SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

(Mark One)
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 1996

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

For the transition period from              to

                          Commission File No. 0-021150

                       SPICE ENTERTAINMENT COMPANIES, INC.
             (Exact name of registrant as specified in its charter)

         Delaware                                        11-2917462
(State or other jurisdiction of                          (I.R.S. Employer
incorporation or organization)                           Identification No.)

536 Broadway, New York, NY                               10012
(Address of principal executive offices)                 (zip code)

               Registrant's telephone number, including area code:
                                 (212) 941-1434

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

     Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, par value $.01

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

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, 
to the best of the registrant's knowledge, in the definitive proxy or 
information statements incorporated by reference in Part III of this Form 
10-K or any amendment to this Form 10-K [ ].

         The aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 31, 1997 was $24,358,446.

     The number of shares  outstanding of registrant's Common Stock as of 
March 31, 1997 was: 11,339,948.


<PAGE>



Item 1.    Business


         Spice Entertainment Companies, Inc. (formerly known as Graff
Pay-Per-View Inc.) and its subsidiaries (collectively "Spice" or the "Company")
is a leading international provider of adult television entertainment. The
Company has strategically refocused its business to concentrate on its
profitable adult entertainment business and to establish a strong brand 
identity globally. The Company changed its corporate name to Spice 
Entertainment Companies, Inc. to reinforce these strategies. The Company now 
operates through three units: Spice Networks - domestic adult pay-per-view 
networks, Spice International - international adult networks and programming 
and Spice Direct - other products and services.

         Through its Spice Networks operating division, the Company owns and
operates Spice and The Adam & Eve Channel (collectively, the "Spice Networks"),
domestic pay-per-view television networks with access to over 20 million cable
addressable and direct broadcast satellite ("DBS") households.

         Spice International is responsible for expanding the distribution of
the Company's adult television networks and programming globally. In Europe, 
the Company operates and distributes two premium television networks, The 
Adult Channel, originated from the United Kingdom, and Eurotica, originated 
from Denmark (collectively the "European Networks"). The European Networks are
distributed in the cable and direct-to-home ("DTH") markets. The Company,
through agreements with NetHold Electronic Media, B.V., United Philips Cable,
Metromedia International Telecommunications and others, has distribution
throughout Europe and the networks are available in over 40 countries. The
Company has expanded distribution into the Pacific Rim through agreements with
Pay Per View Japan Inc., the first digital television program provider in 
Japan, and in Australia, with Northgate Communications Australia PY Ltd. 
("Northgate").  Spice International is in discussions with various other 
parties for distribution of the Company's networks and programming in Latin 
America, the Pacific Rim and Asia.

         Spice Direct focuses on products and services marketed directly to
consumers. Spice Direct, through agreements with third parties, provides
merchandising and audiotext services on the Spice Networks. It also operates
CyberSpice, the Company's adult Internet website. Spice Direct, in a joint
venture with the Williams Worldwide, Inc., launched Williams Infomercial 
Network (the "Infomercial Network"), a 24-hour a day satellite delivered 
infomercial network featuring mainstream products and advertising. Spice 
Direct is also responsible for the productive utilization of the Company's 
transponder capacity and provides network playback and programming services to 
third parties.

         The Company owns one of the world's largest adult film libraries under
license and production agreements with third parties. The library is licensed
both to affiliates and third parties.

         The Company has disposed of its remaining non-strategic assets. In a
transaction which closed on February 7, 1997, the Company split off Spector
Entertainment Group, Inc. ("SEG"), a provider of telecommunications and
television production services principally to the pari-mutuel wagering 
industry, to the former shareholders of SEG. The Company owns a partnership 
interest in CVS Partners ("CVSP") which owns and operates the Cable Video 
Store Network, a domestic hit movie service. The partners of CVSP have 
determined to wind down the partnership. Finally, the Company terminated its 
television and motion picture production activities previously conducted by 
CPV Productions, Inc. ("CPV").

         The following table sets forth the percentage of revenues contributed
by each of the Company's operating units during each of the last three fiscal
years:
<TABLE>
<CAPTION>

                       Year                                     1996            1995           1994
---------------------------------------------------         -------------    -----------    -----------
<S>                                                                <C>            <C>            <C>  
Spice Networks                                                     45.3%          43.0%          45.6%
Spice Direct                                                        5.5%           6.1%           3.2%
Spice International                                                17.6%          20.3%          17.2%
                                                            -------------    -----------    -----------
Total from Continuing Operations                                   68.4%          69.4%          66.0%
Discontinued Operations (SEG)                                      19.1%          15.2%          14.6%
Suspended/Terminated Operations (CVSP & CPV)
                                                                   12.5%          15.4%          19.4%
                                                            =============    ===========    ===========
Total Revenue                                                     100.0%         100.0%         100.0%

                                                            =============    ===========    ===========
</TABLE>

         The Company was incorporated in 1987 under the laws of the State of
Delaware and has its principal executive offices at 536 Broadway, New York, NY
10012.


SPICE NETWORKS

         The Spice Networks are two of the leading domestic networks in the
adult pay-per-view market place. Pay-per-view television enables a subscriber
with an addressable set top decoder or satellite receiver to purchase a block 
of programming, an individual movie or an event for a set fee. Pay-per-view
programming can be delivered via cable television or "direct to the home" to
households with large satellite dishes receiving a C-band low power analog
signal (the "DTH market") or with small satellite dishes receiving a Ku-band
medium or high power digital signal such as that currently offered by Primestar
and DirecTV which are referred to as "DBS services." At the end of 1996, the
Spice Networks were available to approximately 17.8 million addressable channel
homes in cable systems throughout the country. The Spice Networks have
affiliation agreements with 9 of the top 10 and 17 of the top 20 multiple 
system operators ("MSO"). The Spice Network is also offered as part of the 
DirecTV DBS satellite entertainment service to over 2.3 million households.

         A market leader and innovator, the Spice Networks were the first adult
pay-per-view networks to be available 24 hours a day and the first adult
pay-per-view network to feature an all movie format. The Spice Networks
pioneered the now industry standard 90-minute start times promoting customer
convenience. Spice was the first service to offer a complementary companion
adult pay-per-view service, The Adam & Eve Channel, which provides staggered
start times for its movies and features.

         Each of the Spice Networks feature approximately 50 titles per month,
approximately 12 of which are first time exhibitions. There is no crossover of
programming between the two channels. The Spice Networks feature "cable 
version" adult films. Cable version adult films (as contrasted with the 
explicit or hard core versions) are specially produced and edited to conform 
to strict, internally developed guidelines which are generally accepted as the 
standard in the industry.

         While the retail pay-per-view price of Hollywood hit movies has
declined to less than $3 in some cable and DBS systems, the retail pay-per-view
price for adult programming such as the Spice Networks has remained in the $5 
to $8 range. In addition, the Company believes that retail adult pay-per-view
prices can be raised within a range without adversely affecting buy rates. The
following chart shows the Company's cable addressable and DBS households for
each of the Spice Networks.
<TABLE>
<CAPTION>

                           Spice Networks Subscribers


                        1989       1990       1991       1992       1993       1994       1995        1996
                       -------    -------    -------    -------    -------    -------    --------    --------
<S>                     <C>       <C>        <C>        <C>        <C>        <C>         <C>         <C>   
Spice                   830       2,330      3,860      4,890      7,370      9,270       13,920      16,330
Adam & Eve Channel       -          -          -          -          -          350        3,180       3,650
</TABLE>



         The Company has been aggressively promoting the Spice brand name and
developing cost effective means of building brand identity. The logo was
completely redesigned and new programming was produced for use between feature
movies in 1995. To garner nationwide brand recognition among its affiliates and
viewers, Spice is conducting a nationwide "Search for the Spice Girl 1997"
contest. Local contests are being held in major markets nationwide with a
national contest to be held in New York City. The first two contests had
extensive media coverage and demonstrated the strength of the Spice brand name.

         Marketing adult television entertainment requires creativity and
discretion. The Company, in coordination with its affiliates, has developed
several means of promoting the Spice Networks. The Company regularly 
distributes affiliate marketing kits and conducts affiliate workshops and 
national sweepstakes. To broaden consumer awareness of the Spice Network and 
pay-per-view buying in general, the Company successfully tested a free Spice 
Networks preview in order to increase viewers. Buy rates were up over 500% over 
average normal activity in several systems. Based on preliminary market 
research, about half of the Spice preview buyers were first time buyers and 
over 20% were first time pay-per-view buyers.

         The Company is distributing its programming over a variety of emerging
video delivery technologies including multi-channel analog and digital 
wireless cable systems, satellite master antenna systems and open video 
systems, among others to insure the widest possible distribution of its 
networks and programming. The Spice Networks are the only adult programming 
services currently available on the Tele-Communications, Inc. ("TCI") All TV 
Service, its digital platform of satellite delivered programming. TCI is also 
offering its digital platform to non-TCI cable systems and the Company 
anticipates expanded distribution of the Spice Networks as a result. The 
Company is continuously exploring other avenues and locales of distribution.

         Competition. The Spice Networks have one principal competitor, Playboy
Television ("Playboy"), in the domestic cable and DBS markets. The Company
believes that the Spice Networks are the most widely distributed domestic adult
pay-per-view networks.

         In the C-band DTH market, competition from several explicit version
adult movie services adversely impacted the Spice Network's revenues. As a
result, the Company discontinued distribution of the Spice Networks to the
C-band DTH market on August 31, 1996.

SPICE INTERNATIONAL

         Through its Spice International operating division, the Company has
been pursuing global distribution of its adult networks and programming. The
Company began its international operations with its 1994 acquisition of The 
Home Video Channel Limited ("HVC"), a UK corporation. HVC owns and operates 
The Adult Channel, a satellite delivered subscription service which features 
cable version adult movies and related programming similar to those exhibited 
on the Spice Networks. The Adult Channel, which is broadcast four hours a day 
commencing at midnight, is available to approximately 2 million cable 
households and approximately 4 million DTH satellite households in the United 
Kingdom. The Adult Channel is also available to DTH satellite households 
throughout Continental Europe and currently has subscribers in over 40 
countries.

         HVC also operates a cable exclusive movie service featuring action and
horror movies which began digital satellite delivery in the second quarter of
1996. The Home Video Channel is offered during the evening hours and is
programmed during the pre-midnight hours to segue into The Adult Channel. The
two services are offered as a seamless 8:00 p.m. to 4:00 a.m. programming
service at a package price.

         In February 1995, the Company launched Eurotica, a satellite delivered
subscription network based in Denmark which features explicit version adult
movies and adult entertainment. Eurotica is marketed to the DTH and cable
markets throughout Europe and currently has subscribers in over 25 countries.

         The Company has authorized agents throughout Western Europe who
distribute DTH subscriptions to the European Networks through sales of "smart
cards." The Company is currently concluding negotiations with Satellite
Encryption Services Ltd., a News Corp. Ltd. subsidiary, to provide subscriber
access to The Adult Channel on the Sky Card. The Sky Card is also used to
authorize subscriptions for virtually all DTH channels in the United Kingdom
including those owned by British Sky Broadcasting, Ltd. The Company, which has
lost revenues as a result of unauthorized reception of its European Networks,
believes that the advanced technology of the Sky Card will reduce piracy of its
networks and will permit easier subscriber access. The Company is also
installing its own Subscriber Management Service.

         In promoting the international distribution of its adult television
networks and programming, the Company's strategy is to license its networks or
programming to local cable and DTH operators. This enables the Company to avoid
the high cost of satellite distribution. The Adult Channel is included as an
extended basic programming service and Eurotica as a pay-per-view programming
service in the NetHold Electronic Media, B.V. ("NetHold") digital package of
programming services available for distribution throughout Benelux and
Scandinavia pursuant to a Channel Distribution Agreement. The Adult Channel is
also included in the basic tier of programming in two Netherlands and one
Austrian cable systems operated by United Phillips Cable which have an 
aggregate of approximately 1.1 million subscribers.

         The Company has applied for a broadcast license in both Germany and
France. The Company now believes that it will obtain a broadcast license in
Germany for adult programming and is currently seeking distribution of a Spice
branded network and/or programming in both the cable and DTH markets in Germany.
There are over 16 million cable addressable homes in Germany. The Company has
now been granted a broadcast license in France which will enable it to exploit
distribution opportunities on French cable systems as well as French DTH
platforms.

         In Eastern Europe, the Company has entered into agreements with
affiliates of Metromedia International Telecommunications ("Metromedia") for
distribution of The Adult Channel and Eurotica in several eastern European
Countries including Romania, Slovenia, Belarus and Russia. Under these
agreements, The Adult Channel is included in the basic programming tier and
Eurotica will be available as pay-per-view service when the technology is made
available. The recent devaluation of the Romanian currency will adversely 
impact the Company's revenues from this country. The Canal Plus takeover of 
NetHold has led to that company's discontinuation of its Central European 
marketing and Subscriber Management Services, which NetHold had provided to 
HVC under contract. HVC is now appointing sales agents throughout Central 
Europe and will provide its own Subscriber Management Services.

         The Company has entered into a license agreement with Pay Per View
Japan Inc. ("PPVJ") to be the exclusive adult program provider to PPVJ's 
Perfect Choice TV, the first digital television program provider in Japan. The
programming is Spice branded and specially selected and edited for the Japanese
market. Perfect Choice was launched on January 15, 1997 and preliminary
indications are that the buy rates for the Company's adult programming exceed
projections.

         In Australia, the Company has entered into an agreement with Northgate
Communications Australia PY Ltd. ("Northgate") to distribute Spice as a pay
service and an explicit service on a pay-per-view basis to Northgate's cable
system subscribers in Australia.

         The Company is in discussions with various other operators in Latin
America, Asia, The Pacific Rim, Taiwan and Mandarin China and other areas for
carriage of the Company's networks and programming.

         Competition. As a result of the launch of two competing adult services
in the fourth quarter of 1995 and piracy, the number of DTH network subscribers
declined in 1996. Management believes that the number of subscribers will not
further decline and has developed plans to reverse the trend. In the cable
market, the number of The Adult Channel's cable subscribers remain fairly
constant and the Company is exploring various possibilities to increase cable
distribution of The Adult Channel, The Home Video Channel and Eurotica. 
However, in the short term, any growth in the cable market will not be 
sufficient to offset the loss of revenue from the decline of The Adult Channel 
in the DTH market. Revenues from The Adult Channel for 1996 were approximately 
$3.6 million less than revenues for 1995.

         To combat this decline, the Company has plans to relaunch the Adult
Channel when it becomes available on the Sky Card, the most widely distributed
smart card in the United Kingdom. In addition the Company plans to establish a
new dealer network to replace NetHold and to aggressively market the service in
mainland Europe.

         In the emerging global markets, Spice International's major competitor
is likely to be Playboy. The Company believes that the international appeal of
its tailor made production inventory will enable it to meet this competition.

SPICE DIRECT

         Spice Direct is responsible for the Company's direct marketing of
products and services to consumers, operating the Infomercial Network and
CyberSpice, and arranging for the productive use of the Company's transponder
capacity and providing network playback services and programming to third
parties.

         Spice Direct is responsible for adult-oriented entertainment and
information through pay-per-call telephone lines (audiotext services) 
advertised on the Spice Network pursuant to a Telephone Services Agreement 
("TS Agreement") with Capital Distribution, Inc., d/b/a Cupid Network 
Television ("CNT"). The audiotext with advertisements are produced exclusively 
for the Spice Networks by adult film producers which enables the Company to 
control the networks' on-air look. Under the TS Agreement, the Company 
receives a fee based on the number of Spice Network subscribers. The Company 
receives a sliding percentage of revenues from the audio text services on the 
Adam & Eve Channel which are operated by third parties.

         The operators of the audiotext services are responsible for the
administration of the telephone lines and are contractually required to comply
with all applicable rules and regulations. None of the operators or
administrators of the telephone lines are Company employees. The telephone 
lines feature computerized audio programs and live operators on both 800 and 
900 telephone lines.

         In between feature movies, the Spice Networks also provide home
shopping which offer adult themed products in provocatively staged shopping
segments. The merchandising is handled on both networks by CNT pursuant to an
Amended and Restated Distribution Agreement (the "Merchandise Agreement"). 
These segments, which are produced by CNT, also offer Spice branded products 
which further promote the brand name.

         The Company and CNT have had various disagreements over CNT's
performance under the Merchandise and TSA Agreements and the parties are
currently involved in an arbitration. See "Item 3. Legal Proceedings." There 
are no assurances that the dispute between the Company and CNT can be 
satisfactorily resolved.

         On March 1, 1997, the Company launched a general product infomercial
network known as "Williams Infomercial Network" or "WIN" (the "Infomercial
Network"). The Infomercial Network will be jointly owned and operated by the
Company and Williams Worldwide, Inc. ("WWI") once it has at least a 1.5 million
subscriber base. The network uses the same digital compression equipment and
shares a transponder with the Spice Networks and is designed to enable cable
systems to easily program underutilized blocks of time created when other cable
networks are off-air. The Company has initially targeted cable systems that
carry the Spice Networks on a part time basis and thus can easily carry the
Infomercial Network when the cable system is not distributing the Spice Network.
As discussed below in "GOVERNMENT REGULATION", Section 505 of the
Telecommunication Act of 1996 prevents many cable operators from broadcasting
the Spice Network during the daytime hours. The Company hopes to make up lost
revenue caused by cable operators complying with Section 505 through revenues
generated by the Infomercial Network.

     In 1994, the Company began  CyberSpice as an on-line bulletin board 
service which  utilized the Company's adult programming  and cross promoted 
the Spice Networks.  CyberSpice  was  converted to a website on the Internet 
in the second quarter of 1995. CyberSpice is currently operated by E.O.L. 
Communications Corp. ("EOL") and is included in a bouquet of EOL  operated  
adult pay sites.  Under a month  to  month  agreement,  CyberSpice  receives  
a  portion  of all  revenues generated  by  customers  of EOL's pay  sites who  
access  those  sites  through CyberSpice. See "GOVERNMENT REGULATION, On-Line 
Services."

         The Company had available transponder capacity as a result of the
digital compression of the Spice Networks and CVS. Pursuant to agreements dated
as of August 30, 1996, the Company began providing transponder services to
Emerald Media, Inc. ("EMI"), which owns and operates Eurotica, an explicit
television network distributed in the C-band DTH market. EMI also licenses 
adult films from the Company and the Company has licensed EMI the "Eurotica" 
tradename and related identity and granted the Company an option to acquire 
its stock or assets. EMI acquired additional networks and launched one of its 
own and the Company now provides transponder and playback services for two EMI 
networks and licenses adult films to all four of EMI's networks.

PRODUCTION AND PROGRAMMING

         The Company has an extensive library of adult films which it acquires
pursuant to license and production agreements with many of the principal adult
film producers. Through the activities of its Spice International division, the
Company has been expanding distribution of its adult networks and programming
throughout the world using it's extensive adult film library. The Company
directly or through Spice International, licenses its library to its European
Network and to third parties. This programming may also be used to create new
Spice branded services or other adult networks or repurposed for use in other
media such as the Internet and cable modem markets.

         The Company has long term production agreements with VCA Labs, Inc.
("VCA") and Coastline Films, Inc. and more limited production agreements with
other adult film producers including Sin City Entertainment, Inc., Wicked
Pictures, Thomas Paine Productions and Plush. VCA supplies approximately
one-fourth of the adult films which are licensed under production agreements.
Coastline had supplied two to three movies per month pursuant to one year 24
picture production agreements which expire April, 1997. The Company has also
entered into production agreements with foreign producers as part of the
Company's strategy to globalize its programming and to meet local content
requirements.

         Under the production agreements, the Company acquires worldwide
television rights (pay-per-view, subscription and premium television rights) in
perpetuity for delivery, in most instances, using all known and to be developed
methods of delivery, for both the cable version and the explicit version of 
each movie. The Company may also acquire on-line, Internet and other rights as 
part of the rights, granted under the production agreements.

         The Company has license agreements with other adult film producers.
Under the terms of the license agreements, the Company will typically license
the cable and explicit versions for adult films in the United States and/or
Europe for between one to three years with unlimited exhibitions in return for 
a flat license fee.

NETWORK DELIVERY

         Satellite Transmission. The Company delivers its video programming to
cable systems and other customers via digitally compressed satellite
transmission. Management believes that this is the most efficient delivery
method currently available for point to multipoint distribution. Satellite
delivery of video programming is accomplished as follows: The video programming
is played back at an operations facility. The program signal is then encrypted
so that the signal is unintelligible unless it is passed through the proper
decoding devices. The signal may be transmitted to the satellite as an analog
signal or digitally compressed and combined with other signals and transmitted
(uplinked) from an earth station to a designated transponder on a 
communications satellite.

         The transponder receives the analog or digitally compressed program
signal uplinked by the earth station, amplifies the signal and broadcasts
(downlinks) it to satellite dishes located within the satellite's area of 
signal coverage. The signal coverage of the domestic satellite utilized by the 
Company is the Continental United States, portions of the Caribbean, and 
Canada. The signal coverage of the satellite utilized by the European Networks 
is Continental Europe and portions of North Africa. Each transponder can 
retransmit four or more complete digitally compressed NTSC color television 
signals or one analog NTSC color television signal.

         For cable systems, the encrypted digitally compressed signal received
by the cable system's satellite dish is then decoded and decompressed using, 
for the Company's domestic television networks, General Instrument Digicipher 
II decoders. The cable system then rescrambles the signal using scrambling
technology compatible with the addressable set top boxes deployed in its system
and then distributes the signal throughout its cable system. For DTH and DBS
customers, their set top box contains the descrambling equipment.

         To offer pay-per-view services, the set top boxes must have an 
electronic "address" and the cable system or satellite service provider must 
be able to remotely control each customer's set top box  and cause it to 
descramble the television signal for a specified period of time after the 
customer has made a purchase of a premium service or a pay-per-view event. 
The ability to control the scrambling and descrambling of a signal from a 
cable system's facilities (addressability) is essential for the marketing and 
delivery of pay-per-view programming services.

         In Europe, subscribers purchase "smart cards" from distributors,
including appliance and electronics stores. These smartcards are programmed to
permit reception of a premium programming service. The smart cards are then
inserted into the satellite receiver or set top box which descrambles the 
signal for a specified period of time.

         Service Providers. The Company utilizes transponder services for its
domestic networks pursuant to a February 7, 1995 Agreement ("AT&T Agreement")
with AT&T Corp. The AT&T Agreement was initially for services on five
transponders on AT&T's Telstar 402R Satellite. This was reduced to four
transponders as a result of the loss by AT&T of one of its other satellites on
January 11, 1997. Pursuant to a letter agreement dated March 31, 1997 between
the Company and Loral Skynet (which acquired AT&T's satellite business), the
term of the agreement, which originally expired at the end of the satellite's
useful life, was shortened to October 31, 2004 in consideration of the 
Company's grant to Loral of a right to preempt one of the Company's 
transponders after September 1, 1997. See "Management Discussion And Analysis."

         The Home Video Channel, Ltd. ("HVC") had a contract with Societe
Europeenne des Satellites S.A. ("SES"), the owner of the Astra 1C satellite
providing transmission services for The Adult Channel, through January 1997. 
The footprint of the satellite is Western Europe. This arrangement was replaced 
with an agreement effective February 1, 1997 with Filmnet A.B. who subleased a
transponder from SES for four hours a day that The Adult Channel is broadcast.
The agreement is terminable upon three months prior written notice by either
party.

         Commencing in June 1, 1996, The Home Video Channel began digital
satellite distribution to cable systems on the Intelsat satellite pursuant to a
five year agreement with British Telecommunications plc ("BT") dated April 24,
1996.

         Eurotica obtains transponder services from BT pursuant to a January 8,
1997 offer of transponder services on Eutelsat II Flight-3 satellite. These
services are made available on a month by month basis.

         Neither The Adult Channel nor Eurotica have long term satellite
arrangements. If either of these arrangements are terminated and the Company is
unable to find a replacement satellite service, broadcast of the affected
network may be interrupted or terminated.

         Four Media Company ("4MC") provided domestic playback and uplink
services until February 28, 1997 when the Company's master control and digital
playback center (the "Operations Facility") went into service. The Operations
Facility currently handles playback for five networks utilizing video file
servers. This state of the art application of new technology loads and stores
digitized programming in the memory of the video file servers. Under automated
software control, the programming is then "streamed" from the video file 
servers and transmitted, over fiber optic cable, to the uplink facility. By 
employing this technology, the Company can add additional networks quickly and
efficiently.

         The Company contracted with Atlantic Satellite Communications, Inc.
("Atlantic") for fiber connectivity from the Operations Facility to the uplink
facility and for uplink services pursuant to a three-year letter agreement 
dated February 10, 1997. The parties are currently negotiating a more formal
agreement.

