with the Company. As compensation for
the stockholder's  future services in pursuing and arranging  potential business
combinations,  the Company has agreed to pay an amount not to exceed 2.5 percent
of the total  consideration  involved in such a combination  to the  stockholder
minus any retainer  advanced to the stockholder.  The agreement also calls for a
$50,000 non-refundable retainer to be paid in monthly installments over the term
of the agreement  and a commitment to grant an option to purchase  16,000 shares
of common stock. The agreement is renewable for one-year terms by mutual consent
of the parties,  and is currently renewed through June 1998.  Amounts paid under
this agreement totaled $23,846 and $50,000 for the years ended December 31, 1997
and 1996, respectively.

8. ADVERTISING:

Total  advertising  expense,  including  co-op  advertising,  was  $225,494  and
$148,590 for the years ended December 31, 1997 and 1996, respectively.

9. INCOME TAXES:

The tax effects of temporary  differences that give rise to significant portions
of the deferred tax assets at December 31, 1997 are as follows:

                                                               1997
                                                               ----
     Deferred tax assets:
       Net operating loss carryforwards                    $ 1,063,000
       Allowance for bad debts and sales returns                 9,000
       Inventories                                              42,000
       Other                                                    19,000
                                                           -----------
                                                             1,133,000
     Valuation allowance                                    (1,133,000)
                                                           -----------
                                                           $        --
                                                           ===========

The valuation allowance increased approximately $1,042,000 during the year ended
December 31, 1997.

The  reconciliation  of the effective  income tax rate to the federal  statutory
rate is as follows:
                                               1997         1996
                                               ----         ----
     Federal income tax rate                   34.0%        34.0%
     Effect of valuation allowance            (34.0)%      (34.0%)
                                              -----        -----
     Effective income tax rate                  0.0%         0.0%
                                              =====        =====

The  Company  has  federal  and  state  net  operating  loss   carryforwards  of
approximately $2,516,000. The federal net operating loss carryforwards expire in
2011 and 2012, while the state net operating loss  carryforwards  expire in 2001
and 2002.

                                      F-11
<PAGE>
                      PIRANHA INTERACTIVE PUBLISHING, INC.
                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

10. EQUITY:

PREFERRED STOCK

The Company is  authorized to issue up to 5,000,000  shares of preferred  stock,
with a par  value of  $.001  per  share,  in one or more  series  and to fix the
powers,  designations,  preferences,  and rights of each series.  No series have
been issued to date.

STOCK DIVIDEND

As of August 11, 1997, the Company  declared a dividend  equal to  approximately
0.33 share of Common Stock as to each then  outstanding  share of Common  Stock.
All  references  to the  number  of common  shares  outstanding,  common  shares
reserved  for  issuance  under  the  1996  Stock  Option  Plan,  and  per  share
information  in the  financial  statements  have been  adjusted  to reflect  the
dividend on a retroactive basis.

STOCK OPTION PLAN

On December 13, 1996, the Board of Directors of the Company established the 1996
Stock  Option Plan  ("1996  Plan")  which  authorizes  them to grant  options to
directors, employees and consultants of the Company to purchase shares of common
stock.  An aggregate of 300,000  shares of common stock is reserved for issuance
upon  exercise  of options  granted  under the 1996 Plan.  In  general,  options
granted under the 1996 Plan are not transferable,  expire over periods from five
to ten years after date of grant,  the exercise  price may not be less than fair
market  value of common  stock on grant date and for the one year period  ending
September 23, 1998,  no options may be granted with an exercise  price less than
the initial  public  offering  price.  The vesting terms of options  awarded are
determined by the Board at the grant date.

The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123,  "Accounting for Stock-Based  Compensation" ("SFAS
123").  Accordingly,  no compensation  cost has been recognized in the financial
statements for stock based awards  (including the escrow shares described below)
issued to employees and directors. Pro forma information has been included as if
the Company had  accounted for its stock based awards under the fair value based
method of that Statement.  For purposes of pro forma  disclosure,  the estimated
fair value of the awards is amortized to expense over the vesting  period of the
awards. The pro forma information for 1997 follows:

                                                      1997
                                                      ----
Net loss - as reported                            $(2,377,295)
Net loss - pro forma                              $(2,879,840)
Net loss per share - as reported                  $     (2.86)
Net loss per share - pro forma                    $     (3.47)

No options were issued to employees or directors in 1996.

The fair  value for these  awards  was  estimated  at the date of grant  using a
Black-Scholes option pricing model with the following assumptions for 1997: risk
free interest rate of 6 percent, no common dividend, expected volatility of 55%,
and an expected average life of the option of 4.5 years.

