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


                                   FORM 10-KSB


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


 For year ended December 31, 1996                Commission File No. 0-25022


                          CERX ENTERTANMENT CORPORATION
                          (Exact name of registrant as
                            specified in its charter)

            NEVADA                                       72-1148906
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)

  90 Madison Street, Suite 707
      Denver, Colorado 80206                           (303) 355-3350
(Address of Principal's Executive Offices)        (Registrant's Telephone No.
                                                       incl. area code)

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

 Securities registered pursuant to
    Section 12(g) of the Act:                   Common stock, $.001 par value

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

         Indicate  by  check  mark if no  disclosure  of  delinquent  filers  in
response  to Item  405 of  Regulation  S-B is  contained  in this  form,  and no
disclosure  will  be  contained,  to the  best  of  registrant's  knowledge,  in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-KSB.

         Yes   X     No

         The registrant's revenues for its most recent year were nil.

         The aggregate  market value of the 1,772,985  shares of common stock of
the registrant held by non-affiliates on December 31, 1996 was not determinable.

         At February 28, 1997, a total of 4,952,838  shares of common stock were
outstanding.





<PAGE>


<TABLE>

<CAPTION>

                                TABLE OF CONTENTS


                                     PART I
<S>                                                                                                                    <C>  

Item 1.  Description of Business ..................................................................................      2
Item 2.  Description of Property ..................................................................................     16
Item 3.  Legal Proceedings ........................................................................................     16
Item 4.  Submission of Matters to a Vote of Security Holders ......................................................     16

                                     PART II

Item 5.  Market for the Registrant's Common Equity and Related Stockholder Matters ................................     16
Item 6.  Management's Discussion and Analysis or Plan of Operation.................................................     16
Item 7.  Financial Statements .....................................................................................     19
Item 8.  Changes in and Disagreements with Accountants
                             on Accounting and Financial Disclosure ...............................................     19

                                    PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons;
                             Compliance with Section 16(a) of the Exchange Act ....................................     19
Item 10. Executive Compensation ...................................................................................     20
Item 11. Security Ownership of Certain Beneficial Owners and Management ...........................................     21
Item 12. Certain Relationships and Related Transactions ...........................................................     22

                                     PART IV

Item 13. Exhibits and Reports on Form 8-K .........................................................................     23

                           Index to Financial Statements ..........................................................     25

                           Financial Statements .................................................................      F-1

</TABLE>



                                     PART I

Item 1.  DESCRIPTION OF BUSINESS.

The Company

      Cerx Entertainment  Corporation ("Cerx" or the "Company") was incorporated
in the State of Nevada on April 4, 1989, under the name Chelsea Atwater, Inc. On
March 19, 1997, the Company changed its name to Cerx Entertainment  Corporation.
Until the third quarter of 1996, when it  unsuccessfully  attempted to acquire a
foreign casino management company for stock and cash, Cerx had extremely limited
operations. Cerx's efforts at this time are concentrated upon raising capital to
execute  its  business  plan to become the  premier  operator  of  entertainment
networks on the Internet,  including networks for kids, news, sports, gaming and
general entertainment.

      Cerx's principal executive offices are located at 90 Madison Street, Suite
707, Denver,  Colorado 80206. Its telephone number there is (303) 355-3350,  and
its facsimile number is (303) 355-3063.

Forward-Looking Information

      This report contains  certain  forward-looking  statements and information
relating to Cerx that are based on the beliefs of Cerx's  management  as well as
assumptions made by and information  currently  available to Cerx's  management.
When used in this registration  statement,  the words  "anticipate",  "believe",
"estimate",  "expect", "intend", "plan", and similar expressions, as they relate
to  Cerx  or  Cerx's  management,   are  intended  to  identify  forward-looking
statements.   Such statements  reflect  management's  current  view of Cerx with

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respect to future  events and are subject to certain  risks,  uncertainties  and
assumptions.  Should one or more of these risks or uncertainties materialize, or
should  underlying   assumptions  prove  incorrect,   actual  results  may  vary
materially from those described  herein as anticipated,  believed,  estimated or
expected.  Cerx's  realization  of its  business  aims could be  materially  and
adversely  affected by any technical or other problems in, or difficulties with,
such planned offerings and technologies,  third party  technologies which render
Cerx's  technologies  obsolete,  the  unavailability  of  required  third  party
technology  licenses on commercially  reasonable terms, the loss of key research
and  development  personnel,  the  inability  or failure  to recruit  and retain
qualified  research and  development  personnel,  or the adoption of  technology
standards  which are different from  technologies  around which Cerx's  business
ultimately  is built.  Cerx does not  intend  to  update  these  forward-looking
statements.

                               GENERAL BACKGROUND

Glossary of Technical Terms

      The following terms used in this report have the meanings below:

      BANDWIDTH  -  the  capacity  of a  network  or  data  connection  for  the
transmission of data, images and sound over a line, measured in bits per second.
The  higher  the  capacity,  the  higher  the  bandwidth,  and  the  faster  the
information  moves  through  the line.  Bandwidth  is the major  concern  on the
Internet  as more audio and video are  transmitted  and take up more  bandwidth,
slowing transmissions.

      BROWSER - a software  application  that lets users download World Wide Web
pages and view them on their  computers and lets users  navigate among Web pages
by clicking links.

      BYTE - Equal to 7 or 8 bits, a byte stores a single character of data such
as the letter A.

      CHAT - Live communication  over the Internet or an online service.  As one
person  transmits  text it  appears  almost  instantly  on the  screens of other
participants in the "chat" room. Chat rooms are available on the online services
or through the Internet Relay Chat Service.

      COMPRESSION - A process of using special software to compress data so that
it takes up less space on storage media and can be  transmitted  faster  between
computers.

      DECOMPRESSION  - The process of restoring  compressed data to its original
form using software that recognizes the format of the compressed file.

      DOWNLOAD  - To  retrieve  an  application  or file from  another  computer
through a network connection or modem.

      E-MAIL  (electronic  mail) - Text  messages  sent  through a network  to a
specified  individual or group. E-mail messages can carry attached files so that
one can, for example, send word processing files or graphics between computers.

      ENCRYPTION  -  Encoding  a file to  prevent  anyone  except  the  intended
recipient from accessing the contents,  readable only with the encryption key to
the code.

      FIREWALL - Software or hardware  that limits  certain kinds of access to a
computer from a network or other outside source for security reasons, to protect
information from or to prevent manipulation by a hacker.

      HACKER - Computer jargon for a highly sophisticated  computer user capable
of  electronically  breaking  into other  computer  systems to do damage,  steal
secrets or manipulate computer processes or results.

      HOME PAGE - The name for the main page in a Web site where  users can find
hyperlinks to other Web pages in the same Web site.

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      HTML (Hypertext  Markup  Language) - A language used to create  electronic
documents,  especially  pages on the World Wide Web,  that  contain  connections
called hyperlinks.

      HYPERLINK - An icon,  graphic or word in a file that, when clicked on with
the mouse,  automatically  opens another file for viewing.  World Wide Web sites
often  include  hyperlinks  that display  related Web pages when selected by the
user.

      INTERNET - A global network linking millions of computers.  The World Wide
Web and E-mail are the most popular  applications on the Internet.  The Internet
actually  is a  network  of  networks.  The World  Wide Web is a portion  of the
Internet.

      INTERNET TERMINAL - a portable  computer-based  device, such as the Zenith
Web-TV,  specifically  designed to access the Internet or the World Wide Web but
lacking  many  capabilities  of personal  computers.  Also  referred to as a Web
Terminal, Net Computer,  Internet PC, Internet Appliance,  Browser Box, Internet
Box and by similar names. A number of companies such as Zenith and Phillips have
brought out Internet Terminals priced at a few hundred dollars.

      ISDN  (Integrated  Services  Digital  Network)  - ISDN  lines are  special
high-speed  lines  obtained  from a telephone  company  that  transfer  data 128
kilobytes  per second,  much faster than  standard  phone  lines.  They are more
expensive  than standard  phone lines and mostly  available only in areas with a
large business base.

      ISP (Internet  Service  Provider) - An  organization  that lets users dial
into its  computers to connect to its Internet  link for a fee.  There are local
ISP's with  local-access  telephone numbers and national ISP's with local-access
numbers  around the  country.  ISP's are  unlike  online  services  in that they
typically do not provide any content, just access to the Internet.

      JAVA - A  programming  language  designed  by Sun  Microsystems  to  write
programs  that can be  downloaded  from the Internet to any computer with a Java
interpreter and immediately run. Using small Java applications (called applets),
World Wide Web pages can include functions such as animation and calculators.

      KILOBYTE  (Kb) - Equal to 1,024  bytes,  or space  enough  to store  1,000
characters of information.

      MEGABYTE  (Mb) - A common  measurement  of computer  storage (hard drives,
memory, etc.) capacity equalling  approximately one million bytes. Also called a
"meg".

      MODEM - Acronym for modulator/demodulator. The device that lets a computer
transmit and receive information over telephone lines by converting digital data
from computers into analog data that can be  transmitted  over phone lines.  The
opposite  process takes place on the receiving  end.  Modems are the primary way
most computer users connect to outside networks such as the Internet.

      NETWORK - A set of conjoined  computers  that can share  storage  devices,
peripherals  and  applications.  Networks may be connected by cables,  telephone
lines or satellites.  Networks can be part of a small-office  system or a global
network of other networks.

      OLD MEDIA - long  established  media,  principally  radio,  television and
newspapers and other print media.

      ONLINE - A state in which a computer is interacting with an online service
or the  Internet.  For example,  users go online to check their  E-mail.  ONLINE
SERVICE means a commercial service (ex: America Online,  Compuserve and Prodigy)
that provides access to such online  features as electronic  mail, news services
and the World Wide Web for a monthly fee.

      PLUG-IN - Plug-ins are special  software  utilities that can be downloaded
from the Internet.  Certain Web sites contain  graphics,  video music and sounds
that can only be properly heard or viewed real-time when the necessary  plug-ins
are  installed  on the user's  computer.  Plug-in  examples  include  Shockwave,
QuickTime and RealAudio.


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      ROUTER - A  software  program or a computer  that  forwards a data  packet
towards its final destination;  a data packet may travel through several routers
before finishing its journey.

      URL (Universal  Resource  Locator) - The address of a Web site. An example
of a URL for a Web site is http://www.cerx.net.

      WEB SITE - a site on the World Wide Web with its own unique  address (URL)
consisting of a series of interconnected Web pages. A Web page can contain text,
graphics,  sound, and moving,  changing images,  and can have hyperlinks back to
other Web pages in the site, other Web sites or other Internet sites.

      WORLD WIDE WEB (or WEB) - A vast,  global system of  electronic  documents
(Web sites)  accessible on the Internet that can feature text,  graphics,  video
and  audio  data,  consisting  of  many  millions  of  Web  pages.  The  Web  is
characterized by its use of hyperlinks.

The Internet and the World Wide Web

      The  Internet  is a global  collection  (network)  of  computer  networks,
linking millions of public and private computers around the world. Historically,
the  Internet  was used by  academic  institutions  and  government  agencies to
exchange  information and send and receive electronic mail. A number of factors,
including the proliferation of communication-  enabled personal  computers,  the
availability  of  intuitive,  graphical  software and wide  accessibility  to an
increasingly  robust network  infrastructure,  have allowed widespread access to
the Internet at a rapidly  declining cost and have  facilitated the emergence of
the World Wide Web ("Web"), a client-server  system of hyper-linked,  multimedia
databases.  The Web and electronic mail are by the far the two most popular uses
of the Internet.

      In 1992,  the World  Wide Web was  released  and became  available  to the
public as part of the  Internet,  although  it was not until 1993 that the first
Web "browser" - software  that allows a user to easily and quickly  navigate the
Web using simple Web addresses - became available. The Web enables non-technical
users to easily access  information  on the Internet and enables  individuals or
organizations  to offer  textual,  graphical and other  information  directly to
end-users.

      Historically,  the Internet  has been  accessible  only  through  personal
computers. Recently, several companies have released television set-top Internet
terminals  such as the "Web TV" designed for  attachment to television  sets for
the  purpose of  allowing  access to the  Internet  without  the need for a more
expensive  personal  computer.  Using these access boxes, the television screen,
with its high  resolution,  becomes the monitor.  Although these products do not
permit the full range of  functions  provided  by  personal  computers,  they do
permit many of the  features of the  Internet to be viewed on  television  sets.
While no  assurance  can be given,  these new set-top  products  are expected to
greatly increase the number of people who access the Internet.  The potential is
especially  great in places such as Europe,  where factors such as high computer
prices and the difficulty and expense of arranging Internet access, make it more
difficult to achieve  Internet  access than in the United States.  Cerx believes
that the advent of set-top Internet  terminals will further facilitate the rapid
growth of the Internet,  although their ultimate importance in Internet commerce
cannot yet be predicted.

      In recent years the Web has  experienced  an  astonishing  increase in the
number of individual users. International Data Corporation ("IDC") has estimated
that the number of Internet users worldwide will reach approximately 200 million
by the end of 1999,  from  approximately  56 million at the end of 1995;  and an
October 1996  CommerceNet/Nielsen  Internet  Demographics  Survey indicated that
approximately  50.6  million  people  in the U.S.  and  Canada  (one out of four
persons age 16 or older) had used the Web during the three month period prior to
the  survey.  New media  guru  Nicholas  Negroponte,  founder  and  director  of
Massachusetts  Institute  of  Technology's  Media Lab and a  cofounder  of Wired
Magazine,  says in his 1996 book BEING DIGITAL that the number of Internet users
in 2000 will approximate 1 billion.
Negroponte  also  states in the book that the  Internet  is  growing  at 10% per
month.

