<PAGE>
 
                    U.S. Securities and Exchange Commission
                             Washington, D.C. 20549

                                   Form 10-KSB

[X]      ANNUAL REPORT UNDER SECTION 13 OF 14(d) OF THE SECURITIES EXCHANGE ACT
         OF 1934

         For yearly period ended May 31, 1997
                                 ------------

[_]      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

         For the transition period from               to               . 
                                        -------------    --------------
 
                         Commission file number 0-21634
                                                -------

                            Metro Global Media, Inc.
                        --------------------------------
        (Exact name of small business issuer as specified in its charter)

              Delaware                            65-0025871
-----------------------------------   ------------------------------------
  (State or other jurisdiction of        (IRS Employer Identification No.)
   incorporation or organization) 

                 1060 Park Avenue, Cranston, Rhode Island 02910
        -------------------------------------------------------------  
                  (Address of principal executive offices)

                                 (401) 942-7876
                            -----------------------
                           (Issuer's telephone number)

  ---------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last year)

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

                APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
                   PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Check whether the registrant filed all documents and reports required to be
filed by Section 12,13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court.
Yes      No
    ----   ----
                      APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 3,558,168 at July 31, 1997
<PAGE>

                               TABLE OF CONTENTS

 
                                     PART I
                                     ------

ITEM 1.  BUSINESS............................................................ 2

ITEM 2.  PROPERTIES..........................................................13

ITEM 3.  LEGAL PROCEEDINGS...................................................13

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................14

                                     PART II
                                     -------   

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
            STOCKHOLDER MATTERS..............................................15

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
            CONDITION AND RESULTS OF OPERATIONS..............................15

ITEM 7.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA..........................20

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
             ACCOUNTING AND FINANCIAL DISCLOSURES............................20


                                    PART III
                                    --------
    
ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
         PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
         ACT.................................................................21

ITEM 10. EXECUTIVE COMPENSATION..............................................22

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
             MANAGEMENT......................................................24

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................25

                                    PART IV
                                    -------    

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.....................................28

INDEX TO FINANCIAL STATEMENTS................................................F-0
<PAGE>
 
                                     PART I
                                     ------           
ITEM 1.  BUSINESS
-----------------

(a)  General Development of Business

     Metro Global Media, Inc. (the "Company") was incorporated, under the name
     South Pointe Enterprises, Inc. in Florida in November 1987. In February,
     1996, the Company changed its name from South Pointe Enterprises, Inc. to
     Metro Global Media, Inc.

     In November, 1996 the Company merged into an inactive subsidiary (Metro
Sub, Inc.) under the laws of the state of Delaware and simultaneously changed
its name back to Metro Global Media, Inc.

     In June 1992, the Company completed an offering pursuant to a Registration
Statement under the Securities Act of 1933 of 60,000 Units (the "Units") at an
offering price of $6.00 per Unit (the "Initial Offering"). Each Unit consisted
of six shares of the Company's common stock $.0001 Par Value ("Common Stock")
and six class "A" warrants each exercisable for one share of common stock for
twelve months at a price of $1.50 per share of Common Stock (the "Warrants"). A
total of 60,000 units were sold pursuant to the Initial Offering and the Company
received net proceeds of approximately $311,000. In addition the Company
received $64,326 from the exercise of the Company's Warrants and an additional
42,884 shares were issued pursuant to the exercise of the Warrants during the
Initial Offering period. In August 1995, 306,916 of the Company's outstanding
warrants were exercised, and the Company received an additional $460,524 from
the exercise of the Warrants. All warrants had been exercised or expired.

     The Initial Offering Prospectus did not disclose any specific business or
activity in which the Company would be engaged but rather was a "Blank Check"
offering whereby the Company sought to identify, investigate and if warranted,
acquire an interest in a business opportunity. As more fully set forth below,
the Company has acquired all of the issued and outstanding stock of North Star
Distributors, Inc., who subsequently changed its name to Metro, Inc. ("Metro").

     (b) Narrative Description of Business.

BUSINESS ACQUISITIONS AND OTHER ACTIVITIES.
------------------------------------------

     In August 1992, the Company entered into an Acquisition Agreement (the
"Initial Agreement") with Zeon Corporation to acquire all of the issued and
outstanding shares of stock of North Star Distributors, Inc., d/b/a Metro Home
Video, who subsequently changed its name to Metro, Inc. ("Metro").

     Metro is in the motion picture and print production and distribution
business. Specifically, Metro, Inc. publishes and distributes magazines,
paperback books, motion pictures, (primarily on VHS videocassettes), oriented to
the adult entertainment market. The acquisition was completed on November 5,
1992.


                                        2
<PAGE>
 
     On November 10, 1994, Arcus Media Group, Inc., a wholly-owned subsidiary of
the Company, completed the acquisition of certain assets of Innovative Data
Concepts Incorporated ("IDC"), a Pennsylvania corporation. In connection with
the acquisition, the Company issued 160,000 shares of its Common Stock to IDC
and had agreed to issue up to an additional 40,000 shares of Common Stock to IDC
provided certain sales goals by Arcus were met. In May 1995, Arcus filed suit
against IDC alleging misrepresentation in connection with the transaction. On
May 31, 1996 the suit filed by Arcus against IDC was settled. As a result of the
settlement the Company received from IDC 75,000 shares of the 160,000 shares of
the Company originally issued to IDC as part of the November 10, 1994 Asset
Purchase Agreement.

MOTION PICTURE PRODUCTION AND DISTRIBUTION.
------------------------------------------

     Metro produces and distributes adult motion picture entertainment. This
includes the production and financing of feature films (full length motion
pictures produced on film), feature videos (full length motion pictures produced
on videotape),and video compilations, distributed primarily on videocassettes;
the distribution of pay television and cable programming; and the ownership and
administration of film copyrights. Metro's motion picture productions feature
men and women in a variety of erotic and adult sexual situations. The
Classification and Rating Administration of the Motion Picture Association of
America (the "MPAA"), a motion picture industry trade association, assigns
ratings for age group suitability for theatrical and home video distribution of
motion pictures. Submission of a motion picture to the MPAA for rating is
voluntary, and Metro does not submit its motion pictures to the MPAA for review.
However, with the exception of several titles which have been re-edited for
cable television, most of the films and videos distributed by Metro, if so
rated, would most likely fall into the "NC-17 -- No Children Under 17 
Admitted"/1/ rating category because of depiction of nudity and their sexually
explicit content.

     Metro owns or has distribution rights to a library of over 2,060 titles
available on videocassette and sold approximately 1,341,200 videocassettes
during the fiscal year ended May 31, 1997, primarily to retail stores and
wholesalers located in the United States. Many of Metro's original motion
picture programs have been re-edited and licensed to cable television operators.
Several of the titles in Metro's motion picture library have been obtained from
third parties under distribution agreements pursuant to which Metro has acquired
perpetual distribution rights, and in some cases limited foreign distribution
rights, to the motion picture. Metro continues to expand its video distribution
into international markets and has entered into license agreements with
international distributors granting distribution rights to several of its motion
picture titles in several countries outside the United States.

     During fiscal 1997, the Company released 2 new feature films, 50 feature
videos, and 151 video compilations. During fiscal 1998, management of Metro
hopes to continue to expand its motion picture operations by (i) distributing
new feature films, feature videos, video compilations and additional Magma
titles on an aggressive release schedule (ii) actively seeking to acquire
distribution rights to additional titles produced by third parties, and (iii)
increasing its efforts to distribute its library and new titles into domestic
cable and satellite television markets as well as new international markets. See
"Management Discussion and Analysis of Financial Condition and Results of
Operations."
--------

     /1/"NC-17: No Children Under 17 Admitted" is a registered trademark of the
Classification and Rating Administration of the Motion Picture Association of
America, Inc.

                                        3
<PAGE>
 
Production
----------

       Metro produces films and videos either solely or under arrangements
with other producers, and is generally the principal source of financing for
these motion pictures. In addition, Metro purchases outright, or licenses for
distribution, completed films and videos produced by others. Acquired
distribution rights may be limited to specified territories, specified media
and/or particular periods of time.

     Motion pictures shot on film generally offer better production quality,
utilize more elaborate production techniques and incur higher production costs
than motion pictures shot on videotape. Many of Metro's new feature film
releases are edited into several versions depending on the media through which
they are distributed. Metro has licensed several of its films and videos for
showing on the Playboy Channel, a cable television channel produced by the
publishers of Playboy Magazine/2/, as well as pay-per-view television. In
general, versions of the films edited for cable or pay-per-view television are
less sexually explicit than the versions edited for home video distribution. The
Company has negotiated a variety of non-exclusive licensing arrangements with
several cable and pay television operators for several of its feature releases
that have been produced during the past two fiscal years, including arrangements
which permits unlimited showings for a defined duration in exchange for a one-
time lump sum royalty payment, arrangements for which the Company is paid a fee
based on the number of subscribers to the cable station and the number of times
the Company's motion picture is shown, and arrangements pursuant to which the
Company receives a commission based upon the revenues received by the pay
television operators as a result of a showing of the Company's motion picture.

Distribution
------------

     Metro distributes, for home video use, pre-recorded videocassettes
containing motion pictures owned or licensed by Metro. Wholesale distribution of
Metro's home video products is accomplished through a distribution network of
wholesalers located throughout the United States and Europe. Metro has
contracted with video distributors in many major cities throughout the United
States and Europe for the distribution of its home video products.

     In addition, Metro operates a regional distributorship for its own motion
picture titles as well as the motion picture titles of other companies to retail
outlets located throughout New England and upstate New York. Metro's New England
region fulfillment activities are conducted from a centralized facility in
Cranston, Rhode Island.

     In January 1996, the Company entered into a Distributorship Agreement
with Phantasm Video Productions, BV of Holland ("Phantasm"), one of the largest
distributors of adult entertainment products in Europe. Pursuant to the
Distributorship Agreement, Metro will provide Phantasm with a minimum average of
12 new titles per month during the term of the Agreement, and Phantasm shall
serve as the exclusive distributor throughout Europe for those titles purchased
by Phantasm for a 3 year period from release date. Under the Distributorship
Agreement, Phantasm is required to purchase a minimum of 75,000 units during
each six month period during the term of the Agreement. In August, 1996, the
Company acquired the option to
-----------

       /2/"Playboy" is a registered trademark of Playboy Enterprises, Inc.

                                        4
<PAGE>
 
purchase all of the operating subsidiaries of Phantasm Holdings, BV of Holland.
Under the terms of the Option Agreement, the Company has the option to acquire,
at any time prior to July 31, 1999, the stock of Phantasm Videoproductions, B.V.
Holland, Malibu Videoproductions GmbH of Germany, and Phantasm Videoproductions
SARL of France, at a purchase price to be determined based on a multiple of
earnings of these companies for the two years prior to the date of exercise of
the option. The Company will incur a $200,000 fee for the option that will be
due and payable on or about August, 1997. Presently Phantasm has breeched the
distribution agreement as well as not being in compliance with the terms of the
Option Agreement. At this point in time the completion of this transaction
appears unlikely.

       In July, 1996, the Company opened an international sales office in
Flensburg, Germany. This sales office is handling the sales of video rights
throughout the world excluding the items for European distribution that Phantasm
pre-selects. This office is also handling all international sales of CD-ROM
products and magazines.

Duplication and Fulfillment
---------------------------

     Metro creates and designs all artwork for promotional items and packaging
and contracts for printing services. Over 90% of all videocassettes are
duplicated at Metro's own duplicating facility located in Los Angeles County,
California, with the remaining being contracted to independent laboratories.
Metro markets and sells completed cassettes to distributors, retailers and mail
order outlets in the United States. All international orders are handled from
Metro's sales offices in Flensburg, Germany.

Competition
-----------

     The production and distribution of home video and cable television products
are highly competitive, as each competes with the other as well as with other
forms of entertainment. Furthermore, there is increased competition in the
television industry evidenced by the increasing number and variety of basic
cable and pay television services now available. Revenues for motion picture
entertainment product depends in part upon general economic conditions, but the
competitive position of a producer or distributor is still greatly affected by
the quality of, and public response to, the entertainment product it makes
available to the marketplace. There is strong competition throughout the home
video industry, both from home video subsidiaries of several major motion
picture studios and from independent companies. Nearly all of Metro's products
compete with other products and services that utilize leisure time or disposable
income.

MAGAZINE PUBLISHING AND DISTRIBUTION.
------------------------------------

     Metro publishes and distributes adult magazines and paperback books. Metro
publishes several special interest magazines under various tradenames which it
distributes through wholesalers located throughout the United States, Canada and
Europe. Amateurs in Action is also distributed on newsstands throughout the U.S.
and Canada through an exclusive distribution agreement with Kable News, Inc.,
one of the largest newsstand distributors in the United States. For example, the
Company publishes several magazines featuring pictures of men and women engaged
in erotic and sexually situations, magazines oriented to readers with specific
sexual preferences, and magazines featuring photographs and short stories
contributed by amateur photographers and authors. Metro's more popular
publications include the NorthEast Express(TM),
                         -----------------

                                        5
<PAGE>
 
Dirty Debutantes(TM) and Amateurs in Action(TM) series. Metro also publishes
----------------         ------------------
several single issue picture books and compilations of picture books.

Production and Fulfillment
--------------------------

     Production for Metro is done by several independent companies. Production
contracts are entered into on a series rather than a single title basis and are
fixed-price with provisions for cost of labor, material and specification
adjustments. These contracts, subject to certain limitations, may be terminated
by Metro or the production company.

     All of Metro's publications are printed by independent third parties. Metro
has had a longstanding relationship with a printer in the United States, who is
also a printer of other magazines that compete with Metro. Nonetheless, Metro
believes that generally there is an adequate supply of printing services
available to Metro at competitive prices, should the need arise. All of Metro's
production and printing activities are coordinated through its facility located
in Los Angeles County, California.

     Wholesale distribution of Metro's publications is accomplished through a
distribution network of wholesalers located throughout the United States and
Canada. Metro has contracted with magazine distributors in many major cities
throughout the United States for the distribution of its publications.

     In addition, Metro operates a regional distributorship for its own
publications as well as adult magazines produced by other parties to retail
outlets located throughout New England and upstate New York. Metro's New England
and New York's region fulfillment activities are conducted from a centralized
facility in Cranston, Rhode Island.

Competition
-----------

     Metro meets with direct competition from other publishers of adult
magazines and paperback books as well as all other forms of print media adult
entertainment, including several more well-known national publications with
substantially larger circulation than those of Metro.

RETAIL AND FRANCHISE SALES
--------------------------

     In May 1994, the Company formed Airborne For Men, Ltd., a wholly-owned
subsidiary which engaged in (i) the retail sale of adult entertainment products
through company owned Airborne For Men(TM) retail stores and (ii) the sale of
franchises to operate Airborne For Men(TM) retail stores. Airborne For Men(TM)
stores are upscale, adult-oriented establishments decorated in a aviation-theme
motif, and represent a complete departure from traditional outlets for adult
entertainment products. Airborne For Men(TM) stores differ markedly from
traditional adult video retailers both in product line and presentation. In
addition to selling adult video and magazine products, each Airborne For Men(TM)
store sells nationally recognized name brand men's casual clothing and
accessories such as leather bomber jackets, footwear, underwear and shaving
supplies.

     In September 1994, Airborne For Men, Ltd. completed the acquisition of 100%
of the outstanding capital stock of Eastern Sales, Inc., a Rhode Island
corporation. See "Certain Relationships and Related Transactions." Eastern
Sales, Inc. operates a retail adult video and

                                        6
<PAGE>
 
book store in Johnston, Rhode Island, which opened as the first company owned
Airborne For Men(TM) retail store in October 1994. The exterior of the Johnston,
Rhode Island store has a building-wide mural reflecting Airborne's
military/aviation motif, with a Quonset-hut style entrance and a World War II
vintage jeep projecting from the facade. In April, 1995 the Company's first
Airborne For Men franchise opened in Providence, Rhode Island. The Company
opened a second Airborne For Men(TM) store in East Providence, Rhode Island in
March 1995, and a third Airborne For Men(TM) store in Northboro, Massachusetts
in May 1995.

     Effective January 31, 1996, Airborne for Men, Ltd. sold to Capital Video
Corporation the stock of its wholly owned subsidiary A.F.M. Limited and
effective November 30, 1995, Airborne for Men, Ltd. sold to Capital Video
Corporation the stock of its wholly owned subsidiaries, Eastern Sales, Inc., a
Rhode Island corporation, and Airoldco, Inc. (formerly known as Airborne East,
Inc.), a Rhode Island corporation.

     As a result of the transaction, Airborne for Men, Ltd. has a total of 6
franchisee-owned Airborne for Men(TM) retail stores (of which five are owned by
Capital Video Corporation) as of May 31, 1997. The transaction reflected
Airborne's desire to shift its focus from retail store management to franchise
development, thereby permitting the company to open Airborne for Men locations
without incurring the start-up expenses associated with completing the store
build out and compiling an opening inventory. The transaction improved the
Company's overall cash flow because it significantly reduced the Company's debt
service requirements and dramatically reduced the Company's debt-to-equity
ratio.