         As discussed above the Company's domestic network signals are 
encrypted and digitally compressed using VideoCipher II encoders, which are 
manufactured by General Instrument ("GI") which is currently the industry 
standard scrambling technology. The Company leased a General Instruments 
encoder and 1,210 decoders from Vendor Capital Group. The decoders were then 
provided to Spice Networks affiliates. The European Networks use the Videocrypt 
system developed by News Datacom Limited. The Company plans to switch to 
scrambling technology from Satellite Encryption Services Ltd., which 
distributes the Sky Card. This technology is more secure and the Sky Card is 
more widely used then the existing system used by the European Networks.

PRINCIPAL CUSTOMERS

         The Company's principal customers are TCI and Time Warner, which are
the largest domestic multiple system operators (MSO's). TCI and Time Warner
accounted for 18% and 9%, respectively of the Company's consolidated revenues
for 1996 and 11% and 7%, respectively, of the Company's consolidated revenues
for 1995. TCI and Time Warner accounted for 11% and 9%, respectively, of the
Company's consolidated revenues for 1994.


DISCONTINUED AND SUSPENDED OPERATIONS

         Hit Movie Network. On March 6, 1996, the Company contributed the Cable
Video Store Network, a domestic pay-per-view hit movie service, to a newly
formed partnership, CVS Partners ("CVSP"). The other partner was WilTech Cable
Television Services, Inc. ("WCTV"), a subsidiary of The Williams Companies, 
Inc. Cable Video Store, which the Company had operated since 1989, was 
available via satellite until March 31, 1997, when satellite delivery was 
terminated. The network continues to be available as a video file server based 
network. The Company and WCTV, the CVSP Partners, have determined to wind down 
the partnership. See "CURRENT DEVELOPMENTS, CVS Partners".

         Telecommunications, Television Production And Related Services. The
Company acquired SEG in a merger which took effect on September 1, 1995. SEG is
a provider of telecommunications, television production and related services
primarily to the pari-mutuel wagering industry and to a variety of other
industries including the sports, entertainment and distance learning 
industries.  In the fourth quarter of 1996, the Company determined that SEG was 
no longer a strategic fit with the Company's core adult entertainment business. 
On February 7, 1997, the Company split off SEG to the former SEG shareholders 
in exchange for the 700,000 shares of common stock they had received in the 
SEG Merger. This transaction is described in greater detail in "CURRENT 
DEVELOPMENTS, Spector Entertainment Group, Inc."

         Television and Movie Production. The Company, through its wholly-owned
subsidiary Cinema Products Video, Inc. ("CPV"), was engaged in the production
and distribution of television series and programs, movies and CD-ROMs. Because
of the substantial lead time before the Company recovered its production
advances and because CPV's principal customers did not renew their production
agreements with CPV in 1995, the Company elected to suspend CPV's production
activities at the end of 1995, though the Company continued to market CPV's
library. In 1996, the Company terminated all of CPV's activities and in the
first quarter of 1997 sold a portion of the rights to the CPV library to the
former CPV shareholders.

CURRENT DEVELOPMENTS

         TeleSelect. The Company, Philips Media B.V. ("Philips") and Royal PTT
Netherlands NV ("KPN") established TeleSelect B.V. ("TeleSelect"), a 
Netherlands joint venture. TeleSelect was formed to create joint ventures with 
European cable operators to enable them to provide conditional access services 
such as pay-per-view, near video on demand and electronic retailing to their
subscribers. On April 3, 1996, the Company sold its TeleSelect interest to
Philips and KPN for approximately $3.2 million, an amount equal to its cash
investment in TeleSelect.

         Multimedia Games. The Company formed a joint venture with TV Games,
Inc. ("TVG"), a wholly-owned subsidiary of Multimedia Games, Inc. ("MGAM") and
American Gaming Network J.V. ("AGN"), to jointly develop and promote high 
stakes proxy play Class II tribal bingo games. The Company contributed 
approximately $1.4 million of intellectual property, which the Company had 
acquired from MGAM for cash and notes, and working capital to AGN's capital. 
In related transactions, the Company acquired for cash and notes 275,000 shares 
of MGAM's outstanding stock and a warrant to acquire an additional 175,000 
shares at an exercise price of $3.50 per share (the "MGAM Warrants").

         The parties were unable to agree on a business plan or a strategy for
going forward with AGN. Pursuant to a Purchase Agreement dated June 28, 1996,
the parties resolved their differences with the Company giving up its interest
in AGN and the 275,000 shares of MGAM stock in exchange for (i) the 
cancellation of an aggregate of $775,000 of liabilities owed to MGAM and TVG, 
(ii) $100,000 pursuant to a note due on July 25, 1996 and (iii) $400,000 due 
pursuant to a note due in three years. The Company retained the MGAM warrant. 
The shares underlying the MGAM warrant are transferable pursuant to a currently 
effective registration statement but are subject to a lockup agreement which 
requires MGAM's investment bankers consent to a sale of the shares.

         Spector Entertainment Group, Inc. In the fourth quarter of 1996, the
Company determined that SEG was no longer a strategic fit with its core adult
entertainment business. On February 7, 1997, and pursuant to a Settlement
Agreement (the "SEG Settlement Agreement") dated January 29, 1997 among the
Company, SEG and the Spector Group, the Company conveyed all of the issued and
outstanding shares of the common stock of SEG to certain members of the Spector
Group in exchange for the 700,000 shares of the Company's common stock
previously issued in the SEG Merger.

         Edward M. Spector resigned from the Company's Board of Directors. As
provided for in the SEG Settlement Agreement, the Company also entered into a
Transponder Services Agreement with SEG pursuant to which the Company will
provide transponder services to SEG for monthly payments of $80,000 for two
years. SEG has the right to terminate the agreement on ninety days prior 
written notice. The parties to an August 14, 1995 letter agreement which 
granted certain members of the Spector Group a put to sell all of the stock of 
United Transactive Systems, Inc., for a formula determined number of shares of 
the Company's common stock, also entered into a Termination Agreement dated as 
of February 7, 1997 terminating the August 14th agreement and suspending the
Spector Group's prior exercise of the put.

         Emerald Media. Pursuant to agreements dated as of August 30, 1996, the
Company began providing transponder services to Emerald Media, Inc. ("EMI"),
which owns and operates Eurotica, an explicit television network distributed in
the C-band DTH market. The Company also licenses adult films and the "Eurotica"
trade name and related identity to EMI. EMI also granted the Company an option
to acquire its business or stock for a formula determined amount. EMI expanded
its operations and now operates four explicit television networks in the C-band
DTH market. On March 1, 1997, the Company's agreements with EMI were modified
and now the Company provides transponder services on two transponders to EMI 
and handles playback for two of EMI's networks from its Operations Facility. 
The Company's option to acquire the EMI business or stock was revised with a 
new exercise price of $755,000.

         Operations Facility. In the second quarter of 1995, the Company 
entered into agreements with IBM and others to construct the Operations 
Facility at its New York City headquarters. Approximately $2.1 million of the 
Operation Facility's cost was to be financed by a capital lease with IBM Credit
Corporation ("ICC"). IBM did not deliver the video file servers and tape
archives, approximately $600,000 worth of equipment, and after making an 
initial $435,000 lease payment, the Company terminated the lease and did not 
make any further payments.

         The Company reached an agreement with IBM and ICC and entered into a
superseding equipment lease agreement. Under the agreement ICC provided an
additional $525,000 of financing which the Company used to purchase video file
servers and tape archives from Digital Equipment Corporation ("DEC"). IBM and
ICC agreed to reduce the monthly lease payments to $37,000 per month and the
Company began making lease payments in February, 1997. The Company is currently
using the Operations Facility to playback three of its own networks and two
networks for EMI.

         CVS Partners. On March 6, 1996, pursuant to a General Partnership and
Contribution Agreement dated January 27, 1996, the Company contributed the
assets of Cable Video Store and certain other assets to CVSP, a partnership
owned 75% by the Company and 25% by WCTV, a wholly-owned subsidiary of WilTech.
The Company and Vyvx, Inc. ("Vyvx") entered into service agreements with CVSP 
to provide certain services.

         Satellite distribution of the network terminated on March 31, 1997. 
The Company and WCTV have determined to wind down CVSP and the parties are
formulating a dissolution plan.

         Refinancing. The Company and certain of its subsidiaries (referred to
herein and in the PNC Credit Agreement (as defined below) as "Obligors") and 
PNC Bank, N.A., as successor-in-interest to Midlantic Bank, N.A. ("PNC"), were
parties to an Amended and Restated Loan and Security Agreement, as amended (the
"PNC Credit Facility") pursuant to which PNC provided a credit facility to the
Company. The PNC Credit Facility had an outstanding principal amount of
approximately $14.6 million at December 31, 1996. As part of the PNC Credit
Agreement, the Company issued a warrant to acquire 100,000 shares of the common
stock of the Company.

         Pursuant to a Settlement Agreement (the "PNC Settlement Agreement")
dated January 15, 1997, by and among PNC, the Company and the Obligors, the
Company paid PNC $9.6 million, issued a $400,000 two-year promissory note and
granted a warrant (the "PNC Warrant") to purchase 600,000 shares of common 
stock in satisfaction of the PNC Credit Facility. PNC released its security 
interest in the Company's assets.

         The PNC Warrant supersedes the warrant previously issued to PNC. The
PNC Warrant exercise price is $2.0625 per share and is exercisable until
December 8, 2004. The Company granted PNC registration rights with respect to
the shares of common stock underlying the PNC Warrant pursuant to the terms of 
a Registration Rights Agreement.

         Pursuant to a Loan and Security Agreement dated January 15, 1997, 
which was assigned to Darla L.L.C. ("Darla"), Darla provided a credit facility 
(the "Darla Credit Facility") to the Company consisting of a $10.5 million term 
loan and a revolving Credit Facility of up to $3.5 million. The term loan was 
used to satisfy the $9.6 million cash payment provided for under the PNC 
Settlement Agreement and to pay the loan commitment fee. The Darla Credit 
Facility matures in 30 months with quarterly amortization totaling $2.5 million 
of the principal in the last year of the loan. The loan bears interest at 5% 
over the Citibank prime rate but not less than 13%. Three percent of the 
interest may be accrued and added to the principal of the loan and will be 
forgiven if the Darla Credit Facility is paid in full within two years. As of 
March 31, 1997, the Company has drawn down approximately $1.8 million of the 
revolving Darla Credit Facility.

         As part of this transaction, the Company issued 24,250 shares of $100
face value Convertible Preferred Stock Series 1997-A (the "Preferred Stock").
The terms of the Preferred Stock are set forth in a Certificate of Designation
of Preferences and Rights - Convertible Preferred Stock Series 1997-A. The
Preferred Stock provides for an 8% coupon payable, at the Company's election,
with additional Preferred Stock. The Preferred Stock is convertible after two
years into common stock of the Company at a 10% discount from the then current
market price of the Company's common stock. The Company entered into a
Registration Rights Agreement with Darla providing for registration of the
shares of common stock underlying the Preferred Stock.

         As part of the Loan Agreement, the Company entered into various
agreements with Darla pledging the stock of all of its domestic operating
subsidiaries and HVC and granting Darla a security interest in the Company's
domestic assets.

         CPV. Pursuant to a Program Rights Agreement effective as of February
10, 1997, the Company sold the domestic rights and international home video
rights to the CPV library to MRG Entertainment, Inc. ("MRG") for $170,000. MRG
is owned by the shareholders of CPV prior to CPV's acquisition by the Company.

GOVERNMENTAL REGULATIONS

         Domestic Networks. Congress enacted the Telecommunications Act of 1996
(the "Act"), a comprehensive overhaul of the Federal Communications Act of 1934.
The Act contains several provisions which may impact the Company. (All Section
references which follow refer to the Act.)

         Section 505 requires full audio and video scrambling of channels which
are primarily dedicated to sexually explicit programming. If a multi-channel
video programming distributor (which includes a cable system operator) cannot
comply with the full scrambling requirement, then the channel must be blocked
between 6:00 AM and 10:00 PM. The Spice Networks feature "sexually explicit"
programming within the contemplation of Section 505. While the Company fully
scrambles its signal, several of the Company's cable affiliates lack the
technical capability to fully scramble the audio portion of the signal.

         The Company filed an action in Delaware District Court challenging the
constitutionality of Section 505. The District Court granted the Company's
application for a temporary restraining order enjoining enforcement of Section
505. However the Company's application for a preliminary injunction was denied
on November 8, 1996 though the District Court stayed enforcement of Section 505
pending review by the Supreme Court. On March 24, 1997, the Supreme Court
affirmed the District Court's decision. It is anticipated that Section 505 will
take effect on or about May 1, 1997.

         If Section 505 takes effect on May 1, 1997, the Company's revenues 
will be adversely affected. While the amount of the reduction depends on 
several factors some of which are outside of the Company's control, the Company
estimates the revenue reduction will be between $1.0 million and $2.0 million
for 1997.

         The Act will also affect the Company's businesses in other ways. The
principal purpose of the Act was to promote deployment of advanced
telecommunications and information technologies in the marketplace by
deregulating pricing in the cable television industry and increasing 
competition in the telecommunications industry by permitting the entry of the 
cable and telephone companies into each other's markets. The effect of 
increased competition on the Company's networks is unclear at this point in 
time.

         On-Line Services. CyberSpice, the Company's adult oriented on-line
service, may also be affected by the Act. The Act makes it a criminal offense 
to transmit to minors "indecent" content on-line and over the Internet. However 
a person providing adult content on-line will not be subject to prosecution 
under the Act if the provider has taken good faith reasonable efforts to 
prevent or restrict access to minors. While the Company believes that 
CyberSpice does not contain any "indecent" material and thus complies with the 
Act, the Company is exploring various options for CyberSpice with a view to 
increasing its revenues. If CyberSpice, or portions thereof are converted to 
"pay" sites, the Company intends to install safeguards limiting access to 
CyberSpice to persons who are not minors which should satisfy the statutory 
safe haven.

         The constitutionality of this provision was challenged by unrelated
third parties and a District Court has issued a temporary restraining order
enjoining enforcement of this provision. The Supreme Court recently heard oral
arguments in this case.

         Currency Rates and Regulations. The Company's foreign operations are
subject to the risk of fluctuation in currency exchange rates and to exchange
controls. The Company cannot predict the extent to which such controls and
fluctuations in currency rates may affect its operations in the future or its
ability to remit dollars abroad. See Note 3 to the consolidated financial
statements "Summary of Significant Accounting Policies - Foreign Currency
Translation".

EMPLOYEES

         At February 28, 1997, the Company had a total of 97 employees.



<PAGE>


Item 2.    Properties

The Company leases the following locations(1):

         Headquarters:
         536 Broadway                                   24,750 square feet(2)
         New York, New York 10012

         Other offices:
         2716 Ocean Park Blvd., Suite 1007
         Santa Monica, CA 90405                          2,625 square feet

         1755 Park Street, Suite 200
         Naperville, IL 60563                              330 square feet

         Home Video Channel Limited
         Aquis House, Station Rd.
         Hayes, Middlesex UB3 4DX
         United Kingdom                                  5,020 square feet

         Danish Satellite TV a/s:
         Holger Danskesvej
         40000 Copenhagen, Denmark                       2,925 square feet

The Company believes its leased locations are suitable and adequate for the
conduct of the Company's business.

(1)  The Company previously leased offices from Margate Associates, an 
     affiliate of the former SEG shareholders, which was used by SEG. SEG was 
     split off by the Company on February 7, 1997 and as a consequence, the 
     Company has no further liability under this lease.

(2)  The Company also uses a portion of the roof at its headquarters for
     equipment relating to the Operations Facility.

Item 3.    Legal Proceedings

         The Company instituted a proceeding in the Delaware District Court
against the Federal Government, Graff Pay-Per-View Inc. v. Janet Reno, et. al.
which was consolidated with a prior action filed by Playboy Entertainment 
Group, Inc. (Civil Action No. 96-94/96-107 JJF), challenging the 
constitutionality of Section 505 of the Telecommunications Act of 1996. As 
described above in "GOVERNMENT REGULATION, Domestic Networks," Section 505 
requires full audio and video scrambling of channels which are primarily 
dedicated to sexually explicit programming such as the Spice Networks. If a 
multi-channel video programming distributor (which includes a cable system 
operator) cannot comply with the full scrambling requirement, then the channel 
must be blocked during the hours when children are likely to be watching 
television.

         On March 7, 1996, the Court granted the Company's application for a
temporary restraining order, enjoining enforcement of the Section 505. However
the Company's application for a preliminary injunction was denied on November 
8, 1996 though the District Court stayed enforcement pending review by the 
Supreme Court. On March 24, 1997, the Supreme Court affirmed the District 
Court's decision. It is anticipated that Section 505 will take effect on or 
about May 1, 1997. The Company is considering its legal options in connection 
with this action.

         The Company issued notices of default to Capital Distribution, Inc.,
d/b/a Cupid Network Television ("CNT") under the Amended and Restated
Distribution Agreement ("Distribution Agreement") and the Telephone Services
Agreement ("TS Agreement"). CNT responded by obtaining a temporary restraining
order preventing the Company from terminating the agreements and also filed a
Demand for Arbitration. The Company believes that it has the contractual right
to terminate the agreements and will seek such an order in the arbitration.
Hearings in the arbitration began on March 17, 1997; there are several
additional days of hearings which should be concluded by the end of June. There
are no assurances that the Company will be successful in doing so or that the
arbitrator may seek to impose monetary damages as a result of the Company's
actions.

     The Company, through a wholly-owned subsidiary, was a defendant in 
Monopoli Studio, Inc., et. al. v. Cinema Products Video, Inc., et. al. The 
District Court action was dismissed.

         On November 15, 1996 Eric M. Spector, as trustee for the Eric M.
Spector Revocable Living Trust commenced an action in the Delaware Chancery
Court. As part of the SEG Settlement Agreement, the Delaware Chancery Court
Action was dismissed.

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

         There were no matters submitted to a vote of security holders during
the fourth quarter of the fiscal year ended December 31, 1996.

                                     PART II

Item 5.    Market for Registrants Common Equity and Related Stockholder Matters

           The Company's common stock is presently traded on The Nasdaq 
SmallCap Market under the symbol "SPZE."

           The following table sets forth, for the calendar period indicated,
the per share range of high and low sales prices for the Company's common stock
as reported on The Nasdaq National Market through May 31, 1996 and from June 1,
1996 on the Nasdaq SmallCap Market.


<PAGE>

<TABLE>
<CAPTION>


                                            High              Low
1995

<S>                                         <C>               <C>  
         First Quarter                      $11.38            $9.50
         Second Quarter                     $12.00            $8.38
         Third Quarter                      $10.75            $8.25
         Fourth Quarter                     $ 7.88            $3.88

1996

         First Quarter                        $5.00           $3.13
         Second Quarter                       $3.75           $2.50
         Third Quarter                        $3.44           $2.00
         Fourth Quarter                       $2.63           $1.00
</TABLE>

         The Company currently has approximately 1,600 beneficial shareholders.

         The Company has never paid cash dividends on its common stock and
intends to retain future earnings to support the growth of its business and,
therefore, does not anticipate paying any cash dividends in the near future. 
The payment of any future cash dividend on common stock will be determined by 
the Company's Board of Directors in light of conditions then existing including 
the Company's earnings, financial condition, capital requirements and other 
factors.  In addition the Company's current credit facility with Darla L.L.C. 
contains provisions which restrict payments of cash dividends on its common 
stock.


<PAGE>


ITEM 6.  Selected Financial Data

         The following table is a summary of selected financial data for the
Company for the periods indicated, which has been restated for discontinued
operations:
<TABLE>
<CAPTION>

For the Years ended December 31                    1996            1995            1994            1993            1992
-----------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>            <C>               <C>             <C>              <C>         
Revenues:                                      $33,213,000    $   43,292,000    $ 43,232,000    $ 20,528,000     $ 15,045,000
                                               --------------  ---------------  ------------   --------------- --------------
Operating expenses:
  Cost of goods of sold
                                                    94,000           196,000         123,000         329,000         453,000
  Salaries, wages and benefits                   7,592,000         9,722,000       6,665,000       4,318,000       2,543,000
  Producer royalties and library amortization    5,481,000         6,662,000       7,096,000       4,075,000       3,374,000
  Satellite costs                                1,884,000        10,191,000       9,670,000       5,985,000       3,363,000
  Selling, general and administrative           11,354,000        17,646,000      13,472,000       7,719,000       3,956,000
  Depreciation and amortization of fixed
    assets and goodwill                          7,499,000         2,063,000       1,156,000         465,000         181,000
  Provision for write-downs and non-recurring items:
     Investment in American Gaming Network        (875,000)        2,039,000
     Goodwill related to Guest Cinema, Inc.                          871,000
     Film and CD-ROM costs                                         3,967,000
     Restructuring charges                                         3,655,000
                                            --------------     --------------  --------------  --------------  --------------
  Total operating expenses                      33,029,000        57,012,000      38,182,000      22,891,000      13,870,000
                                            --------------     --------------  --------------  --------------  --------------
Operating income (loss)                            184,000       (13,720,000)      5,050,000      (2,363,000)      1,175,000
Interest expense                                 6,418,000           914,000         299,000         289,000         174,000
Minority interest                               (1,062,000)                          500,000
                                               --------------  --------------  --------------  --------------  --------------
Income (loss) from continuing operations
  before provision for income taxes and equity 
  in undistributed earnings                     (5,172,000)      (14,364,000)      4,251,000      (2,652,000)      1,001,000
   Income tax (benefit) provision                  192,000           734,000       1,298,000         (54,000)         83,000
                                              --------------  --------------   --------------  --------------   -------------
Income (loss) from continuing operations
  before equity in undistributed earnings       (5,364,000)      (15,368,000)      2,953,000      (2,598,000)        918,000
Equity in the undistributed earnings of
  HVC, net of the amortization of goodwill                                                             4,000
                                               --------------  --------------- --------------- ---------------  -------------
  Income from continuing operation              (5,364,000)      (15,368,000)      2,953,000      (2,594,000)        918,000
                                               -------------- ---------------  --------------- ---------------   ------------
Discontinued operations:
  Income from discontinued operations of SEG        35,000           242,000         213,000         225,000         309,000
  Loss on disposal of SEG                       (2,571,000)
                                               --------------  --------------- --------------- --------------- ---------------
  Income (loss) from discontinued operations    (2,536,000)          242,000         213,000         225,000         309,000
                                               --------------  --------------- --------------- --------------- ---------------
Net income (loss)                              ($7,900,000)      (15,126,000)      3,166,000     ($2,369,000)      1,227,000
                                               ==============  =============== =============== =============== ===============
Earnings (loss) per share of common stock
Primary
Income from continuing operations                   ($0.48)           ($1.31)          $0.25          ($0.29)          $0.10
Discontinued operations                              (0.22)             0.02            0.02            0.03            0.03
                                              ==============  ==============   =============  =============== ===============
Net income                                          ($0.70)           ($1.29)          $0.27          ($0.26)          $0.13
                                               ==============  ==============  ============== =============== ===============

Fully diluted
Income from continuing operations                   ($0.48)           ($1.31)          $0.24          ($0.29)          $0.09
Discontinued operations                              (0.22)             0.02            0.02            0.03            0.03
                                               --------------   ------------   -------------   -------------   --------------
Net income                                          ($0.70)           ($1.29)          $0.26          ($0.26)          $0.12
                                               ==============  ==============  ============== ===============  ==============

Cash dividends declared per common share                None            None            None           None            None
                                               ==============  ==============  ==============  ============== ===============
Weighted average number of shares outstanding:
     Primary
                                                 11,351,000       11,747,000       11,909,000       8,954,000       9,662,000
                                               ==============  ==============  ==============  ============== ===============
     Fully diluted
                                                 11,351,000       11,747,000       12,215,000       8,954,000      10,029,000
                                               ==============  ==============  ==============  ============== ===============
Total assets                                     89,312,000       99,199,000       37,458,000      21,221,000      10,125,000
                                               --------------  --------------  --------------  -------------- ---------------
Current portion of long-term debt and
  obligations under capital leases                5,743,000        5,623,000        3,702,000         446,000       1,025,000
                                               --------------  --------------  --------------  -------------- ---------------
Long-term debt and obligations
  under capital leases less current portion      68,411,000       71,311,000        1,049,000       1,608,000       1,303,000
                                               --------------  --------------  --------------  -------------- ---------------
Shareholders' equity                         $    2,294,000    $   8,069,000       23,460,000       8,583,000       4,255,000
                                              ===============  ==============  ==============  ============== ===============
</TABLE>



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

1996 COMPARED TO 1995

         For the year ended December 31, 1996, the Company reported a net loss
of $7.9 million, as compared to a net loss of $15.1 million in 1995. The 
current year's loss is attributable to a loss from continuing operations of 
$5.4 million and a loss from discontinued operations of $2.5 million. The loss 
from continuing operations is primarily attributable to continued losses from 
the Cable Video Store and Eurotica networks. Also contributing to the loss from
continuing operations were losses associated with the CPV operation as well as
the non-cash loss relating to the capitalization of the AT&T transponder lease.