      The rapidly  increasing  number of Web users and ubiquitous  access to the
Web,  both in the  United  States  and  internationally,  have  resulted  in the
emergence  of the Web as a new mass  communications  medium.  The  minimal  cost
required  to publish  content on the Web,  relative  to  traditional  publishing
methods, has resulted in an explosion of Web-based content,  including online  

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magazines,  news feeds and games,  as well as a wealth of product,  educational,
entertainment  and political  information.  But for all its reach and power, the
Web  lacks any  internal  organization  or  governing  authority,  thus with the
Internet's  growth  has come a  certain  amount  of chaos.  For  example,  WIRED
MAGAZINE's  March 1997 issue  reports there are 150 million World Wide Web pages
and  predicts  that by year 2000  there will be 1 billion  Web pages.  Web sites
which are not sponsored by huge companies or which do not somehow become popular
through  word-of-mouth  are for  the  most  part  simply  lost  in the  clutter.
Emphasizing  this fact, the same WIRED MAGAZINE article also reports that 50% of
Web users don't really "surf" the Internet but visit the same Web sites over and
over. For this reason,  Cerx believes that one of the most profitable  niches in
Internet  commerce will be to organize and present  entertainment  offerings for
people, just as television networks have done for half a century.

      The  emergence  of the  Web  also  has  created  major  opportunities  for
companies to advertise  and promote  their  products and services in a targeted,
interactive and multimedia environment.

The World Wide Web Digital Economy

      GENERALLY.  The term "digital  economy"  encompasses  the use of the World
Wide Web for marketing,  advertising and selling goods and services. The ability
to use  the Web  for  marketing  and  advertising  results  from  the  power  to
communicate  information  through the Internet to a large number of individuals,
businesses and other  entities.  The ability to use the Web to consummate  sales
and other  commercial  transactions  results  from the power to  conduct  secure
two-way  communication over the Internet,  from merchant to buyer and from buyer
to merchant.

      The largest companies on the planet are eyeing the digital economy,  which
now approximates $1 billion annually, according to some published estimates. The
following table of statistics and projections  predicts a rate of growth for the
digital economy from 1996 to 2000 well in excess of 1000%.

      Selected Internet statistics and projections (in millions)

                                   1995        1996        1997          2000
                                   ----        ----        ----          ----

Internet advertising revenues      $ 80        $343       $1,100       $ 5,000
Sales of goods and services
  on the Internet                  $450        $800       $1,500       $10,000

      Sources: e-land, Jupiter Communications, Forrester Research

      Importantly,  the digital  economy is  estimated to be $15 billion by year
2000, and this projection does not include  Internet  gambling,  which published
reports  have  estimated at $10 to $20 billion by year 2000.  Such  projections,
even  if  substantially  realized,  in no way  assure  that  Cerx  or any  other
Web-based  business will be  successful or profitable or obtain any  significant
share of the Web market  targeted.  It also bears  noting  that no two  Internet
analysts  agree on future  projections or even on current  Internet  statistics,
which vary tremendously.

      The cost of marketing goods and services on the Web is significantly lower
than  traditional  methods of marketing,  such as catalog sales,  direct mail or
television advertising.  On the other hand, Web marketing and advertising remain
largely  unperfected  arts  that  generally  are  not yet as  effective  as some
traditional forms of marketing and advertising. Marketing and advertising on the
Web,  however,  may be especially  advantageous for smaller companies because of
the ease and relatively low cost of entry.

     ADVERTISING.  Advertisers  have  identified  the  Web as a means  for  mass
communication  of  their  messages,  similar  in  many  respects  to the  use of
advertising in traditional  media such as television and radio  broadcasting and
print  publishing.  As the foregoing  table  indicates,  published  reports have
projected advertising revenues on the Internet to reach $5 billion by year 2000.
Yet impressive as this number is, it would  represent  approximately  only 1% of
projected  advertising  expenditures in traditional print,  television and radio
broadcast  media  by the end of the  decade,  according  to  published  industry
estimates.


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      Advertisers  also have recognized  that Web-based  advertising may be more
effective in a number of respects than traditional  media  advertising.  Because
the Web involves "point-to-point" communication between a server and client that
is  requested  by the user,  rather than broad  indiscriminate  distribution  of
messages,  the Web offers the potential for  advertisers to present  messages to
specific,  self-selected  audiences,  and  to  enable  users  to  interact  with
advertising  information  presented in Web pages. This characteristic of the Web
also permits advertisers to measure more precisely the number of impressions, or
times that an advertisement  appears in page views downloaded by users,  through
verification  by an  independent  third  party  auditor  such as  Nielsen  I/PRO
(Internet Profiles Corporation).  Advertisers can also measure the effectiveness
of  advertising in generating  "click-through,"  or user requests for additional
information  made by click on the  advertiser's  banner  linking the user to the
advertiser's Web site.

      Cerx believes that  increases in  transmission  bandwidth  through  higher
speed  Internet  connections,  and wider adoption of advanced  content  delivery
technologies  for the Web,  such as Java,  VRML and  other  multimedia  enabling
technologies,  will increase the functionality of advertising, and will make the
Web an  even  more  attractive  advertising  medium.  Cerx  also  believes  that
technological  developments may result in greater ability to provide information
and  analysis  about  the  effectiveness  of Web  advertising,  the  demographic
profiles of users,  as well as the  capability  for  advertisers  to  frequently
modify and more  closely  tailor  their  messages.  This  should  result in more
targeted,  higher impact advertising  opportunities,  and greater integration of
Web-based   advertising  into  the  range  of  marketing  options  available  to
advertisers.

                             BUSINESS OF THE COMPANY

Planned Cerx Entertainment Networks

      Cerx  plans  upon  receipt  of  adequate   funding  to  begin  design  and
construction of interactive  entertainment and information networks on the World
Wide Web, as described below.

     CERX WORLD INTERACTIVE  NETWORK ("CWIN").  CWIN is intended to be the crown
jewel of Cerx  entertainment  networks,  providing  a dynamic,  high-performance
platform for  entertainment  offerings,  interactive games and other interactive
diversions.  Cerx is not aware of any similar planned or existing  entertainment
network  on  the  Web,  although  there  are  several  Web  sites  that  feature
entertainment  which overlaps with entertainment  offerings planned by Cerx. The
existing Web sites of which Cerx is aware are not directly  competitive with the
entertainment  offerings planned by Cerx and are operated in a different manner,
as primarily advertising-based sites.

      CERX SPORTS NETWORK (CSpN).  Cerx believes that sports and  sports-related
entertainment  is one of the fastest  growing  industries in the world and that,
even in the face of all of the free  offerings  on the Web,  users  will pay for
sports and  sports-related  entertainment.  A sports oriented network  featuring
virtual  sporting  events where users will be able to  participate  at different
levels - amateur,  professional,  manager  or  spectator.  Eventually,  the CSpN
network will feature fantasy (rotisserie) sports leagues, where users can select
and manage their own "dream" teams.  Cerx also plans to enable members to engage
in virtual  interaction  with  historical  sports  figures.  CSpN will feature a
sports ticker allowing users to keep track of scores, injuries,  trades, updates
and upcoming events and general sports news. Cerx  anticipates  offering a broad
spectrum of  sports-related  entertainment  on CSpN.  There are  already  sports
networks on the Web,  such as ESPNet,  operated by cable  sports  network  ESPN,
which  are  similar  to the CSpN  network  planned  by Cerx,  and which are also
subscription-based  on monthly or longer  payment  schedules.  Because  such Web
sites may be operated by companies like ESPN with vastly  greater  resources and
experience than Cerx will possess,  Cerx  anticipates that such other sports Web
sites will pose serious competitive threats to the planned CSpN network.

      CERX KIDS NETWORK  (Ckids).  Cerx  believes  that there is huge market for
compelling,  interactive  entertainment  offerings for  children.  The Cerx Kids
Network network is planned to consist of games,  fantasy  offerings,  chat rooms
and e-mail, news for kids, educational games and diversions, and much more. Cerx
Kids Network will aim to entertain children and expand their minds with engaging
interactive  experiences.  As is the case with  sports,  there are  numerous Web


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sites  targeted  to  children,  including  educational  games and other types of
interactive games. Cerx expects to encounter significant  competition from other
Web sites,  some of which may be offer  features as  comprehensive  or even more
comprehensive than those planned by Cerx.  Competitive Web sites may be operated
by  companies  with  vastly  greater  resources  and  experience  than Cerx will
possess.  Programming  entertainment  for children poses the additional  problem
that children rarely have a free hand to subscribe to paid entertainment  venues
and must have parental approval, thus one significant competitive factor will be
Cerx's  ability to reach parents and convince them to subscribe to the Cerx Kids
Network.

      CERX  XTENDED  NEWS  NETWORK  (CXNN).  Cerx  believes  that  the  world is
inundated  with news that for the most part is designed for the  convenience  of
the news propagators and does not serve user needs.  Cerx plans to offer news on
CXNN in a three-tiered  arrangement.  The first tier will be short highlights of
the day's news,  arranged  logically  and  cross-referenced  in a manner easy to
navigate for user. The second tier will feature more in-depth articles for users
wishing to pursue  highlighted  news items. The third tier will be an archive of
news items allowing interested users to pursue topics of interest (ex: landmines
in Bosnia) through an archive, or database, of existing news. CXNN is planned to
include  general news and financial  news, as well as news on specific topics of
interest  to the  larger  population.  CXNN  will  probably  be the  last of the
networks implemented by Cerx, due to the costs of generating or buying news text
and the cost of acquiring  rights to databases of archived news material.  While
Cerx believes it will be able to license news material, there is no assurance it
will be  successful,  and its  failure  to obtain  the  required  news from news
organizations would make CXNN uneconomical and not feasible.

      CERX GAMING NETWORK  (CGN).  CGN plans to offer  traditional  casino games
(blackjack,  baccarat, chemin de fer, poker, slot machines, roulette and perhaps
craps) and custom games. Cerx believes that traditional  casino-style games such
as slot machines will not attract young gamblers,  and that it will be necessary
to  offer  to  young  persons  games  that  are  more  similar  to the  types of
interactive  games to which they are  accustomed  and with which they have grown
up. All CGN games will be fully  interactive,  easy and fast to play,  featuring
hot colors, gorgeous graphics and appropriate casino or other action sounds. CGN
may also will offer a virtual sportsbook for sportsbettors, featuring betting on
professional and amateur sports, horse and car racing, and other sports.  Credit
will not be  extended,  and each  gambler will be required to post a deposit and
play against the deposit  until  exhausted,  when the deposit must be refreshed.
Cerx intends to realize  revenues  from  gambling  operations  and from interest
earned upon from deposits posted by gamblers.  As is the case with other planned
Cerx networks,  CGN may host third party gaming offerings on a revenue-splitting
basis. Gamblers will post deposits by cash advance against credit cards, by cash
payments or other means,  including  various Internet  services which facilitate
cash handling and payments, such as Cybercash.

      Although  many firms have  announced  an  interest  in  operating  virtual
casinos on the Web,  the  ballyhooed  "goldrush"  to set up Web  casinos has not
materialized  for many  reasons,  principally  including  legal  and  regulatory
issues,  the  inability to operate  virtual  casinos  from sites  located in the
United States, the availability and cost of Internet bandwidth,  and development
and programming  costs. See  "Gaming-Related  Regulation" below. Only a very few
virtual Web casinos now exist,  and none  operate on the scale  planned by Cerx.
Because the many Web casino sites  predicted have not come to be, and because no
major gaming companies have yet entered the Web casino business, Cerx management
believes that it is possible for a single company to obtain a significant  share
of the Internet gaming market,  providing the gambling Web sites offered are fun
and compelling.  It is currently  anticipated that persons present in the United
States  will not be allowed  to gamble for money on CGN,  but Cerx may offer Web
sites on which  persons in the United States will be allowed to gamble for money
on games  considered  to be games of skill,  not games of chance.  Cerx does not
intend to conduct  gambling  for money or other  value in the  United  States or
available to persons in the United States unless  satisfied that it is lawful to
do so.

Planned Network Operation

     WIRED  MAGAZINE  reported in its March 1997 issue that there  currently are
150 million Web pages on the Internet,  a number  estimated to grow by year 2000
to 1 billion Web pages.  Cerx believes that this very clutter and overload makes
the Web ripe for organization of game software,  entertainment  offerings,  news
and other  information,  and other goods and  services on the Web into  coherent
networks  that  are  roughly  analogous  to  existing  television  networks  and
therefore familiar to users. Cerx management believes that the "Web public" will
respond  positively  to and  pay for  access  to and  use of  entertainment  and
information  networks on the Web that feature content-rich and diverse offerings
organized for the benefit of Web users, not of vendors and operators.

                                        8

<PAGE>





      Cerx management believes that the Web is a fundamentally  different medium
from its "old media"  predecessors,  meaning  principally radio,  television and
print  media.  The  Web  is  interactive  and  operates  in a  rich,  multimedia
environment.  Cerx  management  anticipates  that  successful  operators  in the
digital  economy will  succeed by  observing  the  following  guidelines  and by
focusing on empowering Web site users and facilitating meaningful  communication
between users.  Cerx is designing its networks to  incorporate  the features and
strategies below.

      1.  Offerings  on the Web must be  coherently  grouped  into  content-rich
"virtual  communities"  organized around a uniting theme or specific focus, such
as sports,  games,  news or the like.  This  organization  is  necessary to draw
members with shared interests and needs.

      2. The Web site must feature a broad range of content  (which will include
vendor information and,  eventually,  advertisements)  appealing not only to the
interests and needs served by the Web site but also to related interests.