     In connection with the November 30, 1995 transaction, Capital Video
Corporation agreed to assume indebtedness of Airborne to Kenneth F. Guarino
evidenced by the Promissory Note of Airborne dated September 30, 1994 (the
"Airborne Note"). At November 30, 1995, the outstanding principal balance of the
Airborne Note was $292,711, plus accrued interest of $26,503.

     In addition, Capital Video Corporation agreed to assume the indebtedness of
Metro, Inc. to Metro Equipment Company evidenced by the Promissory Note of North
Star Distributors, Inc. dated June 1, 1991 (the "1/1/92 North Star/MEC Note").
At November 30, 1995, the outstanding principal balance of the 1/1/92 North
Star/MEC Note was $97,323, plus accrued interest of $12,530. In addition,
Capital Video Corporation agreed to assume a portion of the indebtedness of
Metro, Inc. to Metro Equipment Company evidenced by the Promissory Note of North
Star Distributors, Inc. dated 6/1/92 (the "6/1/91 North Star/MEC Note"). At
November 30, 1995, the outstanding principal balance of the 6/1/91 North
Star/MEC Note that Capital Video Corporation agreed to assume was $232,894, plus
accrued interest of $64,623.

     In connection with the January 31, 1996 transaction, Capital Video
Corporation agreed to assume the balance of indebtedness of Metro, Inc. under
the 6/1/91 North Star/MEC Note. At January 31, 1996, the outstanding principal
balance of the 6/1/91 North Star/MEC Note that Capital Video Corporation agreed
to assume was $337,736. In addition, Capital Video Corporation agreed to assume
a portion of the indebtedness of Metro, Inc. to Metro Plus Company evidenced by
the Promissory Note of North Star Distributors, Inc. dated June 1, 1991 (the
"6/1/91 North Star/MPC Note"). At January 31, 1996, the outstanding principal
balance of the 6/1/91 North Star/MPC Note that Capital Video Corporation agreed
to assume was $12,625.


                                        7
<PAGE>
 
     Capital Video Corporation, which operates a chain of 29 retail video and
magazine stores throughout New England and upstate New York, of which 5 are
Airborne for Men(TM) franchises, and Airborne For Men, Ltd. agreed to waive the
standard Airborne for Men(TM) franchise fees. Because of Capital Video's
extensive retail experience in the industry, Airborne anticipates that it will
be required to provide less management, inventory control and marketing services
to Capital than it would to a less experienced franchisee; accordingly, Airborne
agreed to reduce by 50% its standard Airborne for Men(TM) royalty fees. In
connection with the acquisition of A.F.M., Limited, Capital Video Corporation
and Airborne For Men, Ltd. agreed that the store owned by A.F. M. Limited would
constitute the first of Capital's four (4) conversion stores and that Capital
would be permitted to satisfy its remaining three store obligation either by
converting existing Capital Video locations or opening new Airborne For Men(TM)
locations on or before December, 1996. No franchise fees were recognized for
fiscal year May, 1997.

     To enhance Airborne's growth opportunities, the Company has employed a
strategy of pursuing franchised Airborne For Men(TM) retail stores. The extent
to which a prospective market will be developed, will be determined by
evaluating a number of different criteria, including available resources and the
interest generated by prospective franchisees. Airborne retained a franchise
development consultant to assist in the preparation of a retail store franchise
package, and has completed registration of its Franchise Offering Circular in
the States of Rhode Island, New York, California and Connecticut, and has
received an exemption from the registration requirements in the State of
Florida. In addition, as a result of its franchise registration in Rhode Island,
Airborne is permitted to offer franchises in approximately 28 states, including
Massachusetts, Pennsylvania and New Jersey, in which registration of franchise
offerings is not required.

     Under Airborne's franchising program, the Company will grant to a franchise
owner the right to develop one or a specified number of Airborne For Men(TM)
retail stores at an approved location. Prior to the opening of an Airborne For
Men(TM) franchise, franchisees will be required to execute Airborne's standard
franchise agreement. This form of agreement governs the operation of a single
Airborne For Men(TM) store for a period of ten years. Airborne For Men(TM)
franchisees will be required to pay Airborne an initial franchise fee of $20,000
plus an additional $10,000 if the Company selects the sight, a sign lease
expense of $6,000 to $10,000, weekly royalties ranging from 5% to 8% of gross
sales, and weekly advertising fees of 1% of gross sales. Each franchise owner
will have the sole responsibility for all financial commitments relating to the
opening and operation of an Airborne For Men(TM) franchise, including rent,
utilities, payroll and other incidental expenses. In addition, franchisees will
be required to purchase all of its video and magazine inventory from Metro and
all of its mens casual wear and accessories from approved vendors, and will be
required to expend an additional 2% of gross sales on advertising expenses. The
estimated total initial investment per franchise will range from approximately
$165,000 to $230,000, depending on the amount of leasehold improvements,
inventory and other start-up expenses required for the proposed franchise
location.

     Airborne will assist franchisees by approving prospective Airborne For
Men(TM) locations and, if necessary, by finding and securing appropriate
Airborne For Men(TM) locations. In addition, Airborne will provide franchisees
with specifications and layouts for each approved Airborne For Men(TM) location,
an initial training program, a start-up marketing program, and on-site
consultation and guidance as requested. Airborne will provide extensive product
and support services to its franchise owners, and will derive income from
providing these products and services. With the possible exception of offering
net 30-day terms on sales of inventory to credit

                                        8
<PAGE>
 
worthy franchisees, Airborne does not intend to provide financing to prospective
franchisees. Airborne has not set specific requirements as to who may become an
Airborne for Men(TM) franchisee; rather, franchisees will be approved by
Airborne based upon management's assessment of the prospective franchisee's net
worth, available working capital, business acumen and financial ability to
successfully operate an Airborne For Men(TM) franchise.

     The Company has incurred an additional $19,500 in costs associated with its
proposed franchise operation for the year ended May 31, 1997. To date, the
Company has financed its investment in Airborne's franchise operations through
cash flow from operations. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations "). The Company anticipates that
the revenues derived from the sale of franchises will offset the costs
associated with offering and assisting franchisees in opening Airborne For
Men(TM) franchises.

Competition
-----------

     Although the Company has distinguished Airborne For Men(TM) stores from
traditional adult video retailers in product line and presentation, both
Company-owned and franchised Airborne For Men(TM) stores compete with existing
adult video retailers who may be situated in better locations. Airborne's
franchise operation also competes with many well-established and successful
franchisors in the sale of franchises.

ARCUS MEDIA GROUP, INC.
----------------------

     In October 1994, the Company formed Arcus Media Group, Inc. ("Arcus"), a
wholly-owned subsidiary. In November 1994, Arcus acquired certain assets,
including equipment and key technical personnel, of Innovative Data Concepts
Incorporated, a Pennsylvania corporation previously engaged in computer software
development. During the fourth quarter of fiscal 1995, Arcus determined that it
would be more efficient and cost effective to engage independent contractors to
digitize and convert the Company's motion pictures into the CD-ROM format, and
to acquire distribution rights to CD-ROM interactive games authorized by
independent software developers. Accordingly, Arcus reduced its in-house
technical workforce and relocated its sales and marketing operation to the
Company's Rhode Island facility, and the approximately $419,000 in unamortized
cost allocated to the previously capitalized employment contract was expensed at
May 31, 1995. In May 1995, Arcus filed suit against IDC alleging
misrepresentation in connection with the transaction. On May 31, 1996 the suit
filed by Arcus against IDC was settled. As a result of the settlement the
Company received from IDC 75,000 shares of the 160,000 shares of the Company
originally issued to IDC as part of the November 10, 1994 Asset Purchase
Agreement. Effective May 31, 1997 Arcus Media Group was liquidated and has
become a division of Metro, Inc. which will continue CD-Rom product sales and
development under the trade name Arcus Media Group.

     Metro has and intends to continue to digitize and convert selected titles
from the Company's existing film library to the CD-ROM format, under the Arcus
trade name. Arcus has and will continue to develop technically sophisticated
products on the most popular personal computer platforms, currently Microsoft
Windows(TM)/3/ and Apple Macintosh(TM) CD-ROM,

--------

     /3/Microsoft and Windows are registered trademarks of Microsoft
Corporation. Macintosh is a registered trademark of Apple Computer Inc.

                                        9
<PAGE>
 
primarily for use in home personal computers. Arcus has released 25 full-length
CD-ROM titles in the hybrid Windows/Macintosh platform in May, 1996. To capture
international sales opportunities, Arcus expects to release these CD-ROM titles
utilizing Video CD technology, which will permit playback on both the CDI and
MPEG platforms. Future product releases by Arcus will be dependent on the
continued market acceptance of its initial product releases.

     Arcus' CD-ROM products enable viewers to enjoy full-screen, full-motion (30
frames per second) CD-ROM visual display. Arcus' product development process
includes design, prototyping, programming, computer graphic design, animation,
sound and video recordings and quality assurance. Arcus has and expects to
continue to utilize third-party designers, artists and programmers to introduce
creative and technically superior products. The success of software product
development is unpredictable due to the technological complexity, inherent
uncertainty in anticipating technological developments, the need for coordinated
efforts of numerous technical personnel in such development and the difficulties
in identifying and eliminating errors prior to product release.

     Preparation of master CD-ROM discs, user manuals and promotional materials
as well as duplication of the CD-ROM discs and printing of the user manuals and
packaging has been and will be performed by outside developers to Arcus'
specifications. Arcus does not anticipate experiencing any material difficulties
and delays in the manufacture and packaging of its products. Distribution of
Arcus' CD-ROM products is accomplished through the same distribution network of
wholesalers and retailers to whom Metro distributes its adult video products and
computer software distributors and retailers. Order fulfillment is coordinated
through Metro's Rhode Island distribution facility.

     Sales of consumer software are highly dependent on the availability of
relatively inexpensive personal computers. Major computer manufactures have
continued to enhance their lower-end product offerings to consumers by
increasing the power and speed of these machines without significantly
increasing the price. The inclusion of CD-ROM technology in home personal
computers and the decline in prices for CD-ROM hardware will contribute to the
demand for CD-ROM software products that can utilize the graphics, sound and
data capabilities of the latest hardware technology.

     Although Arcus intends to focus on digitizing selected titles from the
Company's existing film library for the foreseeable future, Arcus also intends
to engage in the distribution of other adult-theme digital multimedia projects
such as interactive games. The Company launched its first CD-ROM inter-active
game in July of 1995, Virtual Valerie II, which has been quite successful. The
revenue generated by Virtual Valerie II since its release through the fiscal
year ended May 31, 1997 is approximately $1,000,000. Based on the success of its
first CD-ROM inter-active game offering, Arcus is continuing to look for other
opportunities in this arena. Arcus' ability to successfully market these
products will depend on continued market acceptance of its initial products and
the availability of independently produced adult CD-ROM interactive games.

     The Company has no way of accurately assessing the amount of capital
resources that will be required to develop future projects, or the amount and
extent of financing that will be available to meet these requirements. The
Company, in connection with the development of Arcus products, incurred minimal
operating costs during fiscal 1997. The Company has

                                       10
<PAGE>
 
financed, and will continue to finance, its investment in Arcus brand products
through cash flow from the Company's operations.


Competition
-----------

     There are several competitors of Arcus that have already released adult
CD-ROM titles and interactive games, many of whom have significantly greater
financial, technical and marketing resources than those of Arcus. Moreover,
Arcus believes that new competitors are increasing their focus on the consumer
software market which will result in greater competition for Arcus.

MAJOR CUSTOMERS
---------------

     Capital Video Corporation operates approximately 29 video and magazine
retail stores in the New England and upstate New York areas and accounted for
approximately 38.8% of Metro's net sales for the fiscal year ended May 31, 1997,
32% of Metro's net sales for the fiscal year ended May 31, 1996, and 32% of
Metro's net sales for the fiscal year ended May 31, 1995. See "Certain
Relationships and Related Transactions". No other customer accounted for more
than 10% of Metro's net sales for the fiscal years ended May 31, 1997, 1996 and
1995.

TRADEMARKS AND TRADE NAMES
--------------------------

     Metro owns or licenses numerous trademarks and copyrights that it uses in
its video and magazine businesses. Its most important trademarks are METRO(TM),
INTROPICS(TM), CAL VISTA(TM), MAGMA(TM) and ULTRACOLOR PUBLICATIONS(TM), and the
new AMAZING(TM). Airborne For Men, Ltd. has filed trademark registration
applications with respect to its AIRBORNE FOR MEN(TM) tradename and logo. The
Company believes that the name recognition and image that it has developed in
each of its markets significantly enhance customer response to its sales
promotions. Accordingly, trademarks and copyrights are important to the
Company's business and the Company intends to aggressively defend them.

GOVERNMENT REGULATION.
---------------------

     The right to distribute adult videocassettes, magazines and CD-ROM products
is protected by the First and Fourteenth Amendments to the United States
Constitution, which prohibit Congress or the various states from passing any law
abridging the freedom of speech.

     The First and Fourteenth Amendments, however, do not protect the
dissemination of obscene material, and several states and communities in which
Metro's products are distributed have enacted laws regulating the distribution
of obscene material with some offenses designed as misdemeanors and others as
felonies, depending on numerous factors. The consequences for violating the
state statutes are as varied as the number of states enacting them. Similarly,
18 U.S.C. (S)1460 - 1469 contain the federal prohibitions with respect to the
dissemination of obscene material, and the potential penalties for individuals
(including corporate directors, officers and employees) violating the federal
obscenity laws include fines, community service, probation, forfeiture of assets
and incarceration. The range of possible sentences require calculations under
the Federal Sentencing Guidelines, and the amount of the fine and the length of
the period of the incarceration under those guidelines are calculated based upon
the retail value of the unprotected

                                       11
<PAGE>
 
materials. Also taken into account in determining the amount of the fine, length
of incarceration or other possible penalty are whether the person accepts
responsibility for his or her actions, whether the person was a minimal or minor
participant in the criminal activity, whether the person was an organizer,
leader, manager or supervisor, whether multiple counts were involved, whether
the person provided substantial assistance to the government, and whether the
person has a prior criminal history. In addition federal law provides for the
forfeiture of: (1) any obscene material produced, transported, mailed, shipped
or received in violation of the obscenity laws; (2) any property, real or
personal, constituting or traceable to gross profits or other proceeds obtained
from such offense; and (3) any property, real or personal, used or intended to
be used to commit or to promote the commission of such offense, if the court in
its discretion so determines, taking into consideration the nature, scope and
proportionality of the use of the property in the offense.

     With respect to the realm of potential penalties facing an organization
(such as the Company or Metro), the forfeiture provisions detailed above apply
to corporate assets falling under the statute. In addition, a fine may be
imposed, the amount of which is tied to the pecuniary gain to the organization
from the offense or determined by a fine table tied to the severity of the
offense. Also factored into determining the amount of the fine are the number of
individuals in the organization and whether an individual with substantial
authority participated in, condoned, or was willfully ignorant of the offense;
whether the organization had an effective program to prevent and detect
violations of the law; and whether the organization cooperated in the
investigation and accepted responsibility for its criminal conduct. In addition,
the organization may be subject to a term of probation of up to five years.

     Federal and state obscenity laws define the legality or illegality of
materials by reference to the United States Supreme Court's three-prong test set
forth in Miller v. California, 413 U.S 1593 (1973). This test is used to
         --------------------
evaluate whether materials are obscene and therefore subject to regulation.
Miller provides that the following must be considered: (a) whether "the average
------
person, applying contemporary community standards" would find that the work,
taken as a whole, appeals to the prurient interest; (b) whether the work depicts
or describes, in a patently offensive way, sexual conduct specifically defined
by the applicable state law; and (c) whether the work, taken as a whole, lacks
serious literary, artistic, political or scientific value. The Supreme Court has
clarified the Miller test in recent years advising that the prurient interest
              ------
prong and patent offensiveness prong must be measured against the standards of
"an average person, applying contemporary community standards," while the value
prong of the test is to be judged according to a reasonable person standard.

     Because the Company is engaged primarily in the wholesale distribution of
its products to other wholesalers and/or retailers, the Company can regulate the
communities to which it distributes its products. Management has taken steps to
ensure compliance with all federal, state and local regulations regulating the
content of its motion pictures and print products, by staying abreast of all
legal developments in the areas in which its motion pictures and print products
are distributed and by specifically avoiding distribution of its motion pictures
and print products in areas where the local standards clearly or potentially
prohibit these products. In addition, the Company requires that all video
material be reviewed by an independent advisory panel comprised of two
psychologists, a certified sex therapist, licensed marriage and family
therapist, a certified sex educator and a licensed independent clinical social
worker. Their review is directed to aspects of serious scientific value as set
forth in the Miller test, because that aspect of the test is not limited by
             ------
community standards but is concerned with whether a reasonable person

                                       12
<PAGE>
 
would find such value in the material, taken as a whole. In light of the
Company's efforts to review, regulate and restrict the distribution of its
materials, management believes that the distribution of Metro's products does
not violate any statutes or regulations.