         Revenues. Total revenues from continuing operations for the year ended
December 31, 1996 decreased by approximately $10.1 million to approximately
$33.2 million compared to total revenues of approximately $43.3 for the year
ended December 31, 1995. The decline was primarily attributable to declines in
revenues from the C-band DTH market ($6.2 million), CPV ($2.8 million) and HVC
($3.6 million), totaling approximately $12.6 million. Offsetting these declines
was the revenue growth of Spice in the domestic cable and the DBS markets
totaling approximately $2.9 million.

         In the domestic C-band DTH market several competing adult explicit
services were launched during 1994 and 1995. These explicit adult services
competed directly with Spice Networks in the C-band DTH market and have 
resulted in a decline in revenues in this market of approximately $6.2 million 
for the year ending December 31, 1996, as compared to the same period in 1995. 
These explicit adult services are not distributed by cable operators and 
therefore, do not have an impact on Spice Networks in the cable market. As a 
result of the decline in the Spice Networks' C-band DTH revenues, the Company 
suspended the distribution of the Spice Networks in this market on August 31, 
1996.

         As part of the Company's restructuring plan instituted in 1995 and 
1996 and the continued projected decline in the C-band market, the Company 
executed a plan in September of 1996 to transmit its programming on a digital
platform, which can not be received by the C-band market. The Company expects 
to realize significant reductions in the costs resulting directly from the 
digital conversion (see discussion of satellite expenses).

         The revenues from CPV decreased as a result of the company's decision
to cease production activity in the beginning of 1996.

         In the United Kingdom, two new competing adult services were launched
in the fourth quarter of 1995. The new adult services compete directly with The
Adult Channel, the Company's United Kingdom satellite delivered adult network.
In addition, in the second half of 1995, The Adult Channel switched satellites
to a satellite which could not be viewed by many of its existing subscribers
without the purchase of new equipment. These two factors have resulted in a
decline in revenues of approximately $3.6 million for the year ended December
31, 1996, as compared to the same period in 1995

         Revenues from the Spice Networks cable market increased by
approximately $1.8 million for the year ended December 31, 1996, as compared to
the same periods in 1995, a gain of approximately 12.5%. The Company increased
the number of addressable households with access to the Spice Networks at
December 31, 1996 by approximately 20% over the number of such addressable
households at December 31, 1995. The percentage increase in addressable
subscribers did not translate into the same percentage increase in revenues due
to normal delays in realizing revenues from new subscribers and a reduction in
the Company's share of revenues (referred to as license fees in the Company's
agreements with cable operators) from cable sales of the Spice Networks. This
reduction in license fees is a result of increased competition in the Company's
market segment and the growing concentration in the ownership of cable systems
by multiple system operators ("MSOs"). Management expects this downward trend 
to slow and for license fees to stabilize.

         Salaries. Total salaries from continuing operations for the year ended
December 31, 1996 decreased by approximately $2.1 million to approximately $7.6
million compared to total salaries of approximately $9.7 for the year ended
December 31, 1995. The decline was a result of the implementation and execution
of the restructuring plan that included the consolidation and elimination of
some employee functions which translated into significant reductions of the
Company's personnel. Under the same restructuring plan, the Company entered 
into separation agreements with two of its then executive officers which 
translated into an annual expense saving of approximately $1.0 million.

         Royalties. Producer royalties and film cost amortization from
continuing operations decreased by approximately $1.2 million for the year 
ended December 31, 1996, as compared to the same period in 1995. The decline is
primarily attributable to the reduction in film cost amortization resulting 
from the write-down of CPV's film and CD-ROM costs in the fourth quarter of 
1995.

         Satellite. In December 1995, the Company entered into a service
agreement with AT&T for the use of five transponders on Telstar 402R for the
satellite's useful life, estimated to be 12 years. The Company is using the
transponders for broadcast of its domestic networks. The AT&T transponder
agreement is being accounted for as a capital lease as required by Statement of
Financial and Accounting Standards No. 13, "Accounting for Leases". As a 
result, the Company is required to establish an asset and a corresponding 
offsetting interest bearing obligation equal to $58.7 million, the present 
value of the expected future minimum lease payments at the lease inception. 
The asset is depreciated, on the straight-line method, over the satellite's 
estimated 12 year useful life. The actual lease payments are applied against 
the principal and interest of the obligation similar to a fully amortizing
mortgage loan. For the year ended December 31, 1996 the Company recognized 
total expenses attributable to the lease of approximately $10.3 million 
comprised of depreciation expense of approximately $5.3 million and interest 
expense of approximately $5.0 million. Had the lease been accounted for as an 
operating lease, the Company would have recognized approximately $2.0 million 
less in total expenses attributable to the AT&T transponder lease for the year 
ended December 31, 1996.

         Satellite, playback and uplink expenses from continuing operations for
the year ended December 31, 1996 have decreased by approximately $8.3 million,
as compared to the same period in 1995. The decrease is primarily attributable
to the capitalized AT&T transponder lease as compared to the treatment during
the same period in 1995 when domestic transponder expenses were accounted for 
as operating leases. Had the AT&T lease been accounted for as an operating 
lease, the Company's satellite expense for the year ended December 31, 1996 
would have been approximately the same as 1995.

         In September 1996, the Company completed the project that enabled the
digital compression and transmission of its video programming to its domestic
cable systems. Digital compression and transmission allows a single transponder
to carry the programming for multiple digitally compressed Networks. 
The Company has transferred three of its networks onto a single transponder, 
which has resulted in an annual cost saving to the three networks of 
approximately $3.1 million and has made available two other transponders for 
productive use by the Company.

         Selling, General and Administrative Expenses. Selling, general and
administrative expenses from continuing operations for the year ended December
31, 1996 decreased by approximately $6.3 million as compared to the same 
periods in 1995. The decrease is attributable to, among other items, the 
suspension of the exploration of international opportunities and decrease in
marketing, advertising and sales promotions. Also, the implementation of the 
restructuring plan has contributed to the reduction of selling, general and 
administrative expenses by suspending the exploration for new businesses. The 
Company has also reduced selling, general and administrative expenses by 
amending the Company's travel policies and reducing employee benefits as well 
as overhead expenditures.  Offsetting these reductions is an increase in legal 
fees primarily attributable to litigation with the government over Section 505 
of the Telecommunications Act of 1996 and an increase in bad debt expense 
relating to the collection of receivables at CPV which was closed down during 
1996.

         Depreciation of Fixed Assets. Depreciation of fixed assets and the
amortization of goodwill from continuing operations for the year ended December
31, 1996 increased by approximately $5.4 million as compared to the same period
in 1995. The increase was primarily attributable to the depreciation of the
capitalized AT&T transponder lease as compared to 1995 when domestic 
transponder leases were treated as operating leases and reflected in satellite
costs.

         Interest Expense. Interest expense from continuing operations 
increased by approximately $5.5 million for the year ended December 31, 1996, 
as compared to the same period in 1995. $5.0 million of the increase is 
attributable to the interest expense recognized under the capitalized AT&T 
transponder lease during 1996, as compared to 1995 when the domestic 
transponder leases were accounted for as operating leases. The remaining 
increase of $0.5 million is primarily the result of the increased average loan 
balance associated with the PNC debt in 1996 as compared to 1995.

FACTORS THAT MAY AFFECT FUTURE RESULTS

         The Company expects to realize continued savings from the execution of
the plan to dispose unprofitable and non-core adult businesses. The Company
expects significant revenue growth in 1997 and beyond from its international
operations and the sale of available transponder capacity. The Company's
international operations have targeted and have or expect to sign distribution
contracts in numerous foreign markets, including the Japanese, German,
Australian, and Latin American markets. These distribution agreements are
projected to translate into additional revenue sources at minimal additional
costs. With the completion of the project to digitally compress and transmit
video programming to the domestic cable systems, the Company has increased its
transponder capacity and expects to realize incremental revenues from the sale
of available transponder capacity.

         On March 31, 1997, the Company amended the terms of the satellite
transponder lease with AT&T. As a result of the amendment, the lease will be
reclassified to an operating lease on March 31, 1997 and will give rise to a
non-recurring gain in 1997 of approximately $2.0 million as compared to a $2.0
million charge to income in excess of the lease payments in 1996.

         The Company's domestic cable revenues are expected to be adversely
affected as a result of the Supreme Court's affirmation of Section 505 in 
March, 1997 (See GOVERNMENT REGULATIONS "Domestic Networks"). The effect on 
revenues is estimated to be from $1.0 to $2.0 million in 1997.

         During 1996 the Company has experienced continued downward pressure on
its license fees but expects license fees to level off in the near future. The
Company expects that revenue from projected additional subscribers will offset
the effects of any reductions in the license fees.

1995 COMPARED TO 1994

         For the year ended December 31, 1995 the Company reported a net loss 
of $15.1 million as compared to net income of $3.2 million in 1994. The 1995 
loss is primarily attributable to a non-recurring restructuring charge of
approximately $3.7 million and approximately $6.9 million of provisions to
write-down investments including film and CD-ROM costs, the investments in AGN
and goodwill relating to the acquisition of PSP, which owns the technology
utilized by Guest Cinema.

         The restructuring charge and provisions for write-down of investments
resulted from a restructuring plan intended to streamline and refocus the
Company on its profitable core businesses.

         The restructuring terminated capital intensive or peripheral 
businesses and other activities that the Company could no longer afford. The 
Company suspended exploration of new businesses throughout Europe other than 
those related to the globalization of its adult networks and programming. It 
suspended the production of movie and television series for 1996 by CPV and 
substantially reduced CPV's overhead. The Company suspended its activities in 
developing, marketing and supporting AGN. The Company also restructured its 
senior management and reduced its staff.

         Revenues. Total revenues from continuing operations for the years 
ended December 31, 1995 and 1994 were approximately the same ($43.3 million 
versus $43.2 million).

         In the C-band DTH market several competing adult explicit services 
were launched during 1994 and 1995. These explicit adult services compete 
directly with the Spice Networks in the DTH market and have resulted in a 
decline in revenues of $0.6 million or 8.0% in this market. These explicit 
adult services are not currently distributed by cable operators and therefore, 
do not have an impact on the Spice Networks revenues in the cable market.

         Revenues from the Spice Networks cable market increased $0.8 million
despite the loss of access to one million Spice cable subscribers (8% of 
Spice's accessible subscriber base) on July 1, 1995 from the Time Warner New 
York Cable System. This system represented annualized revenues of approximately 
$2 million. Offsetting the loss of revenue from Time Warner New York was the 
addition of new cable systems, including other Time Warner systems, and growth 
in the subscriber base of existing systems. While the Company was able to 
increase its access to Spice Networks addressable households by approximately 
50% in 1995, this increase did not translate into greater revenues because of 
downward pressure on the Company's license fees including lower license fees 
on the subscribers acquired as part of the AEC acquisition. This is a result of 
increased competition in the Company's market segment and the growing 
concentration in the ownership of cable systems. The addition of new cable 
subscribers and the increased distribution as a result of distribution of the 
Spice Network on DirectTV and other outlets for distribution should continue 
the growth in the Spice Networks' subscriber base.

         HVC's two networks and the start up of Eurotica contributed $1.1 and
$0.6 million to the increased revenues while CPV and Cable Video Store
experienced declines in revenues of $1.9 million and $0.6 million, respectively.
HVC's revenues were less than projected because The Adult Channel's revenues
declined in the fourth quarter of 1995 as a result of the launch of two
competitive services in the United Kingdom and the switch to a satellite which
could not be received by many existing subscribers without the purchase of
additional equipment.

         Salaries. Salaries, wages and benefits from continuing operations
increased by approximately $3.1 million (45.8%) for the year ended December 31,
1995 over the similar period in 1994. The increase resulted primarily from
higher levels of staffing believed necessary to maintain and increase the
Company's subscriber base, explore new network opportunities, produce CD-ROMs
and the Company's on-line service and explore other business opportunities such
as video dial tone delivery systems and international ventures.

         The Company has restructured its operations and has reduced its staff,
including terminating the employment agreements of all of the executives
responsible for exploring international opportunities and approximately 30 of
CPV's employees. Under the same restructuring, the Company reduced its salary
expense by amending employment agreements and entering into separation
agreements with two officers who resigned.

         Royalties. Producer royalties and library amortization from continuing
operations decreased by approximately $0.4 million (6.1%). The decline was
primarily attributable to a decline in royalties payable to the studios
attributable to the decrease in Cable Video Store network revenues.

         Satellite Expense. Satellite costs from continuing operations, which
include satellite transponder, playback and uplink costs, increased by
approximately $0.5 million (5.4%) for the year ended December 31, 1995. On May
31, 1995, the Company terminated its domestic transponder lease agreement with
TVN. On April 1, 1995, AT&T began providing transponder services to the Company
at a more economic rate. The Company launched a new European network which
required a transponder. The decrease in domestic satellite transponder costs 
was offset by the addition of the new European transponder.

         Commencing December 1995, the Company began utilizing five 
transponders pursuant to a Transponder Services Agreement with AT&T which has 
been accounted for as a capital lease.

         Selling, General and Administrative. Selling, general and
administrative costs from continuing operations increased by approximately $4.2
million (31.0%) in the year ended December 31, 1995. The increase was
attributable to, among other items, the exploration of international and new
network opportunities, improving the on-air images of the Company's networks,
additional marketing, advertising and sales promotion undertaken to both
maintain and increase the networks' subscriber bases and additional overhead 
due to the expansion of corporate headquarters. During 1995, the Company 
heavily promoted its adult services to combat new competition from other 
networks.

         The restructuring entails a major cost reduction program designed to
reduce selling, general and administrative costs in 1996. The plan is intended
to streamline the operations of the Company's core businesses, suspend the
exploration of new businesses and significantly reduce or eliminate the
activities of non-essential capital intensive operations. The Company has also
taken steps to reduce the amount of leased space used for its operations, 
reduce expenses by amending the Company's travel policies and reduce employee 
benefits and other overhead expenditures.

         The bad debt expense increased by approximately $0.9 million in 1995.
The increase is primarily attributable to a provision for doubtful account on a
receivable owed to the Company by XTV Television, Inc. ("XTV"). The Company has
a distribution agreement with XTV pursuant to which XTV distributes the Spice
Networks in combination with XTV's two explicit adult services in the C-band 
DTH market. In addition MLI has licensed adult movies to XTV. Due to increased
competition in XTV's market, XTV has informed the Company that it is
experiencing financial difficulty and as a result ceased paying the Company its
distribution fee commencing in the third quarter of 1995. By year end, XTV owed
the Company $0.8 million in past due distribution fees and unpaid movie license
fees. The Company is pursuing collection of these amounts but has established a
reserve against these amounts aggregating $0.8 million.

         Depreciation of Fixed Assets and Amortization of Goodwill. 
Depreciation of fixed assets and the amortization of goodwill from continuing 
operations increased by approximately $0.9 million (78.5%) for the year ended 
December 31, 1995 as compared to 1994. The increase is primarily due to the 
increased ownership of HVC resulting from the purchase of the remaining 49% for 
$6.7 million in cash and stock on August 1, 1994. The excess of the purchase 
price over the fair market value of the net assets acquired is being amortized
utilizing the straight-line method over twenty years. Also contributing to the
increase was depreciation incurred on new capital improvements for the 
expansion of the Company's corporate headquarters, which are being amortized 
using the straight-line method over the life of the lease.

         Interest Expense. Interest expense from continuing operations has
increased by approximately $0.6 million (205.7%) for the year ending December
31, 1995 as compared to the same period in 1994. The increase is primarily due
to additional borrowings of $12.3 million during 1995 under the revolving line
of credit.

NON-RECURRING ITEMS

         Guest Cinema - Goodwill. In January 1994, the Company acquired through
the merger of PSP into its wholly-owned subsidiary, Guest Cinema, Inc., a
hotel/motel pay-per-view system. The Company suspended distribution of this
system because the Company projected that the technology would not generate
future cash flows sufficient to support its investment. Therefore, the Company
has incurred an expense of approximately $0.9 million attributable to the
write-down of goodwill created in the acquisition of PSP.

         CPV Library and CD-ROMs. The Company, through its wholly-owned
subsidiary CPV, produced and distributed television, movie productions and
CD-ROMs. In the fourth quarter of 1995, the Company concluded that it was
carrying the film and CD-ROM costs at a net book value materially greater than
its current projected cash flow. Therefore, the Company has realized a one-time
expense of $4.0 million to record the impairment of its investment. Moreover,
the Company has suspended any future productions of films and television series
and the creation of CD-ROMs until such a date that the Company's liquidity
position improves and it believes that these ventures could be profitable.

         American Gaming Network, J.V. and Multimedia Games, Inc. Pursuant to a
Joint Venture Agreement dated June 28, 1995, the Company formed American Gaming
Network ("AGN") with TV Games, Inc., a wholly-owned subsidiary of Multimedia
Games, Inc. ("MGAM"), to develop and promote high stakes proxy play Class II
tribal bingo games and other interactive gaming products. The Company
contributed intellectual property and cash aggregating approximately $1.4
million to AGN's capital.

         In a related transaction, the Company exercised a warrant and 
purchased an aggregate of 275,000 shares of MGAM common stock (the "MGAM 
Shares") for approximately $0.4 million in cash and a note of $0.275 million 
payable August 30, 1996. MGAM also granted the Company additional warrants to 
acquire 175,000 shares of MGAM common stock (the "MGAM Warrant"). MGAM granted 
the Company registration rights for the MGAM Shares and the shares underlying 
the MGAM Warrant.

         On December 11, 1995, the parties executed a letter agreement 
modifying the Joint Venture Agreement which released claims the parties had 
against each other through such date. The parties had been unable to agree on a 
strategy or a business plan for the next twelve months. As a result the Company 
has established a reserve against its investment in AGN. In addition there is 
no assurance that the MGAM Shares or the shares underlying the MGAM Warrant, if
exercised, will be registered or if registered, whether the Company will be 
able to sell such shares, in the near future. The Company also reserved against 
the value of its investment in the MGAM Shares in 1995.

         Restructuring Costs. The Company, in an attempt to return to
profitability, has restructured its operations. The Company has suspended
production of all films, television series and CD-ROM for 1996. It will 
continue to license CPV's library to third parties. As a result of the 
suspended productions, CPV has terminated approximately 30 employees and has 
renegotiated the employment contracts with the two key executives of CPV to 
provide for their early termination as described above. The Company has 
recognized a charge of approximately $0.6 million in 1995 for restructuring 
CPV.

         The Company has also terminated the employment of all of the employees
of Pay-Per-View International, Inc. ("PPVI") at the end of 1995. PPVI employees
were responsible for the development of TeleSelect and exploring other
international opportunities for the Company. In the first quarter of 1996, the
Company sold its interest in TeleSelect and suspended exploration of new
international business opportunities. The Company will continue to pursue its
strategy of globalizing its adult networks and programming.

         The Company has restructured Guest Cinema by terminating the 
employment contract of its President and discontinuing the marketing and use of 
its hotel/motel pay-per-view system.

         Two senior executives, Mark Graff and Leland H. Nolan, have resigned 
as officers of the Company effective December 31, 1995. Messrs. Graff and Nolan
have signed separation agreements (see "Executive Compensation, Employment
Agreements") which are in force through 1998. The Company has also reduced its
staffing in other areas of the Company and reduced overhead.

         The accrued restructuring charge at December 31, 1995 was 
approximately $3.7 million and was comprised of corporate level restructuring 
and the suspension of production activities formerly conducted by CPV. Each 
component involved contraction of the Company's workforce and facilities and 
other miscellaneous costs associated with the restructuring as follows:

Corporate
         Salaries                   $2,750,000
         Facilities and Other          250,000
CPV
         Salaries                      464,000
         Facilities and Other          191,000
                                    ------------
                  Total             $3,655,000

         Management estimates that cash outflows associated with the accrued
restructuring costs will aggregate approximately $2.2 million in 1996, $755,000
in 1997, and $700,000 in 1998.

         Liquidity and Capital Resources. At December 31, 1996, the Company had
a working capital deficit of approximately $6.1 million compared to a surplus 
of approximately $0.1 and $2.8 million at December 31, 1995 and 1994. 
Stockholders' equity at December 31, 1996 was approximately $2.3 million 
compared to approximately $8.1 million on December 31, 1995 and $23.5 million 
at December 31, 1994. The decrease in working capital and Stockholders' equity 
was primarily attributable to the net losses in 1996 and 1995.

         At December 31, 1996, the Company had a credit facility with PNC with 
a principal balance of $14.6 million. On January 15, 1997 the Company entered 
into agreements with PNC and Darla L.L.C. ("Darla") which resulted in the 
replacement of its primary revolving credit line with PNC. PNC settled the 
outstanding balance of the credit line, totaling $14.6 million, for $9.6 
million in cash, a new $400,000 term loan, and 600,000 warrants.

         The Darla agreement provided a term loan of $10.5 million, of which
$9.6 million was used to satisfy the PNC settlement and $0.9 which financed
acquisition fees. This agreement also made available a revolving line of credit
totaling $3.5 million. The term loan and the credit line both mature in 30
months. The agreement contains certain covenants including financial covenants
regarding working capital, tangible net worth, EBITDA, revenues and capital
expenditures.

         Net cash provided by operating activities of continuing operations was 
approximately $3.0 million for the year ended December 31, 1996, compared to 
$0.5 million for the year ended December 31, 1995 and a use of cash in 
operating activities of approximately $3.2 million for the year ended 
December 31, 1994. In 1996 and 1995 the cash from operating activities was 
primarily the result of non-cash adjustments to net income which more than 
offset net losses for the period. The principal adjustments in 1996 were 
depreciation and amortization of fixed assets, goodwill and the library as 
well as a decrease in the accounts receivable and the loss from the 
discontinued operations. Offsetting these sources of cash were a reduction of 
subscription revenues received in advance and the allocation of losses to the 
minority partner of CVSP in 1996, as well as payments of accrued restructuring 
charges.  Principal adjustments in 1995 were the restructuring charges, 
provision for write-down of investments and bad debts, amortization and 
depreciation of fixed assets, film costs, library of movies, and goodwill, 
together with an increase in accounts payable and royalties payable, offset by 
an increase in film costs. The net cash used in operating activities in 1994 
was primarily attributable to the non-cash adjustments to net income which 
more than offset net income for the period. The principal adjustments in 1994 
were increases in the accounts receivable, CD-ROM costs and decreases in 
royalties payable offset by amortization of CD-ROM costs.

         Net cash used in investing activities in continuing operations was 
approximately $0.2 million for the year ended December 31, 1996, compared with 
approximately $10.4 million for the year ended December 31, 1995 and $4.4 
million for the year ended December 31, 1994. The decrease in net cash used in 
investing activities in 1996 as compared to 1995 was primarily attributable to 
significant declines in the purchase of property and equipment and proceeds 
from the sale of the Company's investment in TeleSelect as compared to 
investments in TeleSelect in 1995. The increase in net cash used in investing 
activities in 1995 as compared to 1994 was primarily attributable to greater 
investments in fixed assets and library of movies in 1995 as compared to 1994.

         Net cash used in financing activities of continuing operations was 
approximately $1.4 million for the year ended December 31, 1996, compared with 
cash provided by financing activities of approximately $10.3 and $6.7 million 
for the years ended December 31, 1995 and 1994. The decrease in cash from 
financing activities is primarily attributable to payments of the PNC debt 
($1.0 million) as compared to borrowings from PNC in 1995. Also contributing to 
the decline in cash from financing activities was the treatment of the AT&T 
lease in 1996 as a capital lease as compared to an operating lease in 1995. 
Offsetting these declines in 1996 was a capital contribution by a minority 
partner to CVS Partners and borrowings under the IBM lease. The increase in 
cash provided from financing activities in 1995 as compared to 1994 was the 
increased borrowings from PNC and Imperial Bank in 1995 as compared to 1994. 
Offsetting the increase in cash from PNC and Imperial borrowings was a 
reduction of proceeds from the issuance of common stock and warrants, a capital 
contribution in 1994 related to the AEC merger as well as an increase of loans 
related to parties in 1995 as compared to a decrease in 1994.