      3.  Similarly,  the Web  site  should  feature  a broad  range  of  vendor
offerings,  not just one dominant  vendor,  in order to foster  competition  and
allow members to make informed, cost-effective buying decisions.

      3.  Operators  must base the Web  business  in the first  years  upon paid
subscriptions  or  memberships  and, in  addition,  paid usage of  services  and
entertainment on a fixed or time basis, not upon paid advertising.

      4. The Web site operator must concentrate on building a subscriber base as
large and as fast as  possible in order to reach a size where  operation  of the
Web site becomes economically practical.

      5. The Web site operator must also build large and powerful sites offering
the most desirable,  diverse and compelling  content  possible,  since depth and
breadth of content will (together with real  interactivity) be the key factor in
drawing and retaining subscribers.

      6. The Web site's content must be integrated with  meaningful  interactive
communication  between  subscribers by several  means,  such as "chat" rooms and
bulletin boards,  since live interaction is the one feature of the Internet that
old media cannot match.  This  interactivity  must feature  environments for the
propagation  of  content  such as  product  or game  reviews,  experiences  with
vendors, product ratings, and the like supplied by subscribers.

      7. The successful Web site must feature  information  that is reliable and
of high  quality,  either  free or  available  on a  cost-effective  basis,  not
"shovelware,"  which is  material  original  propagated  in "old  media" that is
merely shoveled into a Web site with no attempt to exploit the unique properties
and digital capabilities of the Web.

      8. The nature of digital  communities - such as Cerx's planned  networks -
must be user oriented and empower Web users.  Management  believes that the "old
media"  concept of  vendors  and  information  propagators  determining  what is
available  to the public  will not work on the Web.  Old media,  which are still
vastly  popular,  already work this way.  There simply is no need for a Web that
works in old media fashion, and the Web for all its unique  characteristics will
not in the near future match the key  properties of old media.  For this reason,
successful  Web operators  will cater to the needs and wants of the public,  not
vendors. In a membership and  subscription-based  environment,  advertisers will
not be in a position to dictate content or operation of Web sites.

      9. Operation of the Web site and delivery of text, graphics and video must
be as fast and  high-quality as possible,  using plug-in,  compression and other
technologies  where  possible,  since speed and bandwidth are the major limiting
factors in Web usage and product delivery.

      10. Web sites must be  graphically  exciting  and the sounds and  graphics
frequently reworked, in order to maintain user interest and excitement level.

                                        9

<PAGE>




      The Cerx  networks as planned  will  feature  hot,  exciting  graphics and
sophisticated  design, and will be designed primarily for ease and speed of use.
Cerx  management  believes  that an important key to the success of its business
plan is to make its  programming  easy to use, fast,  transparent and intuitive.
Interactive offerings which are slow, cumbersome,  or hard to learn will be at a
tremendous disadvantage in the highly competitive Web market.

      Management  anticipates  that Cerx will in some cases develop in-house its
own  entertainment  products but in most cases will acquire or license games and
programming from independent developers. Cerx believes its networks will provide
software and  entertainment  developers a link to  customers  worldwide  through
sophisticated Cerx network services.  Cerx has access to a huge, growing body of
game,  sports,  entertainment  and other  software  that  already  exists.  Cerx
anticipates  providing the technical  expertise,  technology platform and global
audience for these offerings on its own, sharing revenues with developers.

      Each Cerx  network will  include  marketing  of services,  games and other
entertainment offerings, clothing and many other types of merchandise. Marketing
will include promotions and giveaways,  links between Cerx networks and links to
other Web sites, and other forms of marketing.  Cerx management believes that it
can arrange to have its CWIN, Ckids, CXNN and CSPN networks added as "bookmarks"
on the  Netscape  and  Microsoft  Explorer  browsers.  Each network will feature
bulletin boards and "chat" rooms, so that network members with similar interests
never  have to leave the  network  to talk with  other  interested  members on a
real-time basis.

Anticipated Revenue Sources

      Management  anticipates  that a Cerx  priority  will be to form  strategic
alliances  with  both  other  content  providers  and  Internet   infrastructure
developers  in order to  establish a "brand"  identity and presence on the World
Wide Web. As Cerx  establishes  this  identity and presence  through  marketing,
high-quality entertainment,  a competitive rate structure and aggressive product
acquisition-licensing  strategy,  management believes that it will have a unique
opportunity to become a significant force in the digital economy.

      Through its entertainment networks, Cerx anticipates earning revenues from
many sources,  including fees from its network and game  subscribers,  royalties
and transactional fees from hosted programs,  advertising revenues,  interest on
deposits,  development  fees,  income from gaming  operations,  and splitting of
revenues from merchandise and service sales.

      Cerx intends to build its network business on a paid  subscription  basis,
whereby  subscriber-members  will pay a small  monthly fee in order to belong to
one or  more  of  the  Cerx  networks.  As a Cerx  network  member,  subscribers
generally will have full and free access to resources  offered on or through the
network. Members will be charged, however, for additional services ordered, such
as playing  certain  games,  participating  in certain  activities,  downloading
certain information or news from archives, and other services. Such charges must
be  reasonable,  since  Cerx  believes  that the high  costs of  subscribing  to
numerous Web sites (news,  encyclopedias,  financial news,  etc.), each of which
run from  $4.95 to $19.95  per month per  subscription,  are  prohibitive.  Cerx
believes  that it can add  value for  members  by  making  specific  information
desired by subscribers  available on a very inexpensive  basis,  such as a small
charge for  downloading  a magazine  article.  The Cerx Gaming  Network  will be
operated  on a separate  basis,  and  persons  gambling on CGN for money will be
required to post deposits and to gamble against those deposits.

      If  Cerx  is  successful  at  building  a  base  of   subscribers  on  its
entertainment  networks,  management anticipates that it will eventually be able
to sell  advertising  of various  types on its  networks  and derive  additional
income from  advertising.  However,  management has determined to concentrate in
the first few years on building a base of paying  subscribers  and game  players
instead of relying on advertising  sales,  as do many companies on the Web. Cerx
management believes that current advertising-based  Internet business models are
not practical due to the general lack of  effectiveness  of Web  advertising  at
this time and is not aware of any known to have made money  consistently or on a
significant scale.

      Cerx plans for its networks to be  content-driven  and its  operations  to
concentrate on revenue  growth.  Management  believes that the quality of Cerx's
entertainment  offerings  will be the  primary  lure  for  subscribers  and game
players.  Management also believes that too many  Internet-based  companies have


                                       10

<PAGE>



assumed that raw Internet  growth will  inevitably lead to profits in the future
(despite   significant  losses  currently).   Cerx,  on  the  other  hand,  will
concentrate on generating revenues and focus on achieving  profitability as soon
as  possible.  However,  it must be  remembered  that the  digital  economy is a
largely   unexplored   territory   and  is  a  rapidly   evolving   marketplace,
characterized  by constantly  changing and advancing  technology.  For these and
many other reasons,  there can be no assurance that Cerx's business plan will be
successful.

Marketing and Distribution

      Cerx  anticipates  using a  variety  of  marketing  programs  designed  to
stimulate  demand for its  networks  and seek  strategic  partners  and software
developers.  Some of the key marketing  strategies planned for the Cerx networks
may include some or all of those described below.  Because Cerx's business is in
the development stage, and because Internet  marketing is in its infancy,  there
can be no assurance that any of these strategies will work as intended.

      MARKETING  ON  THE  INTERNET.  Cerx  plans  various  forms  of  electronic
advertising and electronic promotions on the Internet. Cerx intends to market by
use of multiple  sites on the Web and postings in newsgroups on the Usenet which
are  hyper-linked  back to the Cerx networks.  Cerx intends to seek inclusion of
the networks as  "bookmarks"  on the Netscape  Navigator and Microsoft  Internet
Explorer browsers so that they are easily  accessible to Web surfers  unfamiliar
with the Cerx  networks.  Cerx may also use direct  E-mail to potential  network
members  and to  software  developers  and  vendors  and other  vendors  who are
potential  clients or partners.  Cerx believes that Internet sales and marketing
will be particularly well suited to address the large base of Internet users.

      TARGET  MARKETING.  Cerx  plans  to  focus  direct  marketing  efforts  to
demographically  selected user lists. Cerx may also use outbound  telemarketing,
direct response advertising, trade shows and seminar programs. The goal of these
efforts will be to identify  potential  members of Cerx networks and  developers
seeking a Web platform for commercial  launch of software products and to create
awareness of Cerx networks and product offerings.

      MARKETING TO PC USERS.  Cerx will attempt to have  brochures  highlighting
its networks and services  included with new personal  computers  sold. Cerx may
also offer free trial memberships with new personal  computer  purchases and may
market to existing personal computer users through magazines and other venues.

      PACKAGE  MEMBERSHIP  SALES.  Cerx  intends  in the first year or first and
second  years to market its  network  services  directly  to larger  businesses,
offering package  membership deals for their employees on a trial or longer-term
basis. Cerx may also market institutional memberships to companies,  schools and
institutions on a bulk-fee basis.

      OTHER  MEDIA  ADVERTISING.  Cerx  anticipates  doing some  advertising  on
television  and in  newspapers  and  magazines.  Due to the high cost of display
advertising, this advertising will be mostly targeted to software developers and
similar potential partners and clients.

      BUNDLING  SALES.  Cerx will market to businesses  inclusion of its network
memberships  (on a trial or  fixed-term  basis) with  product  sales as an added
incentive to potential purchasers.

Infrastructure, Operations and Technology

      Cerx plans to make its  entertainment  networks  (except CGN) available to
users through a set of network  servers  housed in Denver,  Colorado,  operating
with server  software  optimized by Cerx to provide an efficient and  responsive
user experience. Cerx will purchase access initially to one or more T-1 Internet
connections  on a 24 hour a day,  seven  days a week  basis.  Bandwidth  will be
increased  as user  access  requires,  up to one or more T-3  connections.  Cerx
gambling operations on the Cerx Gaming Network will be operated through a set of
network servers housed in a developed European country. Cerx may, if user demand
requires and sufficient cash is available,  eventually  establish similar access
points with duplicate  servers in the Eastern United States,  Asia and Europe in
order to optimize access speeds for Cerx's users,  and to provide  redundancy in
Cerx's system.  Any disruption in the Internet  access provided by Cerx's chosen
Internet  service  provider  (ISP) or any  failure  of the ISP to handle  higher
volumes of queries could have a materially  adverse  effect on Cerx's  business,
results of operations and financial condition.

                                       11

<PAGE>




      A key element of Cerx's  strategy will be to generate a high volume of use
of its entertainment and media products.  Accordingly, the performance of Cerx's
products and media properties will be critical to Cerx's reputation, its ability
to attract  advertisers to Cerx's Web sites and to achieve market  acceptance of
these  products.  Any system failure that causes  interruption or an increase in
response time of Cerx's products could result in less traffic to Cerx's networks
and,  if  sustained  or  repeated,  could  reduce the  attractiveness  of Cerx's
networks to advertisers and licensees.  An increase in the volume of use of Cerx
networks could strain the capacity of the software or hardware deployed by Cerx,
which  could lead to slower  response  time or system  failures,  and  adversely
affect the number of users and thus revenues.  In addition, as the number of Web
pages and users  increase,  there can be no assurance  that Cerx's  products and
infrastructure  will be able to scale  accordingly.  Cerx will  also be  heavily
dependent, especially in the first few years of operation, upon Web browsers and
Internet online service providers for access to its networks.

Trademarks and Proprietary Rights

      Cerx is obtaining trademarks for its network names and logos, and believes
that its  trademarks,  trade  dress,  trade  secrets  and  similar  intellectual
property will be significant in building a brand identity for its networks. Cerx
will  rely upon  trademark  and  copyright  law,  trade  secret  protection  and
confidentiality  or license agreements with its employees,  customers,  partners
and others to protect  its  proprietary  rights.  The  Company is  pursuing  the
registration  of its  trademarks  in the United States and will also pursue them
(based  upon   anticipated  use)   internationally,   and  will  apply  for  the
registration of certain trademarks, including its network logos and names.

Security Concerns

      Currently,   one  of  the  largest  barriers  to  a  potential  customer's
willingness  to conduct  commerce over the Internet is the perceived  ability of
unauthorized  persons  ("hackers") to access and use personal  information about
the user, such as credit card account  numbers,  social security number and bank
account  information.  Concerns  about  the  security  of the  Internet  include
concerns  over the  authenticity  of the user,  verification  and  certification
methods of who these  users are,  and privacy  protection  for access to private
information transmitted over the Internet.

      Cerx's planned  entertainment  products,  licensed  technology that may be
incorporated in such products and third-party  products  offered by Cerx, may be
vulnerable  to  break-ins  and similar  disruptive  problems  caused by Internet
hackers.  Further,  weaknesses in the  environment in which Cerx products may be
used  may  compromise  the  security  of  confidential   electronic  information
exchanges across the Web. Any such flaws in the Web or the end-user environment,
or weaknesses or  vulnerabilities  in Cerx's  products or third-party  products,
would  jeopardize the security of  confidential  information  sent over the Web,
such as credit card numbers and e-mail,  and might  enable  hackers to dismantle
the special security techniques meant to protect such transactions.

      Any  such  computer   break-ins  or  other  disruptions  could  result  in
significant  liability  to Cerx and deter  potential  customers,  which could be
expected  to have a  materially  adverse  effect on Cerx's  planned  businesses.
Moreover,  the security and privacy concerns of potential customers,  as well as
concerns related to computer  viruses,  may inhibit the growth of the World Wide
Web market generally, and Cerx's customer base and revenues in particular.  Cerx
currently does not have and does not plan to obtain product liability  insurance
to protect against risks associated with hacker break-ins or disruptions.