     Many of the communities in the areas in which Airborne intends to offer
Airborne For Men(TM) franchises have enacted zoning ordinances restricting the
retail sale of adult entertainment products. Airborne intends to open Airborne
For Men(TM) stores and to permit the opening of Airborne For Men(TM) franchises
only in locations where the retail sale of adult entertainment products is
permitted.

     Distribution rights to video cassettes, magazines and CD-ROM products are
also granted legal protection under the copyright laws of the United States and
most foreign countries, which provide substantial civil and criminal sanctions
for unauthorized duplication and exhibition. Metro plans to take all appropriate
and reasonable measures to secure and maintain copyright protection for all of
its products under the laws of all applicable jurisdictions.

EMPLOYEES.
---------

     As of May 31, 1997, the Company and its subsidiaries employed approximately
122 persons.

ITEM 2. PROPERTIES.
------------------

     In June 1993, the Company relocated its principal administrative offices to
an approximately 50,000 square foot office, warehouse and shipping complex
located in Cranston, Rhode Island. See "Certain Relationships and Related
Transactions". This facility houses Metro's administrative, editorial and
operational offices; the data center, customer service, and warehouse and
fulfillment facilities. Metro also leases approximately 21,500 square feet of
warehouse space in Los Angeles County, California. This site also houses Metro's
duplicating laboratory. Because Metro's Rhode Island warehouse facility is not
yet at full productive capacity, management of the Company believes that its
current facility is suitable and adequate for the foreseeable future.

     In November 1994, the Company relocated its principal executive office to a
5,000 square foot office in Cranston, Rhode Island. See "Certain Relationships
and Related Transactions".

ITEM 3. LEGAL PROCEEDINGS.
-------------------------

     On September 24, 1996, in order to avoid the expense and uncertainty of
litigation, the Company pled guilty to the one count of the August 28, 1995
indictment, and agreed to pay a fine of $200,000 (which fine will be paid by the
former owner of North Star and will have no impact on the Company's financial
condition). Even though North Star entered a plea of guilty to effect a
settlement of this matter, there was no judgement or finding that the videotapes
were obscene or violated any law. There are no other legal proceedings pending
against the Company or its subsidiaries other than routine litigation that is
incidental to the business.

                                       13
<PAGE>
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------

     Effective November 7, 1996, the Company merged into Metro Sub, Inc., a
Delaware corporation and wholly-owned subsidiary of the Company ("metro
Delaware"), pursuant to the Agreement and Plan of Merger between the Company and
Metro Delaware (the "Merger"). Concurrent with the Merger, Metro Delaware
changed its name to metro Global media, Inc. The Merger was approved by a
majority of the shareholders of the Company at the Annual Meeting of
Shareholders held October 31, 1996.

                                      14
<PAGE>
 
                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
-----------------------------------------------------------------------------

     The Company's Common Stock is traded in the over-the-counter market and
quoted on the NASDAQ Small Cap Market. There is a limited market for the
Company's Common Stock and no assurances can be given that any trading market
will be sustained.

<TABLE>
<CAPTION>

                                                    COMMON STOCK*
                                               High Bid         Low Bid
<S>                                           <C>               <C>
Fiscal Year Ended May 31, 1997
------------------------------
First Quarter                                 $  2.8125         $1.875
Second Quarter                                $  3.6250         $1.625
Third Quarter                                 $  2.6250         $1.125
Fourth Quarter                                $  2.1250         $1.000

Fiscal Year Ended May 31, 1996
------------------------------
First Quarter                                 $  7.3750         $4.750
Second Quarter                                $  4.7500         $2.750
Third Quarter                                 $  3.6250         $2.000
Fourth Quarter                                $  3.4375         $2.250

Fiscal Year Ended May 31, 1995
------------------------------
First Quarter                                 $ 10.2500         $5.375
Second Quarter                                $  8.3750         $6.250
Third Quarter                                 $  7.9380         $6.125
Fourth Quarter                                $  7.1250         $6.250
</TABLE>

*    Such market quotations reflect the high and low prices for the Company's
securities as quoted by dealers without retail mark-ups and may not necessarily
represent actual transactions.

     At July 31, 1997, there were approximately 447 holders of record of the
Company's Common Stock.

     The Company did not pay any cash dividends during its last fiscal year and
the Board of Directors does not contemplate doing so in the near future. Any
decision as to future payment of dividends will depend on the earnings and
financial condition of the Company and such other factors as the Board of
Directors deems relevant.

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

Fiscal Year Ended May 31 , 1997
Compared to Fiscal Year Ended May 31, 1996

The Company had revenues of $18,355,868 the fiscal year ended May 31, 1997, a 6%
decrease over revenues of $19,526,010 for the fiscal year ended May 31, 1996.
Revenues consist

                                       15
<PAGE>
 
principally of sales of prerecorded video cassettes, magazines, novelties and
CDs. Lower revenues were primarily the result of the following factors: 1) the
sale of the Airborne retail stores in fiscal 1996 which accounted for
approximately $600,000 in revenue vs zero in fiscal 1997; 2) a reduction in
magazine sales of approximately $610,000 due to the elimination of unprofitable
issues and a consolidation of that product line; 3) a reduction in the sales of
CD Roms of approximately $723,000 which principally reflects the decrease in
sales of the company's Virtual Valerie II interactive game. These reductions
were partially offset by an increase of approximately $867,000 in the sale of
cable and foreign film rights of some of the titles contained in the Company's
film and video library.

The Company released 2 new feature films, 50 feature videos, 151 video
compilations and titles in fiscal 1997, an 22.2% decrease from the prior year.
This was the result of the complete reorganization and restructuring of the
Company's west coast operation. The Company's new release schedule for the
fiscal year ended May 31, 1997 was significantly impacted. The Company intends
to increase its release schedule in fiscal 1998.

Cost of revenues (including amortization of film costs) for fiscal 1997
decreased 3.1% to $11,564,466 from $11,939,031 for fiscal 1996 corresponding to
the decrease in revenues for the year. Cost of revenues as a percentage of gross
revenues increased in 1997 to 63% as compared to 61.1% in 1996. The primary
reason for the decrease was the reduced sales of the Company's own video product
resulting from the aforementioned reduced video production schedule,
substantially all of the revenue was replaced by sale of other vendor's video
product at lower margins. Amortization of film costs decreased 62.2% to $707,522
in 1997 versus $1,873,761 in fiscal 1996, principally because of a decrease in
new releases during 1997.

Selling, general and administrative expenses for the fiscal year ended May 31,
1997, increased $279,562 or 4.1% to $7,026,944 from $6,747,382 for the fiscal
year ended May 31, 1996. As a percentage of sales, selling, general and
administrative expenses were 38.3% of the revenues in 1997 as compared to 34.6%
in 1996, an increase of 3.7%. The primary reason for the increase in selling,
general and administrative expenses is as follows: 1) $(42,200) of reduced
advertising costs due to less films and videos being released, better discounts
and more concentrated advertising; 2) increased bad debt expense of $290,000
including the write-off of the sale of foreign film rights of $211,000; 3)
increased equipment rental of duplicating and editing equipment of $136,800; 4)
increased freight due to a greater volume of smaller shipments of $60,900; 5)
increased payroll costs due to the restructuring of the Company's west coast
operation of $135,000; all of which were offset partially by a $(312,500)
reduction in professional fees, consisting mainly of reduced legal costs.

Other income (expense) increased $(66,106) to $(87,158) in 1997 as compared to
($21,352) in 1996. The increase was primarily due to the following factors: 1) a
gain on settlement of litigation of $113,000 relating to the sale of foreign
film rights of a portion of the titles contained in the Company's film library;
2) royalty income of $128,100 received from the Company's Airborne franchises
and; 3) interest expense of $(340,900) in fiscal 1997 as compared to $(396,200)
in fiscal 1996 which was lower due to the following: a) the debt assumption of
approximately $973,000 in the sale of the Company's retail Airborne stores; b) a
reduction in debt to a previous owner due to indemnification of $200,000 and
lastly; c) lower interest rates.

As a result of the factors detailed above, net income decreased $732,833 or
139.4% to $(207,158) in 1997 or $(.06) per share, from the net income of
$525,675 in 1996, or $0.17 per share. The

                                       16
<PAGE>
 
Company's earnings per share decreased $.24 to $(.06) for the fiscal year ended
May 31, 1997 versus $.17 per share for fiscal 1996, notwithstanding an increase
in weighted average number of shares as a result of the warrant exercise and
debt conversion discussed below.

Fiscal Year Ended May 31 , 1996
Compared to Fiscal Year Ended May 31, 1995

The Company had revenues of $19,526,010 the fiscal year ended May 31, 1996, a
9.7% increase over revenues of $17,804,301 for the fiscal year ended May 31,
1995. Revenues consist principally of sales of prerecorded video cassettes,
magazines and related items as well as retail sales from the Company's three (3)
company-owned Airborne for Men(TM) stores. Higher revenues were primarily the
result of a significant increase in unit sales of new releases and catalog
titles from the Company's expanded video library. Other factors contributing to
the increase in revenues were increases in magazine circulation, and limited
income from the sale of foreign film distribution rights and sales of CD-ROM
products including the highly successful Virtual Valerie II.

The Company released 3 new feature films, 109 feature videos, 103 video
compilations and 46 Magma(TM) titles in fiscal 1996, an 17% increase from the
prior year. Based upon the sales results for new titles and the impact on
ongoing sales of catalog titles, the Company intends to increase its release
schedule in fiscal 1997.

Cost of revenues (including amortization of film costs) for fiscal 1996
increased 12.5% to $11,939,031 from $10,609,199 for fiscal 1995 corresponding to
the increase in revenues for the year. Cost of revenues as a percentage of gross
revenues increased slightly in 1996 to 61.1% as compared to 59.6% in 1995. This
increase is primarily the result of increased competition and the sale of older
inventory items at lower than usual margins. Amortization of film costs
increased 58% to $1,873,761 in 1996 versus $1,187,186 in fiscal 1995,
principally because of an increase in new releases during the year.

Selling, general and administrative expenses for the fiscal year ended May 31,
1996, decreased 1.0% to $6,747,382 from $6,832,518 for the fiscal year ended May
31, 1995. As a percentage of sales, selling, general and administrative expenses
were 34.6% of the revenues in 1996 as compared to 38.4% in 1995, a reduction of
3.8%. The reduction is the result of the elimination of the one-time start-up
and administrative costs associated with the Company's Arcus Media Group
subsidiary which was incurred in 1995, reduction in personnel and payroll costs,
and the Company's continuing effort to reduce expenses.

Other income expense decreased $547,550 or 96.3% to ($21,352) in 1996 as
compared to ($568,902) in 1995. Interest expense increased to $396,170 in 1996
from $178,375 in 1995 due to the company obtaining working capital financing
from United Credit in June, 1995. This increase was offset by recognizing: (a)
gain of $196,400 from the settlement of the Arcus-IDC suit in May, 1996, which
resulted in the Company receiving 75,000 shares back from IDC (the Company had
expensed a $419,000 capitalized employment contract as a result of this suit in
1995) and (b) gain of $171,795 from the Company sale of its Airborne for Men
retail operations in November, 1995 and January, 1996 for the assumption of
$1,076,948 in debt of the Company's subsidiaries to Metro Equipment Company and
an officer and shareholder.

                                       17
<PAGE>
 
As a result of the factors detailed above, net income increased $732,697 or
353.9% to $525,675 in 1996, $0.17 per share, from the net loss of ($207,022) in
1995, or ($0.08) per share. The Company's earnings per share increased $.25 to
$.17 for the fiscal year ended May 31, 1996 versus ($.08) per share for fiscal
1995, notwithstanding an increase in weighted average number of shares as a
result of the warrant exercise and debt conversion discussed below.

Fiscal Year Ended May 31 , 1997
Compared to Fiscal Year Ended May 31, 1996

Liquidity and Capital Resources

The Company's financial position remains sound. Cash and cash equivalents
amounted to $57,724 at year-end. Cash provided by operating activities amounted
to $1,027,435 in fiscal 1997, $1,326,785 in fiscal 1996, and $1,557,928 in
fiscal 1995. The Company's primary sources of cash in fiscal 1997 consisted of
(1) funds provided from operations $1,027,435 and (2) net proceeds from
short-term borrowings of $391,186. The primary uses of cash in fiscal 1997
consisted of (1) investments in motion pictures and other films $1,402,883; (2)
payments on capital lease obligations of $177,708; and (3) purchases of property
and equipment $147,726.

Working capital amounted to $2,489,792 in fiscal 1997 as compared to $3,332,590
in fiscal 1996. The net increase in accounts receivable of $870,852 was
primarily due to the increase of sales in April and May 1997. Inventory
decreased $362,023 due to better inventory management. Accounts payable and
accrued expenses increased $802,883 due to improved vendor terms from tape
supplies and the inclusion of a $100,000 litigation settlement liability due
November, 1997. Increased spending for film production is another factor of the
increase in accounts payable.

Of Metro's total accounts receivable at May 31, 1997 and 1996, $1,711,443
(41.9%) and $662,807, (21.0%), respectively, is owed by Capital Video
Corporation ("CVC"), a chain of retail stores of which a former
officer/shareholder of the Company is the sole shareholder. Because of the
amount of this receivable and the concentration of business with CVC, this
receivable is monitored very closely. Metro has the personal guaranty of its
sole shareholder. Accordingly, no allowance for related party receivables and no
related party bad debt expense has been recorded in the Company's financial
statements.

At May 31, 1997 the Company had entered into agreements with producers to
finance 45 new feature films and videos which will be released during fiscal
1998. The completion of these movies will require approximately $900,000 to
$1,200,000. Financing for these activities has been and will continue to be
generated through earnings and profits as well as funds received from its line
of credit.

The Company funds its working capital requirements on a short-term basis through
funds generated by operations and borrowings under its line of credit agreement.
During June 1995, Metro entered into a line of credit agreement with a finance
company. Under the agreement, Metro may borrow up to 70% of assigned accounts
receivable less than 90 days old, up to a maximum of $750,000. The balance due
under the line of credit bears interest at the prime rate plus 6% per annum. In
addition, Metro pays a management fee equal to 3/4 of 1% of sales submitted to
United Credit for inclusion in the net security value of accounts receivable,
but not more than $7,500 per month. The outstanding balance under the line is
secured by accounts receivable of Metro and guaranties of the Company and
certain officer/shareholder. In May,

                                       18
<PAGE>
 
1997 the agreement was modified increasing the maximum borrowings to $1,000,000
and a new agreement was signed in June, 1997 raising the line of credit to
$1,500,000, decreasing the interest rate to the prime rate plus 5% per annum,
increasing the eligible receivables base and the advance rate to 75%. The new
line of credit agreement provides for a two year term expiring in June, 1999 but
includes an option for an additional year. The unpaid balance at May 31, 1997
was $897,247.

Capital Expenditures: Capital expenditures in fiscal 1997 amounted to $147,726
as compared to $301,793 in fiscal 1996. The Company anticipates that its capital
expenditures for 1998 will be approximately $300,000 to $400,000 primarily used
for computer equipment, duplicating and editing equipment. The company currently
has a $500,000 lease line available for its use which management believes is
sufficient.

Management believes that funds provided by operations, existing and new line of
credit, are adequate to meet the anticipated short-term and long-term capital
needs. Management believes that inflation has not had a material effect on its
operations.

In January 1996, the Company entered into a Distributorship Agreement with
Phantasm Video Productions, BV of Holland ("Phantasm"), one of the largest
distributors of adult entertainment products in Europe. Pursuant to the
Distributorship Agreement, Metro will provide Phantasm with a minimum average of
12 new titles per month during the term of the Agreement, and Phantasm shall
serve as the exclusive distributor throughout Europe for those titles purchased
by Phantasm for a 3 year period from release date. Under the Distributorship
Agreement, Phantasm is required to purchase a minimum of 75,000 units during
each six month period during the term of the Agreement. In August, 1996, the
Company acquired the option to purchase all of the operating subsidiaries of
Phantasm Holdings, BV of Holland. Under the terms of the Option Agreement, the
Company has the option to acquire, at any time prior to July 31, 1999, the stock
of Phantasm Videoproductions, B.V. Holland, Malibu Videoproductions GmbH of
Germany, and Phantasm Videoproductions SARL of France, at a purchase price to be
determined based on a multiple of earnings of these companies for the two years
prior to the date of exercise of the option. The Company will incur a $200,000
fee for the option that will be due and payable on or about August, 1997.
Presently Phantasm has breeched the distribution agreement as well as not being
in compliance with the terms of the Option Agreement. At this point in time the
completion of this transaction appears unlikely.