Item 8.    Financial Statements and Supplementary Data

           The information required by this Item is included at Pages F-1
through F-34.

Item 9.    Changes in and Disagreements with Accountants on Account and 
Financial Disclosure.

         (a) The Company terminated its audit relationship with its former
auditors, Coopers & Lybrand L.L.P. ("C&L"), on January 9, 1997. C&L's report on
the financial statement for the past two years did not contain an adverse
opinion or disclaimer of opinion, and was not qualified or modified as to
uncertainty. The audit committee of the Board of Directors approved the 
decision to change accountants. During the Company's two most recent fiscal 
years and any subsequent interim period preceding such termination, there were 
no disagreements with the former accountant on any matter of accounting 
principles or practices, financial statement disclosure, or auditing scope or 
procedure, which disagreements, if not resolved to the satisfaction of the 
former accountant, would have caused it to make reference to the subject matter 
of the disagreements in connection with its report. There were no reportable
events of the type described in Item 304(a)(1)(v) (a) through (d) of Regulation 
S-K.

         (b) On February 13, 1997, the Company engaged the firm of Grant
Thornton LLP as its independent auditors to audit its financial statements for
the fiscal period ended as of December 31, 1996.


<PAGE>


                                    PART III

Item 10. Directors and Executive Officers of the Registrant

     Name                  Age   Position, Occupation and Business Experience
     -----                ----   --------------------------------------------
J. Roger Faherty           58    Chairman of the Board of Directors, Chief 
                                 Executive Officer, President and Director.  
                                 Mr. Faherty has been Chairman of the
                                 Board and a Director of the Company since 
                                 December 1991.  In 1991 he was elected as the 
                                 Company's Chief Executive Officer and became
                                 President in 1996.  Beginning in March 1990 
                                 and until joining the Company in December 
                                 1991, he was a consultant to the Company.
Leland H. Nolan            50    Director.   Mr. Nolan  has been a 
                                 Director of the Company since 1988 and from 
                                 that time and until the end of 1995, held 
                                 various executive positions, most recently 
                                 as Vice Chairman, International Initiatives. 
                                 Prior to joining the Company, he was Chairman 
                                 of the Board of Orange Entertainment Company, 
                                 a video production and distribution company

Dean R. Ericson            51    Director.  Mr. Ericson was elected a Director 
                                 of the Company on January 24, 1994.  Mr. 
                                 Ericson is co-founder and President, since
                                 1987, of Media Management Services, Inc., a 
                                 Denver-based consulting practice providing 
                                 technology and business development services 
                                 to selected media and telecommunications 
                                 companies.  He was formerly Vice President of 
                                 New Business Development, Director of Pay
                                 Television, and Manager of Special Markets at 
                                 American Television and Communications 
                                 Corporation.
R. Christopher Yates       54    Director.  Mr. Yates was elected a Director of 
                                 the Company on July 23, 1996.  He has been the 
                                 Chief Executive Officer of HVC since HVC's
                                 1989 formation. Since the end of 1994, HVC has 
                                 been a wholly-owned subsidiary of the Company. 
                                 Prior to 1989, he was the Chief Executive
                                 of Cabletel Communications Ltd. which was 
                                 owned by the Ladbrook Group PLC and Comcast 
                                 Communications Inc. and operated a fully 
                                 interactive cable system in West London.  Mr. 
                                 Yates is also a founding member of the Cable 
                                 Television Association in the U.K. and has 
                                 served in various capacities with that 
                                 organization.
Rudy R. Miller             49    Director.  Mr. Miller was elected a Director 
                                 of the Company on July 23, 1996.  He has 
                                 served as Chairman, President and Chief 
                                 Executive Officer of Miller Management Corp., 
                                 a financial consulting firm, since 1972 and of 
                                 Miller Capital Corp., a venture capital, 
                                 financial services and investor relations 
                                 firm, since 1993.  Mr. Miller was Chairman, 
                                 President and Chief Executive Officer of 
                                 StatesWest Airlines, Inc. operating as US Air 
                                 Express from 1986 to 1993.  That company 
                                 petitioned for protection under Chapter 11 of 
                                 the U.S. Bankruptcy Code in December 1992 
                                 which was dismissed by the Bankruptcy Court 
                                 in September 1994.  Mr. Miller was also a 
                                 member of the board of directors of American 
                                 West Airlines from 1982 to 1986 and a member 
                                 of the board of directors of Jacor 
                                 Communications Inc., one of the largest radio
                                 broadcasting groups in the United States.
Steve Saril                43    Director, Senior Vice President, Sales & 
                                 Marketing.  Mr. Saril has been an executive 
                                 officer of the Company since 1989 and is 
                                 currently its Senior Vice President of Sales
                                 and Marketing. He was elected as a
                                 Director on September 26, 1996.  Between 1979 
                                 and 1989, he was a Director of National 
                                 Accounts for Showtime Networks, Inc., an
                                 operator of cable movie networks.
Harlyn C. Enholm           55    Executive Vice President, Chief Financial 
                                 Officer. Mr. Enholm was appointed as the 
                                 Company's Executive Vice President and Chief
                                 Financial Officer on May 20, 1996 having 
                                 previously worked for SEG as its Chief 
                                 Financial Officer since June, 1994.  Between 
                                 joining SEG in 1994 and 1991, he was a 
                                 self-employed consultant.  From 1984 to
                                 1991 he was Executive Vice President and Chief 
                                 Financial Officer of The Geneva Companies.
Rich Kirby                 36    Senior Vice President, Network Operations.  
                                 Mr. Kirby has been an executive officer of the 
                                 Company since 1988 and is currently its
                                 Senior Vice President, Network Operations.  
                                 Between 1985 and 1988, Mr. Kirby was Vice 
                                 President of Operations for Reiss Media, which
                                 operated Request Television.
Daniel J. Barsky           41    Senior Vice President, General Counsel & 
                                 Secretary.   Mr. Barsky has been an executive 
                                 officer of the Company since 1995 and is 
                                 currently its Senior Vice President, General 
                                 Counsel and Secretary.  Prior to joining the 
                                 Company, he was a partner in Dornbush Mensch 
                                 Mandelstam & Schaeffer, which acted as the 
                                 Company's legal counsel from 1989 to 1994.
<PAGE>


Item 11.      Executive Compensation

         The following table sets forth, for the fiscal years ended December 
31, 1996, 1995 and 1994, compensation paid by the Company for services in all
capacities to the Chief Executive Officer, the former Chief Operating Officer
and the four most highly compensated executive officers during 1996.

<TABLE>
<CAPTION>

                                            Summary Compensation Table


                                        Annual Compensation                            Long-Term Compensation
                                ------------------------------------    ------------------------------------------------------
                                                         
                                                           Other         Restricted      Securities
                                                           Annual          Stock        Underlying              All Other
         Name and                            Salary      Compensation      Awards          Options             Compensation1
    Principal Position           Year         ($)           ($)             ($)             (#)                    ($)
----------------------------    --------    ---------    -----------    ------------   --------------        -----------------
<S>                              <C>        <C>            <C>       <C>            <C>       <C>      <C>        <C>   
J. Roger Faherty                 1996       358,077        44,071     1                    38,500       5         14,463
  Chairman and Chief             1995       421,539        58,298     1                   435,585       6         19,909
  Executive Officer              1994       400,000        67,667     1                                           12,432

Edward M. Spector*               1996       341,250                   2                                 7
  Director, Former Chief         1995        80,769
  Operating Officer &            1994
President

R. Christopher Yates,            1996       348,032        42,442     3                   38,407        8         43,535
  Director, President            1995       378,013                   2                   38,000        9         43,997
Spice                            1994       264,699                   2                                           31,793
  International

Steve Saril                      1996       200,000                   2                   70,000       10          2,375
  Director, Senior Vice          1995       193,462                       345,000    4    70,000       11          2,200
  President  Sales &             1994       177,500                                       50,000       12          1,500
Marketing

Harlyn C. Enholm                 1996       148,900                   2                   18,962       13
  Executive Vice President,      1995
  Chief Financial Officer        1994

Daniel J. Barsky                 1996       150,000                   2                   45,000       14          1,500
  Senior Vice President,         1995       142,500                        233,000   4    20,000       15            750
  General Counsel, &             1994                                                     20,000       15
Secretary

*No longer a Company employee.
</TABLE>

1)        Mr. Faherty's other annual compensation included a Company provided
         leased automobile and payments of auto operating expenses of $14,400 
         in 1995 and $24,115 in 1994, respectively, and deferred compensation 
         of $36,566 each year in 1996, 1995 and 1994 and long-term disability
         premiums of $7,505 in 1996, $7,332 in 1995 and $6,986 in 1994.

2)       Other Annual Compensation for these executives is less than 10% of
         such executive's salary and bonus compensation for the year.

3)       Mr. Yates' other annual compensation consists of auto operating
         expenses of $12,499 in premiums paid on a long-term disability policy
         of $3,937 and deferred compensation of $26,006.

4)       Messrs. Saril and Barsky received 40,000 and 27,000 shares, 
         respectively, of Restricted Stock on May 12, 1995 at a market 
         value of $8.63 per share.

5)       Mr. Faherty's securities underlying options for 1996 include (i)
         21,000 options granted on August 13, 1996 with an exercise price of
         $2.75 and (ii) 17,500 options granted on December 13, 1996 with an
         exercise price of $1.75.

6)       Mr. Faherty's securities underlying options in 1995 include 249,585
         options granted on December 11, 1995 with an exercise price of $3.875
         in replacement of the identical number of options which were granted 
         in 1991, exercised in April 1995 and whose exercise was rescinded in
         December, 1995. Mr. Faherty was also granted 25,000 options on May 12,
         1995 which were repriced on December 11, 1995. In addition, 136,000
         options previously granted in 1993 were repriced on December 11, 1995.

7)       Mr. Spector was granted 17,500 options on August 13, 1996 with an 
         exercise price of $2.75 and 17,500 options on December 13, 1996 with 
         an exercise price of $1.75.  These options were canceled as part of
         the SEG Settlement Agreement.

8)       Mr. Yates' securities underlying options for 1996 include (i) 18,589
         options granted on August 13, 1996 with an exercise price of $2.75 and
         (ii) 19,818 options granted on December 13, 1996 with an exercise 
         price of $1.75.

9)       Mr. Yates' securities underlying options for 1995 include 19,000
         options granted on May 12, 1995 which were repriced on December 11,
         1995.

10)      Mr. Saril's securities underlying options for 1996 include (i) 10,000
         options with an exercise price of $4.25 granted on January 26, 1996 in
         lieu of a cash raise for 1996 based on 1995 performance and (ii) 
         40,000 options granted on January 26, 1996 in lieu of a performance 
         based cash bonus. Mr. Saril was also granted 10,000 options on August 
         13, 1996 with an exercise price of $2.75 and 10,000 options on 
         December 13, 1996 with an exercise price of $1.75.

11)      Mr. Saril's securities underlying options for 1995 include 10,000
         options granted on May 12, 1995 which were repriced on December 11,
         1995. 50,000 options granted on January 6, 1996 were also repriced on
         December 11, 1995.

12)      Mr. Saril's securities underlying options for 1994 include 50,000
         options granted on January 6, 1994 which were repriced on December 11,
         1995.

13)      Mr. Enholm's securities underlying options for 1996 include 9,250
         granted on August 13, 1996 with an exercise price of $2.75 and 9,712
         options on December 13, 1996 with an exercise price of $1.75.

14)      Mr. Barsky's securities underlying options for 1996 include (i) 7,500
         options granted in January 26, 1996 with an exercise price of $4.25 in
         lieu of a cash raise for 1996 based on 1995 performance and (ii) 
         22,500 options granted in January 26, 1996 in lieu of a performance 
         based cash bonus. Mr. Barsky was also granted 7,500 options on August 
         13, 1996 with an exercise price of $2.75 and 7,500 options on 
         December 13, 1996 with an exercise price of $1.75.

15)      Mr. Barsky's securities underlying options for 1995 include 20,000 
         options granted on December 16,1994 were repriced on December 11, 
         1995.

16)      The amount paid by the Company for Messrs. Faherty, Yates, Spector,
         Saril and Barsky for premiums for life insurance and for employer
         contributions to the 401(k) Plan, or with respect to Mr. Yates, a
         pension plan was as follows:


<TABLE>
<CAPTION>

                                                                 Life Ins.     401(k), Pension Plan
           Name                                    Year          Premiums         Contributions
           -----                                   ----          ----------     --------------------
            <S>                                    <C>            <C>                    <C>
           J. Roger Faherty                        1996           12,088                 866
                                                   1995           17,599               2,310
                                                   1994           10,122               2,310
           R. Christopher Yates                    1996            6,131              37,404
                                                   1995            6,196              37,801
                                                   1994            5,323              26,460
           Edward M. Spector                       1996           15,371
                                                   1995
                                                   1994
           Steve Saril                             1996                                 462
                                                   1995                               1,435
                                                   1994                               1,500
           Daniel J. Barsky                        1996              436                231
                                                   1995              436                375
                                                   1994
</TABLE>


         1996 Compensation Program for Key Executives. At a Compensation
Committee meeting held on November 17, 1995, the committee determined that the
Chief Executive Officer, Chief Operating Officer and Chief Financial Officer
would not receive compensation adjustments for 1996. Compensation adjustments
for other employees were capped at 5% and employees earning over $61,000 would
receive options in lieu of cash raises. No cash bonuses would be paid at year
end 1995; options would be issued in lieu thereof.

         At a meeting held on January 30 and 31, 1996, the Compensation
Committee granted an aggregate of 114,771 options in lieu of raises including
10,000 options granted to Mr. Saril and 7,500 options granted to Mr. Barsky. 
The committee also granted an aggregate of 127,500 options in lieu of cash 
bonuses under the performance based plan to five executives including 40,000 
options granted to Mr. Saril and 22,500 options granted to Mr. Barsky. Both of 
these sets of option grants had an exercise price of $4.25 and all options were
immediately exercisable.

         Employment Agreements. Mr. Faherty is employed by the Company as its
Chairman, Chief Executive Officer and President pursuant to an Employment
Agreement effective January 11, 1992 which was amended effective June 15, 1993,
March 23, 1994, March 23, 1995 and again as of January 1, 1996. The agreement,
as presently amended, provides for a base salary of $350,000, with any
adjustments determined annually. The agreement has a six year term. In each 
year that the agreement is not terminated, the agreement's term is extended for 
five years from that anniversary date. Under the most recent amendment, the 
agreement provides for loans from the Company of up to $215,000 exclusive of 
accrued interest. The loan has a maturity date of December 31, 1997 and bears 
interest at the same rate the Company is paying its principal lender. The 
agreement also provides for annual retirement benefits of not less than 
$100,000 (implemented by the deferred compensation agreement described below) 
and provides for other benefits including reimbursement for automobile costs. 
Mr. Faherty waived his rights to a reimbursement for automobile costs for 1996.

         On October 1, 1992, the Company entered into a deferred compensation
agreement with Mr. Faherty. Under the agreement the Company is obligated to
provide for retirement benefits to the executive on or after reaching the age 
of 65 and also provide for early retirement benefits. Upon retirement the 
executive will receive from the Company a total of 180 monthly payments which 
will provide a benefit of $100,000 per annum. Upon early retirement the 
executive will receive maximum benefits of $95,000 or a minimum of $50,000 
annually upon retirement on or after age 55 but before the age of 65. Upon the 
death of the executive, prior to the age of 65 but after the age of 55, his 
beneficiary will receive maximum annual benefits of $95,000 or a minimum 
benefit of $50,000 payable monthly.

         Mr. Spector was employed by the Company as a Director and Senior
Executive Officer of SEG pursuant to an employment agreement effective 
September 1, 1995 and expiring on August 31, 1998. The Company had guaranteed 
Mr. Spector's employment agreement. He was serving as President and Chief 
Operating Officer of the Company until his September 25, 1996 resignation. The 
agreement provided for a base salary of $350,000, with annual increases of not 
less than 5%. The Company's liability under Mr. Spector's agreement was 
terminated under the SEG Settlement Agreement.

         Mr. Yates is employed by HVC pursuant to a Service Agreement dated
January 22, 1993 and amended on June 16, 1994. Mr. Yates' original annual 
salary of (pound)125,000 was adjusted to (pound)239,400 based on HVC's pre-tax 
profits for the fiscal period ending July 31, 1994. In addition, the agreement 
requires pension contribution equal to 10% of his salary. The agreement expires 
on one year prior notice provided such termination occurs after March 1, 1997 
and provides for a lump sum severance payment of (pound)125,000. On October 11,
1996, the Company issued a notice to Mr. Yates of its intention to renegotiate
or, if a renegotiation could not be completed, to terminate the agreement. The
Company and Mr. Yates are currently negotiating a new employment agreement.

         Mr. Enholm had been employed by SEG pursuant to an employment 
agreement dated August 31, 1995. As part of the SEG Settlement Agreement, SEG 
terminated Mr. Enholm's employment and the Company continued the engagement of 
Mr. Enholm as its Chief Financial Officer pursuant to a consulting agreement 
effective February 1, 1997. Under this agreement, Mr. Enholm has agreed to 
serve as the Company's Chief Financial Officer through May 31, 1997.

         Mr. Barsky is employed by the Company pursuant to a January 1, 1995 
Employment Agreement.  The agreement provided for a base salary of $135,000 
with no less than 5% annual increases.  Mr. Barsky waived his rights to
the 5% increase in 1996 and his automobile allowance in 1996.

         Stock Option Plans. The Company has four stock option plans (the 1992,
1993, 1994 and 1995 Plans) (collectively the "Plans") for officers, employees,
directors and consultants of the Company or any of its subsidiaries and a
Directors' Plan ( the "Directors' Plan"). Options granted to employees may be
either incentive stock options (ISO's) or non-ISO's; ISO's may not have an
exercise price of not less than 100% of fair market value of the Company's
common stock on the grant date and all options may not have an exercise price 
of less than 100% of fair market value on the grant date in the case of options
granted to holders of 10% or more of the voting power of the Company's stock on
the date of the grant. The aggregate fair market value, as determined on the
grant date, of ISO's that may become exercisable in any one year can not exceed
$100,000. Options canceled subsequent to issuance are returned to the Plan and
are available for re-issuance as determined by the Stock Option Committee.

         The Plans are currently administered by the Stock Option Committee
consisting of two non-employee directors (the "Committee"). In general, the
Committee has the responsibility to select the persons to whom options will be
granted and will determine, subject to the terms of the Plan, the number, the
exercise period, vesting schedule and other provisions of such options.

         The options are evidenced by a written agreement containing the above
terms and such other terms and conditions consistent with the Plans as the
Committee may impose. Each option, unless sooner terminated, expires no later
than 10 years (five years in the case of ISOs granted to holders of 10% of the
voting power of the Company's common stock) from the date of grant, as the
Committee may determine. The Committee has the right to amend, suspend or
terminate the Plans at any time, provided, however, that unless ratified by the
Company's stockholders within 12 months thereafter, no amendment or change in
the Plans including: (a) increasing the total number of shares which may be
issued under the Plans; (b) reducing below fair market value on the date of
grant the price per share at which any option which is an ISO may be granted;
(c) extending the term of the Plan or the period during which any option which
is an ISO may be granted or exercised; (d) altering in any way the class of
persons eligible to participate in the Plans; (e) materially increasing the
benefits accruing to participants under the Plans; or (f) with respect to
options which are ISOs, amending the Plans in any respect which would cause 
such options to no longer qualify for incentive stock option treatment pursuant 
to the Internal Revenue Code of 1986, as amended, will be effective.

         The Directors Plan, as amended, provides for the automatic annual
issuance of 10,000 options to each non-employee director on the last business
day of the calendar year. The exercise price of option issued under the
Directors' Plan is equal to the closing price of the Company's common stock on
the date of grant. In 1996, 10,000 options were issued to each of Messrs.
Ericson, Nolan and Miller non-employee directors who are also the Stock Option
Committee members.

         The following table sets forth stock options that the Company granted
to the named executive officers during 1996.

<TABLE>
<CAPTION>

                                         Option/Grants in Last Fiscal Year

                                  Individual Grants
---------------------------------------------------------------------------------------
                                                                                           Potential Realizable
                               Number of                                                     Value at Assumed
                               Shares of                                                      Annual Rates of
                                 Common             Total                                       Stock Price
                                 Stock             Options                                   Appreciation for
                               Underlying        Granted to      Exercise                        Option Term
                                Options           Employees      or Base       
           Name                 Granted           in Fiscal       Price        Expiration      5%           10%
                                  (#)               Year          ($/Sh)       Date           ($)           ($)
---------------------------   -------------      ------------    ---------    ---------    ----------------------
<S>                                 <C>     <C>     <C>            <C>         <C>           <C>          <C>   
J. Roger Faherty                    21,000  1       1.79           2.75        8/13/06       34,599       86,737
                                    17,500  2       1.49           1.75       12/13/06       19,153       48,477
R. Christopher Yates                18,584  1       1.58           2.75        8/13/06       30,619       76,758
                                    19,818  2       1.69           1.75       12/13/06       21,690       54,898
Edward M. Spector                   17,500  3       1.49           2.75        8/13/06       28,833       72,281
                                    17,500  3       1.49           1.75       12/13/06       19,153       48,477
Steve Saril                         10,000  4        .85           4.25        1/25/06       23,670       58,422
                                    40,000  5       3.41           4.25        1/26/06       94,715      233,793
                                    10,000  1        .85           2.75        8/13/06       16,476       41,303
                                    10,000  2       . 85           1.75       12/13/06       10,945       27,701
Harlyn C. Enholm                     9,250  1        .79           2.75        8/13/06       15,240       38,206
                                     9,712  2        .83           1.75       12/13/06       10,630       26,903
Daniel J. Barsky                     7,500  4        .64           4.25        1/25/06       17,752       43,816
                                    22,500  5       1.92           4.25        1/26/06       53,277      131,508
                                     7,500  1        .64           2.75        8/13/06       12,357       30,978
                                     7,500  2        .64           1.75       12/13/06        8,209       20,776
</TABLE> 


1)       These options were granted on August 13, 1996. Twenty five percent
         were immediately exercisable and the balance are exercisable in three
         equal annual installments commencing August 13, 1997, one year after
         the effective date of the grant.

2)       These options were granted on December 13, 1996. Twenty five percent
         were immediately exercisable and the balance are exercisable in three
         equal annual installments commencing December 13, 1997, one year after
         the effective date of the grant.

3)       The options granted to Mr. Spector were canceled on February 7, 1997
         pursuant to the SEG Settlement Agreement.

4)       These options were granted on January 25, 1996 in lieu of a cash raise
         for 1996.

5)       These options were granted on January 25, 1996 in lieu of a
         performance based cash bonus.

<TABLE>
<CAPTION>


                                  Aggregate Options Exercised in Last Fiscal Year
                                             and Year End Option Value

----------------------------------- -- ------------------ - ------------------ -- --------------- -- -----------------
                                                                                    Number of
                                                                                    Securities           Value of
                                                                                    Underlying         Unexercised
                                                                                   Unexercised         In-the-Money
                                                                                    Options at          Options at
                                                                                      FY-End              FY-End
                                                                                  ---------------    -----------------
                                        Shares Acquired           Value            Exercisable/        Exercisable/
                                          on Exercise           Realized          Unexercisable      Unexercisable(1)
Name                                          (#)                  ($)                 (#)                 ($)
----------------------------------- -- ------------------ - ------------------ -- --------------- -- -----------------
<S>                                         <C>                   <C>                    <C>                <C>      
J. Roger Faherty                             None                 None                   620,347            1,085,608
                                                                                         157,069              274,870
----------------------------------- -- ------------------ - ------------------ -- --------------- -- -----------------
R. Christopher Yates                         None                 None                    14,351               25,113
                                                                                          43,052               75,340
----------------------------------- -- ------------------ - ------------------ -- --------------- -- -----------------
Edward M. Spector                            None                 None                     8,750               15,313
                                                                                          26,250               45,938
----------------------------------- -- ------------------ - ------------------ -- --------------- -- -----------------
Steve Saril                                  None                 None                   203,500              356,125
                                                                                          22,500               39,375
----------------------------------- -- ------------------ - ------------------ -- --------------- -- -----------------
Harlyn C. Enholm                             None                 None                     4,741                8,296
                                                                                          14,222               24,888
----------------------------------- -- ------------------ - ------------------ -- --------------- -- -----------------
Daniel J. Barsky                             None                 None                    43,750               76,563
                                                                                          21,250               37,188
----------------------------------- -- ------------------ - ------------------ -- --------------- -- -----------------
</TABLE>

(1)  Based on the last trade price on December 31, 1996 of $1.75 quoted by 
The NASDAQ Small Cap Market.