Government Regulation

      Cerx is not currently subject to direct government regulation,  other than
pursuant to  securities  laws and the  related  regulations  applicable  to most
public companies,  and laws and regulations  applicable to businesses generally,
and there are currently few laws or regulations directly applicable to access to
or commerce on the Internet.  However, due to the increasing  popularity and use
of the  Internet,  it is  likely  that a number of laws and  regulations  may be
adopted at the local,  state,  national or international  levels with respect to
the Internet,  covering issues such as user privacy and  expression,  pricing of
products and services,  taxation,  advertising,  intellectual  property  rights,
information  security or the convergence of traditional  communication  services
with Internet communications.


                                       12

<PAGE>



      For   example,   the   Telecommunications   Reform   Act  of   1996   (the
constitutionality  of which is currently under  challenge) was recently  enacted
and imposes criminal penalties (via the Communications  Decency Act or "CDA") on
anyone who distributes obscene,  lascivious or indecent  communications over the
Internet.  Moreover,  the adoption of any such laws or regulations  may decrease
the growth of the  Internet,  which could in turn decrease the demand for Cerx's
entertainment  offerings  or increase  Cerx's cost of doing  business or in some
other  manner  have a  material  adverse  effect on Cerx's  business,  operating
results or financial condition.  In addition,  the applicability to the Internet
of existing laws  governing  issues such as property  ownership,  copyrights and
other  intellectual  property  issues,  taxation,  libel and personal privacy is
uncertain.  The vast  majority of such laws were adopted  prior to the advent of
the Internet and related  technologies  and, as a result,  do not contemplate or
address the unique issues of the Internet and related  technologies.  Changes to
such laws  intended to address these issues,  including  some recently  proposed
changes,  could create  uncertainty in the marketplace which could reduce demand
for Cerx's  offerings,  could increase Cerx's cost of doing business as a result
of costs of litigation or increased product  development costs, or could in some
other  manner  have a  material  adverse  effect on Cerx's  business,  operating
results or financial condition.

      Cerx may develop,  license or otherwise use software utilizing  encryption
technology,  which  would be deemed to be a  "munition"  subject to U.S.  export
controls  pertaining  to munitions.  There can be no assurance  that such export
controls,  either in their current form or as may be subsequently  revised, will
not limit Cerx's ability to distribute certain encrypted products outside of the
United  States or  electronically.  While  Cerx will  take  precautions  against
unlawful exportation, such exportation may occur from time to time. In addition,
federal  or  state  legislation  or  regulation  may  further  limit  levels  of
encryption or  authentication  technology,  and foreign  governments could enact
import laws or  regulations  that may restrict the type of  encryption  software
that is permitted for distribution in their countries.  In any such event,  Cerx
may encounter  difficulties competing overseas with competitors that are subject
to less restrictive controls.

Gaming-Related Regulation

      Operating online casinos and other gambling  businesses over the Internet,
as Cerx  proposes to do with the Cerex  Gaming  Network,  is subject to numerous
potential  legal  problems and  conflicts.  It is well settled that,  subject to
certain limits, every state and every foreign jurisdiction can regulate gambling
conducted  within  its  borders.  What is not well  settled  in the  context  of
gambling  conducted over the Internet is just exactly where the "gambling" takes
place,  since it takes  place in  "cyberspace"  and not in a physical  location.
While the U.S.  Justice  Department  has indicated  informally  that it will not
pursue persons  placing bets over the Internet or take action against  purveyors
of Internet  gambling,  this stance  could  change based on a number of factors,
such as a change in  leadership  or agency  direction.  Moreover,  the Attorneys
General of several states (e.g., Minnesota and Florida) have opined that it is a
violation of their laws for an Internet  gaming  operator to offer gambling over
the  Internet to citizens of their  respective  states.  The extent to which the
"Commerce Clause" of the United States  Constitution  permits states to regulate
electronic Internet transactions crossing their borders is unclear. On the other
hand,  regulation of gambling  within the states has,  except for Indian gaming,
traditionally  been  left  solely to state  regulation.  Thus the reach of state
authorities  regarding  Internet gambling is at this time unknown and completely
untested.

      Due to the  potential  for  criminal  prosecution  initiated by the United
States  government or the  authorities of various  states  against  purveyors of
Internet  gaming,  Cerx has decided that it will not knowingly allow gambling on
the Cerx  Gaming  Network  by persons it can  identify  as being  present in the
United  States.  Cerx will not allow  gambling  on the Cerx  Gaming  Network  by
persons in the United States unless and until it should become satisfied that it
is lawful to do so. However, the United States contains only four percent of the
world's  population  (though of course a much  larger  percentage  currently  of
connected computers and regular Web users), and there are huge gaming markets in
Europe,  South  America  and the  Pacific  Rim.  Cerx  believes  that  there are
economically  significant  gaming markets available to be exploited and that the
profit potential is equally huge. Should other countries outlaw Internet gaming,
Cerx may restrict  access to its Internet  gaming  offerings by persons in those
countries as well.  Should enough countries take this position,  which Cerx does
not believe will happen,  Internet  gambling  probably would not be economically
feasible.




                                       13

<PAGE>



Employees

      Cerx  currently has no employees  other than its officers and no full-time
employees.  Once,  and  assuming,  funding  is  obtained,  Cerx  expects  to add
approximately   fifteen   full-time   employees  in  1997,   including   persons
knowledgable  in  gambling,  Internet  programming  and  development,   software
programming and development, network and telephone systems, engineers, marketing
and sales persons,  acquisition  staff to negotiate  agreements with independent
programmers,  and support  staff.  Cerx will use  consultants  and  non-employee
experts on an as-needed  basis.  Cerx's  future  success  will be  substantially
dependent on its ability to attract and retain  highly  qualified  technical and
managerial  personnel and the performance of such persons.  Competition for such
personnel  is intense  and there can be no  assurance  that Cerx will be able to
attract and retain qualified technical and managerial personnel.

Competition

      The World Wide Web is so large and  diverse,  and  growing  so fast,  that
there probably is no one business strategy that will permit any company, however
large, to dominate the digital economy.  Cerx management  believes that, as with
all large and diverse economies,  numerous business  strategies will work in the
digital economy and indeed are necessary to its ultimate success. The market for
Web products and services is highly  competitive  and competition is expected to
continue to increase  significantly.  In  addition,  Cerx expects the market for
Web-based  advertising  and commercial Web- based  entertainment,  to the extent
they develop, to be intensely competitive.  There are no substantial barriers to
entry, and Cerx expects that  competition  will continue to intensify.  Although
Cerx  believes  that  the  diverse  segments  of the  Web  market  will  provide
opportunities  for more than one provider of products  and  services  similar to
those  anticipated  by  Cerx,  it is  possible  that  one or a  small  group  of
entertainment providers may come to dominate Web entertainment.

      Many of Cerx's  potential  competitors are expected to have  significantly
greater  financial,  technical  and  marketing  resources  than Cerx. It is also
possible that  competitors  will forge alliances with large  companies,  such as
America  Online or  Microsoft,  important in Web commerce.  Greater  competition
resulting  from such  relationships  probably  would have a  materially  adverse
effect on Cerx's business,  results of operations and financial condition.  Cerx
may also be affected by if competitors  are able to obtain  licenses of popular,
established  products,  games and  technology,  if Cerx is not.  There can be no
assurance  that Cerx's  competitors  will not develop Web  products and services
superior to those offered by Cerx or that achieve greater market acceptance than
Cerx's offerings.

      Cerx will also compete with online  services and other Web site operators,
as well as traditional offline media such as television,  radio and print, for a
share of advertisers' total advertising budgets.  There can be no assurance that
Cerx will be able to compete successfully against its future competitors or that
competition  will not have a  materially  adverse  effect  on  Cerx's  business,
results of operations and financial condition.

      Cerx believes that the principal competitive factors in the Web market for
paid  entertainment  and games  will be brand  recognition,  breadth  of product
features,   ease  of  use  and  responsiveness   (meaning   principally  speed),
comprehensiveness,  independence,  product quality, pricing and customer service
and support.  Competition  among providers of paid Web  entertainment  and games
could result in significant  price competition and reductions in advertising and
transactional  revenues.  Competition  will also come from "free"  entertainment
sites  that do not  charge  for  entry  or  play  by  users  but  which  rely on
advertising revenues.

Developing Market; New Entrants;  Uncertain Acceptance of Cerx's Products; Price
Erosion;  Uncertain  Adoption  of the  Internet  as a  Medium  of  Commerce  and
Commmunications

      The market for Cerx's  anticipated  entertainment  offerings is relatively
new, is rapidly evolving and is characterized by an increasing  number of market
entrants who have  introduced or developed  entertainment  products and services
for  commerce  over  the Web.  As is  typical  in the case of a new and  rapidly
evolving industry, demand and market acceptance for recently introduced products
and  services  are  subject  to a high level of  uncertainty.  The  industry  is
relatively young and has a limited number of proven products. Moreover, critical
issues   concerning  the  use  of  the  World  Wide  Web  (including   security,
reliability, cost, ease of deployment and administration and quality of service)


                                       14

<PAGE>



remain  unresolved  and may  impact  the  growth  of Web  use.  There  can be no
assurance that commerce and communication  over the Web will become  widespread.
In addition,  there can be no assurance that  individual PC users in business or
at home will  adopt or, if  adopted,  continue  to use the  Internet  for online
commerce or communication.

      Because the market for  entertainment  products and services is relatively
new and evolving, it is difficult to predict the future growth rate, if any, and
size of this  market  or the  degree  to which  online  users  will  respond  to
commercial (non- free) entertainment  offerings.  There can be no assurance that
the market for Cerx's anticipated products and services will develop or that the
Web will be widely  adopted  for  commerce  and  communication.  If a market for
Cerx's anticipated  products fails to continue to develop,  develops more slowly
than expected or becomes saturated with  competitors,  or if Cerx's products and
services do not achieve market  acceptance,  Cerx's business,  operating results
and financial condition will be materially adversely affected.


New Product Development and Technological Change

      Management  believes  that the markets  for Cerx's  planned  networks  and
entertainment  offerings  are  characterized  by  rapidly  changing  technology,
evolving industry standards and frequent new product introductions. Operation of
the Web and the digital economy are subject to many technological uncertainties,
such as: whether digital televisions under development will be computer capable,
thus  allowing the Web to migrate from the  computer  monitor to the  television
screen;  whether  ISDN lines or faster  lines will become  widely  available  at
reasonable cost;  whether data compression  technologies are developed that will
increase effective  transmission speeds (and thus increase  bandwidth);  whether
cable television operators will install equipment to allow Web interconnectivity
and interactivity over extremely fast cable lines; and many other uncertainties.

      Cerx's  future  success will depend in large part on its ability to design
and develop,  or to acquire or license,  and to support  entertainment  software
products  and  enhancements  on a timely  and  cost-effective  basis  that  meet
changing  customer needs and respond to technological  developments and emerging
industry  standards.  There can be no  assurance  that  Cerx  will  successfully
develop  or  acquire  and  bring  new   products  to  market  in  a  timely  and
cost-effective manner, or that products or technologies developed by others will
not render Cerx's products or technologies  obsolete or  noncompetitive.  Cerx's
proprietary or acquired  products will be designed around certain  technological
standards.  Widespread  adoption of a different  standard not  supported by Cerx
products could have a materially  adverse effect on Cerx's  business,  operating
results or financial condition.

Limited Operating History; Development Stage Company; Planned Operations Not Yet
Commenced;  Funding  Required for Operations Not Assured;  Impossible to Predict
Results

      Cerx has an extremely  limited  operating  history,  and its prospects are
subject to the risks,  expenses,  and  difficulties  frequently  encountered  by
companies  in the new and rapidly  evolving  markets for  Internet  products and
services.  To address these risks,  Cerx must,  among other  things,  respond to
competitive  developments,  attract,  retain, and motivate qualified  personnel,
implement and successfully execute its business strategy, develop or acquire and
market  entertainment  properties,  implement  sophisticated  technologies,  and
commercialize products and services incorporating such technologies.
There can be no assurance that Cerx will be successful in addressing such risks.

      The extremely  limited  operating  history of Cerx, the fact that it is in
the development  stage, and the fact that it is yet to raise the necessary funds
to  execute  its  business  plan  makes  the  prediction  of future  results  of
operations  difficult or  impossible.  As a result of Cerx's  extremely  limited
operating  history,  Cerx  does  not  have  historical  financial  data  for any
significant period of time on which to base planned operating  expenses.  Cerx's
operating  results may  fluctuate  significantly  in the future as a result of a
variety of factors, many of which are outside its control. At this time Cerx has
not signed any agreements with potential advertisers, has not erected any of its
planned networks,  has no agreements signed with software  developers or put any
infrastructure in place for the generation of revenues,  none of which can occur
unless and until Cerx is properly funded, of which there can be no assurance.


                                       15

<PAGE>



Item 2.  DESCRIPTION OF PROPERTY.

      Cerx neither owns nor leases any real estate or other  properties.  Cerx's
offices currently are located at 90 Madison Street, Denver,  Colorado 80206, and
are provided at no charge by its President. This arrangement will continue until
Cerx determines to relocate its offices, which is not anticipated to occur until
it is adequately  funded,  and the current  arrangement is entirely adequate for
Cerx's needs at this time. Once properly  funded,  Cerx intends to lease offices
in the Denver metropolitan area for future operations.

Item 3.  LEGAL PROCEEDINGS.

      Cerx is not involved in any threatened or pending legal proceeding.