On December  13,  1996,  the Company  issued an option to a  stockholder  of the
Company under the 1996 Plan to purchase  16,000 shares of common stock (see Note
7) at an exercise  price of $5.00 per share.  The option  became fully vested in
September 1997, and may be  exercised at any  time prior to August 31, 2002. The

                                      F-12
<PAGE>
                      PIRANHA INTERACTIVE PUBLISHING, INC.
                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

compensation  cost  recognized  in income  for this  option  for the year  ended
December 31, 1996 was $18,600  based on the fair value of the option.  This fair
value was estimated on the date of grant using a  Black-Scholes  option  pricing
model with the following  assumptions:  risk free interest rate of 6 percent, no
common dividend, expected volatility of 75%, and an expected average life of the
option of 4.5 years;  and the estimated fair value of the underlying stock based
on the historical stock prices of similar public entities following a comparable
period in their lives, of $3.00 per share.

A summary of the Company's stock option  activity and related  information is as
follows:

                                            1997                    1996
                                      ------------------     -----------------
                                                Weighted              Weighted
                                       Shares   Average      Shares   Average
                                       Under    Exercise     Under    Exercise
                                       Option   Price        Option   Price
                                       ------   --------     ------   --------
Outstanding, beginning of year         16,000    $5.00           --       --
Granted                               166,800    $5.00       16,000    $5.00
Exercised                                  --       --           --       --
Canceled                                   --       --           --       --
                                      -------    -----      -------    -----
Outstanding, end of year              182,800    $5.00       16,000    $5.00
                                      =======    =====      =======    =====

Exercisable at end of year             84,667    $5.00           --       --

Shares available for future grant     117,200               284,000

The weighted  average  remaining life of options  outstanding as of December 31,
1997 is 6.7 years.

INITIAL PUBLIC OFFERING

On September 23, 1997, the Company  completed its initial  public  offering (the
"Offering") of 1,600,000 units ("Offering  Units"),  each unit consisting of one
share  of  common  stock  and one  Class A  warrant.  Each  Class A  warrant  is
exercisable at any time during the five years following the date of the Offering
to purchase  one share of common  stock for $6.50,  subject to  adjustment.  The
Company may redeem such  warrants  at $.05 per  warrant if the  Company's  stock
price meets certain price levels.

In connection  with the public  offering,  the present  holders of the Company's
common stock have been required to place 1,225,000  shares of common stock in an
escrow account to be released only upon the Company  attaining  certain  minimum
earnings  thresholds or the market price of the  Company's  common stock meeting
certain minimum levels.  In the event that it becomes  probable that the Company
will meet the  requirements  for the release of the escrow  shares,  the Company
will be required to recognize  estimated  compensation  expense based on current
share prices  through the date the shares are released.  On March 31, 2002,  all
shares still held in escrow will be forfeited,  which shares will then be placed
in the Company's treasury for cancellation thereof as a contribution to capital.

                                      F-13
<PAGE>
                      PIRANHA INTERACTIVE PUBLISHING, INC.
                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

WARRANTS

During the year ended December 31, 1996, the Company issued 750,000  warrants in
connection with $1,500,000 of notes payable. The warrants entitle the holders to
purchase  one share of common  stock for $3.00;  however,  these  warrants  were
exchanged automatically for 750,000 Selling  Securityholders'  Warrants upon the
close of the public offering, each of which is identical to the Class A warrants
(including the exercise price of $6.50)  included in the Offering  Units.  These
Selling  Securityholders'  Warrants are exercisable  during the four-year period
commencing September 1998 through September 2002.

At December 31, 1997, all warrants remain outstanding.

11. COMMITMENTS:

EQUITY

In connection with the public offering,  the Company sold to the  representative
of the  underwriters  (the  "Representative"),  for nominal  consideration,  the
option to purchase  up to 160,000  Units  ("Unit  Purchase  Option"),  each unit
substantially  identical to the Offering Units. The Unit Purchase Option will be
exercisable  during the three-year  period  commencing  September 23, 1999 at an
exercise price equal to $6.50 per Unit, subject to adjustment. The Unit Purchase
Option is not  transferable  until  September 23, 1999 except to officers of the
Representative  or to members of the selling  group.  The exercise price and all
other  terms  of  any  common  stock  or  Class  A  warrants   issuable  to  the
Representative  upon  exercise  of the Unit  Purchase  Option are  substantially
identical to those sold in the offering  except that the warrants  issued to the
Representative are not subject to redemption by the Company.

During  the  five-year  period  starting  November  27,  1996,  in the event the
Representative originates a financing or a merger, acquisition or transaction to
which the Company is a party, the  Representative  will be entitled to receive a
finder's fee in consideration  for origination of such  transaction.  The fee is
based on a percentage of the consideration paid in the transaction.