         401(k) Tax Deferred Savings Plan. Effective January 1, 1993, all
qualified employees, including the executive officers, are eligible to
participate in the Company's 401(k) Tax Deferred Savings Plan (the "401(k)
Plan"). Under the 401(k) Plan, each employee may, at his or her option, elect 
to defer (and contribute to the Plan) up to 15% of his or her salary. At its
discretion, the Company may elect to contribute a percentage of the
contributions of the employees. Contributions to the 401(k) Plan shall be
invested as determined by the Plan trustees, Messrs. Faherty and Barsky. The
trustees have retained Nationwide Services Company to invest the 401(k) Plan
funds.

         Filings with Securities and Exchange Commission. Section 16(a) of the
Securities Exchange Act of 1934 requires that officers, directors and 10%
stockholders of the Company file reports of their ownership with the Securities
and Exchange Commission. No officer or director was late with their filings for
1996.

         Director's Compensation.  The Company pays $1,000 per meeting, plus 
expenses and $250 per telephone conference to non-officer directors serving on 
its Board of Directors.

         Compensation Interlocks and Insider Participation.  Since 1994, 
recommendations relating to executive compensation have been made by the 
Company's Compensation Committee to the Board of  Directors.  The Compensation
Committee members currently are Messrs. Ericson, Miller and Nolan, non-employee 
Directors of the Company.  Mr. Nolan resigned as an officer of the Company on 
December 31, 1994.


<PAGE>


                                PERFORMANCE GRAPH

         The graph below compares the cumulative total shareholder return on 
the common stock for the period from August 31, 1992 to December 31, 1996 with 
the cumulative total return on the NASDAQ Stock Market-United States Index and 
a peer group (1) of comparable companies (the "Peer Group") selected by the
Company over the same period (assuming the investment of $100 in the common
stock, the NASDAQ Stock Market-United States Index and the Peer Group on August
31, 1992 and the reinvestment of all dividends).

         The following table is an Edgar representation of the data points used
in the printed graphic presentation:

<TABLE>
<CAPTION>

                             CUMULATIVE TOTAL RETURN
                                     SUMMARY

                                 9/92       1992       1993        1994        1995      1996
                               -------    -------    --------    -------    --------- ----------

 
 
     <S>                         <C>        <C>         <C>       <C>         <C>         <C>
     Spice Entertainment
      Companies, Inc.            100        242         325        450         185         70

     Peer Group                  100        118         228        195         474        237
     NASDAQ Stock Market -  
      United States              100        118         136        133         188        231

    (C)   Paul Kagan Associates, Inc. estimates.  All rights reserved.
</TABLE>

(1)     The peer group comprises those companies which compete against the
        Company in the interactive television and pay-per-view industries. None
        of the companies in the peer group is fully comparable with the
        Company's business. The returns of each company have been weighted
        according to their respective stock market capitalization for purposes
        of arriving at a peer group average. The members of the peer group are
        as follows: Macromedia, Inc., Hypermedia Communications, Lodgenet
        Entertainment Corp., Interfilm Inc., Iwerks Entertainment Inc., 
        Creative Program Tech Venture, Videotron Group Ltd., Actv Inc., NTN
        Communications Inc., Interactive Network Inc., Playboy Enterprises 
        Inc., and Spi Holding Inc.



<PAGE>


Item 12.      Security Ownership of Certain Beneficial Owners and Management

         The following table sets forth certain information regarding the
beneficial ownership of the Company's common stock as at March 1, 1997 (i) by
each person who is known by the Company to own beneficially more than 5% of the
outstanding shares of common stock, (ii) each of the Company's directors, (iii)
each of the Company's named executive officers and (iv) all officers and
directors of the Company as a group.

<TABLE>


<CAPTION>
 Executive Officers,                           Shares              Percentage of
 Directors and 5%                          Beneficially        Shares Outstanding
 Shareholders                                Owned                   (1)
------------------------                -----------------      -------------------
<S>               <C>                     <C>            <C>          <C>
 J. Roger Faherty (2)                     1,025,297      (7)(8)       8.5
 Mark Graff       (3)                     1,043,066      (9)          8.7
 Leland H. Nolan  (2),                      976,442      (10)(11)     8.1
 Dean R. Ericson  (4)                        36,000      (12)         0.3
 Rudy R. Miller   (5)                         5,000      (13)         0.0
 Steve Saril      (2)                       265,067      (14)         2.3
 R. Christopher 
    Yates         (6)                       385,762      (15)(16)     3.4
 Harlyn C. Enholm (2)                         4,741      (16)         0.0
 Daniel J. Barsky (2)                        70,750      (17)         0.6
 All directors and executive officers 
  as a group (10 persons)                 3,950,124                  33.2%

</TABLE>


(1)      Assumes exercise of options exercisable within sixty days owned by 
         such person and the exercise of no other options or warrants.

(2)      The business address of such persons, for purposes hereof, is c/o 
         Spice Entertainment Companies, Inc., 536 Broadway 7th Floor, New York, 
         New York 10012.

(3)      The business address of such person is c/o Web Feat, Inc., 611 
         Broadway, New York, New York 10012.

(4)      The business address of such person is 5429 South Krameria Street, 
         Englewood, CO 80111.

(5)      The business address of such person is 4909 East McDowell Road, 
         Phoenix, Arizona  85008

(6)      The business address of such person is Aquis House, Station Road, 
         Hayes, Middlesex UB3 4DX, United
         Kingdom.

(7)      Includes 729,791 shares issuable upon exercise of outstanding options.

(8)      Mr. Faherty's shares do not include the 85,097 shares owned by his 
         spouse and the 10,800 shares owned by his children.  Mr. Faherty does 
         not have or share voting or investment power over the shares owned by
         his spouse or children and disclaims beneficial ownership of such 
         shares.

(9)      Includes 702,916 shares issuable upon exercise of outstanding options.

(10)     Includes 684,166 shares issuable upon exercise of outstanding options.

(11)     Mr. Nolan's shares do not include the 25,500 of shares issuable upon 
         exercise of outstanding options owned by his wife.  Mr. Nolan does 
         not have or share voting or investment power over the shares owned by
         his spouse and disclaims beneficial ownership of such shares.

(12)     Includes 35,000 shares issuable upon exercise of options.

(13)     Includes 5,000 shares issuable upon exercise of options.

(14)     Includes 203,500 shares issuable upon exercise of options and 40,000 
         shares of Restricted Stock.

(15)     Includes 4,741 shares issuable upon exercise of options.

(16)     Includes 43,750 shares issuable upon exercise of options and 27,000 
         shares of Restricted Stock.

Item 13.      Certain Relationships and Related Transactions

         During 1995, Messrs. Faherty, Graff and Nolan borrowed $215,000,
$24,000 and $82,000, respectively, from the Company. All of the loans bear
interest at the same rate the Company pays on its loan from its senior secured
lender. Pursuant to the Fourth Amendment to Mr. Faherty's Employment Agreement
and a December 31, 1996 letter from the Chairman of the Compensation Committee
of the Board of Directors, Mr. Faherty's loan is due on December 31, 1997. Mr.
Graff plans to repay his loan in full in the second quarter of 1997 and Mr.
Nolan's loan will be paid in monthly installments beginning January, 1998.

         As part of the SEG Merger, certain members of the Spector Group and 
the Company entered into a Letter Agreement dated August 14, 1995, as amended 
(the "August 14th Agreement"), under which the Company was granted an option to
acquire and the Spector Group signatories were granted a put ("Put") to sell,
all of the issued and outstanding shares of the Spector Information Systems,
Inc. (n/k/a United Transactive Systems, Inc.) in exchange for a formula
determined number of shares of the Company's common stock. As part of the SEG
Settlement Agreement, the parties to the August 14th Agreement also entered 
into a Termination Agreement dated as of February 7, 1997 terminating the 
August 14th Agreement and suspending the Spector Group's prior exercise of the 
Put. The Company also entered into a Transponder Services Agreement with SEG 
pursuant to which the Company will provide transponder services to SEG for 
monthly payments of $80,000 for two years

         SEG had a note receivable from Buccaneer Games, Inc. ("Buccaneer"), a
developmental corporation, owned by Eric M. Spector. During the third quarter 
of 1996, the Company deemed that the note was uncollectable and established a
provision for the write-down of the note. SEG leased offices from Margate
Associates, an affiliate of Edward M. Spector. The aggregate lease payments 
were $221,000 in 1996. SEG also leased equipment from entities affiliated with 
Mr. Spector; the aggregate 1996 lease payments were $150,000 in 1996. As a
consequence of the split off of SEG pursuant to the SEG Settlement Agreement,
the Company has no further liability under these transactions.

         Management believes that the terms of the transactions described above
are no more favorable than could be obtained in transactions between
non-affiliated parties.

                                     PART IV


ITEM 14. Financial Statements, Financial Statement Schedules and Exhibits

         (a)      1.       Financial Statements of the Company.

                  2.       Financial Statements Schedules.

                  3.       Exhibits.

2.01     SEG Settlement Agreement dated January 29, 1997 among Spice 
         Entertainment Companies, Inc., Spector Entertainment Group, Inc., 
         the Spector Family Revocable Trust, the Eric M. Spector Revocable 
         Living Trust, Edward M. Spector, Ilene H. Spector, Eric M. Spector, 
         Evan M. Spector and Staci M. Spector.  Incorporated by reference to 
         Exhibit 2.03 of the Form 8-K filed on February 13, 1997.

3.01     Certificate of Incorporation of the Company. Incorporated by 
         reference to Exhibit 2.2 of the 8-A.

3.02     By-Laws of the Company.  Incorporated by  reference to Exhibit 2.2 
         of the 8-A.

3.03     Certificate of Merger dated May 13, 1992 merging Jericap, Inc. into 
         Graff Pay-Per-View Inc.

3.04     Certificate of Amendment of Certificate of Incorporation dated 
         November 26, 1996.

4.01     Specimen Certificate representing the Common Stock, par value $.01 
         per share. Incorporated by reference to Exhibit 1 of the 8-A.

4.02     Termination Agreement dated as of February 7 , 1997 by and among 
         Spice Entertainment Companies, Inc. and the Spector Family Revocable 
         Trust, Eric M. Spector, Evan M. Spector and Staci M. Spector.  
         Incorporated by reference to Exhibit 4.06 of the Current Report on 
         Form 8-K dated February 13, 1997.

4.03     Settlement Agreement dated January 15, 1997 by and among PNC Bank, 
         N.A. and Spice Entertainment Companies, Inc. and the other Obligors.  
         Incorporated by reference to Exhibit 4.07 of the Current Report
         on Form 8-K dated February 13, 1997.

4.04     Warrant to Purchase 600,000 shares of Common Stock of Spice 
         Entertainment Companies, Inc. issued to PNC Bank, N.A. dated January 
         15, 1997.  Incorporated by reference to Exhibit 4.08 of the Current 
         Report on Form 8-K dated February 13, 1997.

4.05     Registration Rights Agreement dated as of January 15, 1997 by and
         between Spice Entertainment Companies, Inc. and PNC Bank, N.A.
         Incorporated by reference to Exhibit 4.09 of the Current Report on 
         Form 8-K dated February 13, 1997.

4.06     Loan and Security Agreement dated as of January 15, 1997 between Spice
         Entertainment Companies, Inc. and Darla L.L.C. Incorporated by
         reference to Exhibit 4.06 of the Current Report on Form 8-K dated
         February 13, 1997.

4.07     Certificate of Designation of Preferences and Rights Convertible 
         Preferred Stock Series 1997-A.  Incorporated by reference to 
         Exhibit 4.10 of the Current Report on Form 8-K dated February 13, 
         1997.

4.08     Registration Rights Agreement dated January 15, 1997 by and between 
         Spice Entertainment Companies, Inc. and Darla L.L.C.  Incorporated by 
         reference to Exhibit 4.11 of the Current Report on Form 8-K dated
         February 13, 1997.

10.01    Amended 1991 Management Stock  Option Plan.  Incorporated by reference 
         to Exhibit 10 of the March, 1992 10-Q.
  
10.02    The Company's 401(k) Tax Deferred Savings Plan. Incorporated by 
         reference to Exhibit 10.03 of the 1992 10-K.

10.03    Employment Agreement dated as of June 1, 1992 between the Company and 
         J. Roger Faherty.  Incorporated by reference to Exhibit 10.04 of the  
         1992 10-K.

10.04    First Amendment dated as of February 22, 1993 to Employment Agreement 
         dated as  of June 1, 1992 between the Company and J. Roger  Faherty.  
         Incorporated by reference to Exhibit 10.05 of the 1992 10-K.

10.05    Deferred Compensation Agreement dated as of October 1, 1992 between 
         the Company and J. Roger Faherty.  Incorporated by reference to 
         Exhibit 10.06 of the 1992 10-K.

10.06    Investment and Option Agreement dated as of January 22, 1993 between 
         R.C. Yates, A. D. Wren, S. P. Kay, the Company and The Home Video 
         Channel Limited.  Incorporated by reference to Exhibit 2.1 of the
         Company's Current Report on Form 8-K dated February 22, 1993.

10.07    1993 Employees Stock Option Plan. Incorporated by reference to 
         Exhibit 10.19 of the 1993 S-1.

10.20    Second Amendment dated as of June 15, 1993 to Employment Agreement 
         dated as of June 1, 1992 between the Company and J. Roger Faherty.  
         Incorporated by reference to Exhibit 10.20 of the 1993 S-1.

10.08    Employment Agreement dated as of June 1, 1992 between Richard Kirby 
         and the Company. Incorporated by reference to Exhibit 10.24 of the 
         1933 S-1.

10.09    Third Amendment dated as of March 23, 1994 to Employment Agreement 
         dated as of June 1, 1992 between the Company and J. Roger Faherty.  
         Incorporated by reference to Exhibit 10.41 of the 1993 10-K.

10.10    1994 Employees' Stock Option Plan. Incorporated by reference to 
         Exhibit 1 to the Company's Proxy Statement (the "1994 Proxy 
         Statement") for its Annual Meeting of Stockholders held June 22, 1994.

l0.11    Employment Agreement dated January 1, 1995 between the Company and 
         Daniel J. Barsky.  Incorporated by reference to Exhibit 10.48 of the 
         December 31, 1994 10-K.

10.12    Agreement between AT&T Corp. and Graff Pay-Per-View Inc. concerning 
         Skynet Transponder Service dated February 7, 1995.  Incorporated by 
         reference to Exhibit 10.45 of the December 31, 1994 10-K.

10.13    Form of Promissory Note between the Company and each of J. Roger 
         Faherty, Mark Graff and Leland H. Nolan dated April 7, 1995 to Graff 
         Pay-Per-View Inc.  Incorporated by reference to Exhibit 10.59 of the
         Company's Registration Statement on Form S-3, Registration No. 
         33-93534, effective July 5, 1995.

10.14    Joint Venture Agreement of American Gaming Network dated June 28, 
         1995 and between American Gaming Network, Inc. and TV Games, Inc. 
         Incorporated by reference to Exhibit 10.60 of the Company's
         Registration Statement on Form S-3, Registration No. 33-93534, 
         effective July 5, 1995.

10.15    Merger Agreement and Plan of Reorganization dated August 9, 1995 by 
         and among Spector Entertainment Group, Inc., Edward Spector and the
         Registrant and Newco SEG, Inc. Incorporated by reference to Exhibit
         2.04 of the September 12, 1995 Form 8-K.

10.16    Industrial Lease Between Margate Associates and Spector Entertainment 
         Group, Inc. Incorporated by reference to Exhibit 10.62 of the 
         September 12, 1995 Form 8-K.

10.17    Employment Agreement dated September 1, 1995 between the Company and 
         Edward M. Spector.  Incorporated by reference to Exhibit 10.63 of the 
         September 12, 1995 Form 8-K.

10.18    Separation Agreement entered into as of December 31, 1995 between 
         Graff Pay-Per-View Inc. and Leland Nolan.  Incorporated by reference 
         to Exhibit 10.66 of the December 31, 1995 Form 10-K/A-1.

10.19    Separation Agreement entered into as of December 31, 1995 between 
         Graff Pay-Per-View Inc. and Mark Graff.  Incorporated by reference to 
         Exhibit 10.67 of the December 31, 1995 Form 10-K/A-1.

10.20    Fourth Amendment to Employment Agreement effective as of January 1, 
         1996 between Graff Pay-Per-View Inc. and J. Roger Faherty.  
         Incorporated by reference to Exhibit 10.68 of the December 31, 1995 
         Form 10-K/A-1.

10.21    General Partnership and Contribution Agreement of CVS Partners dated
         January 27, 1996 by and between the Company and WilTech Cable
         Television Services, Inc., WilTech Services, Inc. and Cable Video
         Store, Inc. Incorporated by reference to Exhibit 10.69 of the December
         31, 1995 Form 10-K/A-1.

10.22    Share Sale Agreement made on March 22, 1996 by and between Philips 
         Media Services B.V., KPN Multimedia B.V. and Graff Pay-Per-View Inc.  
         Incorporated by reference to Exhibit 10.71 of the December 31, 1995
         Form 10-K/A-1.

10.23    Telephone Services Agreement made as of October 20, 1995 by and 
         between Capital Distribution, Inc. d/b/a Cupid Television Network, 
         and Spice, Inc.

10.24    Contract between British Telecommunications and The Home Video 
         Channel Limited dated 24 April, 1996.

10.25    Production Agreement between VCA Labs, Inc. and Media Licensing, Inc. 
         dated as April 20, 1995.

10.26    Transponder Services Agreement dated February 7, 1997 by and between 
         Spice Entertainment Companies, Inc. and Spector Entertainment Group, 
         Inc.  Incorporated by reference to Exhibit 10.72 of the Current Report
         on Form 8-K filed on February 13, 1997.

10.27    Service Agreement dated January 22, 1993 between The Home Video 
         Channel Limited and Richard Christopher Yates as amended on June 16, 
         1994.

10.28    Purchase Agreement dated June 25, 1996 among TV Games Inc., AGN 
         Venture LLC, Multimedia Games, Inc., American Gaming Network, Inc., 
         Cable Video Store, Inc., Graff Pay-Per-View Inc. and American Gaming
         Network, J.V.

11.01    Computation of Earnings Per Share.

21.01    Subsidiaries of the Registrant.

23.01    Consent of Grant Thornton LLP

23.02    Consent of Coopers & Lybrand L.L.P.

23.03    Consent of Price Waterhouse LLP

27.00    Summary Financial Data Schedule.

         (b)  Reports on Form 8-K.  None.



<PAGE>


                                   SIGNATURES

         Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, Spice Entertainment Companies, Inc. has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.


Dated:  April 15, 1997


                                  SPICE ENTERTAINMENT COMPANIES, INC.

                                  By:   /s/ J. ROGER FAHERTY
                                        J. Roger Faherty
                                        Chairman, Chief Executive
                                        Officer, President and Director

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of Spice
Entertainment Companies, Inc. and in the capacities and on the date indicated.

 /s/ LELAND H. NOLAN               Director                   April 15, 1997
---------------------
Leland H. Nolan

/s/ DEAN R. ERICSON                Director                   April 15, 1997
--------------------
Dean R. Ericson

/s/ STEVE SARIL                    Director                   April 15, 1997
---------------
Steve Saril

/s/ RUDY R. MILLER                 Director                   April 15, 1997
--------------------                                                      
Rudy R. Miller

/s/ R. CHRISTOPHER YATES           Director                   April 15, 1997
--------------------------                                        
R. Christopher Yates

PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER:

/s/ HARLYN C. ENHOLM               Executive Vice             April 15, 1997
----------------------             President and
Harlyn C. Enholm                   Chief Financial Officer
                                   and Chief Accounting Officer


<PAGE>
<TABLE>


                       SPICE ENTERTAINMENT COMPANIES, INC.
                       Peer Group Cumulative Total Return
                       (Weighted Average by Market Value)



                                                                                                         % Peer Group;
<CAPTION>
                                                               Peer Group                                   Market
                                                         Cumulative Total Return                        Capitalization
                                       ------------------------------------------------------------    ------------------
                                                   9/92       1992      1993      1994      1995       1992       1995
                                                   ------     ------    ------    ------    -------    -------    -------
<S>                                    <C>          <C>         <C>      <C>       <C>        <C>       <C>       <C>
Peer Group Weighted Average                         100         119      229       172        386       100       100
                                                                                                        134       898 
                                                                                                             
Macromedia Inc.                        MACR                     100       97       148        606                44.0
Hypermedia Communications              HYPR                     100      160       100         65                 1.7
Lodgenet Entertainment Corp.           LNET                     100       87        45         57                 6.1
Interfilm Inc.                         IFLM                     100      100       124          2                 3.4
Iwerks Entertainment Inc.              IWRK                     100       80        14         19                 5.3
Creative Program Tech Venture          CPTV                     100       84        41         15                 0.7
Videotron Group Ltd.                   VDO          100          96      151       157        119       
Actv Inc.                              IATV         100         113      353       193        200       6.7       3.6
NTN Communications Inc.                NTN          100         134      271       163        122      26.2      12.8
Interactive Network Inc.               INNN                     100      121        18          0                 4.5
Playboy Enterprises Inc.               PL           100         113      200       162        129      67.0      18.8

</TABLE>

<TABLE>
<CAPTION>

                                                                                    Cumulative Total Return
                                                                                            Summary
                                                                      ----------------------------------------------------

 
<S>                                                                    <C>         <C>        <C>        <C>        <C> 
                                                                       9/92        1992       1993       1994       1995
                                                                      --------     ------    -------    -------    -------
Spice Entertainment Companies, Inc.                                     100         242       325        450        185
PEER GROUP                                                              100         119       229        172        386
NASDAQ STOCK MARKET--United States                                      100         118       136        133        188

</TABLE>

<PAGE>


<TABLE>
                                                                                                      Exhibit 11.01

                                  SPICE ENTERTAINMENT COMPANIES and SUBSIDIARIES
                                     COMPUTATION OF EARNINGS (LOSS) PER SHARE
<CAPTION>


                                                                               Years Ended December 31,
                                                                 ------------------------------------------------------
                                                                      1996               1995                1994
                                                                 ---------------    ----------------    ---------------
Primary:
Earnings (loss) per share subject to primary earnings per
share;
<S>                                                                <C>                <C>               <C>         
  Income (loss) from continuing operations                         ($5,364,000)       ($15,368,000)     $  2,953,000
  Income (loss) from discontinued operations                        (2,536,000)            242,000           213,000
                                                               ----------------      ---------------     --------------
Net Income (loss), subject to primary earnings per share           ($7,900,000)       ($15,126,000)     $  3,166,000
                                                                 ===============    ================    ===============
Weighted average number of common shares outstanding (1)            11,351,000          11,747,000        10,386,000
Issued common shares assuming that warrants and options 
  outstanding during that period were exercised                                                            2,791,000
Common shares assumed to be repurchased with proceeds 
  from the exercise of warrants and options subject to 
  20% limitation under the modified treasury stock method(2)                                              (1,268,000)
                                                                 ===============    ================    ===============
Weighted average number of common shares and equivalents
  outstanding                                                       11,351,000          11,747,000        11,909,000
                                                                 ===============    ================    ===============

From continuing operations                                              ($0.48)             ($1.31)            $0.25
Discontinuing operations                                                 (0.22)               0.02              0.02
                                                                 ===============    ================    ===============
Earning (loss) per share                                                ($0.70)             ($1.29)            $0.27
                                                                 ===============    ================    ===============


Fully Diluted:
Earnings (loss) per share subject to primary earnings 
per share;
  Income (loss) from continuing operations                         ($5,364,000)       ($15,368,000)       $2,953,000
  Income (loss) from discontinued operations                        (2,536,000)            242,000           213,000
                                                                 ===============     ===============    ===============
Net Income (loss), subject to primary earnings per share           ($7,900,000)       ($15,126,000)       $3,166,000
                                                                 ===============    ================    ===============
Weighted average number of common shares outstanding (1)            11,351,000          11,747,000        10,386,000
Issued common shares assuming that warrants and options 
  outstanding during that period were exercised                                                            2,791,000
Common shares assumed to be repurchased with proceeds from 
  the exercise of warrants and options subject to 20%
  limitation under the modified treasury stock method(2)                                                    (962,000)

                                                                 ===============    ================    ===============
Weighted average number of common shares and equivalents
  outstanding                                                       11,351,000         11,747,000         12,215,000
                                                                 ===============    ================    ===============

From continuing operations                                              ($0.48)            ($1.31)             $0.24
Discontinuing operations                                                 (0.22)              0.02               0.02
                                                                 ===============    ================    ===============
Earning (loss) per share                                                ($0.70)            ($1.29)             $0.26
                                                                 ===============    ================    ===============

Notes to Primary Earnings per Share:
(1)  Represents the number of common shares outstanding
     during the period in connection with the modified
     treasury stock method

(2)  The common shares assumed to be repurchased under the 
     modified treasury method are as follows:

     Average price per common share during the period                                                         $8.54
                                                                                                       ===============
     Proceeds from exercise of options and warrants                                                   $  10,830,577
     Common shares repurchased                                                                            1,268,217
                                                                                                       ===============




Notes to Fully Diluted Earnings per Share:
(1)  Represents the number of common shares outstanding
     during the period in connection with the modified treasury
     stock method

(2)  The common shares assumed to be repurchased under the 
     modified treasury method are as follows:

       The  price per common share at December 31, 1994                                                 $     11.26
                                                                                                        ===============
       Proceeds from exercise of options and warrants                                                   $10,830,577
                                                                                                        ===============
       Common shares repurchased                                                                            962,000
                                                                                                        ===============
</TABLE>

<PAGE>


                                                              Exhibit 12.01

                       SPICE ENTERTAINMENT COMPANIES, INC.