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

      No matters were submitted by management to a vote of Cerx security holders
during the year ended  December 31, 1996.  However,  on December 28, 1996,  four
shareholders  of Cerx,  holding in the  aggregate  more than a  majority  of the
issued and  outstanding  shares entitled to vote, took action by written consent
in lieu of a meeting,  as permitted by the Nevada  General  Corporation  Law. By
means of that written  consent,  the  shareholders  approved (i) a change of the
Company's  name to Cerex  Entertainment  Corporation,  (ii) a  reduction  in the
number of authorized  common shares from  250,000,000  to  50,000,000,  (iii) an
increase  in the  number  of  authorized  preferred  shares  from  5,000,000  to
15,000,000,   and  (iv)  certain   amendments  to  the  Company's   articles  of
incorporation.

                                     PART II

Item 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
         MATTERS.

Market Information

      Commencing  in the fourth  quarter of the year ended  December  31,  1995,
Cerx's common shares were quoted "name only" (meaning no price quotation  shown)
by a single market maker on the OTC Electronic  Bulletin Board maintained by the
National  Association of Securities  Dealers,  Inc.  Prior to that quarter,  the
common  shares were not quoted in any  medium.  To Cerx's  knowledge,  no market
transactions  have taken  place in the common  shares  since  initial  name-only
quotation, and there currently is no market for the common shares. Due to Cerx's
change of name,  the common  shares are  quoted on the OTC  Electronic  Bulletin
Board under symbol CERX.

Holders

      Cerx had approximately 200 shareholders of record as of February 28, 1997.

Dividends

      Cerx does not expect to pay a cash  dividend upon its capital stock in the
near future.  Payment of dividends in the future will depend on Cerx's  earnings
(if any) and its cash requirements at that time.

Item 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.


Liquidity and Capital Resources

     Cerx has funded its operations to date  exclusively  through cash loans and
cash  advances  provided  by  shareholders.  Cerx did not  realize any cash from
equity financing  activities in 1996 and has no line of credit or similar credit
facility available to it. However,  Cerx currently pays no salaries or rent, has
little in the way of general or  administrative  overhead  expenses,  and has no
material  capital  commitments and will have none unless and until it is able to
raise the equity  capital to become  operational.  Assets and cash  available to
Cerx from its management and current shareholders are not sufficient for Cerx to
carry out its business plan described in this report.

                                       16

<PAGE>




      As of December  31,  1996,  Cerx had  accumulated  a deficit (net loss) of
$267,502,  and had  $2,309  in cash but no other  significant  assets.  Cerx was
indebted to its principal  shareholder  and  President,  John D. Brasher Jr., at
December 31, 1996,  for cash loans,  expenses  advanced and legal fees.  At year
end,  Cerx owed Mr.  Brasher an aggregate  of $83,022 in  principal  and $473 in
interest for cash loans and $908 for Cerx  expenses  advanced.  In addition,  at
year end Cerx owed Mr. Brasher's law firm,  Brasher & Company,  $15,256 for Cerx
expenses advanced. Cerx has no long-term liabilities.

         The most  promising  source of capital  available to Cerx is through an
offering  of its  securities  for cash.  Cerx is taking  steps to  initiate  the
raising of capital  through the sale of its  preferred  stock and hopes to raise
not less than $5 million in the second and third  quarters of 1997. The offering
is  anticipated to be made outside the United States of America in reliance upon
Regulation S under the  Securities  Act of 1933, as amended.  Subsequent to year
end,  Cerx  received  from  the firm  designated  to act as  distributor  of the
preferred  shares  approximately  $75,000 as an advance against this anticipated
offering  to assist  Cerx in  ramping  up to conduct  the  offering.  Should the
offering be  successful,  the  advance,  which Cerx is treating as a loan,  will
either be repaid or converted to Cerx  preferred  stock on the same terms as the
preferred stock offering, as the distributor elects. Cerx has not yet executed a
formal agreement with the distributor. No agreement obligates the distributor to
sell any shares of preferred stock, and there can be no assurance that such sums
can be raised.  Cerx's  failure to raise such funds would mean its  inability to
launch the business plan described in this report.

      If such capital is not raised,  Cerx will pursue a different business plan
and  probably  will seek an existing  business to acquire for the benefit of its
shareholders.  In such event, Cerx believes that existing cash and cash advances
available  from  shareholders  will be  sufficient to cover its expenses for the
remainder of calendar 1997.

Results of Operations - 1995

      During the year ended December 31, 1995, Cerx had no revenues and incurred
a net loss of  $12,773.  Expenses in 1995  related  primarily  to  miscellaneous
operating costs and  professional  fees.  Operating  costs primarily  related to
filing of reports with the Securities and Exchange  Commission and investigating
business  opportunities.  Cerx paid no salaries or rent during 1995 and incurred
only insignificant administrative or overhead costs.

Results of Operations - 1996

      During the year  ended  December  31,  1996,  Cerx  incurred a net loss of
$233,902,  and  revenues  were  nil.  Expenses  in  1996  related  primarily  to
miscellaneous  operating  costs,  professional  fees, and losses incurred in the
third and fourth  quarters  associated  with Cerx's  attempt to  consummate  the
purchase of a company engaged in casino gaming operations in St. Vincent and the
Grenadines.  In January 1996,  the Company  issued  123,260 shares of its common
stock (after  giving  effect to a 5-for-1  forward stock split) to its principal
shareholder  and President,  John D. Brasher Jr., in  reimbursement  of expenses
advanced by him on Cerx's  behalf in 1995.  Cerx paid no salaries or rent during
1996 and incurred $79,002 of other $79,002  administrative  costs. Cerx incurred
$136,860  in legal fees and  $15,256 in company  expenses  advanced by Brasher &
Company,  a law firm owned by Cerx's President,  Mr. Brasher.  In December 1996,
Cerx  issued  1,839,593  shares of common  stock to Mr.  Brasher  in  payment of
$147,167 in legal fees and expenses owed to Brasher & Company.

     Cerx on July 12,  1996,  entered  into an Asset  Purchase  Agreement  ("PLC
Purchase  Agreement") with Casino Casino PLC, a company  organized in the Island
of  Nevis  (British  West  Indies)  under  Section  4(6) of the  Nevis  Business
Corporation  Ordinance 1984, as amended ("Casino PLC"). Pursuant to the Purchase
Agreement,  Casino PLC  assigned to Cerx  certain  rights  which Casino PLC held
under an Option to Purchase and that certain  Management  Agreement,  both dated
June 26,  1996,  between  Casino PLC and  E.V.A.  LIMITED,  a limited  liability
company organized in St. Vincent and the Grenadines  (British West Indies) under
the  provisions  of the  Companies  Act,  Chapter 219 ("EVA").  The PLC Purchase
Agreement called for the issuance and delivery to the shareholders of Casino PLC
an aggregate of 1,195,035 shares of Cerx common stock, $.001 par value per share
(the "PLC Shares"), and options (the "PLC Options") to purchase an aggregate of

                                       17

<PAGE>



4,500,000  shares of Cerx  common  stock  (the "PLC  Option  Shares"),  all such
amounts giving effect to the 5:1 forward split of Cerx common stock effective in
July 1996.  Cerx and Casino PLC executed an Assignment and Reservation of Rights
which purported to assign to Cerx all Casino PLC rights, except for Casino PLC's
reservation of a revenue  interest.  The PLC Shares were issued and delivered to
Casino PLC, but the PLC Options never were issued or delivered. Cerx reported in
a report  on Form 8-K  dated  July 12,  1996,  that it had  consummated  the PLC
Purchase Agreement, but Cerx believes for several reasons that such agreement in
fact never was consummated.  Certain deliveries  required of Casino PLC were not
made,  and the PLC Options  never were issued or delivered by Cerx,  among other
things.  Cerx cancelled the PLC Purchase Agreement and all related  transactions
and cancelled all of the PLC Shares on its stock  transfer books for breaches of
that  agreement  by  Casino  PLC.  This  acquisition  was  not  consummated  and
management  has  treated  all  related  expenses  as  having  been  incurred  in
connection with its attempt to complete the acquisition of Casino PLC.

      Cerx executed an Exchange  Agreement,  later amended,  among Cerx,  E.V.A.
Limited, a St. Vincent and the Grenadines company ("EVA"),  and the shareholders
or members of EVA,  pursuant to which Cerx agreed among other things and subject
to certain terms and  conditions  to purchase all of the issued and  outstanding
common  shares of EVA. In  exchange,  the  agreement  called for Cerx to pay and
issue to the EVA  shareholders  an aggregate of $200,000 in cash  represented by
promissory  notes,  500,000  shares of Cerx common  stock,  and warrants for the
purchase of an  additional  500,000  shares of Cerx  common  stock at a price of
$2.75 per share,  all  subject to  adjustment.  In the course of  attempting  to
consummate the purchase,  Cerx incurred  significant  expense,  including paying
past due bills and taxes of E.V.A. Limited,  before determining in late December
1996 to  discontinue  any  attempt to  complete  the  purchase  and to write off
related  expenses.  Cerx  terminated  the  Exchange  Agreement  due to  numerous
breaches  thereof by EVA and the EVA  shareholders  and breaches and failures of
representations  and  warranties  contained  in the  agreement,  and  due to the
termination  by the casino  owner of the casino lease under which EVA claimed to
operate the casino and the owner's  re-entry,  which ended any purported  casino
operations by EVA. This  acquisition  was not  consummated  and  management  has
treated all related  expenses as having  been  incurred in  connection  with its
attempt to complete the acquisition of EVA.

      In connection with its attempts to acquire Casino PLC and EVA, the Company
charged an aggregate of $154,427 in cash  advances,  legal fees and travel costs
to operations for the year ended December 31, 1996.

Plan of Operation

      Cerx's plan of operation  for the next twelve months will be determined by
its success or lack of success in raising  capital.  Assuming that Cerx achieves
the requisite  funding  levels,  it will take the following  steps over the next
twelve months:

     1. Begin hiring of necessary personnel, including executives, key employees
and support staff.

     2. Purchase or lease high-speed servers,  software and software development
tools,  limited  production  studio  tools,  routers and other  equipment  on an
as-needed  basis  necessary to establish and begin operation of the planned Cerx
World Wide Web networks.

     3.  Commence  development  of two  entertainment  networks,  CWIN  and CGN.
Management  currently  intends to put its initial  emphasis on constructing  the
Cerx Gaming Network and putting it into  commercial  operation,  since cash flow
from  gambling  activities  is  expected on this  network  upon  completion  and
commercial launch. Cerx believes that it can make advantageous  arrangements for
the  purchase,  licensing or hosting of advanced Web gambling  software and will
have access to  professional  development  teams  intimately  familiar  with the
software.  Development of programming  for the CWIN network is expected to occur
more or less  simultaneously,  with Cerx also  purchasing,  licensing or hosting
software and products developed by independent companies.

     4. Market  Cerx  network  platform  services to  independent  producers  of
software and media and attempt to purchase, license or obtain hosting agreements
with the producers.

     5. Market Cerx  networks to  subscribers  in order to build a large base of
paying membership as fast as possible.

                                       18

<PAGE>




Item 7.  FINANCIAL STATEMENTS.

      See index to financial  statements  at page 25. The  financial  statements
begin following that index. No supplementary financial data is required.

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

      On April 7, 1997, Cerx engaged Stephen M. Siedow, P.C., as its independent
accountant,  replacing Johnson,  Holscher & Company, P.C., who were dismissed as
Cerx's auditors effective the same date. Stephen M. Siedow, P.C. has reported on
Cerx's  financial  statements for the year ended December 31, 1996.  Such report
was qualified as to uncertainty  based upon doubts  concerning Cerx's ability to
continue as a going concern unless Cerx obtains future profitable  operations or
additional  financing.  There were no disagreements on any matters of accounting
principle or practices,  financial statement  disclosures,  or auditing scope or
procedure in connection with Stephen M. Siedow, P.C.'s audit of Cerx's financial
statements  for such year which,  if not resolved to their  satisfaction,  would
have caused  such firm to make  reference  in their audit  report on the subject
matter of the disagreement.

      Johnson,  Holscher & Company,  P.C.  reported on Cerx's balance sheets for
the years ended December 31, 1995 and 1994 and reported on Cerx's  statements of
operations and cash flow for the years ended  December 31, 1995,  1994 and 1993.
Such  reports  did not  contain  either an adverse  opinion or a  disclaimer  of
opinion,  and were not qualified or modified as to  uncertainty,  audit scope or
accounting principles.  There were no disagreements on any matters of accounting
principle or practices,  financial statement  disclosures,  or auditing scope or
procedure in connection with such firm's audits of Cerx's  financial  statements
for such years which, if not resolved to the auditors' satisfaction,  would have
caused them to make  reference in their audit  reports on the subject  matter of
the disagreement.

                                    PART III

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

      Directors are elected for one-year  terms or until the next annual meeting
of  shareholders  and until their  successors  are duly  elected and  qualified.
Officers  continue  in office at the  pleasure  of the Board of  Directors.  The
following  table  sets  forth the name,  age,  position  held and tenure of each
director and executive officer:

        Name         Age              Position Held and Tenure

John D. Brasher Jr.   45   President, Chief Executive Officer, Director, 
                           Chairman of the Board, Secretary, since April 4, 1989

Johnny D. Brasher     70   Senior Vice-President, Director since April 10, 1989

      Johnny D. Brasher is the father of John D. Brasher Jr. Otherwise there are
no  family  relationships  among  the  officers  and  directors.   There  is  no
arrangement  or  understanding  between the Company (or any of its  directors or
officers)  and any other  person  pursuant  to which such person was or is to be
selected as a director or officer.  The  directors  and officers are expected to
devote their time to the Company's  affairs on an "as needed" basis, but are not
required to make any specific portion of their time available to the Company.