New Accounting Standards

     FASB No. 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles and goodwill. FASB No. 121
was adopted during fiscal year 1997 and did not have a material effect on the
Company's financial position of results of operations.

SFAS No. 128 has been issued effective for the years ending after December 15,
1997. This statement establishes standards for computing and presenting earnings
per share and also establishes standards with respect to disclosure of
information about an entity's capital structure. Earnings per share calculations
should not be impacted if the Company adopted such standard for the year ended
May 31, 1997. The Company is required to adopt the provisions of SFAS No. 128 in
the third quarter of 1998 and does not expect adoption thereof to have a
material effect on the Company's financial position or results of operations.

                                       19
<PAGE>
 
Statement of Financial Accounting Standards No. 129 ("SFAS No. 129"),
"Disclosure of Information About Capital Structure" has been issued effective
for the years ending after December 15, 1997. This statement establishes
standards for disclosing information about an entity's capital structure. The
Company will be required to adopt the provisions of SFAS No. 129 in the third
quarter of 1998 and does not expect adoption thereof to have a material impact
on the Company's financial position, results of operations or cash flows.

In October, 1995, the Financial Accounting Standards Board issued Statement
(SFAS) No. 123, Accounting for Stock Based Compensation, which becomes effective
for transactions entered into in fiscal years beginning after December 15, 1995.
This statement permits an entity to apply the fair value based method to stock
options awarded during 1995 and thereafter in order to measure the compensation
cost at the grant date and recognize it over its vesting period. This statement
also allows an entity to continue to measure compensation costs for these plans
pursuant to APB Opinion 25. Entities electing to remain with the accounting
treatment under APB Opinion 25 must make proforma disclosures in net income and
earnings per share to include the effects of all awards granted in fiscal years
beginning after December 31, 1994, as if the fair value based method of
accounting pursuant to SFAS No. 123 had been applied.

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
---------------------------------------------------

     The consolidated financial statements and supplemental data of the Company
and the report of independent auditors thereon set forth at pages F-1 through
F-25 herein are incorporated herein by reference.

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

                                      None

                                       20
<PAGE>
 
                                    PART III
                                    --------

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
--------------------------------------------------------------------------------
           WITH SECTION 16(a) OF THE EXCHANGE ACT
           --------------------------------------

     The Directors and Executive Officers of the Company are as follows:

<TABLE>
<CAPTION>

Name                      Age              Position
----                      ---              --------
<S>                       <C>              <C>  
A. Daniel Geribo          52               Director and President
T. James Blair            43               Director and Secretary/Treasurer
Alan S. Casale            47               Director
Dolores Guglielmi         58               Director
</TABLE>


     A. Daniel Geribo was elected President in November, 1996 and has served as
President, Treasurer, Secretary and sole director of Capital Video Corporation,
which operates a chain of retail video stores in the New England and upstate New
York area since November 1994, and from September 1993 to November 1994 served
as General Manager of Capital Video Corporation. From January 1983 to May 1993,
Mr. Geribo served as President of Unfinished Furniture House, Inc., a chain of
retail furniture stores.

     T. James Blair was elected Treasurer and a Director of the Company in
April, 1996. Mr. Blair served as Controller for Triangle Wire and Cable Inc., a
manufacturer of building wire, and specialty wire products, from July 1993 to
February, 1996. From March, 1990 to July, 1993 Mr. Blair served as Director of
Finance and Administration for Hermitage Hospital Products, a manufacturer of
medical products. Mr. Blair is a Certified Public Accountant.

     Alan S. Casale a principal in the accounting firm of Casale, Caliri & 
Jeroma since 1996. Mr. Casale was formerly the principal of Cardello, Riccitelli
& Casale who were the auditors of record of the Company from December 1992 to
February 1993, and audited the financial statements of Metro for the years ended
May 31, 1992 and May 31, 1991.

     Dolores Guglielmi has been a Registered Nurse Anesthetist for Associates in
Anesthesia, Inc. a medical services provider, for more than five years.

     In addition to the Directors and Executive Officers listed above, Dennis
Nichols is expected to make a significant contribution to the business of the
Company and its subsidiaries. Dennis Nichols has served as President and sole
director of Metro since its inception in 1990, and previously served in
executive capacitates with Metro Inc., a video distribution company. From March
1992 to November 1994, Mr. Nichols served as President, Treasurer, Secretary and
sole director of Capital Video Corporation, which operates a chain of retail
video stores in the New England and upstate New York area. Mr. Nichols is 48
years old.

     On April 11, 1996, Mr. Blair was elected to the Company's Board of
Directors, and filed Form 3 on May 23, 1996. In August, 1996, Dolores Guglielmi
filed a Form 5 with respect to the exercise of outstanding warrants during
fiscal 1996. The Company is not aware of the failure of any person to file any
form required by Section 16 (a) of the Exchange Act.

                                       21
<PAGE>
 
     No director or executive officer serves pursuant to any arrangement or
understanding between him or her and any other person(s), other than arrangement
or understandings with directors and officers acting solely in their capacity as
such.

ITEM 10. EXECUTIVE COMPENSATION.
         ----------------------
<TABLE>
<CAPTION>

                                                 Annual Compensation                           Long Term Compensation
                                       --------------------------------------        -----------------------------------------
                                                                       Other
Name and Principal         Fiscal                                      Annual                                    All Other
Position                   Year            Salary        Bonus         Comp.         Awards        Payouts       Comp.
------------------------------------------------------------------------------------------------------------------------------
<S>                        <C>         <C>                 <C>           <C>           <C>           <C>           <C>
A. Daniel Geribo           1997        $        -          -             -             -             -             -
President

Kenneth F. Guarino         1997        $   74,200          -             -             -             -             -
President (1)              1996        $   83,798          -             -             -             -             -
                           1995        $  383,907          -             -             -             -             -

Carl Bruno                 1996        $   17,600          -             -             -             -             -
President (2)              1995        $   41,616          -             -             -             -             -
</TABLE>

(1) Mr. Guarino was elected President of the Company effective April 28, 1993.
Prior to this election, Mr. Guarino served as Operations Manager of Metro. Mr.
Guarino resigned as President of the Company effective July 27, 1994 and resumed
his position as Operations Manager of Metro. Mr. Guarino was elected President
effective October 31, 1995. Mr. Guarino resigned as President of the Company
effective October 31, 1996.

(2) Mr. Bruno served as President from July 27, 1994 until October 31, 1995.

<TABLE>
<CAPTION>
                                         Options/SAR Grants in Last Fiscal Year
                                 -----------------------------------------------------
                                   Number of            % of Total                           Market
                                   Securities          Options/SARs                         Price on
                                   Underlying           Granted to        Exercise or        Date of
                                  Options/SARs         Employees in        Base Price         Grant         Expiration
Name                                Granted            Fiscal Year         ($/share)        ($/share)          Date
--------------------------------------------------------------------------------------------------------------------------
<S>                               <C>                  <C>                <C>               <C>             <C> 
NA                                     0                    -                  -                -               -
</TABLE>

   Aggregated Options/SAR Exercises in Last Fiscal Year and fiscal year-end
   ------------------------------------------------------------------------
                              Option/SAR Values
                              -----------------

<TABLE>
<CAPTION>

                                                                         Number of                                   
                                                                        Securities              Value of Unexercised 
                                                                        Underlying                  In-the-Money     
                                                                        Unexercised               Options/SARs at    
                                                                      Options/SARs at                  FY-end        
                                                                          FY-End

                            Shares Acquired    Value                   Exercisable /               Exercisable /
Name                        on exercise (#)    Realized ($)            Unexercisable               Unexercisable
------------------------------------------------------------------------------------------------------------------------
<S>                                <C>            <C>                 <C>                          <C>   
Kenneth Guarino                    0               -                     200,000/0                       -
</TABLE>

                                       22
<PAGE>
 
     In September 1993, a disinterested majority of the Board of Directors
authorized the execution of an Employment Agreement with Kenneth F. Guarino,
effective as of January 1, 1993. The Agreement is for a term of four years;
however, on December 31, 1995 and on each December 31 thereafter (the "Renewal
Date"), the term shall automatically be extended for an additional one year
period unless Metro notifies Mr. Guarino in writing on or before the applicable
Renewal Date that Metro does not wish to extend the Agreement beyond the term
thereof. By mutual agreement the employment agreement was terminated on December
31, 1996. In addition, the Company granted Mr. Guarino stock options to purchase
up to 200,000 shares of Common Stock at a purchase price of $1.50 per share,
exercisable in four annual installments of 50,000 shares commencing January 1,
1994. In January, 1997 the term of the options was extended to December 31,
2006. The requirement that the options be exercised within 30 days after
termination of employment was deleted. Except as set forth above, no other
executive officer received salary and bonus exceeding $100,000 in any of the
last three fiscal years except for Anthony P. Santucci who received $123,914 in
the fiscal year 1995. Mr. Santucci resigned as treasurer in August, 1995.


                                       23
<PAGE>
 
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
-----------------------------------------------------------------------

     The following table sets forth certain information regarding the Company's
Common Stock beneficially owned as of July 31, 1997, (i) by each person who is
known by the Company to own beneficially more than 5% of the Company's common
stock, (ii) by each of the Company's directors, and by all executive officers
and directors as a group.

<TABLE>
<CAPTION>
                                         No. of Shares of      Percentage of
                                           Common Stock         Beneficial
Name and Address                        Beneficially Owned     Ownership (1)
<S>                                      <C>                   <C>  
Officers and Directors
----------------------

T. James Blair
1060 Park Avenue
Cranston, RI  02910                             600                   *

Alan S. Casale
1140 Reservoir Avenue
Cranston, RI  02920                             620                   *

A. Daniel Geribo
788 Reservoir Avenue, Suite 300
Cranston, RI  02910                             600                   *

Dolores Guglielmi
27 Sherman Avenue
Lincoln, RI  02865                           24,600                   *

  
All Executive Officers and                                            *
Directors as a group (8 people)              26,420


Other 5% Beneficial Owners
---------------------------

Briana Investment Group LP
c/o Helen Adderley, Esquire
Corner House
20 Parliament Street
Hamilton HM DX, Bermuda                   1,472,903               39.23

Kenneth F. Guarino
50 Fort Avenue
Cranston, RI 02905                          351,852 (2)            9.26
</TABLE>

*    Beneficial ownership represents less than 1% of the outstanding common
     stock.

(1)  Assumes 3,558,168 shares of Common Stock issued and outstanding at July 31,
     1997 and 200,000 unexercised stock options.

(2)  Includes 200,000 unexercised stock options


                                       24
<PAGE>
 
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-------------------------------------------------------

     A. Daniel Geribo serves as the sole officer and director of, and Mr.
Guarino also serves as the operations manager and is 100% owner of, Capital
Video Corporation ("CVC") which operates a chain of retail video stores in the
New England and upstate New York area. Capital Video Corporation accounted for
$7,134,774 (38.8%), $6,297,550 (32%), and $5,625,047 (32%) of the net sales of
Metro, Inc. for the fiscal years ended May 31, 1997, 1996, and 1995
respectively. At May 31, 1997, $1,711,443 (41.9%) of Metro's outstanding
accounts receivable were due from Capital Video Corporation. At May 31, 1996,
$662,807 (21%) of Metro's outstanding accounts receivable were due from Capital
Video Corporation, secured by a security interest in all of the inventory of
Capital Video Corporation and the personal guaranty of Mr. Guarino's wife. At
May 31, 1995, $205,561 (7%) of Metro's outstanding accounts receivable were due
from Capital Video Corporation. The age of the accounts receivable from CVC is
as follows:

<TABLE>
<CAPTION>

                        Current               30-60 days         60-90 days          Over 90 days
                        -------               ----------         ----------          ------------
<S>                     <C>                   <C>                <C>                 <C> 
May 31, 1997            $  814,473            $ 612,796          $ 284,174           $       0
May 31, 1996            $  566,033            $  96,774          $       0           $       0
May 31, 1995            $  205,561            $       0          $       0           $       0
</TABLE>

     The significant increase in Metro's accounts receivable from Capital Video
is the result of increased sales due to Capital opening new stores, and a
reflection of Capital's excellent payment history with Metro. Metro has
permitted CVC to return to the previous net 60 day payment terms. Management of
the Company has determined that, given the volume of business Capital Video has
historically provided to Metro, the value of the CVC inventory (which is
monitored by Metro and in which Metro retains a security interest), and the
inability of CVC to obtain inventory financing elsewhere, such aging is
reasonable and in the best interests of the Company.

     During the fiscal year 1995 and 1996, Mr. Guarino made aggregate advances
to the Company of $63,383 and $40,000, respectively, bearing interest at 12%, to
be repaid on or before May 31, 1998 and May 1, 1998, respectively. The terms of
the $40,000 loan are subject to ratification by the Company's Board of
Directors.

     Effective May 1, 1993, Metro entered into a lease with Castle Properties,
L.L.C. for an approximately 50,000 square foot office, warehouse and shipping
complex located in Cranston, Rhode Island. This new facility houses Metro's
executive, administrative, editorial and operational offices, the data center
and customer service, warehouse and fulfillment facilities. The lease is for a
term of 10 years with two five-year renewal options, and provides for a fixed
annual rent of $245,200 for the first five years, triple net. The annual rent
for lease years 6 through 10 as well as the rent for the renewal terms, if any,
shall be adjusted based on increases in the consumer price index. Approximately
7,500 square feet of the facility is sublet to Capital Video Corporation under
an oral, month-to-month lease agreement for $9,000 per month for June, 1996 and
$4,000 per month thereafter. Castle Properties, L.L.C. is a Rhode Island limited
liability company principally owned by Mr. Guarino's wife.

     On January 13, 1995, the Company entered into a lease agreement with
Centurion Financial Group, L.L.C. for approximately 5,000 square feet of office
space in Cranston, Rhode Island, with a monthly rent of $5,833.33, effective
June 1, 1994. The lease is for a term of 5 years, with a 5 year renewal option.
Centurion Financial Group, L.L.C. is a Rhode Island limited

                                       25
<PAGE>
 
liability company principally owned by a trust for the benefit of Mr. Guarino's
children. This lease was terminated by mutual agreement of the parties during
the year ended May 31, 1996.

     Effective May 8, 1997, Briana Investment Group, A British Virgin Island
L.P. acquired 730,863 shares of common stock of the Registrant from Capital
Video Corporation in consideration of a promissory note of Briana Investment
Group, L.P. in the 742,050 shares of common stock of the Registrant from Zeon
Corporation.

Conflicts of Interest
---------------------

     Of necessity, some inherent conflict of interest is involved whenever
Officers, Directors and others acting on behalf of the Company supply services
or goods to the Company for compensation. Additional conflicts and non-arm's
length transactions may arise in the future when Company officers or directors
are involved in the management of any other company with which the Company
transacts business. Conflicts may also arise with respect to opportunities which
come to the attention of such persons. Conflicts may also arise with respect to
the amount of time and effort devoted to respective businesses and
opportunities.

     Many of the persons who perform services as officers, and directors to the
company are actively, and in the future will be, involved in businesses from
which they derive income, other than the Company. Their activities may include
information and management of business ventures, the legal profession, purchase
and sale of real estate and pursuit of other opportunities. It is expected that
these persons will continue their separate business activities in conjunction
with their activities at the Company.

     Although the Board of Directors believes that members of Management will be
of great assistance to the Company in the fulfillment of its corporate mission,
some transactions may and will occur where the Company and a member of
Management will have conflicts in particular respects. Prospective investors are
specifically cautioned that such conflicts will occur as a routine matter in the
operation of the Company. However, it is intended that, in accordance with legal
principals applicable to corporations, Company action will be determined
whenever possible by a disinterested majority of the Board of Directors.


                                       26
<PAGE>
 
     It is the Company's policy that all transactions in which an officer,
director or 5% shareholder has a direct or indirect interest be on terms no less
favorable to the Company than the Company would grant to or obtain from a
independent third-party in a arms-length transaction. Because a majority of the
Broad of Directors are not affiliated with Capital Video Corporation, all
transactions between the Company or Metro and Capital Video Corporation have
been, and all future transactions will be, approved and/or ratified by a
disinterested majority of the Board of Directors.



                                       27
<PAGE>
 
                                     PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
------------------------------------------

(A) EXHIBITS.

     2.1  Amended and Restated Acquisition Agreement dated as of November 5,
          1992 between the Registrant and Zeon Corporation, as filed with the
          Commission on March 26, 1993 as Exhibit 2.1 to Form 8 and incorporated
          herein by reference.

     3.1  Articles of Incorporation, as filed with the Commission on August 23,
          1988 as Exhibit 3.1 to the Registration Statement on Form S-18 and
          incorporated herein by reference.