                         Subsidiaries of the Registrant


                                                    State or Jurisdiction of
          Subsidiary                                  Incorporation
------------------------------------         --------------------------------

DOMESTIC:

         Cable Video Store, Inc.                        Delaware

         CPV Productions, Inc.                          Delaware

         CyberSpice, Inc.                               Delaware

         Guest Cinema, Inc.                             Delaware

         Magic Hour Productions, Inc.                   Delaware

         Spector Entertainment Group(1)                 Delaware

         Spice Direct, Inc.                             Delaware

         Spice International, Inc.                      Delaware

         Spice Networks, Inc.                           New York

         Spice Productions, Inc.                        Nevada



         FOREIGN:

         Home Video Channel Limited                     England and Wales

         Danish Satellite T/V a/s                       Denmark

  (1) Split off from the Company on February 7, 1997 pursuant to the
      SEG Settlement Agreement.



                      SPICE ENTERTAINMENT COMPANIES, INC.
                                and SUBSIDIARIES



                        Consolidated Financial Statements

                               for the years ended

                        December 31, 1996, 1995 and 1994












<PAGE>



                          INDEX TO FINANCIAL STATEMENTS
                                  AND SCHEDULE






                                                              Page Number(s)
                                                              --------------
Spice Entertainment Companies, Inc. 
          and Subsidiaries

Reports of Independent Accountants

Consolidated Balance Sheets at December 31, 1996 
  and 1995

Consolidated Statements of Operations 
  for the years ended December 31, 1996, 1995 
  and 1994

Consolidated Statements of Stockholders' Equity 
  for the years ended December 31, 1996, 1995 
  and 1994

Consolidated Statements of Cash Flows 
  for the years ended December 31, 1996, 1995 
  and 1994

Notes to the Consolidated Financial Statements

Consolidated Financial Statement Schedule



                                                   
                       REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



To the Board of Directors of
Spice Entertainment Companies, Inc.
(formerly Graff Pay-Per-View Inc.)


         We have audited the consolidated balance sheet of Spice Entertainment
Companies, Inc. and Subsidiaries (the "Company") as of December 31, 1996 and the
related statements of operations, stockholders' equity and cash flows for the
year then ended. 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 audit.

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Spice Entertainment Companies, Inc. and Subsidiaries as of December 31, 1996,
and the consolidated results of their operations and their consolidated cash
flows for the year then ended in conformity with generally accepted accounting
principles.

         We also audited Schedule II for the year ended December 31, 1996. In
our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.


GRANT THORNTON LLP

New York, New York
March 31, 1997



<PAGE>


                         REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors of Spice
Entertainment Companies, Inc.
(formerly Graff Pay-Per-View Inc.):


         We have audited the consolidated financial statements and the financial
statements schedule II of SPICE ENTERTAINMENT COMPANIES, INC. (formerly Graff
Pay-Per-View Inc.) and Subsidiaries (the "Company") for the years ended December
31, 1995 and 1994. These financial statements and financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statements and financial
statement schedule based on our audits. We did not audit the financial
statements or the financial statement schedule information of Spector
Entertainment Group, Inc. a wholly-owned subsidiary, which statements reflect
15% of consolidated assets as of December 31, 1994, and 15% of consolidated
revenues for December 31, 1994. This statements were audited by other auditors,
whose report, which has been furnished to us, includes an emphasis of a matter
paragraph that describes the subsidiaries extensive transactions and
relationships with related parties, and in our opinion, insofar as it relates to
the amounts included for Spector Entertainment Group, Inc. is based solely on
the report of the other auditor.

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

         In our opinion, based on our audits and the report of other auditor,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company as of
December 31, 1995 and 1994, and the consolidated results of their operations and
their consolidated cash flows for each of the two years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
In addition, in our opinion, based upon our audits and the report of the other
auditor, the financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole present fairly, in
all material respects, the information required to be included therein.

COOPERS & LYBRAND L.L.P.

New York, New York March 8, 1996 except for Note 2 and paragraph (a) and (e) of
Note 6 as to which the dates are April 3, 1996, March 29, 1996 and April 10,
1996, respectively.


<PAGE>


                       REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders of
Spector Entertainment Group, Inc.

         In our opinion, the statements of operations, of stockholders' equity
and of cash flows for the year ended December 31, 1994 of Spector Entertainment
Group, Inc. (not presented separately herein) present fairly, in all material
respects, the results of its operations and its cash flows for the year ended
December 31, 1994, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.

         As described in Note 8 to the aforementioned financial statements, the
Company is a member of a group of affiliated companies and, as disclosed in the
financial statements, has extensive transactions and relationships with members
of the group. Because of these relationships, it is possible that the terms of
these transactions are not the same as those that would result from transactions
among wholly unrelated parties.

         We have not audited the financial statements of Spector Entertainment
Group, Inc. for any period subsequent to December 31, 1994.

PRICE WATERHOUSE, LLP

San Diego, California
March 30, 1995



<PAGE>


                                     

SPICE ENTERTAINMENT COMPANIES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                                                               December 31,
                                                                          Year Ended December 31, 1996            1995
                                                                   ------------------------------------    ----------------
                                                                        Historical           Pro forma
                                                                   ----------------    ----------------
                                                                                           (unaudited)
                                                                                             (Note 15)
                             ASSETS:
Current assets:
<S>                                                                          <C>              <C>                      <C>       
     Cash and cash equivalents                                     $     2,663,000     $     2,663,000          $1,292,000
     Accounts receivable, less allowance for doubtful accounts of
        $1,736,000 in 1996 and $1,178,000 in 1995                        4,801,000           4,801,000           7,523,000
     Income tax refunds receivable                                          28,000              28,000             495,000
     Film and CD-ROM costs, net                                                -                  -                400,000
     Prepaid expenses and other current assets                           1,325,000           1,222,000           2,269,000
     Deferred subscription costs                                           132,000             132,000             511,000
     Due from related parties and officers                                  23,000              23,000             262,000
     Investment in TeleSelect, asset held for sale                             -                   -             3,177,000
     Net assets of discontinued operations                               2,550,000           2,550,000           2,329,000
                                                                   ----------------    ----------------    ----------------
                    Total current assets                                11,522,000          11,419,000          18,258,000
     Property and equipment                                             61,948,000           8,581,000          66,556,000
     Due from related parties                                              294,000             294,000              87,000
     Library of movies                                                   3,797,000           3,797,000           2,990,000
     Cost in excess of net assets acquired, net of accumulated
        amortization of $1,931,000 in 1996 and $1,267,000 in 1995       11,399,000          11,399,000          10,961,000
     Other assets                                                          352,000             726,000             347,000
                                                                   ================    ================    ================
                    Total assets                                    $   89,312,000      $   36,216,000      $   99,199,000
                                                                   ================    ================    ================
              LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
    Current portion of obligations under capital leases            $     4,926,000      $      828,000      $    3,978,000
     Current portion of long-term debt                                     817,000             817,000           1,645,000
     Royalties payable                                                   2,322,000           2,322,000           2,611,000
     Accounts payable                                                    2,319,000           4,224,000           3,305,000
     Accrued interest expenses payable                                   1,118,000                                 198,000
     Accrued cost of discontinued operations                             1,800,000           1,800,000
     Accrued expenses payable                                            2,395,000           2,715,000           1,892,000
     Current portion of accrued restructuring costs                        820,000             820,000           2,205,000
     Deferred subscription revenue                                       1,121,000           1,121,000           2,337,000
                                                                   ----------------    ----------------    ----------------
                    Total current liabilities                           17,638,000          14,647,000          18,171,000
Obligations under capital leases                                        53,759,000           1,707,000          56,230,000
Long-term debt                                                          14,652,000          10,931,000          15,081,000
Accrued restructuring costs                                                700,000             700,000           1,450,000
Deferred compensation                                                      269,000             269,000             198,000
                                                                   ----------------    ----------------    ----------------
                    Total liabilities                                   87,018,000          28,254,000          91,130,000
                                                                   ----------------    ----------------    ----------------
Commitments and contingencies (Note 11)
Stockholders' equity
     Preferred stock, $.01 par value; authorized 
      10,000,000 shares, none were issued or outstanding
     Common stock, $.01 par value; authorized 25,000,000 
      shares; 11,339,948 and 11,357,928 shares issued and
      outstanding at December 31, 1996 and 1995                            113,000             113,000             114,000
     Additional paid-in capital                                         22,645,000          26,174,000          22,997,000
     Unearned compensation                                                (765,000)           (765,000)         (1,323,000)
     Accumulated deficit                                               (21,338,000)        (19,199,000)        (13,438,000)
     Cumulative translation adjustment                                   1,639,000           1,639,000             210,000
                                                                   ----------------    ----------------    ----------------
                                                                         2,294,000           7,962,000           8,560,000
     Stockholders' loan collateralized by common stock                         -                   -              (491,000)
                                                                   ----------------    ----------------    ----------------
                    Total stockholders' equity                           2,294,000           7,962,000           8,069,000
                                                                   ================    ================    ================
                    Total liabilities and stockholders' equity      $   89,312,000      $   36,216,000      $   99,199,000
                                                                   ================    ================    ================

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

</TABLE>

SPICE ENTERTAINMENT COMPANIES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>


                                                                       Years Ended December 31,
-------------------------------------------------------- -- -----------------------------------------------
                                                                    1996             1995             1994
                                                            -------------    -------------    -------------
<S>                                                         <C>              <C>              <C>         
Revenues:                                                   $ 33,213,000     $ 43,292,000     $ 43,232,000
                                                            -------------    -------------    -------------

Expenses:
     Cost of goods sold                                           94,000          196,000          123,000
     Salaries, wages and benefits                              7,592,000        9,722,000        6,665,000
     Producer royalties and library amortization               5,481,000        6,662,000        7,096,000
     Satellite costs                                           1,884,000       10,191,000        9,670,000
     Selling, general and administrative expenses             11,354,000       17,646,000       13,472,000
     Depreciation of fixed assets and amortization of
     goodwill                                                  7,499,000        2,063,000        1,156,000
     Provision for write-downs and non-recurring items:
       Investment in AGN                                        (875,000)       2,039,000
       Goodwill related to Guest Cinema                                           871,000
       Write-down of film & CD-ROM costs                                        3,967,000
       Restructuring costs                                                      3,655,000
                                                            -------------    -------------    -------------
Total operating expenses                                      33,029,000       57,012,000       38,182,000
                                                            -------------    -------------    -------------

           Total income (loss) from operations                   184,000      (13,720,000)       5,050,000

Interest expense                                               6,418,000          914,000          299,000
Minority interest                                             (1,062,000)                          500,000
                                                            -------------    -------------    -------------
Income (loss) from continuing operations before
 provision for income taxes                                   (5,172,000)     (14,634,000)       4,251,000

Provision for income taxes                                       192,000          734,000        1,298,000
                                                            -------------    -------------    -------------

           Net (loss) income from continuing operations       (5,364,000)     (15,368,000)       2,953,000
                                                                                           
Discontinued operations, net of income taxes
  Income from discontinued operations of SEG                      35,000          242,000          213,000
  Loss on disposal of SEG                                     (2,571,000)
                                                            =============    =============    =============
Net income (loss)                                            ($7,900,000)    ($15,126,000)    $  3,166,000
                                                            =============    =============    =============

Earnings (loss) per share,
  Primary
    From continuing operations                                   ($0.48)          ($1.31)            $0.25
    Discontinued operations                                       (0.22)            0.02              0.02
                                                            =============    =============    =============
      Earnings (loss) per common share                           ($0.70)          ($1.29)            $0.27
                                                            =============    =============    =============

  Fully diluted
    From continuing operations                                   ($0.48)          ($1.31)            $0.24
    Discontinued operations                                       (0.22)            0.02              0.02
                                                            -------------    -------------    -------------
      Earnings (loss)  per common share                          ($0.70)          ($1.29)            $0.26 
                                                            =============    =============    =============

Weighted average number of shares outstanding,
  Primary
                                                              11,351,000       11,747,000       11,909,000
                                                            =============    =============    =============

  Fully diluted                                               11,351,000       11,747,000       12,215,000
                                                            =============    =============    =============


              The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>



<PAGE>


SPICE ENTERTAINMENT COMPANIES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>




                                                                  Years Ended December 31, 1996, 1995 and 1994
                                      ---------------------------------------------------------------------------------------------
                                                                                            Foreign
                                                    Additional                              Currency
                                      Common        Paid-in      Unearned     Accumulated  Translation      Stock in
                                       Stock        Capital     Compensation    Deficit     Adjustment      Treasury       Total
                                   ----------    -----------    ------------ ------------   -----------    ----------  ------------
<S>                                   <C>             <C>         <C>              <C>           <C>            <C>           <C>
Balance at January 1, 1994         $98,000     $  9,607,000     $   -         ($997,000)     ($23,000)     ($50,000)    $8,635,000
Issuance of shares in connection
  with the purchase of 100%
  interest in PSP Holding Inc.
  ("PSP") and PSP Communications     1,000        1,046,000                                                              1,047,000
Exercise of warrants in
  connection with the private
  placement offering of 500,000   
  units and other warrants           6,000        2,602,000                                                              2,608,000
Exercise of employee stock
  options                                            64,000                                                                 64,000
Shares issued in connection with a
  conversion of a convertible note   1,000          418,000                                                                419,000
Capital contribution in
  connection with the merger
  of AEC                                          1,165,000                                                              1,165,000
Issuance of shares as
  compensation for
  services rendered                                  37,000                                                                 37,000
Contributed services by AEC
  shareholders                                      278,000                                                                278,000
Sale of treasury stock                               76,000                                                   50,000       126,000
Issuance of shares in connection
  with the purchase of the
  remaining 49% interest in HVC      6,000         5,595,000                                                             5,601,000
Net income for the year                                                        3,166,000                                 3,166,000
Foreign currency translation
  adjustment                                                                                   315,000                     315,000
                                   ----------    -----------    ------------ ------------   -----------    ----------  ------------
Balance at December 31, 1994       112,000        20,888,000               -    2,169,000      292,000         -        23,461,000
Shares issued in connection with
  the exercise of employee options                   32,000                                                                 32,000
Shares issued in connection with
  the settlement of a consultancy
  agreement                                         224,000                                                                224,000
Contributed services by
  shareholders                                       46,000                                                                 46,000
Capital contribution in
  connection with AEC Merger                         26,000                                                                 26,000
Restricted stock granted to
  executive officers                2,000         1,524,000     (1,323,000)                                                203,000
Distribution by SEG to its
  former shareholders                                                           (481,000)                                 (481,000)
Shares issued as compensation
  for services rendered and
  bonuses to employees                              148,000                                                                148,000
Shares issued in connection with
  library purchases                                 109,000                                                                109,000
Net loss for the period                                                      (15,126,000)                              (15,126,000)
Foreign currency translation                                                                                               (82,000)
  adjustment                                                                                  (82,000)
                                   ----------    -----------    ------------ ------------   -----------    ----------  ------------
                                   114,000       22,997,000     (1,323,000)  (13,438,000)     210,000          -         8,560,000
Shareholders' loans                                                                                                       (491,000)
                                   ----------    -----------    ------------ ------------   -----------    ----------  ------------
Balance at December 31, 1995       114,000       22,997,000     (1,323,000)  (13,438,000)     210,000          -         8,069,000

Shares issued in connection with
  the exercise of employee options                   27,000                                                                 27,000

Pro rata share of restricted stock
  granted to executive officers                                    178,000                                                 178,000

Cancellation of restricted stock
  granted to an executive officer   (1,000)        (379,000)       380,000                                                      -

Net loss for the period                                                       (7,900,000)                               (7,900,000)

Foreign currency translation
  adjustment                                                                                1,429,000                    1,429,000
                                   ----------    -----------    ------------ ------------   -----------    ----------  ------------
                                   113,000       22,645,000       (765,000)  (21,338,000)   1,639,000           -        1,803,000
Shareholders' loans                                                                                                        491,000
                                                                                                                        -----------
Balance at December 31, 1996      $113,000      $22,645,000      ($765,000) ($21,338,000)  $1,639,000           -        2,294,000
                                   ==========    ===========    ============ ============   ===========    ==========  ============


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

</TABLE>

<PAGE>



SPICE ENTERTAINMENT COMPANIES, INC., and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                         Years Ended December 31,
                                                                         ----------------------------------------------------------
                                                                                     1996                 1995                1994
                                                                         -----------------    ----------------    -----------------
Cash flows from operating activities:
<S>                                                                           <C>                 <C>                <C>            
  Net income (loss)                                                           ($7,900,000)        ($15,126,000)    $     3,166,000
                                                                         -----------------    ----------------    -----------------
  Adjustments to reconcile net income (loss) to net cash provided
    by (used in) operating activities:
  (Income) loss from discontinued operations (Note 4)                           2,536,000             (242,000)           (213,000)
  Write-down of goodwill related to PSP Holding, Inc. acquisition                                      871,000
  Write-down of film and CD-ROM costs                                                                3,967,000
  Accrual (payments) of restructuring costs                                    (2,135,000)           3,655,000   
  Provision for investment in American Gaming Network
  Depreciation and amortization of fixed assets                                 6,834,000            1,148,000             626,000
  Gain on sale of property and equipment                                          (47,000)
  Amortization of goodwill and other intangibles                                  661,000              914,000             530,000
  Amortization of films and CD-ROM cost                                           400,000            1,681,000           1,299,000
  Amortization of library of movies                                             1,638,000            1,539,000              43,000
  Provision for bad debts                                                         558,000              847,000              87,000
  Decrease in income tax (benefit) provision, net                                 467,000             (495,000)
  Amortization of debt discounts and deferred financing costs                                           50,000
  Compensation satisfied through the issuance of common stock                     178,000              576,000              56,000
  Charge for contributed services                                                                       72,000             278,000
  Deferred compensation expense                                                    71,000               66,000              65,000
  Subscription revenues received in advance                                    (1,216,000)            (854,000)            464,000
  Minority interest                                                            (1,062,000)                                 500,000
  Other, net                                                                      111,000
  Changes in assets and liabilities (excluding the effects of acquisitions):
    Decrease (increase) in accounts receivable                                  2,164,000              279,000          (4,390,000) 
    Decrease (increase)in prepaid expenses in other current assets                517,000             (760,000)            286,000
    Decrease (increase) in deferred subscription costs                            379,000              542,000             (88,000)
    Increase in film and CD-ROM costs                                                               (2,790,000)         (3,183,000)
    (Increase) decrease in other assets                                            (4,000)             488,000            (713,000)
    (Decrease) increase in royalties payable                                     (289,000)             432,000          (1,565,000)
    (Decrease) increase in accounts payable and accrued expenses                  (95,000)           1,562,000            (110,000)
    Decrease in advance                                                                                                   (275,000)
    Increase in security deposit                                                                                           (75,000)
                                                                         -----------------    ----------------    -----------------
           Total adjustments                                                   10,891,000           15,587,000          (6,378,000)
                                                                         -----------------    ----------------    -----------------
           Net cash provided by (used in) operating activities from                                                     
             continuing operations                                              2,991,000             461,000           (3,212,000) 
           Net cash provided by  operating activities from
             discontinued operations                                              932,000           1,542,000              279,000
                                                                         -----------------    ----------------    -----------------
           Net cash provided by (used in) operating activities                  3,923,000           2,003,000            2,933,000
                                                                         -----------------    ----------------    -----------------
Investment activities:
    Investment in subsidiaries and J.V.                                                            (3,656,000)          (1,132,000)
    Purchase of property and equipment                                         (1,094,000)         (4,451,000)          (1,686,000)
    Proceeds from sale of property and equipment                                  135,000
    Proceeds from the sale of TeleSelect                                        3,177,000
    Purchase of rights to libraries of movies                                  (2,444,000)         (2,342,000)          (1,593,000)
                                                                         -----------------    ----------------    -----------------
           Net cash used in investing activities from 
             continuing operations                                               (226,000)        (10,449,000)          (4,411,000)
           Net cash used in investing activities from
             discontinued operations                                             (473,000)           (798,000)            (926,000)
                                                                         -----------------    ----------------    -----------------
           Net cash used in investing activities                                 (699,000)        (11,247,000)          (5,337,000)
                                                                         -----------------    ----------------    -----------------
Financing activities:
    Proceeds from issuance of common stock and detachable warrants                 27,000              32,000            2,672,000
    Proceeds from issuance of long-term debt and capital lease 
      obligations                                                               1,377,000          12,815,000            4,201,000
    Proceeds from sale of treasury stock                                                                                   126,000
    Additional capital contribution in connection with the merger of AEC                                                 1,165,000
    Decrease (increase)in loans receivable from related parties                   523,000            (840,000)             471,000
    Repayment of long-term debt and  capital leases obligations                (4,321,000)         (1,658,000)          (1,125,000)
    Proceeds from capital contribution of a third party                         1,000,000
    Dividends paid to minority shareholders of HVC                                                                        (848,000)
                                                                         -----------------    ----------------    -----------------
           Net cash provided by (used in) financing activities from          
            continuing operations                                              (1,394,000)         10,349,000            6,662,000
           Net cash used in financing activities from
            discontinued operations                                              (459,000)           (744,000)             647,000
                                                                         -----------------    ----------------    -----------------
           Net cash provided by (used in) financing activities                 (1,853,000)          9,605,000            7,309,000
                                                                         -----------------    ----------------    -----------------
           Net increase (decrease) in cash and cash equivalents                 1,371,000             361,000             (961,000)
     Cash and cash equivalents, beginning of the year                           1,292,000             931,000            1,892,000
                                                                         -----------------    ----------------    -----------------
           Cash and cash equivalents, end of the year                     $     2,663,000      $    1,292,000     $        931,000
                                                                         =================    ================    =================
Supplemental disclosure of cash flow information: 
  Cash paid during the year for:
    Interest                                                                   $5,718,000          1,323,000               164,000
                                                                         =================    ================    =================
    Income taxes                                                                    3,000          1,256,000               914,000
                                                                         =================    ================    =================

Supplemental schedule of non-cash investing and financing activities:
  Capital Lease Obligations (Note 8)                                            1,163,000         60,127,000
  Fair market value of 15,000 shares issued to purchase
    foreign library rights                                                                           109,000
  Fair market value of shares issued as compensation for services
    rendered by a consultant                                                                                                38,000
  Acquired investment in AGN through issuance of notes payable                                       740,000
  Distributions to former shareholders in the form of property and
    equipment and the elimination of amounts owed from shareholders                                  454,000
  Issuance (cancellation) of common shares to senior management (Note 9)        (380,000)          1,527,000
  Acquired 100,000 shares of Multimedia Games' common stock                                                                     
    through issuance of a note payable                                                               200,000
  Acquired equipment through the issuance of a note payable                                                                 39,000
  Convertible debentures and accrued interest converted into
    GPPV's common shares                                                                                                   419,000
  Fair market value of 582,820 common shares issued in connection
    with the acquisition of HVC, Ltd                                                                                     5,601,000
  Fair market value of 12,500 common shares issued in connection
    with the purchase of PSP  Communications, Inc.                                                                          94,000
  Fair market value of 125,000 common shares issued in connection
    with the purchase of PSP Holding, Inc.                                                                                 953,000
  Liabilities assumed from the purchase of  PSP  Holdings                                                                   75,000
  Liabilities assumed from the purchase of HVC Ltd.                                                                        342,000
  Notes receivable forgiven in connection with the purchase of PSP
    Holdings and PSP Communications                                                                                        106,000
  Foreign currency translation adjustment                                     $1,099,000           $(82,000)              $315,000


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

</TABLE>


SPICE ENTERTAINMENT COMPANIES, INC. and SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.       Organization

         Spice Entertainment Companies, Inc., (formerly Graff Pay-Per-View Inc.)
and its subsidiaries (collectively "SPICE" or the "Company") is a diversified
media entertainment company which owns and operates television networks in North
America and Europe, and produces and distributes television programs and motion
pictures. Certain business units and activities have been discontinued or are
being phased out as a result of the Company's restructuring plan (Note 2, 5 and
14).