Biographical Information

     JOHN D. BRASHER JR. Mr. Brasher is an attorney  engaged since February 1988
in the practice of law in Denver,  Colorado,  as proprietor of Brasher & Company
and  concentrates  in the fields of corporate and securities  law. From February
1987 to February 1988 he practiced law as a  profit-sharing  partner in the firm


                                       19

<PAGE>



of Pred and Miller, Denver, Colorado,  concentrating in corporate and securities
law. From August 1982 until February 1987, Mr. Brasher  practiced  corporate and
securities  law as an  associate  and later as a partner of  Broadhurst,  Brook,
Mangham and Hardy, of Lafayette,  Louisiana.  Mr. Brasher received a B.A. degree
in  English  in 1979,  and in 1982  received  a law  degree  (J.D.),  both  from
Louisiana State University. He is admitted to practice in the States of Colorado
and Louisiana and is a member of the bar of the United States Supreme Court.

     JOHNNY D. BRASHER.  From 1962 to late 1988,  Mr. Brasher owned and operated
Central  Construction  Company,  a  sole  proprietorship  located  in  Ferriday,
Louisiana,  which engaged in the business of supplying services and equipment to
the oil drilling industry.  Since early 1989 he has been semi-retired,  engaging
in farming and other business activities in Louisiana.

      If Cerx is successful in obtaining needed funding,  it anticipates that it
will hire several persons at the executive and key employee level,  including an
experienced gaming executive, one or more executives with experience in Internet
programming and development, and persons experienced in software programming and
development,  network and telephone systems and computer systems  engineers.  No
agreements  have  been  reached  with  any  such  persons,  but on the  basis of
discussions to date, Cerx is confident that it will be able to hire persons with
the requisite background, experience and skills to execute its business plan.

General Conflicts of Interest

      Certain conflicts of interest now exist and will continue to exist between
Cerx and its  officers  and  directors  due to the  fact  that  each  has  other
employment or business interests to which he devotes his attention. Each officer
and  director is expected  to continue to do so,  notwithstanding  the fact that
management  time  should be devoted  to Cerx's  affairs,  until Cerx  provides a
viable source of support.  The officers and directors are accountable to Cerx as
fiduciaries,  which means that they are legally obligated to exercise good faith
and  integrity in handling  Cerx's  affairs.  Failure by them to conduct  Cerx's
business in its best interests may result in liability to them.

Compliance with Section 16(a)

      Section  16(a)  of  the  Securities  Exchange  Act  of  1934,  as  amended
("Exchange  Act"),  requires the  Company's  executive  officers,  directors and
persons who  beneficially  own more than 10% of a class of the Company's  equity
securities  registered  under the Exchange Act to file reports of ownership  and
changes in ownership with the Securities and Exchange  Commission.  Based solely
on a review of the forms it has  received  and on  representations  from certain
reporting  persons,  the  Company  believes to the best of its  knowledge  that,
during the year ended December 31, 1996,  all Section 16(a) filing  requirements
applicable to its officers,  directors and 10%  beneficial  owners were complied
with by such persons.

Significant Employees

      None, other than officers of Cerx listed above.

Item 10.  EXECUTIVE COMPENSATION.


Cash Compensation

      For the year ended December 31, 1996, no executive  officer  received cash
compensation.

Compensation Pursuant to Plans

     During the year ended December 31, 1996,  Cerx issued 123,260 shares of its
common stock,  giving effect to a 5-for-1 forward split, to John D. Brasher Jr.,
its Chief Executive Officer, in consideration of expenses of the Company (filing
fees,  etc.) paid by him  personally in 1995. In December  1996,  Cerx issued an
additional 1,839,593 shares of common stock to Mr. Brasher at a price of $0.08

                                       20

<PAGE>



per share in payment of  approximately  $147,167 in legal fees and expenses owed
to Brasher & Company,  a law firm owned by Mr.  Brasher.  All such  shares  were
issued under the Company's 1994 Employee Stock Compensation Plan and had, at the
time of issuance,  been  registered  under the Act under cover of a registration
statement  on Form S-8.  The Company has no other  agreement  or  understanding,
express or implied,  with any officer or director concerning  employment or cash
compensation for services.

Other Compensation

     None, other than as disclosed above under "Compensation Pursuant to Plans."

Compensation of Directors.

      No compensation  currently is paid to any person for serving as a director
of the Company.

Employee Stock Compensation Plan

      The  Company has adopted the 1994  Employee  Stock  Compensation  Plan for
employees,  officers,  directors of the Company and advisors to the Company (the
"ESC Plan"). The Company has reserved a maximum of 5,000,000 Common Shares to be
issued upon the grant of awards  under the ESC Plan.  Employees  will  recognize
taxable  income upon the grant of Common Stock equal to the fair market value of
the  Common  Stock on the date of the grant and the  Company  will  recognize  a
compensating  deduction at such time. The ESC Plan will be  administered  by the
Board of  Directors.  An aggregate of 1,962,853  common shares have been awarded
under the ESC Plan.

Compensatory Stock Option Plan

      The Company has adopted the  Compensatory  Stock Option Plan for officers,
employees,  directors and advisors (the "CSO Plan").  The Company has reserved a
maximum of  5,000,000  Common  Shares to be issued upon the  exercise of options
granted under the CSO Plan. The CSO Plan will not qualify as an "incentive stock
option"  plan  under  Section  422A of the  Internal  Revenue  Code of 1986,  as
amended.  Options  will be granted  under the CSO Plan at exercise  prices to be
determined  by the  Board of  Directors  or other CSO Plan  administrator.  With
respect  to  options  granted  pursuant  to the CSO  Plan,  optionees  will  not
recognize  taxable  income upon the grant of options  granted at or in excess of
fair market  value.  The Company  will be entitled to a  compensating  deduction
(which it must expense) in an amount equal to any taxable income  realized by an
optionee as a result of exercising the option. The CSO Plan will be administered
by the Board of  Directors  or a committee  of  directors.  Options  covering an
aggregate of 1,765,000 shares have been granted under the CSO Plan.


Item 11.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

      The  following  table sets  forth,  as of  February  28,  1997,  the stock
ownership  of each  officer and  director of the  Company,  of all  officers and
directors of the Company as a group,  and of each person known by the Company to
be a  beneficial  owner of 5% or more of its Common  Stock,  $.001 par value per
share.  Except  as  otherwise  noted,  each  person  listed  below  is the  sole
beneficial  owner of the shares and has sole investment and voting power as such
shares. No person listed below has any option, warrant or other right to acquire
additional  securities  of the Company,  except as may be otherwise  noted.  The
Company had 4,952,838  common shares issued and  outstanding  as of February 28,
1997. The  calculations  set forth in the following table are based upon a total
of 6,652,838  shares,  which includes the shares actually issued and outstanding
and an additional 1,700,000 common shares not currently outstanding but issuable
upon the exercise of stock options held by management.

                                       21

<PAGE>



                                            Amount
   Name and Address of                Common Stock Owned       Percent of Common
   of Beneficial Owner                   Beneficially         Stock  Outstanding

*John D. Brasher, Jr. ..............      4,429,853 (1)              66.5
      90 Madison Street
      Suite 707
      Denver, Colorado 80206

*Johnny D. Brasher .................        450,000 (2)               6.7
      P.O. Box 1686
      Ferriday, Louisiana 71334

      *All directors and executive
      executive officers (2 persons) ...  4,879,793                  73.3%

(1)Includes  options to  purchase an  aggregate  of  1,500,000  shares of common
     stock. Mr. Brasher disclaims  beneficial ownership as to 85,000 shares held
     in the name of the Lisa K.  Brasher  Children's  Trust,  of which his wife,
     Lisa K. Brasher, is the trustee.

(2)Includes options to purchase an aggregate of 200,000 shares of common stock.

Changes in Control

      Management  of the Company  does not  currently  anticipate  any change of
control in the management of the Company.


Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

      In January 1996,  the Company issued 123,260 shares of common stock to its
President  and principal  shareholder,  John D. Brasher Jr., at a price of $0.02
per share in reimbursement  of expenses  advanced by him on the Company's behalf
in 1995. In December 1996, Cerx issued an additional  1,839,593 shares of common
stock to Mr.  Brasher at a price of $0.08 per share in payment of  approximately
$147,167 in legal fees owed to and expenses advanced by Brasher & Company, a law
firm owned by Mr. Brasher.

      Cerx on July 12, 1996,  entered  into an Asset  Purchase  Agreement  ("PLC
Purchase  Agreement") with Casino Casino PLC, a company  organized in the Island
of  Nevis  (British  West  Indies)  under  Section  4(6) of the  Nevis  Business
Corporation  Ordinance 1984, as amended ("Casino PLC"). Pursuant to the Purchase
Agreement,  Casino PLC  assigned to Cerx  certain  rights  which Casino PLC held
under an Option to Purchase and that certain  Management  Agreement,  both dated
June 26,  1996,  between  Casino PLC and  E.V.A.  LIMITED,  a limited  liability
company organized in St. Vincent and the Grenadines  (British West Indies) under
the  provisions  of the  Companies  Act,  Chapter 219 ("EVA").  The PLC Purchase
Agreement called for the issuance and delivery to the shareholders of Casino PLC
an aggregate of 1,195,035 shares of Cerx common stock, $.001 par value per share
(the "PLC Shares"),  and options (the "PLC Options") to purchase an aggregate of
4,500,000  shares of Cerx  common  stock  (the "PLC  Option  Shares"),  all such
amounts giving effect to the 5:1 forward split of Cerx common stock effective in
July 1996.  Cerx and Casino PLC executed an Assignment and Reservation of Rights
which purported to assign to Cerx all Casino PLC rights, except for Casino PLC's
reservation of a revenue  interest.  The PLC Shares were issued and delivered to
Casino PLC, but the PLC Options never were issued or delivered. Cerx reported in
a report  on Form 8-K  dated  July 12,  1996,  that it had  consummated  the PLC
Purchase Agreement, but Cerx believes for several reasons that such agreement in
fact never was consummated.  Certain deliveries  required of Casino PLC were not
made,  and the PLC Options  never were issued or delivered by Cerx,  among other
things.  Cerx cancelled the PLC Purchase Agreement and all related  transactions
and cancelled all of the PLC Shares on its stock  transfer books for breaches of
that agreement by Casino PLC.

                                       22

<PAGE>




      Cerx  executed an Exchange  Agreement  dated  September  30,  1996,  later
amended,  among Cerx, E.V.A.  LIMITED,  a St. Vincent and the Grenadines company
("EVA"),  and the shareholders or members of EVA,  pursuant to which Cerx agreed
among other things and subject to certain  terms and  conditions to purchase all
of the issued and  outstanding  common shares of EVA. The  agreement  called for
Cerx to pay and  issue to the EVA  shareholders  in  exchange  an  aggregate  of
$200,000 in cash  represented  by promissory  notes payable over several  years,
500,000  shares of Cerx  common  stock,  and  warrants  for the  purchase  of an
additional  500,000  shares of Cerx common  stock at a price of $2.75 per share,
all subject to adjustment.  Cerx  terminated the Exchange  Agreement in December
1996 due to numerous  violations  of that  agreement and breaches or failures of
representations  and  warranties  contained  in the  agreement,  and  due to the
termination  by the casino  owner of the casino lease under which EVA claimed to
operate the casino due to numerous alleged  breaches of that lease.  Neither the
promissory  notes,  stock or warrants called for in the Exchange  Agreement were
issued or delivered.

      Cerx was indebted to its  principal  shareholder  and  President,  John D.
Brasher Jr., at December 31, 1996, for cash loans,  expenses  advanced and legal
fees.  At year end,  Cerx owed Mr.  Brasher an aggregate of $83,022 in principal
and $473 in interest  (at 8% simple  interest per annum) for cash loans and $908
for Cerx expenses advanced. In addition, at year end Cerx owed Mr. Brasher's law
firm, Brasher & Company, $15,256 for Cerx expenses advanced.

      Otherwise, there were no transactions, or series of transactions,  for the
year ended December 31, 1996, nor are there any currently proposed transactions,
or series of transactions, to which Cerx is a party, in which the amount exceeds
$60,000, and in which to the knowledge of Cerx any director,  executive officer,
nominee,  five percent or greater  shareholder,  or any member of the  immediate
family of any of the foregoing persons, have or will have any direct or indirect
material  interest.  John  D.  Brasher  Jr.  has  indicated  to  management  his
willingness  to loan modest  sums to the  Company in the event it cannot  obtain
funding for the business  plan  discussed in this  report.  Mr.  Brasher has, as
noted  above,  loaned  money  to Cerx and  advanced  certain  expenses  of Cerx.
Otherwise,   Cerx  has  no  understandings  with  its  officers,   directors  or
shareholders pursuant to which such persons have agreed to contribute capital to
Cerx or otherwise loan funds.

                                     PART IV

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

      (a)  Exhibits.

      The  following  exhibits  are  either  filed  with  this  report  or  have
previously  been filed  with the  Securities  and  Exchange  Commission  and are
incorporated by reference to another report,  registration statement or form. As
to any shareholder of record requesting a copy of this report,  the Company will
furnish any exhibit  indicated  in the list below as filed with this report upon
payment to the Company of its expenses in furnishing the information. References
to the "Company" mean Cerx Entertainment Corporation.