     3.2  Bylaws, as filed with the Commission on August 23, 1988 as Exhibit 3.2
          to the Registration Statement on Form S-18 and incorporated herein by
          reference.

     3.3  Articles of Amendment of Articles of Incorporation of the Registrant,
          as filed with the Commission on January 17, 1995 as Exhibit 3.3 to the
          Quarterly Report on Form10-QSB for the fiscal quarter ended November
          30, 1994 and incorporated herein by reference.

     3.4  Amendment to Bylaws of the Registrant, as filed with the Commission on
          January 17, 1995 as Exhibit 3.4 to the Quarterly Report on Form 10-QSB
          for the fiscal quarter ended November 30, 1994 and incorporated herein
          by reference.

     3.5  Articles of Amendment of Articles of Incorporation of the Registrant,
          as filed with the Commission on August 28, 1996 as Exhibit 3.5 to the
          Form 10-KSB for the fiscal year ended May 31, 1996 and incorporated
          herein by reference.

     4.1  Warrant Agreement dated as of February 13, 1992 between the Registrant
          and First Securities Transfer Systems, Inc., as filed with the
          Commission on March 26, 1993 as Exhibit 4 to the Annual Report on Form
          10-KSB for the fiscal year ended September 30, 1992 and incorporated
          herein by reference.

     10.1 Employment Agreement dated September 9, 1993 between the Registrant,
          North Star Distributors, Inc. and Kenneth F. Guarino, as filed with
          the Commission on February 3, 1994 as Exhibit 10.1 to the Annual
          Report on Form 10-KSB for the fiscal year ended May 31, 1993 and
          incorporated herein by reference.

     10.2 Stock Option Agreement dated September 9, 1993 between the Registrant
          and Kenneth F. Guarino, as filed with the Commission on February 3,
          1994 as Exhibit 10.2 to the Annual Report on Form 10-KSB for the
          fiscal year ended May 31, 1993 and incorporated herein by reference.

     10.3 Termination Agreement dated September 9, 1993 between Metro Control
          Company and Metro, Inc., as filed with the Commission on February 3,
          1994 as Exhibit 10.3 to the Annual Report on Form 10-KSB for the
          fiscal year ended May 31, 1993 and incorporated herein by reference.

                                       28
<PAGE>
 
     10.4  Lease Agreement dated September 9, 1993 between Castle Properties,
           L.L.C. and Metro, Inc., as filed with the Commission on February 3,
           1994 as Exhibit 10.4 to the Annual Report on form 10-KSB for the
           fiscal year ended May 31, 1993 and incorporated herein by reference.

     10.5  Security Agreement dated September 24, 1993 between Metro, Inc. and
           Capital Video Corporation, as filed with the Commission on February
           3, 1994 as Exhibit 10.5 to the Annual Report on Form 10-KSB for the
           fiscal year ended May 31, 1993 and incorporated herein by reference.

     10.6  Guaranty of Elvira Famiglietti dated December 1, 1993, as filed with
           the Commission on February 3, 1994 as Exhibit 10.6 to the Annual
           Report on form 10-KSB for the fiscal year ended May 31, 1993 and
           incorporated herein by reference.

     10.7  Promissory Note of Airborne for Men, Ltd. dated September 30, 1994
           payable to the order of Kenneth F. Guarino, as filed with the
           Commission on October 14, 1994 as Exhibit 10.1 to the Quarterly
           Report on Form 10-QSB for the fiscal quarter ended November 30, 1994
           and incorporated herein by reference.

     10.8  Lease Agreement dated January 13, 1995 between Centurion Financial
           Group, LLC and the Registrant, as filed with the Commission on
           January 17, 1995 as Exhibit 10.13 to the Quarterly Report on Form 10-
           QSB for the fiscal quarter ended November 30, 1994 and incorporated
           herein by reference.

     10.9  Asset Purchase Agreement dated November 5, 1994 between Innovative
           Data Concepts Incorporated, Arcus Media Group, Inc. and the
           Registrant, filed as Exhibit 10.14 to the Post-Effective Amendment
           No. 14 to the Registration Statement on form SB-2 and incorporated
           here by reference.

     10.10 Form of Airborne For Men, Ltd. Franchise Agreement, filed as Exhibit
           10.15 to the Post-Effective Amendment No. 14 to the Registration
           Statement on Form SB-2 and incorporated herein by reference.

     10.11 Promissory note of Metro, Inc. payable to the order of Capital Video
           Corporation dated as of March 29, 1995 in the principal amount of
           $1,000,000 as filed with the Commission as Exhibit 10.12 to the Form
           10-KSB for the fiscal year ended May 31, 1995 and incorporated herein
           by reference.

     10.12 Promissory note of Metro, Inc. payable to the order of Kenneth F.
           Guarino dated as of May 24, 1995 in the principal amount of $63,393
           as filed with the Commission as Exhibit 10.13 to the Form 10-KSB for
           the fiscal year ended May 31, 1995 and incorporated herein by
           reference.

     10.13 Capital Stock Purchase Agreement dated as of November 30, 1995 by and
           between Airborne for Men, Ltd. and Capital Video Corporation, as
           filed with the Commission on December 10, 1995 as Exhibit 10.1 to
           Form 8-K and incorporated herein by reference.


                                       29
<PAGE>
 
     10.14 Debt Conversion Agreement between Capital Video Corporation and the
           Registrant, as filed with the Commission on December 11, 1995 as
           Exhibit 10.2 to the Form 8-K and incorporated herein by reference.

     10.15 Capital Stock Purchase Agreement dated as of January 31, 1996 by and
           between Airborne for Men, Ltd. and Capital Video Corporation as filed
           with the Commission on May 9, 1996 as Exhibit 10.1 to the Quarterly
           Report on Form 10-QSB for the fiscal quarter ended February 28, 1996
           and incorporated herein by reference.

     10.16 Amendment to Capital Stock Purchase Agreement dated as of November
           30, 1996 by and between Airborne For Men, Ltd. and Capital Video
           Corporation, as filed with the Commission on August 28, 1996 as
           Exhibit 10.16 to the Form 10-KSB for the fiscal year ended May 31,
           1996 and incorporated herein by reference.

     10.17 Amendment Agreement dated as of December 31, 1995 between Kenneth
           Guarino and the Registrant, as filed with the Commission on August
           28, 1996 as Exhibit 10.17 to the Form 10-KSB for the fiscal year
           ended May 31, 1996 and incorporated herein by reference.

     10.18 Amendment to Stock Option Agreement dated January 16, 1997 by and
           between Kenneth F. Guarino and the Registrant, as filed with the
           Commission on April 15, 1997 as Exhibit 10.1 to the Quarterly Report
           on Form 10-QSB for the quarter ended March 1, 1997 and incorporated
           herein by reference.

     10.19 Indemnification Agreement dated December 3, 1996 by Kenneth F.
           Guarino in favor of Registrant as filed with the Commission on April
           15, 1997 as Exhibit 10.2 to the Quarterly Report on Form 10-QSB for
           the quarter ended March 1, 1997 and incorporated herein by reference.

     10.20 Termination Agreement dated April 10, 1997 between Capital Video
           Corporation, Elvira Famigliette and Metro, Inc. as filed with the
           Commission on April 15, 1997 as Exhibit 10.3 to the Quarterly Report
           on Form 10-QSB for the quarter ended March 1, 1997 and incorporated
           herein by reference.

     10.21 Description of Directors Compensation Arrangement, as filed with the
           Commission on April 15, 1997 as Exhibit 10.4 to the Quarterly Report
           on Form 10-QSB for the quarter ended March 1, 1997 and incorporated
           herein by reference.

     10.22 Registration Rights Agreement dated May 8, 1997 between Briana
           Investment Group, Ltd. and the Registrant, as filed with the
           Commission on May 8, 1997 as Exhibit 10.1 to Form 8-K and
           incorporated herein by reference.

     21    Subsidiaries of the Registrant, as filed with the Commission on
           August 28, 1996 as Exhibit 21 to the Form 10-KSB for the fiscal year
           ended May 31, 1996 and incorporated herein by reference.


                                       30
<PAGE>
 
     22   Consent of Trien, Rosenberg, Rosenberg, Weinberg, Ciullo & Fazzari,
          LLP, as filed with the Commission on August 28, 1996 as Exhibit 22 to
          the Form 10-KSB for the fiscal year ended May 31, 1996 and
          incorporated herein by reference.

     99.1 Excerpts from Notice of Meeting and Proxy Statement of the Registrant
          dated October 7, 1996 and filed with the Commission on October 15,
          1996 and incorporated herein by reference.

(B) REPORTS ON FORM 8-K

          The company filed a Form 8-K with the Securities and Exchange 
          commission on November 7, 1996, to report the following:
 
          Item 5. Other events

               On November 6, 1996, the Board of Directors elected A. Daniel
               Geribo as President of the Company.

               Effective November 7, 1996, the Company merged into Metro Sub,
               Inc., a Delaware corporation and wholly-owned subsidiary of the
               Company ("Metro Delaware"), pursuant to the Agreement and Plan of
               Merger between the Company and Metro Delaware (the "Merger").
               Concurrent with the Merger, Metro Delaware changed its name to
               Metro Global Media, Inc. As a result of the Merger, the
               Certificate of Incorporation and Bylaws of Metro Delaware will be
               the Articles of Incorporation and bylaws, respectively, of the
               Company.

          Item 8. Change in Fiscal Year

               To facilitate the business operations of the Company, commencing
               with the fiscal year ended May 31, 1997. the Company will adopt
               the so-called 4-4-5 fiscal year, with all months ending on a
               Saturday. Quarterly reports on Form 10-QSB for the balance of the
               1997 fiscal year will be filed for the periods ended November 30,
               1996 and March 1, 1997.

          The Registrant filed Form 8-K with the Commission on May 8, 1997 to
          report the following:

               Item 1. Changes in control of the Registrant

               Effective May 8, 1997, Briana Investment Group, L.P. acquired
               730,863 shares of common stock of the Registrant from Capital
               Video Corporation in consideration of a promissory note of Briana
               Investment Group, L.P. in the principal amount of $841,492,
               representing a purchase price of $1.15 per share. The note was
               secured by a pledge of the purchased stock as well as the
               guaranty of the limited partner of the purchase. Effective May 8
               1997, Briana Investment Group, L.P. acquired 742,050 shares of
               common stock of the Registrant from Zeon Corporation in
               consideration

                                       31
<PAGE>
 
               of a promissory note of Briana Investment Group, L.P. in the
               principal amount of $553,358, representing a purchase price of
               $1.15 per share. The Note is secured by a pledge of the purchased
               shares as well as the guaranty of the limited partner of the
               purchaser.

               Briana Investment Group, L.P. is a limited partnership organized
               under the laws of the British Virgin Islands. The general partner
               of Briana Investment Group, L.P. is Windbridge Holdings, Ltd., a
               British Virgin Islands corporation. Vernon J. Douglas, Jr. is the
               sole shareholder of Windbridge Holdings, Ltd. As a result of the
               transaction, Briana Investment Group, L.P. will own 1,472,913
               shares of common stock of Registrant, representing 41.66% of the
               total issued and outstanding shares of the Registrant. In
               connection with the transaction, the Registrant entered into a
               Registration Rights Agreement with Briana Investment Group, L.P.


                                       32
<PAGE>
 
                               S I G N A T U R E S

     Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused the report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                     Metro Global Media, Inc.

                                     By: /s/ A. Daniel Geribo
                                        -------------------------
                                     A. Daniel Geribo, President

                                     Date: August 29, 1997

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>

Signature                           Title                             Date
---------                           -----                             ----
<S>                       <C>                                   <C> 

/s/ A. Daniel Geribo      President, (principal                 August 29, 1997
---------------------     executive officer) and Director
A. Daniel Geribo         

/s/ T. James Blair        Secretary/Treasurer (principal        August 29, 1997
------------------        financial and accounting
T. James Blair            officer) and Director
                           

/s/ Alan S. Casale        Director                              August 29, 1997
---------------------
Alan S. Casale

/s/ Dolores Guglielmi     Director                              August 29, 1997
---------------------
Dolores Guglielmi
</TABLE>

                                      33
<PAGE>
 
                               S I G N A T U R E S

     Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused the report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                        Metro Global Media, Inc.

                                        By:
                                           ------------------------
                                        A. Daniel Geribo, President

                                        Date: August 29, 1997

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>

Signature                      Title                             Date
---------                      -----                             ----
<S>                    <C>                                   <C> 

                       President, (principal                 August 29, 1997
------------------     executive officer) and  Director
A. Daniel Geribo  

                       Secretary/Treasurer (principal        August 29, 1997
------------------     financial and accounting
T. James Blair         officer) and Director
 
------------------     Director                              August 29, 1997
Alan S. Casale

------------------     Director                              August 29, 1997
Dolores Guglielmi
</TABLE>


                                       34
<PAGE>
 
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
FOR THE YEARS ENDED MAY 31, 1997, 1996 AND 1995
--------------------------------------------------------------------------------








                          INDEX TO FINANCIAL STATEMENTS



Independent Auditors' Report                                             F-1

Consolidated Balance Sheets                                              F-2

Consolidated Statement of Operations                                     F-3

Consolidated Statement of Shareholders' Equity                           F-4

Consolidated Statement of Cash Flows                                     F-5

Notes to Consolidated Financial Statements                               F-8


                                       F-0
<PAGE>
 
                          INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Shareholders of
Metro Global Media, Inc. and Subsidiaries
Cranston, Rhode Island


We have audited the accompanying consolidated balance sheets of Metro Global
Media, Inc. and Subsidiaries as of May 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three-year period ended May 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Metro Global Media,
Inc. and Subsidiaries as of May 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the years in the three-year period
ended May 31, 1997, in conformity with generally accepted accounting principles.



                                           TRIEN, ROSENBERG, ROSENBERG,
                                               WEINBERG, CIULLO, & FAZZARI, LLP

Morristown, New Jersey
July 31, 1997

                                       F-1

<PAGE>

METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FOR THE YEARS ENDED MAY 31, 1997 AND 1996
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                                                                        1997                 1996
                                                     Assets                                             ----                 ----
                                                     ------
<S>                                                                                                 <C>                 <C> 
Current assets
--------------
   Cash                                                                                             $    57,724         $   360,671
   Accounts receivable, less allowance for doubtful accounts of
      $22,082 and $40,030, respectively                                                               4,081,031           3,210,179
   Inventory                                                                                          3,684,501           4,046,524
   Recoverable income tax                                                                               287,000
   Prepaid expenses and other current assets                                                             41,460             102,193
   Deferred income taxes                                                                                165,650              78,500
                                                                                                    -----------         -----------
     Total current assets                                                                             8,317,366           7,798,067
     --------------------

Motion pictures and other films at cost, less accumulated amortization
   of $5,085,183 and $4,377,661, respectively                                                         3,353,743           2,658,382

Property and equipment at cost, less accumulated depreciation and
   amortization of $1,303,939 and $970,433, respectively                                              1,575,199           1,463,059

Other assets                                                                                            292,235             289,731
                                                                                                    -----------         -----------

     Total assets                                                                                   $13,538,543         $12,209,239
     ------------                                                                                   ===========         ===========

                                        Liabilities and Shareholders' Equity
                                        ------------------------------------

Current liabilities
-------------------
   Current portion of long-term debt                                                                $   137,651         $   151,216
   Current portion of capital lease obligations                                                         222,962             128,063 
   Short-term borrowings                                                                                897,247             506,061 
   Accounts payable and accrued expenses                                                              4,206,577           3,403,694 
   Income taxes payable                                                                                 363,137             276,443 
                                                                                                    -----------         ----------- 
     Total current liabilities                                                                        5,827,574           4,465,477
     -------------------------                                                                      

Long-term debt, less current portion                                                                    395,988             626,847 
Capital lease obligations, less current portion                                                         361,591             304,017 
Deferred income taxes                                                                                    35,700              42,000 
                                                                                                    -----------         ----------- 
     Total liabilities                                                                                6,620,853           5,438,341
     -----------------                                                                              -----------         ----------- 
                                                                                                                                    
Commitments and contingencies                                                                                                       
                                                                                                                                    
Shareholders' equity                                                                                                                
--------------------                                                                                                                
Preferred stock, no par value; authorized 2,000,000 shares; issued                                                                  
   and outstanding, none                                                                                                            
Common stock, $.0001 par value; authorized 10,000,000 shares;                                               356                 341 
   issued and outstanding, 3,558,168 and 3,408,034 shares,                                                                          
   respectively                                                                                                                     
Additional paid in capital                                                                            5,542,762           5,179,098 
Retained earnings                                                                                     1,374,572           1,635,209 
                                                                                                    -----------         ----------- 
                                                                                                      6,917,690           6,814,648 
Unearned compensation                                                                                        --             (43,750)
                                                                                                    -----------         ----------- 
     Total shareholders' equity                                                                       6,917,690           6,770,898 
     --------------------------                                                                     -----------         ----------- 
                                                                                                                                    