         Formed in 1987, the Company is a leading provider of pay-per-view
entertainment networks. The Company operates and distributes Spice and The Adam
and Eve Channel (collectively, the "Spice Networks"), two domestic pay-per-view
programming services with access to over 20 million cable and DirecTV direct
broadcast satellite ("DBS") households. In Europe, the Company operates and
distributes two subscription networks, The Adult Channel ("TAC") and Eurotica
which have approximately 360,000 and 7,000 subscribers, respectively and are
distributed in the cable and the C-band direct to home ("DTH") markets. In
addition, the Company in conjunction with a partner (Note 2) operated Cable
Video Store ("CVS"), a domestic hit movie pay-per-view service with access to
approximately 2.3 million subscribers and The Home Video Channel, a subscription
movie service in the United Kingdom with approximately 66,000 subscribers.

         In 1996, approximately 68% of total consolidated revenues from
continuing operations was from the United States and the United Kingdom cable
operators, 19.4% of total revenue was from the DBS and DTH markets and 12.6% of
the total revenue was from worldwide programming distribution and other sources.

         The Company experienced losses of approximately $7.9 and $15.1 million
in the years ended December 31, 1996 and 1995, respectively. The Company
analyzed all its business units and determined in December 1995 that certain
actions had to be taken to conserve cash and to return to profitability. These
actions included the following: ceasing production of and distribution of movies
and television programs which resulted in the write-down of approximately $4.0
million of accumulated film and CD-ROM costs (Note 5); suspending distribution
of its hotel/motel pay-per-view technology related to Guest Cinema and writing
down associated goodwill of approximately 0.9 million (Note 2); ceasing the
Company's involvement in American Gaming Network, J.V., a joint venture formed
to develop and promote high stakes proxy play Class II tribal bingo games and
writing off its investment in the joint venture of approximately $2.0 million
(Note 2). The Company also reviewed all of its operations and restructured its
operating units to reduce overhead and labor costs, resulting in a charge for
restructuring of approximately $3.7 million in 1995 (Note 14).

         The accompanying financial statements had been prepared assuming that
the Company will be able to meet its obligations in the ordinary course of
business. The Company has incurred a $5,364,000 loss from continuing operations
for the year ended December 31, 1996. At December 31, 1996, the Company has a
working capital deficit of $6,116,000. The Company's revolving credit line
amounting to $14,621,000 at December 31, 1996, scheduled to mature on January 2,
1997 was extended until January 15, 1997. On January 15, 1997, the Company
entered into agreements with a new lender which paid off the revolving line of
credit and replaced it with a term loan and line of credit (Note 15).


<PAGE>


              SPICE ENTERTAINMENT COMPANIES, INC. and SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

         Section 505 of the Telecommunications Act of 1996 requires cable
operators to fully scramble the audio and video signal of television channels
such as the Spice Networks or block the channels between 6:00 a.m. and 10:00
p.m. The Company filed an action in Delaware District Court challenging the
constitutionality of Section 505 which was granted before the provision was
scheduled to take effect. The Company's application for a preliminary injunction
was denied on November 8, 1996 though the District Court continued the stay
enforcement of Section 505 pending review by the Supreme Court. On March 24,
1997 the Supreme Court affirmed the District Court's decision. It is anticipated
that when Section 505 takes effect, the Company's revenues will be adversely
affected, the amount of which depends on several factors which are mostly
outside of the Company's control.

         In August, 1996, the Company entered into a capital lease for equipment
including a Digicipher Encoder and approximately 1,200 decoder boxes which were
provided to cable system customers (Note 8). This equipment enabled the Company
to digitally compress its domestic television networks, which freed up the use
of two transponders. In January, 1997 another transponder was preempted by the
lessor, AT&T, resulting in a reduction of annual lease payments of approximately
$1,400,000 (Note 15).

2.       Acquisitions, Joint Ventures and Divestitures

         Spector Entertainment Group. On August 31, 1995, pursuant to a Merger
Agreement and Plan of Reorganization by and among Spector Entertainment Group,
Inc. ("SEG"), Edward M. Spector, the Company and a newly-formed wholly-owned
subsidiary, the subsidiary was merged into SEG and the surviving corporation
became a wholly-owned subsidiary of the Company (the "Spector Merger"). On
February 7, 1997 and pursuant to a Settlement Agreement (the "Settlement
Agreement") dated January 29, 1997, among Spice Entertainment Companies, Inc.,
SEG and the former shareholders of SEG, the Company conveyed all of the issued
and outstanding shares of the common stock of SEG to the former shareholders of
SEG in exchange for the 700,000 shares of the Company's Common Stock, $.01 par
value ("Common Stock"), previously issued to certain members of the Spector
Group as part of the acquisition merger transaction whereby SEG became a
wholly-owned subsidiary of the Company. The Settlement Agreement also provides
for mutual general releases and for each party to indemnify the other in
connection with certain matters relating to the transactions contemplated by the
Settlement Agreement. As provided for in the Settlement Agreement, the Company
also entered into a Transponder Service Agreement with SEG pursuant to which the
Company will provide transponder services to SEG for monthly payments of $80,000
for two years. SEG is accounted for as a discontinued operation in the
accompanying financial statements (Note 4).

         Adam & Eve Communications, Inc. On April 13, 1995, pursuant to a Merger
Agreement and Plan of Reorganization, Adam & Eve Communications, Inc. ("AEC")
merged with and into SPICE (the "AEC Merger"). In consideration of the AEC
Merger, the AEC shareholders received 820,000 shares of common stock. This
transaction was accounted for as a pooling of interest whereby the financial
statements for all prior periods to the combination were restated to reflect the
combined operations.

         During the first quarter of 1995, former shareholders of AEC provided
the Company with management, consulting accounting and advisory services free of
charge. The Company has recorded a charge of $46,300 to operations and a
corresponding increase to additional paid-in capital for the cost of these
services for the year ended December 31, 1995.

         The Home Video Channel Limited. On January 22, 1993, the Company
entered into an Investment and Option Agreement (the "Agreement") with The Home
Video Channel Limited ("HVC"), a corporation registered in England and Wales.

         Pursuant to the Agreement, the Company acquired 10,001 shares of HVC, a
25% interest, for $2,000,000 in cash and 200,004 shares of common stock valued
at $1,000,000. On December 16, 1993, the Company acquired an additional 10,399
shares, constituting an additional 26% interest in HVC for $1,458,000 in cash.
On December 27, 1994, the Company purchased 19,600 shares constituting the
remaining 49% interest in HVC for $1,132,000 in cash and 582,820 shares of
common stock valued at $5,600,000. The Company is now the sole stockholder of
HVC.

         CVS Partners. On March 6, 1996, the Company contributed the Cable Video
Store Network ("CVS"), a domestic pay-per-view hit movie service which the
Company had operated since 1989, to a newly formed partnership, CVS Partners
("CVSP"). The other partner was Wiltech Cable Television Services, Inc.
("WCTV"), a subsidiary of The Williams Companies, Inc. The CVS network was
available via satellite until March 31, 1997, when satellite delivery was
terminated.

         The partners of CVSP are in the process of winding down the affairs of
the partnership.

         CPV Productions, Inc. On May 27, 1994, the Company acquired all of the
outstanding common stock of CPV Productions, Inc. ("CPV") and its wholly-owned
subsidiary, Magic Hour Productions, Inc. ("MH") (which created, produced and
distributed movies and television programming) in exchange for 845,000 shares of
common stock in a business combination accounted for as a pooling of interest.
Historical financial statements have been restated to include CPV. At the
beginning of 1996 the Company had suspended production of movies due to a
shortage of capital requirements but had continued to license and distribute the
related film library. At the end of 1996, the Company determined to shut-down
the operations of CPV and in the first quarter of 1997 sold a portion of the
rights to the film library to the former owners of CPV for $170,000.

         Guest Cinema, Inc. In January 1994, the Company acquired through the
merger of PSP Holding, Inc. ("PSP") into its wholly-owned subsidiary, Guest
Cinema, Inc., a hotel/motel pay-per-view system. As part of the restructuring
plan instituted in the first quarter of 1995, the Company ceased distribution of
this system because the Company projected that the technology would not generate
future cash flows sufficient to support its investment. Accordingly, the Company
incurred a $871,000 expense in 1995 attributable to the write-down of goodwill
created on the acquisition of PSP.

         American Gaming Network, J.V. Pursuant to a joint venture agreement
dated June 28, 1995, the Company formed American Gaming Network, J.V. ("AGN")
with TV Games, Inc. ("TVG"), a wholly-owned subsidiary of Multimedia Games, Inc.
("MGAM"), to jointly develop and promote high stakes proxy play Class II tribal
bingo games. The Company contributed approximately $1.4 million of intellectual
property and working capital to AGN's capital. The Company had acquired the
intellectual property from MGAM for cash and notes. In related transactions, the
Company acquired for cash and notes 275,000 shares of MGAM's outstanding stock
and a warrant to acquire an additional 175,000 shares at an exercise price of
$3.50 per share. The parties were unable to agree on a business plan or a
strategy for going forward with AGN.

         Pursuant to a Purchase Agreement dated June 28, 1996, the parties
resolved their differences with the Company giving up its interest in AGN and
the 275,000 shares of MGAM stock in exchange for (i) the cancellation of an
aggregate of $775,000 of liabilities owed to MGAM and TVG, (ii) $100,000
pursuant to a note which was paid in 1996 and (iii) $400,000 due pursuant to a
note due in three years. The Company retained a warrant to acquire 175,000
shares of common stock of MGAM stock and the parties released each other. Due to
the likelihood that the parties would not proceed forward with AGN and as part
of the Company's restructuring at December 31, 1995, the Company wrote off its
investment in AGN and the MGAM stock. As a result of the foregoing transaction,
the Company recognized a non-recurring gain of $875,000 in the second quarter of
1996 and will recognize an additional non-recurring gain of $400,000 when the
$400,000 note is paid.

         TeleSelect B.V. The Company, Philips Media B.V. ("Philips") and Royal
PTT Netherlands NV ("KPN") established TeleSelect B.V. ("TeleSelect"), a
Netherlands joint venture, to create joint ventures with European cable
operators to enable them to provide conditional access services such as
pay-per-view, near video on demand and electronic retailing to their
subscribers. On April 3, 1996, the Company received $3.2 million of proceeds
from the sale of its TeleSelect interest of which $1 million was utilized to pay
down long-term debt and the remaining funds were utilized to pay trade payables.

3.       Summary of Significant Accounting Policies

         Consolidation.  The consolidated financial statements include the 
accounts of the Company and its wholly-owned subsidiaries and majority-owned 
partnership.   All significant intercompany transactions have been eliminated.

         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.

         Fair Value of Financial Instruments. The carrying amounts for cash,
cash equivalents, accounts receivable, royalties payable, accounts payable and
accrued expenses reflected in the financial statements approximate fair value
because of the short maturity of these items. See Note 15 for a discussion of
the fair value of the Company's long-term debt and capitalized lease obligations
at December 31, 1996.


         Cash and Cash Equivalents. The Company considers all highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents.

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

         The Company's trade receivables are from a broad base of cable
operators, two of which account for 24% and 10%, respectively, of the
consolidated accounts receivable balance at December 31, 1996. The Company
routinely assesses the financial strength of these debtors. Accordingly,
concentration of credit risk is limited. The Company's cash is deposited in
major banks, thereby limiting credit risk.

         Valuation of Long-Term Assets. The Company adopted Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121"), "Account for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
during the year ended December 31, 1996. The statement requires that the Company
recognize and measure impairment losses of long-lived assets, such as the movie
library, film and CD-ROM costs, transportation and other equipment and certain
identifiable intangibles and value long-lived assets to be disposed of.

         The Company periodically assesses the possible impairment of its
long-term assets by comparing the sum of the undiscounted projected future cash
flows attributable to each business unit to the carrying value of the assets of
that business unit. Projected future cash flows for each business unit are
estimated for a period approximating the remaining lives of that business unit's
long-lived assets, based on earnings history, market conditions and assumptions
reflected in internal operating plans and strategies. The Company has determined
that no provision is necessary for the impairment of long-lived assets at
December 31, 1996.

         Cost in Excess of Net Assets Acquired (Goodwill). This represents the
cost over the fair value of net assets acquired in business combinations
accounted for as a purchase. This asset is being amortized on a straight line
basis over a period of 20 years. Goodwill is reviewed for impairment whenever
events or changes in circumstances indicate that the carrying value amount may
have been impaired. If the sum of the future cash flows is less than the
carrying amount of the asset, a loss is recognized.

         Property and Equipment. Property and equipment, including major capital
improvements, are recorded at cost. The cost of maintenance and repairs is
charged against results of operations as incurred. Depreciation is charged
against results of operations using the straight line method over the estimated
useful lives of the related assets. Equipment leased under capital leases are
amortized over the lives of the respective leases. Improvements to leased
property are amortized over the life of the lease or life of the improvement,
whichever is shorter. Sales and retirements of depreciable property and
equipment are recorded by removing the related cost and accumulated depreciation
from the accounts. Gains or losses on sales and retirements of property and
equipment are reflected in results of operations.

         Revenue Recognition. Pay-per-view revenues are recognized in the
periods in which the films or events are aired by the cable systems which have
license agreements with the Company.

         Subscription revenues are deferred and amortized over the life of the
subscription. At December 31, 1996 and 1995 deferred subscription revenues were
$1,121,000 and $2,337,000 respectively.

         Deferred subscription costs of $132,000 and $511,000 at December 31,
1996 and 1995, respectively, are deferred and amortized over the life of the
subscription.

         CPV (which terminated operations at the end of 1996) recognized
revenues in accordance with Statement of Financial Accounting Standards ("FAS")
No. 53, Financial Reporting by Producers and Distributors of Motion Picture
Films. Revenue is recognized when films rights are distributed.

         SEG (which was reacquired by the original owners on February 7, 1997)
recognizes revenue when services are performed. A substantial part of SEG's
revenues are generated under long-term contracts with remaining terms from 1 to
6 years. SEG provides services for all the customers' scheduled events under
these cancelable contracts for the term of the contract.

         Producer Royalties. The Company has entered into contractual agreements
with producers or film makers in order to obtain the rights to license films or
events to the cable systems, home backyard satellite dish market and hotels. The
producer agreements require that royalties be paid on the basis of either a
percentage of the revenues ("the producer royalty split") or a flat fee for a
specified period, generally one or two years. The producer royalty splits are
recorded in the period the film or event is exhibited. Royalties paid on a flat
fee basis are amortized by the straight-line method over the term of the
licensing period.

         Amortization of Film and CD-ROM Costs. Film and CD-ROM costs are
amortized using the income forecast method.

         Earnings (Loss) per Share. The computations of primary and fully
diluted earnings (loss) per share are based upon the weighted average number of
shares outstanding during the periods presented, after giving effect to the
potential dilutive effect, if any, of common stock equivalents and excludes
those securities whose conversions, exercise or other contingent issuance would
have the effect of increasing earnings per share or decreasing loss per share.

         Foreign Currency Translation. Assets and liabilities in foreign
currencies are translated into United States dollars at the exchange rate
existing at the balance sheet date. Revenues and expenses are translated at
average rates for the period. The net exchange difference resulting from these
translations is recorded as a separate component of stockholders' equity. The
excess cost over the Company's share in the net book value in the foreign
investee has been considered as a foreign currency denominated asset in applying
Statement of Financial Accounting Standards No. 52, "Foreign Currency
Translation".

         Income Tax. The Company uses the liability method of accounting for
income taxes, as set forth in Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes". Under this method, deferred income taxes,
when required, are provided on the basis of the difference between the
financial-reporting and income-tax bases of assets and liabilities at the
statutory rates enacted for future periods.

         Reclassifications.  Certain amounts for previous years have been 
reclassified to conform with the 1996 presentation.

4.       Discontinued Operations and Activities

         As part of the Company's restructuring efforts, the Company determined
during the fourth quarter of 1996 that it would dispose of or sell certain
non-strategic operating units. In November, 1996, the Board of Directors
approved a plan to split off Spector Entertainment Group, Inc., (which provides
satellite simulcasting and television production services to the pari-mutuel
industry) to the former shareholders of the wholly-owned subsidiary in exchange
for the 700,000 shares of Common Stock of the Company they received in the
original merger between SEG and the Company.

         The results of operations for SEG have been classified as discontinued
operations for all periods presented in the Consolidated Statement of
Operations. The components of the net assets of SEG which are included in the
Consolidated Balance Sheet as Net Assets of Discontinued Operations at December
31, 1996 and 1995 are as follows:



<PAGE>
<TABLE>
<CAPTION>


                                                                    1996                    1995
                                                             --------------------    --------------------
            <S>                                                 <C>                     <C>      
            Current Assets                                      $ 658,000               1,095,000
            Property, plant and equipment, net                  3,977,000               4,214,000
            Other assets                                          801,000                 589,000
            Current liabilities                                (1,951,000)             (1,738,000)
            Long-term debt                                       (920,000)             (1,816,000)
            Deferred taxes                                        (15,000)                (15,000)
                                                             ====================    ====================
            Net Assets                                         $2,550,000               2,329,000
                                                             ====================    ====================
</TABLE>

         The revenues of SEG for 1996, 1995 and 1994 were $7,885,000, $7,766,000
and $7,424,000, respectively. Included in the loss on disposal on SEG is
$403,000 of operating losses subsequent to the measurement date.

         In addition, the Company also determined to terminate the operations of
CPV Productions, Inc. (a wholly-owned subsidiary which created, produced and
distributed movies and television programming) at the end of 1996. The Company
had suspended production of movies at the beginning of 1996 due to a shortage of
capital but had continued to license and distribute its existing film library.

5.       Film and CD-ROM Costs

         Film and CD-ROM costs consists of the following:
<TABLE>
<CAPTION>

                                                                           December 31,
                                                                     1996               1995
                                                                ---------------    ----------------

                 <S>                                                  <C>               <C>       
                 Films and CD-ROMs released                           $400,000          $8,071,000
                 Films and CD-ROMs not released                              0             290,000
                                                                ---------------    ----------------
                                                                       400,000           8,361,000
                 Less Amortization                                     400,000           3,994,000
                 Reduction to net realizable value                                       3,967,000
                                                                ===============    ================
                                                                            $0            $400,000
                                                                ===============    ================
</TABLE>

         Prior to the restructuring, the Company created, produced and
distributed movies and television programs (Note 14).

6.       Property and Equipment

         Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                                               December 31,
                                                                                       ------------------------------
                                                            Useful Lives in Years          1996             1995
                                                            -----------------------    -------------    -------------
           <S>                                                    <C>              <C>               <C>        
           Satellite transponders                                     12               $58,663,000       $58,663,000
           Equipment                                                   5                 9,716,000         7,615,000
           Furniture and fixtures                                      7                                     505,000
                                                                                           510,000
           Leasehold improvements                              Life of lease or                            2,483,000
                                                                   shorter               2,564,000
                                                                                       -------------    -------------
                                                                                        71,453.000        69,266,000
           Less, accumulated depreciation and                                                              2,710,000
           amortization                                                                  9,505,000
                                                                                       =============    =============
                                                                                       $61,948,000       $66,556,000
</TABLE>
                                               
         Certain of the aforementioned equipment having a net book value of
$54,559,000 and $60,260,000 is collateral for the equipment loans and capital
leases at December 31, 1996 and 1995, respectively.



<PAGE>


7.       Long-Term Debt

         Long-term debt consists of the following:
<TABLE>
<CAPTION>

                                                                    December 31,
                                                         -----------------------------------
                                                               1996                1995
                                                         ----------------    ---------------

                     <S>                                  <C>                <C>                
                     9.9% note payable (a)               $           -       $
                                                                                    638,000
                     Revolving credit line (a)                14,621,000         14,880,000
                     10% note payable                             80,000            130,000
                     11% note payable                            100,000            125,000
                     7% note payable (b)                         668,000
                     8% note payable (c)                                            178,000
                     Notes payable (d)                                              775,000
                                                                             ---------------
                                                         ----------------
                                                              15,469,000         16,726,000
                     Less current portion                        817,000          1,645,000
                                                         ================    ===============
                     Long-term portion                     $  14,652,000        $15,081,000
                                                         ================    ===============
</TABLE>

         The aggregate principal payments of the aforementioned long-term debt,
reflecting the proforma effect of the debt refinancing on January 15, 1997 (Note
15), maturing in each of the years subsequent to December 31,1996, including
estimated payments on debt with contingent terms, are as follows:
<TABLE>
<CAPTION>

               Years Ending December 31,                   Payment 
      ----------------------------------------    --------------------
                        <S>                          <C>                               
                         1997                       $    817,000
                         1998                          1,030,000
                         1999                          9,500,000
                                                   ====================
                         Total                      $ 11,347,000
</TABLE>
                                                   ====================

     On October 21, 1994, the Company entered into a loan agreement with
     Midlantic National Bank, N.A. ("Midlantic"). The loan agreement included a
     term loan with a principal sum of $900,000 and a revolving credit line of
     $15,000,000, no further funds were available on or after December 31, 1995.
     The term loan bore interest at 9.90% and was repayable in forty-eight
     monthly payments of $18,750. Interest on the revolving credit line is based
     on either prime plus 1% or the 30, 60, or 90 day LIBOR plus 3% as selected
     by the Company at the time of each draw-down. Interest payments are made
     quarterly and the revolving credit line expired on December 31, 1996 and
     was extended to January 15, 1997. On December 31, 1996, the interest rate
     was 9.25%. The term loan and revolving credit line are collateralized by
     the stock of the Company's subsidiaries excluding SEG.

     On April 3,1996, the Company paid the balance of the term loan in full
     from the proceeds received on the sale of its TeleSelect interest.

     On January 15, 1997, the Company restructured its debt with PNC Bank N.A.,
     as successor in interest to Midlantic ("PNC") (Note 15).

     On September 19, 1996, the Company's UK subsidiary HVC entered into a
     short-term loan agreement with National Westminster Bank in England to
     provide up to $750,000 of financing.  The loan is payable over 12 months 
     at $65,000 per month including interest at 7% per annum.

     Prior to the acquisition of CPV, a former shareholder of CPV and officer
     of the Company, provided loans to CPV to fund its working capital needs.
     The loan balance and accrued interest totaling $207,000 was paid in 1996.

     The Company issued a $500,000 note at 8% in connection with a joint
     venture in AGN. The Company also issued a $275,000 note in connection with
     the purchase of 100,000 shares of MMG stock at $2.75 per share. The
     $275,000 note was due on July 26, 1996 and bore interest at the short term
     applicable federal rate, as such term is defined in Section 1274 of the
     Internal Revenue Code ("AFR"). On June 28, 1996, the parties entered into
     an agreement which settled various disputes and the $775,000 in notes were
     canceled.

8.       Obligation Under Capital Leases

         Minimum annual rentals under capital leases for the five years
subsequent to 1996 and in the aggregate are as follows:

           1997                                                 10,660,000
           1998                                                  8,730,000
           1999                                                  8,445,000
           2000                                                  7,657,000
           2001                                                  7,620,000
           Thereafter                                           45,720,000
                                                        -------------------
           Net minimum lease payments                           88,832,000
           Less amount representing interest                    30,147,000
                                                        -------------------
           Present value of minimum lease obligations           58,685,000
           Current portion of lease obligations                  4,926,000
                                                        ===================
           Long-term portion of lease obligations              $53,759,000
                                                        ===================

     Effective as of December 1995, the Company entered into a non-cancelable
     lease agreement for five transponders on the AT&T satellite Telstar 402R
     for a monthly payment of $635,000. The term of the agreement for the useful
     life of the satellite's geo-stationary orbit, which was estimated to be
     twelve years. Included in property and equipment is an asset with an
     original cost of $58,663,000 equal to the discounted lease payments using a
     discount rate of 8%. On March 31, 1997, this lease was amended which
     resulted in the lease being accounted for as an operating lease (Note 15).

     In 1995, the Company entered into a financing agreement, accounted for as
     a capital lease, totaling $2,078,000 with IBM to construct a master control
     and digital playback center, at its New York facility. In 1995, the Company
     made payments totaling $435,000 on the obligation. As a result of certain
     delays, changes in equipment requirements and other factors, the original
     lease agreement was superseded in the fourth quarter of 1996 with a new
     lease which requires 36 payments of approximately $37,000, commencing on
     February 1, 1997. The lease obligation on December 31, 1996 is $1,083,000.