<TABLE>

<S>      <C>                                                                                                     <C> 

 3.1     Certificate of Incorporation of the Company, as filed with the Nevada
         Secretary of State on April 4, 1989, incorporated by reference to Exhibit
         3.1 to registration statement on Form 10-SB, file no. 0-25022 .......................................... 1

 3.2     Certificate of Amendment of the Company, as filed with the Nevada Secretary
         of State of the State of Nevada on November 8, 1990, incorporated by reference
         to Exhibit 3.2 to registration statement on Form 10-SB, file no. 0-25022 ............................... 1

 3.3     Certificate of Amendment of the Company, as filed with the Nevada Secretary
         of State on October 26, 1994, incorporated by reference to Exhibit 3.3 to
         registration statement on Form 10-SB, file no. 0-25022 ................................................. 1

 3.4     Bylaws of the Company as adopted on March 22, 1989, incorporated by reference
         to Exhibit 3.4 to registration statement on Form 10-SB, file no. 0-25022 ............................... 1


</TABLE>


                                       23

<PAGE>

<TABLE>



<S>                                                                                                               <C>  


 3.5     Certificate of Increase in Number of Authorized  Shares of Common Stock
         of the Company, as filed with the Nevada Secretary of State on July 15,
         1996,
         incorporated by reference to Exhibit 3.5 to report on Form 8-K dated July 12, 1996 ...................... 1

 3.6     Certificate  of  Amendment  of the  Company  (changing  name  to  Cerex
         Entertainment  Corporation) as filed with the Nevada Secretary of State
         on January 27, 1997,
         incorporated by reference to Exhibit 3.1 to report on Form 8-K dated January 27, 1997 ................    1

 3.7     Certificate of Amendment of the Company (amending certificate of incorporation
         in its entirety) as filed with the Nevada Secretary of State on February 28, 1997,
         incorporated by reference to Exhibit 3.2 to report on Form 8-K dated January 27, 1997 ................    1

 3.8     Certificate of Amendment of the Company  (establishing  and designating
         the  Series A,  6.75%  Non-Voting  Convertible  Preferred  Stock of the
         Company) as filed with the Nevada Secretary of State on March 12, 1997,
         incorporated by
         reference to Exhibit 3.3 to report on Form 8-K dated January 27, 1997 ................................... 1

 3.9     Certificate  of  Amendment  of  the  Company  (changing  name  to  Cerx
         Entertainment  Corporation) as filed with the Nevada Secretary of State
         on March 19, 1997,
         incorporated by reference to Exhibit 3.4 to report on Form 8-K dated January 27, 1997 ................    1

 3.10 Bylaws of the Company adopted February 20, 1997, incorporated by reference
         to Exhibit 3.5 to report on Form 8-K dated January 27, 1997 ............................................. 1

 4.1     Specimen common stock certificate of the Company, incorporated by reference
         to Exhibit 4.1 to registration statement on Form 10-SB, file No. 0-25022 ................................ 1

10.1     1994 Compensatory Stock Option Plan, incorporated by reference to
         Exhibit 10.1 to registration statement of Form 10-SB, file No. 0-25022 .................................. 1

10.2     1994 Employee Stock Compensation Plan, incorporated by reference to
         Exhibit 10.2 to registration statement of Form 10-SB, file No. 0-25022 .................................. 1

10.3     Amendment to 1994 Compensatory Stock Option Plan of the Company, incorporated
         by reference to Exhibit 10.1 to report on Form 8-K dated January 27, 1997 ............................... 1

10.4     Option to Purchase granted by E.V.A. Limited in favor of
         Casino Casino PLC dated June 26, 1996, incorporated by reference
         to Exhibit 10.5 to report on Form 8-K dated July 12, 1996 ............................................... 1

10.5     Management Agreement between E.V.A. Limited and Casino Casino PLC
         dated June 26, 1996, incorporated by reference to Exhibit 10.6 to
         report on Form 8-K dated July 12, 1996 .................................................................. 1

10.6     Asset Purchase Agreement between Casino Casino PLC as seller and
         the Company as purchaser dated July 12, 1996, incorporated by
         reference to Exhibit 10.7 to report on Form 8-K dated July 12, 1996 ..................................... 1

10.7     Assignment and Reservation of Rights between Casino Casino PLC and
         the Company dated July 12, 1996, incorporated by reference to Exhibit
         10.8 to report on Form 8-K dated July 12, 1996 .......................................................... 1


</TABLE>



                                       24

<PAGE>



     1 - Incorporated by reference to another registration statement,  report or
document. 

     2 - Filed herewith as an exhibit.


     (b) Reports on Form 8-K.

     None were filed by the Company during the fourth quarter ended December 31,
1996.

     (c) Financial statements and supplementary data. None.

<TABLE>


<CAPTION>

                          INDEX TO FINANCIAL STATEMENTS


      <S>                                                 <C>                                                                   <C> 


      Independent Auditor's Report ............................................................................................ F-1

      Balance Sheet as of December 31, 1996 ................................................................................... F-3

      Statements of  Operations  for years ended  December 31, 1996 and 1995 and
       from April 4, 1989
       (inception) through December 31, 1996 .................................................................................. F-4

      Statement of Shareholders' Equity
       from April 4, 1989 (inception) through
       December 31, 1996 ...................................................................................................... F-5

      Statements  of Cash Flows for years ended  December  31, 1996 and 1995 and
       from April 4, 1989
       (inception) through December 31, 1996 .................................................................................. F-7

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

</TABLE>


                                                             25

<PAGE>






                          INDEPENDENT AUDITOR'S REPORT




To the Board of Directors
Cerx Entertainment Corporation
Denver, Colorado


I have audited the accompanying balance sheet of Cerx Entertainment  Corporation
(a  development  stage  company)  as of  December  31,  1996,  and  the  related
statements of operations,  changes in stockholders'  deficit, and cash flows for
the year then ended and the 1996 amounts included in the cumulative amounts from
April 4, 1989 (inception) through December 31, 1996. These financial  statements
are the responsibility of the management of Cerx Entertainment  Corporation.  My
responsibility  is to express an opinion on these financial  statements based on
my  audit.  The  financial  statements  of  Cerx  Entertainment  Corporation  (a
development  stage  company)  for the period from April 4, 1989  (inception)  to
December 31, 1995, were audited by other auditors whose opinion,  dated February
29, 1996, on those financial statements was unqualified.

I conducted my audit in accordance with generally  accepted auditing  standards.
Those standards  require that I 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.
I believe that my audit provides a reasonable basis for my opinion.

In my opinion, the financial statements referred to above present fairly, in all
material respects,  the financial position of Cerx Entertainment  Corporation (a
development  stage  company) as of  December  31,  1996,  and the results of its
operations and cash flows for the year then ended and the 1996 amounts  included
in the cumulative  amounts from April 4, 1989  (inception) to December 31, 1996,
in conformity with generally accepted accounting principles.





                                       F-1


<PAGE>



To the Board of Directors
Cerx Entertainment Corporation
Page Two



The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note A to the
financial  statements,  the Company's recurring losses and stockholders' deficit
raise  substantial  doubt  about the  Company's  ability to  continue as a going
concern  unless  the  Company  obtains  future   profitable   operations  and/or
additional  financing.  Management's  plans  in  regard  to  these  matters  are
discussed in Note A. The  financial  statements  do not include any  adjustments
that might result from the outcome of this uncertainty.


                                              /s/  Stephen M. Siedow, P.C.


April 9, 1997
Aurora, Colorado






                                       F-2


<PAGE>



                         CERX ENTERTAINMENT CORPORATION
                          (A Development Stage Company)
                                  Balance Sheet
                                December 31, 1996



                                                           ASSETS


Current assets
   Cash                                                $   2,309
                                                       ---------

                                                       $   2,309
                                                       =========



                      LIABILITIES AND STOCKHOLDERS' DEFICIT


Current liabilities (Note F)
   Due to officer/stockholder                          $  16,637
   Promissory notes to officer/stockholder                83,022
                                                       ---------

                                                          99,659

Stockholders' deficit (Notes B and F)
   Preferred stock; $.001 par value; Authorized -
      15,000,000 shares; Issued - none                        --
   Common stock; $.001 par value; Authorized -
      50,000,000 shares; Issued and outstanding -
      4,952,838 shares                                     4,953
   Additional paid-in capital                            165,199
   Deficit accumulated during the development stage     (267,502)
                                                        ---------

               Total stockholders' deficit               (97,350)

                                                        $  2,309
                                                        =========


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

                                       F-3

  
<PAGE>


<TABLE>

<CAPTION>

                                               CERX ENTERTAINMENT CORPORATION
                                                (A Development Stage Company)
                                                  Statements of Operations



                                                                                                    April 4, 1989
                                                                       Year Ended December 31,     (inception) to
                                                                                                    December 31,
                                                                      1996              1995            1996
                                                                   ------------    ------------      ---------
<S>                                                              <C>              <C>               <C>

Costs and expenses (Notes C, D, E and F)
   Costs related to attempted
     business acquisitions                                       $     154,427    $          --     $     154,427
   General and administrative                                           79,002           12,773            94,568
   Interest                                                                473               --               473
   Offering costs                                                           --               --            18,034
                                                                   -----------      -----------     -------------

Net loss                                                         $   (233,902)     $  (12,773)      $    (267,502)
                                                                  ===========      ==========       =============

Loss per common share                                            $      (.047)     $    (.004)
                                                                  ===========      ==========

Weighted average shares outstanding                                  4,952,800      2,990,000
                                                                  ============     ==========

</TABLE>


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

                                       F-4


<PAGE>


<TABLE>

<CAPTION>

                                               CERX ENTERTAINMENT CORPORATION
                                                (A Development Stage Company)
                                Statements of Changes in Stockholders' Deficit for the Period
                                       April 4, 1989 (Inception) to December 31, 1996

                                                                                                       Deficit
                                                          Common Stock              Additional       Accumulated
                                                    ------------------------          Paid-in           from
                                                     Shares           Amount          Capital         Inception
                                                     ------           ------          -------         ---------
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Balance at April 4, 1989 (inception)                      --      $         --     $         --       $        --
Common stock issued for cash,
   March 29, 1989, at $.006 per share                405,000               405            1,845                --
Common stock issued for cash,
   March 29, 1989, at  $.012 per share               911,010               911            9,839                --
Common stock issued for cash,
   April 3, 1989, at $.012 per share                 211,860               212            2,288                --
Common stock issued for cash,
   April 7, 1989, at $.006 per share                  90,000                90              410                --
 Common stock issued for cash,
   April 7, 1989, at $.012 per share                 127,115               127            1,373                --
Common stock issued for cash,
   May 23, 1989, at $.002 per share                  175,000               175              175                --
Common stock issued for cash,
   May 23, 1989, at $.004 per share                  310,000               310              840                --
Common stock issued for cash,
   May 31, 1989, at $.002 per share                   20,000                20               20                --
Net loss                                                                                                     (825)
                                                 -----------        ----------       ----------        -----------
Balance at December 31, 1989                       2,249,985             2,250           16,790              (825)
Net loss                                                                                                  (18,014)
                                                 -----------        ----------       ----------       ------------
Balance at December 31, 1990                       2,249,985             2,250           16,790           (18,839)
Net loss                                                                                                      (59)
                                                 -----------        ----------       ----------       ------------
Balance at December 31, 1991                       2,249,985             2,250           16,790           (18,898)
Net loss                                                                                                     (142)
                                                 -----------        ----------       ----------       ------------
Balance at December 31, 1992                       2,249,985          2,250              16,790           (19,040)
Net loss                                                                                                       --
                                                 -----------        ----------       ----------       -----------
Balance at December 31, 1993                       2,249,985             2,250           16,790           (19,040)
Common stock issued for out of
   pocket expenses incurred,
   valued at $.002 per share                         740,000               740              740                --

Net loss                                                                                                   (1,787)
                                                 -----------        ----------       ----------       -----------
Balance at December 31, 1994                       2,989,985      $      2,990     $     17,530      $    (20,827)
                                                 ===========      ============     ============      =============


</TABLE>

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

                                       F-5


<PAGE>

<TABLE>

<CAPTION>


                                               CERX ENTERTAINMENT CORPORATION
                                                (A Development Stage Company)
                                Statements of Changes in Stockholders' Deficit for the Period
                                 April 4, 1989 (Inception) to December 31, 1996 - continued


                                                                                                        Deficit
                                                          Common Stock               Additional       Accumulated
                                                    -----------------------            Paid-in           from
                                                    Shares           Amount            Capital         Inception
                                                    ------           ------            -------         ---------
<S>                                              <C>             <C>               <C>               <C> 

Balance Forward                                    2,989,985      $      2,990     $     17,530      $    (20,827)
Net loss                                                                                                  (12,773)
                                                 -----------        ----------       ----------        -----------
Balance at December 31, 1995                       2,989,985             2,990           17,530           (33,600)
Common stock issued for out of pocket
   expenses incurred, valued at
   $.02 per share                                    123,260               123            2,342                --
Common stock issued pursuant to an
   asset purchase agreement,  valued
   at $.001 per share                              1,195,035             1,195               --                --
Recission of common stock issued
   pursuant to an asset purchase
   agreement, valued at $.001 per share           (1,195,035)           (1,195)              --                --
Common stock issued for out of pocket
   expenses and legal fees incurred,
   valued at $.10 per share                       `1,839,593             1,840          145,327                --
Net loss                                                                                                 (233,902)
                                                 -----------       -----------      -----------        -----------
Balance at December 31, 1996                       4,952,838     $       4,953    $     165,199     $    (267,502)
                                                 ===========      ============     ============      =============

</TABLE>



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

                                                           F-6


<PAGE>


<TABLE>

<CAPTION>

                                               CERX ENTERTAINMENT CORPORATION
                                                (A Development Stage Company)
                                                  Statements of Cash Flows


                                                                                                April 4, 1989
                                                                     Year ended December 31,   (inception) to
                                                                    -------------------------    December 31,
                                                                        1996           1995          1996
                                                                    ----------       --------      --------
<S>                                                               <C>              <C>           <C>  

Cash flows from operating activities
   Net loss                                                       $    (233,902)   $   (12,773)  $   (267,502)
   Adjustments to reconcile net loss to net cash
      provided by operating activities:
       Common stock issued for costs
        advanced and services                                           149,632             --        151,112
      Increase in amounts due to
        officer/stockholder                                               3,557         12,773         16,637
                                                                     ----------       --------      ---------

        Net cash used in operating activities                           (80,713)            --        (99,753)
                                                                     -----------      --------      ---------

Cash flows from financing activities
   Proceeds from promissory notes                                        83,022             --         83,022
   Proceeds from sale of common stock                                        --             --         19,040
                                                                      ----------      --------      ---------

       Net cash provided by financing activities                         83,022             --        102,062
                                                                      ----------      --------      ---------

Net increase in cash and cash equivalents                                 2,309             --          2,309
Cash and cash equivalents at beginning of year                               --             --             --
                                                                     ----------       --------      ---------

Cash and cash equivalents at end of year                           $      2,309     $       --    $     2,309
                                                                    ===========      =========     ==========


Supplemental cash flow information
   Interest paid                                                   $         --     $       --    $        --
   Income taxes paid                                               $         --     $       --    $        --


</TABLE>

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

                                       F-7

  
<PAGE>


                         CERX ENTERTAINMENT CORPORATION
                          (A Development Stage Company)
                          Notes to Financial Statements


Note A -- Summary of Significant Accounting Policies

Description of Business

The financial statements presented are those of Cerx Entertainment  Corporation,
a development stage company  ("Company").  The Company was incorporated on April
4, 1989 under the laws of the State of Nevada.  The Company's initial activities
were directed towards the raising of capital.  On December 28, 1996 a consent by
a majority of the Company's shareholders approved a change in the Company's name
from Chelsea Atwater, Inc. to Cerex Entertainment Corporation.