     Total liabilities and shareholders' equity                                                     $13,538,543         $12,209,239 
     ------------------------------------------                                                     ===========         =========== 
</TABLE> 

                See Notes to Consolidated Financial Statements

                                      F-2
<PAGE>

METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MAY 31, 1997, 1996 AND 1995
--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
                                                                   1997                   1996                 1995
                                                                   ----                   ----                 ----
<S>                                                            <C>                   <C>                   <C> 
Revenues                                                       $ 18,355,868          $ 19,526,010          $ 17,804,301
Cost of revenues, including amortization of motion
   pictures and other films of $707,522,
   $1,823,759, and $1,187,185, respectively                      11,564,466            11,939,031            10,609,199
                                                               ------------          ------------          ------------
                                                                  6,791,402             7,586,979             7,195,102

Selling, general and administrative expenses                      7,026,944             6,747,382             6,832,518
                                                               ------------          ------------          ------------
     (Loss) income from operations                                 (235,542)              839,597               362,584
     -----------------------------                             ------------          ------------          ------------

Other income and expenses
-------------------------
    Interest income                                                   1,119                  --                  28,473
    Gain on sale of subsidiaries                                       --                 171,795                  --
    Gain on settlement of litigation                                113,000               196,400                  --
    Gain on sale of equipment                                         2,927                  --
    Miscellaneous income                                              8,269                 6,623                  --
    Interest expense                                               (340,864)             (396,170)             (178,375)
    Other expense                                                      --                    --                (419,000)
    Royalty income                                                  128,091                  --                    --
                                                               ------------          ------------          ------------

                                                                    (87,458)              (21,352)             (568,902)
                                                               ------------          ------------          ------------

     (Loss) income before provision for income taxes               (323,000)              818,245              (206,318)
     -----------------------------------------------

(Benefit) provision for income taxes                               (115,842)              292,570                   704
                                                               ------------          ------------          ------------

     Net (loss) income                                         $   (207,158)         $    525,675          $   (207,022)
     -----------------                                         ============          ============          ============
Net (loss) income per share
    Primary                                                    $       (.06)                  .17          $       (.08)
    Fully diluted                                              $       (.06)                  .17                  (.08)

Weighted average number of shares outstanding
    Primary                                                       3,503,565             3,163,675             2,654,830
    Fully diluted                                                 3,503,565             3,163,675             2,654,830
</TABLE> 

                See Notes to Consolidated Financial Statements

                                      F-3

<PAGE>

METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                                                                      Additional
                                                                               Common Stock            Paid-in        Retained
                                                                          Shares         Amount        Capital        Earnings
                                                                       ------------------------       -----------     --------
<S>                                                                    <C>               <C>         <C>            <C> 
Balance, May 31, 1994                                                  $ 2,079,884        $208       $ 2,218,177    $ 1,316,556

Shares issued:
  as compensation for services rendered by consultants                      50,000           5           333,120
  in connection with a private placement of 55,000 shares                   45,000           4           269,996
  in connection with the acquisition of certain assets from
Innovative Data Concepts, Inc. (IDC)                                       160,000          16           479,984
  Upon exercise of options                                                  10,000           1            74,999
Amortization of unearned compensation
Net loss                                                                                                               (207,022)
                                                                       -----------        ----       -----------    -----------

Balance, May 31, 1995                                                    2,344,884         234         3,376,276      1,109,534

Shares issued:
  as compensation for services rendered by consultants                      55,666           6           289,657
  in connection with the conversation of a $1,000,000 note payable         730,568          73         1,095,793
  in connection with the "IDC" settlement of litigation                    (75,000)         (8)         (224,992)
  Upon exercise of warrants                                                306,916          31           460,493
  Upon exercise of options                                                  45,000           5           181,871
Amortization of unearned compensation
Net income                                                                                                              525,675
                                                                       -----------        ----       -----------    -----------

Balance, May 31, 1996                                                    3,408,034         341         5,179,098      1,635,209

Shares issued:
   as compensation for services rendered by consultants                    100,000          10           243,790
   as compensation for directors and employees                              12,400           1            13,949
   Stock dividend pursuant to a private placement                           17,734           2            53,477        (53,479)
   Upon exercise of options                                                 20,000           2            52,448
Amortization of unearned compensation
Net (loss)                                                                                                             (207,158)
                                                                       -----------        ----       -----------    -----------

Balance, May 31, 1997                                                  $ 3,558,168         356       $ 5,542,762    $ 1,374,572
                                                                       ===========        ====       ===========    ===========
<CAPTION> 
                                                                                Unearned
                                                                              Compensation                Total
                                                                              ------------                -----
<S>                                                                          <C>                       <C> 
Balance, May 31, 1994                                                        $  (193,750)              $ 3,341,191

Shares issued:
  as compensation for services rendered by consultants                                                     333,125
  in connection with a private placement of 55,000 shares                                                  270,000
  in connection with the acquisition of certain assets from
Innovative Data Concepts, Inc. (IDC)                                                                       480,000
  Upon exercise of options                                                                                  75,000
Amortization of unearned compensation                                             75,000                    75,000
Net loss                                                                                                  (207,022)
                                                                             -----------              ------------

Balance, May 31, 1995                                                           (118,750)                4,367,294

Shares issued:
  as compensation for services rendered by consultants                                                     289,663
  in connection with the conversation of a $1,000,000 note payable                                       1,095,866
  in connection with the "IDC" settlement of litigation                                                   (225,000)
  Upon exercise of warrants                                                                                460,524
  Upon exercise of options                                                                                 181,876
Amortization of unearned compensation                                             75,000                    75,000
Net income                                                                                                 525,675
                                                                             -----------              ------------

Balance, May 31, 1996                                                            (43,750)                6,770,898

Shares issued:
   as compensation for services rendered by consultants                                                    243,800
   as compensation for directors and employees                                                              13,950
   Stock dividend pursuant to a private placement
   Upon exercise of options                                                                                 52,450
Amortization of unearned compensation                                             43,750                    43,750
Net (loss)                                                                                                (207,158)
                                                                             -----------              ------------

Balance, May 31, 1997                                                        $     - 0 -               $ 6,917,690
                                                                             ===========              ============
</TABLE> 

                 See Note to Consolidated Financial Statements

                                      F-4
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 1997, 1996 AND 1995
--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 

                                                                        1997                 1996                 1995 
                                                                        ----                 ----                 ----
<S>                                                                <C>                  <C>                  <C> 
Cash flows from operating activities:
   Net income (loss)                                               $  (207,158)         $   525,675          $  (207,022)
   Adjustments to reconcile net income (loss) to
      cash provided by operating activities:
     Depreciation and amortization                                   1,051,493            2,152,026            1,455,581
      Bad debt expense                                                 331,000
     Loss on abandonment of equipment                                     --                 16,389                 --   
     Gain on sale of equipment                                          (2,927)                --                   --   
     Gain on sale of subsidiaries                                         --               (171,795)                --   
     Gain on settlement of litigation                                 (113,000)            (196,400)                --   
     Amortization of unearned compensation                              43,750               75,000               75,000
     Amortization of goodwill                                             --                 12,666               23,568
     Consulting services for common stock                                 --                289,663              333,125
     Compensation for common stock                                      27,700                 --                   --   
     Loss on cancellation of employment contract                          --                   --                419,000
   (Increase) decrease in assets:
      Accounts receivable                                           (1,201,852)            (483,777)            (624,831)
      Inventory                                                        362,023             (567,989)          (1,817,618)
      Prepaid expenses and other current assets                         60,733              (49,321)              86,617
      Other assets                                                     136,746             (208,912)               7,706
      Recoverable income tax                                          (287,000)                --                   --   
      Deferred income taxes                                            (87,150)                --                   --   
   Increase (decrease) in liabilities:
      Accounts payable and accrued expenses                            832,683             (212,054)           2,010,875
      Income taxes payable                                              86,694              196,257             (196,824)
      Deferred income taxes payable                                     (6,300)             (50,643)              (7,249)
                                                                  ------------         ------------         ------------  

     Net cash provided by operating activities                       1,027,435            1,326,785            1,557,928
     -----------------------------------------                    ------------         ------------         ------------  
</TABLE> 

                See Notes to Consolidated Financial Statements

                                     F-5 
 
 
 
<PAGE>

METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1997, 1996 AND 1995
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 

                                                                                   1997                 1996                1995
                                                                                   ----                 ----                ----
<S>                                                                           <C>                  <C>                  <C> 
Cash flows from financing activities:
    Proceeds from the issuance of common stock                                     26,250              642,399              345,000
    Net proceeds from line of credit                                              391,186              506,061                 --
    Increase in notes payable                                                        --                122,447            1,063,393
    Principal payments on notes payable                                           (30,501)             (38,133)            (152,451)
    Principal payments on capital lease obligations                              (177,708)            (107,247)            (100,442)
                                                                              -----------          -----------          -----------
     Net cash provided by financing activities                                    209,227            1,125,527            1,155,500
     -----------------------------------------                                -----------          -----------          -----------

Cash flows from investing activities:
    Proceeds from sale of equipment                                                11,000                 --                   --
    Increase in notes receivable                                                     --                   --                414,607
    Investments in motion pictures and other films                             (1,402,883)          (1,803,999)          (2,806,051)
    Purchase of property and equipment                                           (147,726)            (301,793)            (606,782)
    Cash transferred in connection with sale of
        subsidiaries                                                                 --                (52,906)                --
                                                                              -----------          -----------          -----------

     Net cash used by investing activities                                     (1,539,609)          (2,158,698)          (2,998,226)
     -------------------------------------                                    -----------          -----------          -----------
Net increase (decrease) in cash                                                  (302,947)             293,614             (284,798)

Cash, beginning of year                                                           360,671               67,057              351,855
                                                                              -----------          -----------          -----------
Cash, end of year                                                             $    57,724          $   360,671          $    67,057
                                                                              ===========          ===========          ===========

Supplemental disclosures of cash flow information:

    Cash paid during the year for:
        Interest                                                              $   253,517          $   235,066          $   153,773
                                                                              ===========          ===========          ===========
        Income taxes                                                          $   290,556          $   147,478          $   204,777
                                                                              ===========          ===========          ===========
</TABLE> 

                See Notes to Consolidated Financial Statements
                                      F-6


<PAGE>

METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1997, 1996 AND 1995
--------------------------------------------------------------------------------

Supplemental schedule of non-cash investing and financing activities:

       Accounts payable with a value of $230,000 was converted into 90,000
       shares of the Company's common stock for the year ended May 31, 1997.

       Under the terms of a prior year private placement, the company issued a
       stock dividend value at $52,450 (17,734 shares of common stock) to such
       applicable stockholders during the year ended May 31, 1997.

       During the year ended May 31, 1997, the Company settled a pending
       litigation by agreeing to pay a fine of $200,200. The Company was
       indemnified by a previous owner and accordingly reduced the related
       indebtedness and increased other liabilities by $200,200.

       During the year ended May 31, 1996, the Company sold three of its
       subsidiaries for an aggregate price of $1,076,947. As payment, the buyer
       assumed the Company's debt and accrued interest of $1,076,947. The
       subsidiaries' net assets over net liabilities (excluding cash transferred
       of $52,906) in connection with the sale amounted to $852,246 resulting in
       a gain of $171,795.

       Machinery and equipment of approximately $159,000, was returned to vendor
       and the related capital lease obligation for $159,252 was canceled during
       the year ended May 31, 1996.

       During the year ended May 31, 1996, in connection with a litigation
       settlement, the Company received back its common stock valued at $225,000
       reflected as a reduction in stockholders' equity (see Note 3).

       Note payable plus accrued interest for $1,095,866 was converted into
       730,568 shares of the Company's common stock for the year ended 
       May 31, 1996.

       During the year ended May 31, 1995, the Company issued common stock with
       a value of $480,000 to acquire certain assets and employment contracts.
       In addition, during the year ended May 31, 1995, the Company issued a
       note payable of $324,000 to acquire all of the outstanding common stock
       of Eastern Sales, Inc. (see Note 3).

       Capital lease obligations of $584,554, $150,564, and $438,642 were
       incurred during the years ended May 31, 1997, 1996 and 1995,
       respectively, when the Company entered into leases for office equipment
       and machinery and equipment.




                 See Notes to Consolidated Financial Statements

                                       F-7
<PAGE>
 
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 1997 and 1996
--------------------------------------------------------------------------------

1. Nature of Business and Summary of Significant Accounting Policies

Nature of Business

The Company produces and distributes, predominantly in the United States, motion
pictures and other films (including magazines, videos and movies) and related
ancillary products to wholesalers and retailers oriented to the adult
entertainment market.

Name Change and Merger

Metro Global Media, Inc. (the "Company") was incorporated, under the name South
Pointe Enterprises, Inc. in Florida in November 1987. In February, 1996, the
Company changed its name from South Pointe Enterprises, Inc. to Metro Global
Media, Inc.

In November, 1996 the Company merged into an inactive subsidiary (Metro Sub,
Inc.) under the laws of the state of Delaware and simultaneously changed its
name back to Metro Global Media, Inc. This transaction was accounted for similar
to that used in pooling of interest accounting. The above transaction had no
effect on authorized, issued, and outstanding shares of the Company on its
financial statements presented herein.

Year-end

For the year ended May 31, 1997 and thereafter, the Company elected a 4-4-5
format for its fiscal year. This election provides for standardizing month ends
to the same day of the week. This election will result in year end dates of
other than a May 31 date.

Principles of Consolidation

The consolidated financial statements include the accounts of Metro Global
Media, Inc. ("Metro Global") and its wholly-owned subsidiaries (collectively the
"Company"). All intercompany balances and transactions have been eliminated in
consolidation.

Recognition of Revenues

Revenue is recognized at the time the Company sells motion pictures and other
products to customers. Substantially all products returned to the Company can
either be exchanged for similar products or returned by the company to its
vendor. The net effect on operations of such returns from customers was not
material for the years ended May 31, 1997, 1996 and 1995.

Fees collected from motion pictures licensed as television program material are
recognized as revenue when the license period begins and the licensee is able to
exercise rights under the agreement.

                                      F-8
<PAGE>
 
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1997 and 1996
--------------------------------------------------------------------------------

1. Nature of Business and Summary of Significant Accounting Policies (Continued)

Reclassifications

Certain amounts included in the consolidated financial statements and related
notes for the fiscal year ended May 31, 1995 have been reclassified to conform
with the May 31, 1996 presentation.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates based on management's
knowledge and experience. Due to their prospec tive nature, actual results could
differ from those estimates.

Allowance for Doubtful Accounts

An allowance has been established based on management's expectation of
uncollectables. The Company utilizes the direct write-off method for income tax
reporting purposes.

Inventory

Inventory is valued at the lower of cost (first-in, first-out method) or market
and consists principally of motion picture films, magazines and novelty items
held for resale.

Property and Equipment

The cost of property and equipment (other than leasehold improvements) is
charged to operations over the estimated useful lives of the respective assets
using depreciation computed by the straight-line method as follows:

<TABLE>
         <S>                                       <C>  
         Machinery and equipment                   7 - 10 years
         Furniture and fixtures                    7 years
         Office equipment                          5 - 7 years
         Leasehold improvements                    Life of lease
</TABLE>

Amortization of assets held under capital leases is included in depreciation
expense.

Maintenance and minor repairs and replacements are charged directly to
operations. Major renewals and improvements are capitalized. Costs and
accumulated depreciation applicable to assets sold are removed from the accounts
and any gain or loss on disposal is charged or credited to income.

                                      F-9
<PAGE>
 
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1997 and 1996
--------------------------------------------------------------------------------

1. Nature of Business and Summary of Significant Accounting Policies (Continued)

Motion Picture Films

Motion picture films, including films, video cassettes, video libraries, video
rights, and CD-ROMs are reflected at the lower of amortized cost or net
realizable value. The cost of motion picture films is charged to operations
using the individual film forecast computation method, which amortizes film
costs in the same ratio as current gross revenues to anticipated total gross
revenues. Estimated future revenues are periodically reviewed and, revisions may
be made to amortization rates or write-downs made to the film's net realizable
value as a result of significant changes in future revenue estimates. Net
realizable value is the estimated selling price in the ordinary course of
business, less estimated costs to complete and exploit in a manner consistent
with realization of that income. More than 90% of unamortized film costs are
expected to be amortized over three years commencing upon the release of the
respective motion picture films.

Deferred Income Taxes

The Company has adopted Statements of Financial Standards No. 109, "Accounting
for Income Taxes". This statement requires a liability approach for measuring
deferred taxes based on temporary differences between the financial statement
and tax bases of assets and liabilities existing at each balance sheet date
using enacted tax rates for years which taxes are expected to be paid or
recovered.