      On August 14, 1996, the Company entered into an equipment lease agreement
     for approximately $1.8 million of equipment from Vendor Capital Group. The
     lease was accounted for as a capital lease. The equipment included a
     Digicipher encoder and approximately 1,200 decoder boxes which were
     provided to the Company's cable systems customers. This equipment enabled
     the Company to digitally compress its domestic television networks, freeing
     up two transponders for other uses.

9.       Capital Transactions

         During May, 1995, the Company granted to several key executives 177,000
restricted shares of common stock ("Restricted Shares") which were approved at
the 1996 annual shareholders' meeting. The Restricted Shares are
non-transferable with such restriction lapsing in five years. During 1996 the
Company canceled 44,000 shares of the restricted stock, issued on May 1, 1995,
as part of a termination agreement with one of the Company's then executive
officers. The Company recorded unearned compensation for the portion of shares
not yet vested and will recognize such amount as an expense on a pro rata basis
over five years as the restriction lapses. The unamortized balance of unearned
compensation at December 31, 1996 of $765,000 has been included as a reduction
in stockholders' equity.

         On July 1, 1993, Pay-Per-View International, Inc. ("PPVI"), a
wholly-owned subsidiary of the Company, entered into an agreement with Coastline
Films and CPV Productions, Inc. ("CPV") to license 200 feature length motion
pictures for ten years. In consideration for the license, the Company issued
37,500 shares of common stock to Coastline Films. As additional consideration,
PPVI agreed to make certain cash payments to CPV and Coastline Films if PPVI's
subscriber base reached certain thresholds. On August 30, 1995, PPVI entered
into a Modification and Substitution Agreement with Coastline Films. Coastline
agreed that no further cash payments would be required in exchange for the
Company's issuance of an additional 15,000 shares of common stock to Coastline
Films. The parties also agreed to reduce the number of films from 200 to 150 and
to extend the terms of the film licenses from 10 years to perpetuity.

         On December 26, 1994, the Company issued 5,000 shares of common stock
to a consultant for services rendered.

         Warrants. On December 8, 1994, the Company granted 100,000 warrants
exercisable at $12.03 (which were subsequently canceled and reissued during 1996
at an exercise price of $3.88) to Midlantic in connection with a revolving
credit line. These warrants were subsequently canceled as part of the Company's
debt restructuring in January of 1997 (Note 15).

         During May 1994, the Company granted 3,750 warrants at a purchase price
of $6.50 to three individuals in connection with an unsecured $125,000 loan.

         During January 1994, the remaining 300,900 warrants exercisable at
$6.67 as part of an equity offering were exercised. Also warrants to acquire
85,409 shares issued in connection with a senior secured note and 24,000 other
warrants were exercised.

         On April 1, 1996 the Company granted Imperial Bank, 20,000 warrants
with an exercise price of $3.125 per share to purchase the Company's common
stock, in connection with the SEG term loan. These warrants will expire on April
1, 2001.

         Changes in warrants outstanding are summarized as follows:
                                                         Warrants
                                           ------------------------------------
                                                           Exercise Price
                                               Shares          Range
                                         ---------------    ------------------

       Balance January 1, 1994                 615,331
       Granted                                 103,750        $6.50-$12.03
       Exercised                              (600,331)         $.08-$6.67
       Canceled
                                            ---------------
       Balance December 31, 1994               118,750
       Granted                                 100,000               $3.88
       Exercised
       Canceled                               (100,000)             $12.03
                                            ---------------
       Balance December 31, 1995               118,750
       Granted                                  20,000              $3.125
       Exercised
       Canceled
                                            ===============
       Balance December 31, 1996               138,750
                                            ===============

         At December 31, 1996, 1995 and 1994, there were 138,750, 118,750, and
118,750 respectively, of exercisable warrants.

         Options. The Company has four stock option plans (the 1992, 1993, 1994
and 1995 Plans) (collectively the "Plans") for officers, employees, directors
and consultants of the Company or any of its subsidiaries and in addition a
Directors' Plan (the "Directors' Plan"). Options granted to employees may be
either incentive stock options (ISO's) or non-ISO's; ISO's may not have an
exercise price less than 100% of fair market value of the Company's common stock
on the grant date and all options may not have an exercise price of less than
110% of fair market value on the grant date in the case of options granted to
holders of 10% or more of the voting power of the Company's stock on the grant
date. The aggregate fair market value, as determined on the grant date, of ISO's
that may become exercisable in any one year can not exceed $100,000. Options
canceled subsequent to issuance are returned to the Plan and are available for
re-issuance as determined by the Stock Option Committee.

         The options are evidenced by a written agreement containing the above
terms and such other terms and conditions consistent with the Plans as the
Board/or Committee may impose. Each options, unless sooner terminated, shall
expire no later than 10 years (five years in the case of ISO's granted to
holders of 10% of the voting power of the Company's common stock) from the date
of grant, as the Board/or Committee may determine.

         The Plans in effect on December 31, 1996, 1995 and 1994 authorize the
granting of stock options to purchase an aggregate of 4,000,000, 4,000,000 and
3,600,000 shares of the Company's common stock, respectively. At December 31,
1996, 1995 and 1994 there were a total of 126,588, 1,213,987 and 950,901 shares
remaining for future grants under the four plans.

         The Directors' Plan authorizes the automatic annual issuance to each
non-employee director of options to acquire 10,000 shares of the Company's
common stock on each December 31, at an exercise price equal to the market price
of the stock on that date. The plan was adopted in 1994 and authorizes the
granting of a total of 100,000 stock options. On December 31, 1996, 1995 and
1994 there were a total of 50,000, 60,000 and 80,000 shares available for future
grant under this plan.

         During 1992 and 1995 the Company granted options to acquire 24,000 and
16,000 shares, respectively, outside the aforementioned plans at an exercise
price equal to the market price of the Company's common stock on each grant
date.

         The Company has adopted the disclosure provisions of Financial
Accounting Standards No. 123. "Accounting for Stock-Based Compensation" (FAS
123). It applies APB Opinion No. 25 "Accounting for Stock Issued to Employees"
and related interpretations in accounting for its plans and does not recognize
compensation expense for its stock-based compensation plans. If the Company had
elected to recognize compensation expense based upon the fair value at the grant
date for awards under these plans consistent with the methodology prescribed by
FAS 123, the Company's net income and earning per share would be reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>

                                        Year ended                     Year ended
                                    December 31, 1996               December 31, 1995
                                  ---------------------------   --------------------------
         Net loss            
         <S>                             <C>                           <C>          
           As reported                   ($7,900,000)                  ($15,126,000)
           Pro forma                      (9,748,000)                   (18,283,000)
         Loss per share
           As reported                          (.70)                         (1.29)
           Pro forma                            (.86)                         (1.56)
</TABLE>


         These pro forma amounts may not be representative of future disclosure
because they do not take into effect pro forma compensation expenses related to
grants made before 1995. The fair value of these options was estimated at the
date of grant using the Black-Scholes option valuation model and using
assumptions for the year ended December 31, 1996 and 1995; respectively;
expected volatility of 63% and 61%; risk-free interest rates of 5.6% and 5.%;
and expected life of 7 years. The weighted average fair value of options granted
during the year ended December 31, 1996 and 1995 for which the exercise price
equals the market price on the grant date was $2.05 and $2.67, respectively, and
the weighted average exercise prices were $3.07 and $4.05, respectively.

         Transactions involving stock options are summarized as follows:

                                               Options
                                      ---------------------------------------
                                       Stock Options       Weighted-average
                                       Outstanding         exercise price
                                       ---------------    --------------------

  Balance at  January 1, 1994          2,434,149                $3.13

                                                       
  Granted                                260,250                 7.84
  Exercised                              (19,200)                3.33
  Canceled                                (2,100)                3.33

                                       ---------------
  Balance at December 31, 1994         2,673,099                 3.59
  Granted                              2,899,820                 5.07
  Exercised                               (8,200)                3.40
  Canceled                            (2,698,706)                5.17
                                      --------------
  Balance at December 31, 1995         2,866,013                 3.60
  Granted                              1,235,918                 3.07
  Exercised                              (26,000)                1.02
  Canceled                              (165,919)                4.23
                                       -----------               
  Balance at December 31, 1996         3,910,012                $3.42
                                    ===============

         The following table summarizes information concerning currently
outstanding and exercisable stock options:
<TABLE>
<CAPTION>

                                        Options Outstanding                             Options Exercisable
                       -------------------------------------------------------    ---------------------------------
                                               Weighted
                           Number              Average            Weighted            Number            Weighted
                       Outstanding at         Remaining            Average        Exercisable at        Average
    Ranges of           December 31,       Contractual Life       Exercise         December 31,         Exercise
 Exercise Prices            1996                                    Price              1996              Price
-------------------    ----------------    -----------------    --------------    ----------------    -------------
<S>       <C>                <C>              <C>                   <C>                <C>               <C>  
   $.83 - $1.75             438,525           8.91 years            $1.55              189,131           $1.28
  $2.61 - $4.63           3,315,487           7.88 years             3.41            2,544,949            3.53
  $7.75 - $9.25             156,000           7.12 years            $8.85              125,250            $8.93

At December 31, 1996, 1995 and 1994, there were 2,859,330, 1,695,113, and
1,335,232 of options that are exercisable, respectively.

</TABLE>

<PAGE>


10.      Income Taxes

         The components of income tax expense (benefit) follow:
<TABLE>
<CAPTION>

                                                                     Years Ended
                                               --------------------------------------------------------
                                                    1996                1995                1994
                                               ----------------    ----------------    ----------------

           Current
                 <S>                           <C>                   <C>                  <C>     
                Federal                        $  89,000             ($423,000)           $351,000
                State and Local                   50,000               240,000             154,000
                Foreign                           53,000               850,000             793,000
                                               ----------------    ----------------    ----------------
                                                 192,000               667,000           1,298,000
                                              ----------------    ----------------    ----------------
           Deferred
                Federal
                State and Local                                                    
                                                                       -                   -
                                           ----------------    ----------------    ----------------
           Total Income Taxes
                                            $   192,000            $   667,000          $1,298,000
                                           ================    ================    ================
</TABLE>

         The following is a reconciliation between the statutory federal income
tax for each of the past three years and the Company's effective tax rate:
<TABLE>
<CAPTION>
  
                                                                                   Years Ended
                                                             -------------------------------------
                                                               1996          1995         1994
                                                             ----------    ---------    ----------
   <S>                                                          <C>        <C>            <C>
   Income tax provision (benefit) at federal statutory          (34%)      (34%)          34%
     rate
   State and local income taxes net of federal tax benefit        1%         0%            2%
   Foreign income taxes                                           1%         2%           15%
   Foreign income, excluded, net of federal tax benefit           0%        (2%)          (13%)
   Amortization of Goodwill                                      12%         4%            4%
   Non-deductible business meals and entertainment                1%         0%            1%
                                                
   (Decrease) increase due to the change in the valuation
     allowance                                                   14%        22%          (13%)
   Other items                                                    1%         3%           (5%)
                                                              =========    ==========   ==========
   Effective tax rate                                            (4%)       (5%)          25%
</TABLE>
         The Company's foreign subsidiaries have no accumulated earnings.
Therefore, no U.S. Federal income taxes have been provided relating to the
foreign subsidiaries. The foreign income subject to foreign taxes was
approximately $161,000 in 1996 and $2,110,000 in 1995.

         As of December 31, 1996, the Company has available, for Federal income
tax purposes, unused net operating loss carryforwards of $3,541,000 which may
provide future tax benefits, expiring 2005. Due to a change in control of the
Company that occurred in September 1990 approximately $1,118,000 of the net
operating loss carryforward is subject to an annual limitation of approximately
$27,000.



<PAGE>


         The components of the net deferred tax assets are as follows:
<TABLE>
<CAPTION>

                                                                         Years Ended
                                                               ---------------------------------
                                                                    1996              1995
                                                               ---------------    --------------
           Deferred tax assets
              <S>                                                 <C>               <C>     
              Bad debts                                           $637,000          $503,000
              Deferred compensation expense                        207,000           185,000
              Net operating loss carry-forwards                  1,204,000           162,000
              Foreign tax carry-forwards                            52,000
              AMT credit carry-forward                             107,000
              Satellite lease classification                       798,000
              Accrual for restructuring changes                  1,695,000          3,506,000
              Non-deductible capital losses                        256,000            938,000
              Valuation allowance                               (4,068,000)        (4,772,000)
                                                              ---------------    --------------
                   Total deferred tax asset                        888,000            522,000
                                                              ---------------    --------------
           Deferred tax liability
              Accrual versus cash method                                              (14,000)
              Tax depreciation in excess of book                  (888,000)          (445,000)
              Undistributed earning of foreign investee                               (63,000)
                                                              ---------------    --------------
                   Total deferred tax liability                   (888,000)          (522,000)
                                                              ===============    ==============
              Net deferred tax assets                         $      -           $      -
                                                              ===============    ==============
</TABLE>

<PAGE>

11.      Commitment and Contingencies

         Employment Agreements. Mr. Faherty is employed by the Company as its
Chairman and Chief Executive Officer pursuant to an amended Employment Agreement
effective January 1, 1996. The agreement, as presently amended, provides for a
base salary of $350,000, with any adjustments determined annually. The agreement
has a six year term. In each year that the agreement is not terminated, the
agreement's term is extended for five years from that anniversary date. The
agreement provides for loans from the Company of up to $215,000, plus accrued
interest. The agreement also provides for certain benefits including annual
retirement benefits of not less than $100,000 (implemented by the Deferred
Compensation Agreement described below). Mr. Faherty has waived his rights to a
reimbursement for automobile costs for 1996.

         Effective December 31, 1995, Messrs. Graff and Nolan resigned as
officers of the Company. Messrs. Graff and Nolan will receive $350,000 per annum
payable in equal installments beginning January 1, 1996 through December 31,
1998. In the event the Company completes financing in excess of $20 million,
each individual may require prepayment of the remaining balance due on their
agreements. These costs were accrued as restructuring costs as of December 31,
1995 (See Note 14).

          Messrs.  Graff and Nolan have loans  outstanding with the Company 
which are required to be repaid during 1997 and 1998.  Pursuant to the Fourth 
Amendment to Mr. Faherty's Employment Agreement,  Mr. Faherty will repay his
loan by December 31,  1997.  All of the loans bear  interest at the same rate 
the Company pays on its loan from its senior secured lender. At December 31, 
1996, the interest rate was 9.25%.

         Each of these agreements prohibits the executive from competing with
the Company for a specified period after termination of employment.

         Deferred Compensation. The estimated present value of future benefits
is accrued over the period from the effective date of the agreements (October 1,
1992) until the expected retirement dates of the participants. The expense
incurred for the year ended December 31, 1996, 1995 and 1994 amounted to
$11,000, $66,000 and $66,000, respectively.

         Leases and Service Contracts. The Company leases its office facilities,
satellite transponders and uplink and certain equipment. As of December 31,
1996, the aggregate minimum rental commitments under non-cancelable leases were
approximately as follows:

<TABLE>
<CAPTION>

                            Years Ending                                 Office               Satellite
     December 31               Total          Facilities and          Transponder
                                                Equipment              and Uplink
 ---------------------    ----------------   -----------------    ---------------------

<S>                               <C>                <C>                  <C>                
     1997                  $    1,762,000     $       581,000      $         1,181,000
     1998                         671,000             502,000                  169,000
     1999                         571,000             477,000                   94,000
     2000                         461,000             461,000
     2001                         405,000             405,000
 Thereafter                       635,000             635,000
                          ================   =================    =====================
          Total           $     4,505,000     $     3,061,000      $         1,444,000
                          ================   =================    =====================

</TABLE>

         Total expense under operating leases amounted to $3,220,000, 
$9,418,000 and $9,448,000 for the years ended 1996, 1995 and 1994, respectively.

         Neither The Adult Channel nor Eurotica have long term satellite
arrangements. If either of these arrangements are terminated and the Company is
unable to find a replacement satellite service, broadcast of the affected
network may be interrupted or terminated.

         Contracts with Producers. The Company has entered into contracts with
several major motion picture studios for the content on Cable Video Store. The
Company has contributed all contract rights associated with Cable Video Store 
to the CVS Partners on March 6, 1996 (Note 2). The terms range from one to two
months to obtain the rights to exhibit the movies or events licensed. Payment
terms are based upon a percentage of the gross revenues, usually ranging from
35% to 50%.

         The Spice Networks, The Adult Channel and The Home Video Channel have
entered into contracts with producers with terms ranging from one to two years
which are on a flat fee basis. Also, the Company has contracted with several
major adult motion picture producers. These contracts allow the Company to
license world-wide pay-TV rights in perpetuity.

         Contracts with Cable Systems. The Company has entered into affiliation
agreements with numerous cable systems in the United States. The contracts have
terms ranging from one to ten years with the fees to the cable systems based
upon a percentage of the subscriber gross revenues, as defined, in the
respective agreements.

12.      Significant Customers

         Two cable operators accounted for approximately 17.6% and 9.0%,
respectively, of revenues in 1996 and approximately 13.0% and 8.3%,
respectively, in 1995 and approximately 12.9% and 10.5%, respectively, in 1994.

13.      Retirement Plan

         On January 13, 1993, the Company established a 401K tax deferred
savings plan (the "Plan") for all employees of the Company on March 1, 1993.
Employees are eligible to participate in the Plan after completing one year of
service. Eligible employees may elect to contribute up to 15% of their annual
compensation to the Plan, up to the maximum allowed by law. The Company 
declared for 1995 and 1994 a discretionary matching contribution equal to 25% 
of the amount of the salary reduction employees elect to defer, up to the firs
4% of compensation. For the years ended December 31, 1995 and 1994, the Company
incurred a 401K contribution expense of approximately $42,000 and $19,000,
respectively. The Company no matching discretionary contribution during the year
ended December 31, 1996.

14.      Restructuring Reserve

         In December, 1995, the Company entered into a restructuring plan for 
certain operating units and its corporate management.  Two executives, Mr. Mark
Graff and Mr. Leland H. Nolan, also resigned as officers of the Company 
effective December 31, 1995.  Messrs. Graff and Nolan have signed separation 
agreements (refer to Employment Agreements) which are in force through 1998.

         The accrued restructuring reserve is comprised of corporate level
restructuring and the suspension of production activities formerly conducted by
CPV. Each component involved contraction of the Company's workforce and
facilities and other miscellaneous costs associated with the restructuring. The
balances of each component at December 31, 1995 and 1996 were as follows:

<TABLE>
<CAPTION>

                                             December 31,                             December 31,
                                                 1995            Cash Outflows            1996
                                            ----------------    -----------------    ----------------
          Corporate
<S>                                              <C>                  <C>                 <C>            
                   Salaries                 $     2,750,000      $     1,301,000     $     1,449,000
                   Facilities and Other             250,000              179,000              71,000
          CPV
                   Salaries                         464,000              464,000                   0
                   Facilities and Other             191,000              191,000                   0
                                            ================    =================    ================
                            Total           $     3,655,000     $      2,135,000     $     1,520,000
                                            ================    =================    ================

</TABLE>

         As a result of this restructuring, the Company took a pretax charge of
$3,655,000 in 1995, including the separation costs for approximately 50
employees.

15.      Subsequent Events

         On January 11, 1997, as a result of Loral Skynet ("Loral") (which
acquired AT&T's satellite business) losing contact with and declaring Telstar
401 permanently out of service, one of the Company's unprotected transponders on
Telstar 402R was preempted by Loral and transferred to another Loral customer.
This action has resulted in the permanent reduction of the Company's satellite
transponder costs with Loral and caused the monthly payments to be reduced from
$635,000 to $520,000 per month. In addition, the Company's capitalized satellite
transponder costs and related obligation have been reduced by $9,655,000 and
$10,026,000 respectively. As a result of this transaction, the Company will
record a one-time gain of $361,000 in the month of January, 1997.

         On March 31, 1997, the Company amended the terms of the satellite
transponder lease with Loral. The term of the agreement, which was to originally
expire at the end of the satellite's useful life, was shortened to October 31,
2004. In consideration of the amendment the Company granted Loral the right to
pre-empt one of the Company's transponders after September 1, 1997. As a result
of the amendment, the lease will be classified as an operating lease on March
31, 1997 and will give rise to a non-recurring gain of approximately $1.6
million.

         On January 15, 1997 the Company negotiated an agreements with PNC and
Darla L.L.C. ("Darla"), AS ASSIGNEE, which resulted in the replacement of its
primary revolving credit line with PNC. PNC settled the outstanding balance of
the credit line, totaling $14.6 million, for $9.6 million in cash, a new
$400,000 term loan, and 600,000 warrants exercisable at $2.06 per share. The new
PNC agreement canceled the 100,000 warrants previously issued to PNC which had
an exercise price of $3.88 per share.

         The Darla agreement provided a term loan of $10.5 million, of which
$9.6 million was used to satisfy the PNC settlement and $0.9 million which
financed acquisition fees. Additionally, this agreement included a revolving
line of credit totaling $3.5 million. The term loan and the credit line mature
in 30 months. The loan bears interest at 5% over the Citibank prime rate but not
less than 13%. Three percent of the interest may be accrued and added to the
principal of the loan and will be forgiven if the Credit Facility is paid in
full within two years.

         As part of the Darla transaction, the Company issued 24,250 shares of
cumulative, convertible Series A Preferred Stock, with a $100 face and
liquidation value per share and an 8.0% cumulative dividend to be paid at the
Company's discretion. The Preferred Stock is convertible after two years into
Common Stock of the Company at a 10% discount from the then current market price
of the Company's Common Stock. The loan is secured by all the Company's assets
including the stock of its subsidiaries, and the loan restricts payment of
common stock dividends.


16.      Geographic Data

         Revenues, operating profits (loss) and identifiable assets by
geographic area were as follows:

                              1996               1995                1994
                         ---------------    ----------------    ---------------
Revenues
    United States        $   26,000,000      $   32,939,000     $   34,530,000
    Europe                    7,213,000          10,353,000          8,702,000
                         ---------------    ----------------    ---------------
                         $   33,213,000      $   43,292,000     $   43,232,000
                         ===============    ================    ===============
Operating Profits (loss)
    United States        $    1,392,000        ($15,550,000)    $    2,511,000
    Europe                   (1,208,000)          1,830,000          2,539,000
                         ---------------    ----------------    ---------------
                         $      184,000        ($13,720,000)         5,050,000
                         ===============    ================    ===============

Identifiable Assets
    United States        $   73,755,000     $    81,529,000
    Europe                   15,557,000          17,670,000
                         ===============    ================
                         $   89,312,000     $    99,199,000
                         ===============    ================



<PAGE>




SPICE ENTERTAINMENT COMPANIES, INC. and SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULE



                                                                      Page
Schedule:                                                          Numbers(s)


II.           Valuation and Qualifying Accounts and Reserves           F-31




         All other schedules are omitted since the required information is not
present or is not presented in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements.



<PAGE>

<TABLE>
<CAPTION>

                                                                                                                        SCHEDULE II

                                                SPICE ENTERTAINMENT COMPANIES, INC.

                                           VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                                        for the years ended December 31, 1996, 1995 and 1994


                       Column A                             Column B          Column C           Column D           Column E
                       --------                             --------          --------           --------           --------

                                                           Balance at         Additions
                                                          Beginning of       Charged to                           Balance End
                                                             Period           Costs and                            of Period
                      Description                                             Expenses          Deductions
                                                          ---------------    --------------     --------------   ---------------
<S>                                                             <C>                <C>               <C>                  <C> 
Fiscal year ended December 31, 1996
  Allowance for Doubtful Accounts                          $  1,178,000     $     832,000      $     274,000       $  1,736,000
                                                         ---------------    -------------      -------------     ---------------
                                                           $  1,178,000     $     832,000      $     274,000       $  1,736,000
                                                         ===============    ==============     ==============    ===============

Fiscal year ended December 31, 1995
  Allowance for Doubtful Accounts                         $     331,000     $     926,000      $      79,000       $  1,178,000 
                                                         --------------     -------------      -------------     --------------
                                                          $     331,000     $     926,000      $      79,000       $  1,178,000
                                                         ===============    ==============     ==============    ===============


Fiscal year ended December 31, 1994
  Allowance for Doubtful Accounts                         $     244,000     $      98,000      $      11,000      $     331,000
                                                         --------------     -------------      -------------     --------------
                                                          $     244,000     $      98,000      $      11,000      $     331,000
                                                         ===============    ==============     ==============    ===============

</TABLE>