ROYALTIES

The  Company  has  entered  into  several  different  license  and  distribution
agreements  (the  "Agreements")  with  independent  software   developers.   The
Agreements generally provide that in return for the Company's exclusive right to
produce,  market and sell certain  software  products,  the  developers of these
products are entitled to royalties  based on a percentage  of the  product's net
sales.  If certain  performance  criteria are not met, such as selling a minimum
amount of units or paying a minimum  amount of  royalties,  the Company may lose
its right for exclusivity or the agreement may terminate.  The Agreements expire
on varying  dates through  February  2004.  Royalty  expense for the years ended
December  31,  1997 and 1996 was  $72,846  and  $90,307,  respectively,  and was
included in the cost of goods  sold.  Also,  the  Company  was  required to make
certain  up-front  advances  related  to  royalties.  The  unamortized  up-front
advances,  included in prepaid  expenses,  were $246,054 and $62,169 at December
31, 1997 and 1996, respectively.

LEASES

The Company is obligated  under a long-term  operating  lease for its  corporate
offices  through  November 1999.  Annual rent  commitments  under this operating
lease are $46,421 and $43,551 for the years  ending  December 31, 1998 and 1999,
respectively.

Rent  expense  amounted to $59,246 and $47,828 for the years ended  December 31,
1997 and 1996, respectively.

                                      F-14
<PAGE>
                      PIRANHA INTERACTIVE PUBLISHING, INC.
                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

12. UNAUDITED PRO FORMA DATA:

The following pro forma data has been presented on the statements of operations:

Income tax benefit has been presented for the year ended December 31, 1996 as if
the Company were a C corporation. The income tax benefit was calculated assuming
an effective tax rate of 42%.

The pro forma tax benefit consists of:

                                     1996
                                   --------
Current benefit:
  Federal                          $ 62,746
  State                              14,718
                                   --------
                                   $ 77,464
                                   ========

Total pro forma provision for income taxes differs from the "expected" pro forma
tax  expense  of 34%  principally  due to state  income  taxes and only  partial
benefit from the net operating loss for the year ended December 31, 1996.

13. LOSS PER SHARE DISCLOSURES:

The Company has adopted the  provisions  of Statement  of  Financial  Accounting
Standards No. 128,  Earnings Per Share ("SFAS 128) effective  December 31, 1997.
Basic  earnings  per share is computed by dividing  income  available  to common
stockholders by the weighted average number of common shares outstanding for the
period.  Diluted  earnings per share is computed  giving  effect to all dilutive
potential  common  shares  that were  outstanding  during the  period.  Dilutive
potential  common shares consist of the incremental  common shares issuable upon
exercise of stock options,  warrants and the unit purchase option.  The adoption
of SFAS 128 had no effect on the net loss per share for 1996.

In accordance with the disclosure  requirements of SFAS 128, a reconciliation of
the numerator and denominator of basic loss per share is provided as follows:

                                                    1997            1996
                                                    ----            ----
Numerator - Basic and Diluted loss per share:
  Net loss                                      $(2,377,295)     $ (834,874)
                                                ===========      ==========
Denominator - Basic and Diluted loss per share:
  Weighted average common shares outstanding      2,055,890       1,620,565
  Less shares of common stock in escrow          (1,225,000)     (1,225,000)
                                               ------------      ----------
                                                    830,890         395,565
                                               ============      ==========
Basic and Diluted loss per share               $      (2.86)     $    (2.11)
                                               ============      ==========

Outstanding warrants,  unit purchase options, and stock options are not included
in the  computations  of  diluted  loss  per  share  as  their  effect  would be
antidilutive.  As the  conditions for release of the escrow shares (see Note 10)
have not been met nor will they be met upon the mere passage of time, the escrow

                                      F-15
<PAGE>
                      PIRANHA INTERACTIVE PUBLISHING, INC.
                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

shares have been considered  contingently issuable and,  accordingly,  have been
excluded from the weighted average number of common shares  outstanding used for
the calculation of the basic and dilutive net loss per share.

Net loss per share is  computed  using  the  weighted  average  number of common
shares  outstanding  during each period after giving  retroactive  effect to the
recapitalization (see Note 1) and stock dividend (See Note 10).

14.  SUPPLEMENTAL CASH FLOW INFORMATION:

                                                      1997         1996
                                                      ----         ----
Cash paid for:
  Interest                                          $148,817     $20,643
Schedule of non-cash financing activities:
  Issuance of stock options for services             $18,517     $18,600
  Warrants issued in connection with notes payable        --      75,000
  Unit Purchase Option issued in connection
    with Initial Public Offering                    $353,600          --




                                      F-16