Earnings Per Share

Earnings per common and common equivalent share are based on the average number
of common shares outstanding during each period, assuming exercise of all
warrants and options that have exercise prices less than the average market
price of the common stock using the treasury stock method. Fully diluted
computations reflect the additional dilutive effect of using year-end prices, if
greater than average prices for the year, under the treasury stock method.

The weighted average number of common shares and common stock equivalent shares
utilized in computing earnings per share were 3,503,565 (1997), and 3,163,675
(1996) for primary earning per share and 3,503,565 (1997), 3,163,675 (1996) for
fully diluted earnings per share.

Recent Accounting Pronouncements

FASB No. 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill. FASB No. 121 was adopted
during fiscal year 1997 and did not have a material effect on the Company's
financial position of results of operations

                                     F-10
<PAGE>
 
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1997 and 1996
--------------------------------------------------------------------------------

1. Nature of Business and Summary of Significant Accounting Policies (Continued)

Recent Accounting Pronouncements (Continued)

SFAS No. 128 has been issued effective for the years ending after December 15,
1997. This statement establishes standards for computing and presenting earnings
per share and also establishes standards with respect to disclosure of
information about an entity's capital structure. Earnings per share calculations
should not be impacted if the Company adopted such standard for the year ended
May 31, 1997. The Company is required to adopt the provisions of SFAS No. 128 in
the third quarter of 1998 and does not expect adoption thereof to have a
material effect on the Company's financial position or results of operations.

Statement of Financial Accounting Standards No. 129 ("SFAS No. 129"),
"Disclosure of Information About Capital Structure" has been issued effective
for the years ending after December 15, 1997. This statement establishes
standards for disclosing information about an entity's capital structure. The
Company will be required to adopt the provisions of SFAS No. 129 in the third
quarter of 1998 and does not expect adoption thereof to have a material impact
on the Company's financial position, results of operations or cash flows.

2. Fair Values of Financial Instruments

Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures about
Fair Value of Financial Instruments", requires that the Company disclose
estimated fair values for its financial instruments. Fair value estimates are
made at a specific point in time, based on relevant market information and
information about the financial instrument. Because no market exists for a
significant portion of the Company's financial instruments, fair values are
based on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instru ments and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision.

Management of the Company estimates that all financial instruments of the
Company, except long-term liabilities (notes payable) and a certain trade
accounts receivable included in other assets, have a fair value equal to the
carrying value. Regarding the fair value of the long-term liabilities and
certain trade account receivables, it has been determined that fair value cannot
be reasonably estimated since the unique nature, interest rates, repayment
terms, restrictions and all related conditions pertaining to these instruments
do not provide information that would yield a basis for a sound fair value in
accordance with guidelines in SFAS 107.

                                     F-11
<PAGE>
 
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1997 and 1996
--------------------------------------------------------------------------------

3. Acquisitions/Dispositions

Airborne For Men, Ltd.

During September 1994, Airborne acquired 100% of the capital stock of Eastern
Sales, Inc. from an officer/shareholder of the Company. Eastern Sales, Inc.
operates a retail store selling adult entertainment theme products. The $324,000
purchase price was payable in the form of a promissory note. The $253,316 excess
of purchase price over net assets acquired has been recorded as goodwill,
amortized over 10 years, by the straight-line method. In addition, Airborne
opened 2 new retail stores in 1995.

Effective January 31, 1996, Airborne for Men, Ltd. sold to Capital Video
Corporation the stock of its wholly owned subsidiary A.F.M. Limited for
$353,360, and effective November 30, 1995, Airborne for Men, Ltd. sold to
Capital Video Corporation the stock of its wholly owned subsidiaries, Eastern
Sales, Inc., a Rhode Island corporation, and Airoldco, Inc. (formerly known as
Airborne East, Inc.), a Rhode Island corporation for an aggregate price of
$723,587.

In connection with the November 30, 1995 transaction, Capital Video Corporation
assumed Airborne's debt to Kenneth F. Guarino, an officer and shareholder,
evidenced by the Promissory Note of Airborne dated September 30, 1994 (the
"Airborne Note"). At November 30, 1995, the outstanding principal balance of the
Airborne Note was $292,713, plus accrued interest of $26,503.

In addition, Capital Video Corporation agreed to assume the indebtedness of
Metro, Inc. to Metro Equipment Company evidenced by the Promissory Note of North
Star Distributors, Inc. dated June 1, 1991 (the "1/1/92 North Star/MEC Note").
At November 30, 1995, the outstanding principal balance of the 1/1/92 North
Star/MEC Note was $97,323, plus accrued interest of $12,530. In addition,
Capital Video Corporation agreed to assume a portion of the indebtedness of
Metro, Inc. to Metro Equipment Company evidenced by the Promissory Note of North
Star Distributors, Inc. dated 6/1/92 (the "6/1/91 North Star/MEC Note"). At
November 30, 1995, the outstanding principal balance of the 6/1/91 North
Star/MEC Note that Capital Video Corporation agreed to assume was $232,894, plus
accrued interest of $64,624.

In connection with the January 31, 1996 transaction, Capital Video Corporation
agreed to assume the balance of indebtedness of Metro, Inc. under the 6/1/91
North Star/MEC Note. At January 31, 1996, the outstanding principal balance of
the 6/1/91 North Star/MEC Note that Capital Video Corporation agreed to assume
was $337,736. In addition, Capital Video Corporation agreed to assume a portion
of the indebtedness of Metro, Inc. to Metro Plus Company evidenced by the
Promissory Note of North Star Distributors, Inc. dated June 1, 1991 (the "6/1/91
North Star/MPC Note"). At January 31, 1996, the outstanding principal balance of
the 6/1/91 North Star/MPC Note that Capital Video Corporation agreed to assume
was $12,625.

The Company's total reported gain on the sale of the Airborne stores described
above amounted to $171,795, for the year ended May 31, 1996.

                                     F-12
<PAGE>
 
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1997 and 1996
--------------------------------------------------------------------------------

3. Acquisitions/Dispositions (Continued)

Arcus Media Group, Inc.

During the year ended May 31, 1995 the Company formed Arcus Media Group, Inc.
("Arcus"), a wholly owned subsidiary, to develop and distribute computer
software products oriented to the adult entertain ment market.

In November, 1994, Arcus acquired certain assets, including equipment and key
technical personnel of IDC for 160,000 restricted shares of the Company's common
stock, having a fair value of $480,000. Costs allocated to the purchase of
employment contracts of $419,000 were expensed during the year ended May 31,
1995. In May, 1995, Arcus filed suit against IDC and its principals alleging
fraud in connection with the transaction and requesting recision and damages. On
May 31, 1996 the suit filed by Arcus against IDC and its principals was settled.
As a result of the settlement, the Company received from IDC 75,000 shares of
its restricted common stock valued at $225,000, of the 160,000 shares originally
transferred by Arcus to IDC as part of the November 10, 1994 Asset Purchase
Agreement which was reflected as a reduction in stockholders' equity. The 75,000
common shares were retired on effective May 31, 1996. As a result of the
settlement of the suit the Company wrote-off its machinery and equipment by
$28,600, and a gain on settlement of litigation was recognized for $196,400 in
the financial statements for the year ended May 31, 1996. During the year ended
May 31, 1997 Arcus was inactive and is in the process of dissolution.

4. Property and Equipment

Property and equipment consist of the following as of May 31:

<TABLE>
<CAPTION>
                                               1997                1996
                                               ----                ----
     <S>                                   <C>                  <C> 
     Machinery and equipment               $1,611,773           $1,295,675  
     Furniture and fixtures                   442,661              438,406  
     Office equipment                         615,477              496,805  
     Automobiles                               15,574               47,904  
     Leasehold improvements                   193,653              154,702  
                                           ----------           ----------
                                            2,879,138            2,433,492  
     Less accumulated depreciation                                          
       and amortization                     1,303,939              970,433  
                                           ----------           ----------
                                           $1,575,199           $1,463,059  
                                           ==========           ==========
</TABLE>

                                     F-13
<PAGE>

METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1997 and 1996
--------------------------------------------------------------------------------

5. Motion Pictures and Other Films

Motion pictures and other films consist of the following as of May 31

<TABLE> 
<CAPTION> 
                                                                                                 1997                   1997   
                                                                                                 ----                   ----   
   <S>                                                                                        <C>                    <C>       
   Motion picture films produced and released                                                 $5,551,301             $4,291,995
   Rights acquired to release motion pictures and other films                                  1,727,654              1,668,653
   CD-Rom                                                                                        313,807                283,750
   Motion picture films in process                                                               846,164                791,645
                                                                                              ----------             ----------
                                                                                               8,438,926              7,036,043
   Less accumulated amortization                                                               5,085,183              4,377,661
                                                                                              ----------             ----------
                                                                                              $3,353,743             $2,658,382
                                                                                              ==========             ========== 
</TABLE> 

6. Long-Term Debt

Long-term debt consists of the following as of May 31:

<TABLE> 
<CAPTION> 
                                                                                                1997                   1996
                                                                                                ---                    ----
<S>                                                                                           <C>                    <C> 
   Note payable to Metro Plus Company, a related company. As of May 31, 1996                                  
   accrued interest of $40,447 was added to the outstanding principal balance of                              
   the note. During May 31, 1997 this note was reduced by $200,200 indemnification                            
   agreement of another related party. The revised note bearing interest at 9% per                            
   annum, is payable in 120 equal monthly installments of $7,860 beginning June,                              
   1996 and ending May 31, 2006                                                                 $430,246               $620,447
                                                                                                              
   Unsecured note payable to Metro Control Company, a related company, is due                                 
   on demand, without interest. This balance was rolled into Metro Plus Co.                        --                    30,000
                                                                                                              
   Note payable to a finance company with principal and interest payable in equal                             
   monthly installments of $676 from March, 1994 through March, 1998,                                         
   bearing interest at 8.5% per annum. Note paid in full in June of 1996                           --                    13,723
                                                                                                              
   Note payable to shareholder with principal and interest due in May, 1998,                                  
   bearing interest at 12% per annum                                                              63,393                 63,393
                                                                                                              
   Note payable to shareholder with principal and interest due in May 1, 1998,                                
   bearing interest at 12% per annum                                                              40,000                 40,000
                                                                                                              
   Note payable to FanPic, Inc., payable in eight monthly installments of $5,250.00                           
   commencing on December 1, 1995 through July 1, 1996, non-interest                                          
   bearing. Paid in full in July of 1996                                                           --                    10,500
                                                                                                --------               --------
   Less current portion                                                                          533,639                778,063
   Total long-term debt                                                                          137,651                151,216
                                                                                                --------               --------
                                                                                                $395,988               $626,847
                                                                                                ========               ========
</TABLE> 


                                     F-14
<PAGE>

METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1997 and 1996
--------------------------------------------------------------------------------

6. Long-Term Debt (Continued)

Annual maturities of long-term debt are as follows:

<TABLE> 
<CAPTION> 
                Year ended                              
                 May 31,                                                 Amount
                 -------                                                 ------
                <S>                                                   <C> 
                  1998                                                $  137,651
                  1999                                                    37,613
                  2000                                                    41,298
                  2001                                                    45,344
                  2002                                                    49,785
                  Thereafter                                             221,948
                                                                      ----------
                                                                      $  533,639
                                                                      ==========
</TABLE> 

<TABLE> 
Capital Lease Obligations
                                                                                           1997               1996
                                                                                           ----               ----
     <S>                                                                                <C>                 <C> 
     The Company leases office equipment ($404,052, less accumulated
     depreciation of $148,308 at May 31, 1997 and $309,628, less accumulated
     depreciation of $104,916 at May 31, 1996) and, machinery and equipment
     ($377,305 less accumulated depreciation of $53,715 at May 31, 1997 and
     $141,547, less accumulated depreciation of $24,541 at May 31, 1996) and,
     furniture and fixtures ($185,339, less accumulated depreciation of $68,476
     at May 31, 1997 and $185,339, less accumulated depreciation of $42,144 at
     May 31, 1996) under noncancellable capital leases. The leases, which expire
     at various times through 2001 bearing interest at annual rates ranging from
     10.895% to 20.785% provide for aggregate monthly payments averaging
     $25,700. All leases are secured by the respective assets aquired.                  $ 584,553           $ 432,080 
     Less current portion                                                                 222,962             128,063  
                                                                                        ---------           ---------  
                                                                                        $ 361,591           $ 304,017  
                                                                                        =========           =========  
                                                                                                                             
</TABLE> 

Annual payments under capital lease obligations are due as follows:

<TABLE> 
<CAPTION> 

       Year ended                                               
        May 31,                                                           Amount
        -------                                                           ------
       <S>                                                              <C> 
         1998                                                           $291,590
         1999                                                            249,622
         2000                                                            118,112
         2001                                                             39,854
         2002                                                              6,174
                                                                        --------
                                                                         705,352
         Less deferred interest                                          120,799
                                                                        --------
                                                                        $584,553
                                                                        ========
</TABLE> 


                                     F-15

<PAGE>

METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1997 and 1996
--------------------------------------------------------------------------------

7. Short-Term Borrowings

The Company's subsidiary, Metro, Inc. entered into a line of credit agreement in
June, 1995 with a finance company. Metro may borrow up to 70% of assigned
accounts receivable less than 90 days old, up to a maximum of $750,000. The
balance due under the line of credit bears interest at the prime rate plus 6%
per annum. In addition, Metro shall pay United Credit a management fee equal to
3/4 of 1% of sales submitted to the finance company for inclusion in the net
security value of the accounts receivable, but not more than $7,500 per month.
The outstanding balance under the line is secured by the accounts receivable of
Metro, and guarantee of the Company and certain officer/shareholders. In May,
1997 the agreement was modified increasing the maximum borrowings to $1,000,000
and a new agreement was signed in June, 1997 raising the line of credit to
$1,500,000. As of May 31, 1997, notes payable to the finance company totaled
$897,247.

8.  Income Taxes

The provision (benefit) for income taxes consists of the following for the years
ended May 31:

<TABLE> 
<CAPTION> 
                                           1997                     1996                     1995
                                           ----                     ----                     ----
<S>                                     <C>                      <C>                      <C> 
Current provision (benefit)             $ (59,704)               $ 262,001                $   7,395
    Federal                                37,312                   41,217                      558
                                        ---------                ---------                ---------
    State and local                       (22,392)                 303,218                    7,953
                                        ---------                ---------                ---------

Deferred provision (benefit)              (58,100)                  (3,037)                  (6,741)
    Federal                               (35,350)                  (7,611)                    (508)
                                        ---------                ---------                ---------
    State and local                       (93,450)                 (10,648)                  (7,249)
                                        ---------                ---------                ---------

       Total                            $(115,842)               $ 292,570                $     704
       -----                            =========                =========                =========
</TABLE> 

The following is a reconciliation of the statutory federal income tax rate to
the actual effective income tax rate for the years ended May 31:

<TABLE> 
<CAPTION> 
                                                                      1997                     1996               1995
                                                                      ----                     ----               ----
         <S>                                                         <C>                     <C>                <C> 
         Statutory federal income tax rate                           (34.0)%                  34.0 %             (34.0)%
         State income taxes, net of federal benefit                    7.0 %                   3.2 %              26.0 %
         Net change attributable to temporary differences              0.0 %                  (1.5)%              (3.6)%
         Net change attributable to permanent differences             (8.9)%                    .3 %              11.6 %
                                                                      ------                  ------             -------

                                                                     (35.9)%                  36.0 %               0.0 %
                                                                     =======                  ======             =======
</TABLE> 

                                     F-16
<PAGE>

METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1997 and 1996
--------------------------------------------------------------------------------

8. Income Taxes (Continued)

Deferred income taxes result from temporary differences in the financial bases
and tax bases of assets and liabilities. The significant components of the
Company's deferred income tax assets and liabilities at May 31, are as follows:

<TABLE>
<CAPTION>
                                                      1997             1996  
                                                      ----             ----  
                                                      Asset            Asset   
                                                   (Liability)      (Liability)
                                                    ---------        ---------
 <S>                                               <C>              <C> 
 Excess depreciation                               $(157,650)       $ (146,550)
 Unearned management compensation                     121,950          104,550 
 Allowance for doubtful account                         8,943           16,346 
 Inventory capitalization                             127,844           62,154 
  State net operating loss carryforward                16,700                  
 Other expenses                                        12,163                - 
                                                   ----------       ----------
 Net deferred assets (liability)                   $  129,950       $   36,500 
                                                   ==========       ==========
</TABLE>

No valuation allowance has been provided for these deferred tax assets and
liabilities at May 31, 1997 and 1996.

As a result of a federal tax audit disallowing certain ordinary and necessary
business expenses incurred during the year ended May 31, 1995, the Company
recorded tax liabilities of approximately $270,000 plus penalties and interest
of approximately $80,000 for the year ended May 31, 1997. Consequently, those
disallowed deductions will be deductible during the year ended May 31, 1997
giving rise to a recoverable tax benefit of approximately $240,000 which has
been reflected in these financial statements.