As shown in the financial  statements,  as of December 31, 1996, the Company has
incurred  cumulative losses of approximately  $267,500 and has limited cash. The
Company's  continuation  in  existence  is  dependent on its ability to generate
sufficient  cash flow to continue to meet its  obligations on a timely basis, to
obtain  additional  equity or debt  financing,  and to obtain future  profitable
operations. Accordingly, the financial statements do not include any adjustments
that might be necessary should the Company be unable to continue in existence.

Cash Equivalents

Cash equivalents  consist of highly liquid  investments with a maturity of three
months or less when purchased.

Income Taxes

The Company  accrues  income taxes based on the  determination  of the amount of
taxes  payable or  refundable  currently or in future years using the  currently
enacted tax laws.

Loss Per Common Share

Loss per common  share is  computed  by  dividing  the net loss by the  weighted
average shares outstanding during the period.

Note B -- Stockholders' Deficit

Common Stock Transactions

In 1989,  the Company sold 2,249,985  shares of common stock to fifteen  persons
for the aggregate sum of $19,040.  Of these shares,  805,000  common shares were
sold to officers and directors of the Company for $3,900.

On September 21, 1994, the Company issued 740,000 shares of common stock to John
D. Brasher Jr., the  Company's  principal  shareholder  and President for out of
pocket expenses paid on behalf of the Company. These shares were valued at $.002
per share or $1,480.


On January 25, 1996,  the Company  issued 123,260 shares of common stock to John
D. Brasher Jr., for out of pocket expenses paid on behalf of the Company.  These
shares were valued at $.02 per share or $2,465.





                                       F-8


<PAGE>


                         CERX ENTERTAINMENT CORPORATION
                          (A Development Stage Company)
                          Notes to Financial Statements


On July 12, 1996,  the Company's  Board of Directors  approved a 5 for 1 forward
stock split of the Company's  $.001 par value common  stock.  The shares and per
share amounts have been restated to reflect this forward stock split.

On December  28,  1996,  a majority  of the  Company's  shareholders  approved a
restructuring of the Company's  authorized  capital including (1) a reduction in
the authorized common shares from 250,000,000 to 50,000,000,  (2) an increase in
the authorized  preferred shares from 5,000,000 to 15,000,000,  and (3) a change
in par value to $.001 for both the common and  preferred  stock.  All shares and
per share  amounts  have been  restated  to reflect  this  restructuring  of the
Company.

On December 31, 1996,  the Company  issued  1,839,593  shares of common stock to
John D. Brasher Jr., for Company expenses  advanced and legal services  provided
by Brasher & Company. These shares were valued at $.08 per share or $147,167.

Dividends  may be paid  on  outstanding  shares  as  declared  by the  Board  of
Directors. Each share of common stock is entitled to one vote.

Preferred Stock

No shares of the Company's  $.001 par value  preferred stock have been issued or
are  outstanding.   Dividends,   voting  rights  and  other  terms,  rights  and
preferences  of the  preferred  shares  have  not  been  designated  but  may be
designated by the Board of Directors from time to time.

1994 Compensatory Stock Option Plan

The Company's  shareholders  on October 10, 1994 approved a  Compensatory  Stock
Option Plan for officers, key employees,  potential key employees,  non-employee
directors and advisors  (the "CSO Plan").  The Company has reserved a maximum of
5,000,000  common shares to be issued upon the exercise of options granted under
the CSO Plan. The CSO Plan will not qualify as an "incentive  stock option" plan
under  Section 422A of the Internal  Revenue Code of 1986,  as amended.  Options
will be granted  under the CSO Plan at exercise  prices to be  determined by the
Board of  Directors  or other CSO Plan  administrator.  With  respect to options
granted  pursuant to the CSO Plan,  optionees will not recognize  taxable income
upon the grant of options, but will realize income (or capital loss) at the time
the options are exercised to purchase common stock. The amount of income will be
equal to the difference  between the exercise price and the fair market value of
the common  stock on the date of  exercise.  The  Company  will be entitled to a
compensating  deduction in an amount equal to the taxable income  realized by an
optionee as a result of exercising the option. The CSO Plan will be administered
by the Board of Directors or a committee of directors.  As of December 31, 1996,
the Company has awarded 1,765,000 shares of common stock under the CSO Plan. The
exercise prices range from $.25 to $1.00 per share.

1994 Employee Stock Compensation Plan

The  Company's  shareholders  on October  10, 1994  approved  an Employee  Stock
Compensation Plan for employees, officers, directors of the Company and advisors
to the Company (the "ESC Plan"). The Company has reserved a maximum of 5,000,000
common  shares  to be  issued  upon the  grant of  awards  under  the ESC  Plan.
Employees will recognize  taxable income upon the grant of common stock equal to
the fair  market  value of the  common  stock on the date of the  grant  and the
Company will be entitled to a compensating deduction in the same amount. The ESC
Plan will be administered by the Board of Directors or a committee of directors.
As of December  31,  1996,  the Company has awarded  1,962,853  shares of common
stock under the ESC Plan.




                                       F-9


<PAGE>


                         CERX ENTERTAINMENT CORPORATION
                          (A Development Stage Company)
                          Notes to Financial Statements



Note C - Attempted Business Acquisitions

The Company on July 12, 1996,  entered  into an Asset  Purchase  Agreement  (PLC
Purchase  Agreement") with Casino Casino PLC, a company  organized in the Island
of  Nevis  (British  West  Indies)  under  Section  4(6) of the  Nevis  Business
Corporation  Ordinance 1984, as amended ("Casino PLC"). Pursuant to the Purchase
Agreement,  Casino PLC assigned to the Company  certain  rights which Casino PLC
held under an Option to Purchase and that  certain  Management  Agreement,  both
dated  June  26,  1996,  between  Casino  PLC and E. V. A.  LIMITED,  a  limited
liability  company  organized in St.  Vincent and the  Grenadines  (British West
Indies) under the provisions of the Companies Act, Chapter 219 ("EVA").  The PLC
Purchase  Agreement  called for the issuance and delivery to the shareholders of
Casino PLC an aggregate of 1,195,035 shares of the Company's common stock, $.001
par value per share  (the "PLC  Shares")  and  options  ("the PLC  Options")  to
purchase an  aggregate  of  4,500,000  shares of the  Company's  stock (the "PLC
Option  Shares").  The  Company  and  Casino  PLC  executed  an  Assignment  and
Reservation  of Rights  which  purported to assign to the Company all Casino PLC
rights,  except for Casino  PLC's  reservation  of a revenue  interest.  The PLC
Shares were issued and  delivered to Casino PLC, but the PLC Options  never were
issued or delivered. The Company reported in a report on Form 8-K dated July 12,
1996,  that it had  consummated  the PLC  Purchase  Agreement,  but the  Company
believes for several reasons that such agreement in fact never was  consummated.
Certain  deliveries  required  of Casino PLC were not made,  and the PLC Options
never were issued or delivered by the Company,  among other things.  The Company
cancelled the PLC Purchase Agreement and all related  transactions and cancelled
all of the PLC Shares on its stock transfer books for breaches of that agreement
by Casino PLC.

The Company  executed an Exchange  Agreement  dated  September  30, 1996,  later
amended,  among the Company,  E. V. A. LIMITED, a St. Vincent and the Grenadines
company ("EVA"),  and the shareholders or members of EVA,  pursuant to which the
Company agreed among other things and subject to certain terms and conditions to
purchase all of the issued and  outstanding  common shares of EVA. The agreement
called for the Company to pay and issue to the EVA  shareholders  in exchange an
aggregate  of $200,000 in cash  represented  by  promissory  notes  payable over
several  years,  500,000  shares of the  Company's  stock and  warrants  for the
purchase of an additional  500,000  shares of the Company's  stock at a price of
$2.75 per share, all subject to adjustment.  The Company terminated the Exchange
Agreement in December,  1996 due to numerous  violations  of that  agreement and
breaches  or  failures  of  representations  and  warranties  contained  in  the
agreement,  and due to the  termination  by the casino owner of the casino lease
under which EVA claimed to operate the casino due to numerous  alleged  breaches
of that lease. Neither the promissory notes, stock or warrants called for in the
Exchange Agreement were issued or delivered.

The Company was  unsuccessful  in these  attempted  business  acquisitions  and,
therefore,  cash advances, legal fees and travel costs in the amount of $154,427
were charged to operations during the year ended December 31, 1996.

Note D -- Public Offering

The  Company  was  unsuccessful  in  making a public  offering  and,  therefore,
offering  costs in the amount of $18,034 were charged to  operations  during the
year ended December 31, 1991.

Note E -- Income Taxes

The Company has a net operating loss  carryforwards  of  approximately  $267,500
which expire in the years 2004 through 2011.




                                      F-10


<PAGE>


                         CERX ENTERTAINMENT CORPORATION
                          (A Development Stage Company)
                          Notes to Financial Statements



The  Company has  recorded a deferred  tax asset for the net  operating  loss of
approximately  $87,600 and has provided a 100% valuation allowance of $87,600 on
the deferred tax asset as management has determined  that it is more likely than
not that the net operating losses will not be utilized in future years.

When more than a 50%  change in  ownership  occurs,  the Tax  Reform Act of 1986
limits the utilization of NOL  carryforwards in the year following the change in
ownership  to the  fair  market  value  of  the  corporation  multiplied  by the
applicable long-term rate on federal obligations.

Note F -- Related Party Transactions

On January 25, 1996,  the Company  issued 123,160 shares of common stock to John
D. Brasher Jr., the  Company's  principal  shareholder  and President for out of
pocket expenses paid on behalf of the Company.  These shares were valued at $.02
per share or $2,465.

On December 31, 1996,  the Company  issued  1,839,593  shares of common stock to
John D. Brasher Jr., for Company expenses  advanced and legal services  provided
by Brasher & Company. These shares were valued at $.08 per share or $147,167.

The Company was indebted to John D. Brasher Jr., at December 31, 1996,  for cash
loans and  expenses  advanced on behalf of the  Company.  The  Company  owed Mr.
Brasher an aggregate of $83,022 in demand  promissory notes and $473 in interest
(8% simple  interest  per annum)  for cash loans and $908 for  Company  expenses
advanced.  In  addition,  the Company  owed Mr.  Brasher's  law firm,  Brasher &
Company, $15,256 for Company expenses advanced in 1996.

The Company owed John D. Brasher Jr.,  $2465 for out of pocket  expenses paid on
behalf of the Company at December 31, 1995.  In addition,  the Company owned Mr.
Brasher's  law firm  $464 for  Company  expenses  advanced  and  $9,844 in legal
services.

The Company  utilized  office  space  provided by Brasher & Company at no charge
during the years ended December 31, 1996 and 1995.

NOTE G - Subsequent Events

On February 10, 1997, the Board of Directors of the Company designated 4,000,000
shares of the Company's authorized 15,000,000 shares, $.001 par value, preferred
stock as a Series A, 6.75% Non-Voting  Convertible Preferred Stock. The Series A
preferred  shares are  convertible  into 5,500,000  common shares of the Company
under certain circumstances. No preferred shares have been issued.

On March 19, 1997, a majority of the Company's  shareholder's  approved a change
in the  name  of the  Company  from  Cerex  Entertainment  Corporation  to  Cerx
Entertainment Corporation.





                                      F-11

<PAGE>


                                   SIGNATURES


     In accordance  with section 13 or 15(d) of the  Securities  Exchange Act of
1934,  the  Registrant  caused  this  Report on Form  10-KSB to be signed on its
behalf by the undersigned, thereto duly authorized individual.

Date:   April 14, 1997
                            CERX ENTERTAINMENT CORPORATION




                            /s/ John D. Brasher Jr.
                            By...................................
                            John D. Brasher Jr., President, Chief Exec. Officer,
                            and Chief Financial Officer

     In accordance  with 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.

         Name                                Title                         Date



  /s/ John D. Brasher Jr.
 ..............................    President, Chief Executive           04/14/97
John D. Brasher Jr.               Officer, Chief Financial Officer,
                                  Director, Chairman of the Board




  /s/ Johnny D. Brasher
 ..............................    Vice President, Director              04/14/97
 Johnny D. Brasher