9. Shareholders' Equity

Public Offering

In June, 1992, Metro Global completed an offering pursuant to a Registration
Statement under the Securities Act of 1933 of 60,000 units (the "units") at an
offering price of $6.00 per unit. Each unit consisted of six shares of Metro
Global's common stock .0001 par value (the "common stock"), and six class "A"
warrants, each exercisable at $1.50 for one share of common stock. A total of
60,000 units were sold pursuant to the offering and Metro Global received net
proceeds of $311,215 on July 2, 1992. Metro Global received an additional
$64,326 from the exercise of 42,884 of class "A" warrants during June, 1992
through September, 1992; and additional 42,884 common shares were then issued.
During August, 1995 the Company issued an aggregate 306,916 share of common
stock upon the exercise of outstanding warrants, and received aggregate proceeds
of $460,524 from the exercise of said warrants. As of August 11, 1995 the
Company had no warrants outstanding. All warrants have been exercised or have
expired.


                                      F-17
<PAGE>
 
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1997 and 1996
--------------------------------------------------------------------------------

9 Shareholders' Equity (Continued)

Consultant Stock Compensation Plan

During the year ended May 31, 1994, the Company adopted a Consultant Stock
Compensation Plan (the "Plan") which allows the Company to compensate
consultants and certain other persons who have provided bona fide service to the
Company through the award of the Company's common stock.

As of May 31, 1996, the company has filed registration statements with the
Securities and Exchange Commission for 300,000 common shares which may be
awarded under the Plan.

During the years ended May 31, 1997 and 1996, 100,000 and 55,666, common shares,
respectively, were awarded under this Plan.

During November, 1994, the Company granted options to purchase up to 150,000
common shares to a consultant under the plan. The options were exercisable
through May 31, 1995 at prices ranging from $7.50 to $8.50 per share. During the
year ended May 31, 1995, options to purchase 10,000 common shares at a price of
$7.50 per share were exercised, the balance of the options expired. During June
1995, the company granted options to purchase up to 110,000 common shares to a
consultant. The options were exercisable as to 60,000 shares commencing June 8,
1995 (at a price of $6 per share) and as to an additional 50,000 shares
commencing September 1, 1995 (at a price of $6.50 per share). Of the options to
purchase up to 110,000, 15,000 shares were purchased and the balance of such
options expired on December 29, 1995. During November, 1995 the Company granted
options to purchase up to 50,000 common shares to a consultant (at a price of
$3.50 per share). Options to purchase 15,000 shares at $3.50 a share were
exercised and the balance expired on March 31, 1996. During April, 1996 the
Company granted options to purchase up to 100,000 common shares to a consultant.
These options were exercisable through December 31, 1996 (at a price of $2.625
per share). Of the options to purchase up to 100,000 common shares, 35,000 were
purchased and the balance of such options expired on December 31, 1996. As of
May 31, 1997 there were no options outstanding.

Equity Incentive Plan

During the year ended May 31, 1997 the Company adopted an Equity Incentive Plan
(the "Plan") which allows the Company to compensate key employees and directors
who have provided bone fide service to the Company through the award of the
Company's common stock, and both qualified and non-qualified stock options.

As of May 31, 1997 the Company has filed registration statements with the SEC
for 500,000 common shares which may be awarded under the Plan.

During the year ended May 31, 1997 options to purchase 200,000 shares were
awarded officers and key employees under the Plan. The grants under the Plan
provide for the options to vest annually, on the anniversary date of the grant,
at the rate of 10,000 share per year, be exercisable for a five year period, and
have an exercise price of $2.00 per share.

                                      F-18
<PAGE>
 
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1997 and 1996
--------------------------------------------------------------------------------

9. Shareholders' Equity (Continued)

Employee Stock Purchase Plan

During the year ended May 31, 1997 the Company adopted an Employee Stock
Purchase Plan. This plan allows employees of the Company to purchase its common
stock at a 15% discount to the market price of the stock on the commencement
date or closing date of the plan year, whichever is lower.

As of May 31, 1997 the Company has filed registration statements with the SEC
for 600,000 common shares which may be awarded under this plan.

During the year ended May 31, 1997 no shares were purchased under this plan.

Private Placement

The company sold 55,000 common shares (45,000 and 10,000 during the fiscal years
ended May 31, 1995 and 1994, respectively) at a price of $6.00 per share to a
limited number of investors, pursuant to a Private Placement Memorandum dated
May 6, 1994. Pursuant to the offering, original participants were to receive .15
shares for each share held as of the second anniversary of the private
placement. This resulted in the Company issuing 17,734 additional shares in
October, 1996.

Debt Conversion

During the quarter ended May 31, 1995, Capital Video Corporation (a related
entity) advanced the company $1,000,000 bearing interest at the rate of 12% to
be repaid on or before May 31, 1996. Effective June 1, 1995, Capital Video
Corporation extended the loan to July 1, 1997 and the interest rate was
increased to 15%. Effective November 30, 1995, the Company converted this note
payable to Capital Video Corporation plus accrued interest of $95,866 into
730,568 shares of common stock (a conversion price of $1.50 per share deemed to
be the fair value) (see Notes 7 and 12). The debt to stock conversion was
approved by the Directors on December 7, 1995. The shares bear restrictive
legend but Capital has been provided with a registration right exercisable upon
demand for up to 250,000 shares. To date, none of these shares have been
registered.

                                      F-19
<PAGE>
 
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1997 and 1996
--------------------------------------------------------------------------------

10. Commitments and Contingencies

Operating Leases
The Company is obligated under long-term operating leases which require minimum
annual rentals as follows:

<TABLE>
<CAPTION>
                                             Office and                       Machinery
                                              Warehouse                          and   
  Year Ending May 31,            Total        Premises        Vehicles        Equipment
                                 -----        --------        --------        ---------
  <S>                        <C>             <C>             <C>              <C>  
     1998                    $  839,467      $  408,652      $ 129,405        $ 301,411
     1997                       722,760         408,834         81,721          232,204
     2000                       402,815         258,836         13,383          130,596
     2001                       262,126         245,200                          16,926
     2002                       259,180         245,200                          13,980
  Thereafter                    224,767         224,767                                
                             ----------      ----------      ---------        ----------
     Total                   $2,711,115      $1,791,489      $ 224,509        $ 695,117
     =====                   ==========      ==========      =========        ==========
</TABLE>

The lease on the Rhode Island warehouse and office facilities (Note 11) has a
renewal option for two successive additional terms of five years (through April,
2008 and April, 2013, respectively), each based on the current annual rent plus
an amount based on the consumer price index one month prior to the date of
renewal. The lease requires monthly rentals of $20,433. The lease for the
executive offices (Note 11) is for a term of five years ending June 1, 1999,
with a five year renewal option. This lease was terminated by mutual agreement
of the parties during the year ended May 31, 1996.

The three leases on the California buildings contain cost of living adjustments
beginning on May 1, 1994 and May 1, 1996, based on the consumer price index two
months prior to the dates specified above. The annual adjustment may be no less
than 4% and increase no more than 8% annually. The California leases each have a
renewal option for one additional term of five years. The renewal option
contains cost of living adjustments beginning on July 1, 1999 and July 1, 2001,
based on the same terms specified in the previous paragraph.

Rent expense under operating leases totaled $364,173, $424,813, and $388,645
during the years ended May 31, 1997, 1996 and 1995, respectively.

Uninsured Cash

The Company maintains its cash and cash equivalents in various banks. Accounts
at each bank are guaranteed by the Federal Deposit Insurance Corporation (FDIC)
up to $100,000. Uninsured cash and cash equivalents approximated $-0- and
$407,731 at May 31, 1997 and 1996, respectively.

                                      F-20
<PAGE>
 
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1997 and 1996
--------------------------------------------------------------------------------

10. Commitments and Contingencies (Continued)

Employment Agreement

The Company entered into an employment agreement (the "Agreement") with an
Executive for a four year period beginning on January 1, 1993 and ending
December 31, 1996. Effective December 31, 1996 this agreement was terminated. In
addition to a salary, the Executive was granted options to purchase 200,000
shares of the Company's common stock at the price of $1.50 per share on January
1, 1993 when the market value of the Company's common stock was $3.00 per share.
Unearned compensation of $300,000 was amortized to operations over the period
the options are exercisable through January 1, 1997. As of January 1, 1997 the
options are fully exercisable. The term of the option was extended to December
31, 2006. The requirement that the option be exercised within 30 days after
termination of employment was deleted.

The options are exercisable as follows:

<TABLE>
<CAPTION>
                                   Number of
        January 1,                  shares  
        ---------                   ------
        <S>                        <C>      
           1994                     50,000  
           1995                     50,000 
           1996                     50,000 
           1997                     50,000 
          -----                    -------
          Total                    200,000 
          =====                    =======
</TABLE>

None of these options were exercised through May 31, 1997.

Other Matters

The Company is a defendant in three claims relating to matters arising in the
ordinary course of business. The amount of liability, if any, from the claims
cannot be estimated, but management and outside counsel is of the opinion that
the outcome of the claims will not have a material impact on the Company's
financial position. Nevertheless, due to uncertainties in the settlement
process, it is at least reasonably possible that management's and outside
counsel's view of the outcome will change in the near term.

During the year the Company settled pending litigation with an individual
concerning the sales of foreign film rights of some of the titles contained in
its film and video library. The Company recovered several of its foreign film
and video masters, which were valued at their historical cost. This recovery of
the film and video masters resulted in a gain on settlement of litigation of
$113,000.

During the years ended May 31, 1997 and 1996, one vendor provided substantially
all printing services (magazines, video boxes and promotional material) for the
Company. Management of the Company believes that other suppliers could provide
similar services at comparable terms.

                                      F-21
<PAGE>
 
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1997 and 1996
--------------------------------------------------------------------------------

11. Related Party Transactions

The Company has significant tenant, borrower and customer relationships with
companies owned and managed by officers/shareholders of the Company (see Notes
6, 9 and 10). Significant related party transactions for the years ended May 31,
1997, 1996 and 1995 are summarized below.

Capital Video Corporation ("CVC") operates approximately 29 video and magazine
retail stores in the New England and New York areas and accounted for
approximately 38.8%, 32%, and 32%, of the company's sales for the years ended
May 31, 1997, 1996 and 1995, respectively.

The Company's accounts receivables include $1,711,443, and $662,807 due from CVC
at May 31, 1997 and 1996. Additionally, the Company has obtained the personal
guarantee of the principal shareholder of CVC. No allowance for doubtful related
party receivables and no related party bad debts expense has been recorded in
the accompanying May 31, 1997, 1996 and 1995 financial statements.

During fiscal 1997 the Company received from CVC $93,480 in royalty income as
per the franchise agreement for the operation of the Airborne for Men stores
owned by CVC.

The Company leases its Rhode Island warehouse and office facilities from Castle
Properties, L.L.C., an affiliate, for its Rhode Island operations.

A portion of the facility rented from Castle Properties, L.L.C. is sublet to
Capital Video Corporation under a month-to-month agreement for $9,000 per month
until June 1996. Capital Video Corporation moved most of its operations to
another facility in June, 1996 and the month-to-month agreement has been
modified to $4,000 per month. Sublease income during the year ended May 31,
1997, 1996 and 1995 totaled $49,000, $104,000, and $60,000 respectively. The
rent expense to Castle Properties, L.L.C. for the years ended May 31, 1997, 1996
and 1995 was $245,200, $245,200, and $245,200, respectively.

Effective January 31, 1996, Airborne for Men, Ltd. sold to Capital Video
Corporation the stock of its wholly owned subsidiary A.F.M. Limited and
effective November 30, 1995, Airborne for Men, Ltd. sold to Capital Video
Corporation the stock of its wholly owned subsidiaries, Eastern Sales, Inc., a
Rhode Island corporation and Aircoldco, Inc. (formerly known as Airborne East,
Inc.), a Rhode Island corporation.

In connection with the November 30, 1995 transaction, Capital Video Corporation
agreed to assume in indebtedness of Airborne to Kenneth F. Guarino evidenced by
the Promissory Note of Airborne dated September 30, 1994 (the "Airborne Note").
At November 30, 1995, the outstanding principal balance of the Airborne Note was
$292,712, plus accrued interest of $26,503.

                                      F-22
<PAGE>
 
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1997 and 1996
--------------------------------------------------------------------------------

11. Related Party Transactions (Continued)

In addition, Capital Video Corporation agreed to assume the indebtedness of
Metro, Inc. to Metro Equipment Company evidenced by the Promissory Note of North
Star Distributors, Inc. dated June 1, 1991 (the "1/1/92 North Star/MEC Note").
At November 30, 1995, the outstanding principal balance of the 1/1/92 North
Star/MEC Note was $97,323, plus accrued interest of $12,530. In addition,
Capital Video Corporation agreed to assume a portion of the indebtedness of
Metro, Inc. to Metro Equipment Company evidenced by the Promissory Note of North
Star Distributors, Inc. dated 6/1/92 (the "6/1/91 North Star/MEC Note"). At
November 30, 1995, the outstanding principal balance of the 6/1/91 North
Star/MEC Note that Capital Video Corporation agreed to assume was $232,893, plus
accrued interest of $64,623.

In connection with the January 31, 1996 transaction, Capital Video Corporation
agreed to assume the balance of indebtedness of Metro, Inc. under the 6/1/91
North Star/MEC Note. At January 31, 1996, the outstanding principal balance of
the 6/1/91 North Star/MEC Note that Capital Video Corporation agreed to assume
was $337,736. In addition, Capital Video Corporation agreed to assume a portion
of the indebtedness of Metro, Inc. to Metro Plus Company evidenced by the
Promissory Note of North Star Distributors, Inc. dated June 1, 1991 (the "6/1/91
North Star/MPC Note"). At January 31, 1996, the outstanding principal balance of
the 6/1/91 North Star/MPC Note that Capital Video Corporation agreed to assume
was $12,625.

The Company's total gain for the sale of the three Airborne stores amounted to
$171,795 for the year ended May 31, 1996.

Debt Conversion

During the quarter ended May 31, 1995, Capital Video Corporation (a related
entity) advanced the company $1,000,000 bearing interest at the rate of 12% to
be repaid on or before May 31, 1996. Effective June 1, 1995, Capital Video
Corporation extended the loan to July 1, 1997 and the interest rate was
increased to 15%. Effective November 30, 1995, the company converted this note
payable to Capital Video Corporation plus accrued interest of $95,866 into
730,568 shares of common stock (a conversion price of $1.50 per share deemed to
be the fair value). The debt to stock conversion was approved by the Directors
on December 7, 1995. The shares bear restrictive legend but Capital has been
provided with a registration right exercisable upon demand for up to 250,000
shares. To date, none of these shares have been registered.

12.  Accounting for Stock Based Compensation

The Company applies APB Opinion 25 and related interpretations in accounting for
its stock option transactions. Accordingly, no compensation cost has been
recognized for the years May 31, 1997, 1996 and 1995 (see Notes 9 and 10).

                                      F-23
<PAGE>
 
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1997 and 1996
--------------------------------------------------------------------------------

12. Accounting for Stock Based Compensation (Continued)

In October, 1995, the Financial Accounting Standards Board issued Statement
(SFAS) No. 123, Accounting for Stock Based Compensation, which becomes effective
for transactions entered into in fiscal years beginning after December 15, 1995.
This statement permits an entity to apply the fair value based method to stock
options awarded during 1995 and thereafter in order to measure the compensation
cost at the grant date and recognize it over its vesting period. This statement
also allows an entity to continue to measure compensation costs for these plans
pursuant to APB Opinion 25. Entities electing to remain with the accounting
treatment under APB Opinion 25 must make proforma disclosures in net income and
earnings per share to include the effects of all awards granted in fiscal years
beginning after December 31, 1994, as if the fair value based method of
accounting pursuant to SFAS No. 123 had been applied.

The Company has stock option plans which reserves shares of common stock for
issuance to executives, employees, and directors. The Company has adopted the
disclosure only provisions of Statement of Financial Accounting No. 123,
"Accounting for Stock Based Compensation". Accordingly, compensation expense
continues to be recognized under APB Opinion 25 for such plans. Had compensation
cost for the Company's stock option plans been determined based on the fair
value at the grant date for awards during the year ended May 31, 1997 consistent
with the provisions of SFAS No. 123, the Company's net income (loss) and earning
(loss) per share would have been reduced to the pro forma amounts indicated
below:

<TABLE>
<CAPTION>

                                                        1997
                                                        ----
     <S>                                           <C>
     Net (loss) - as reported                      $ (207,158)
     Net (loss) - pro forma                        $ (311,558)
     (Loss) per share - as reported                $     (.06)
     (Loss) per share - pro forma                  $     (.09)
</TABLE>

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during May 31, 1997: dividend yield 0.00%, expected
volatility 58.08%, risk free interest rate of 7.50%, and expected lives of 10
years.

                                      F-24