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               UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                               Washington, D.C.

                                 FORM 10-KSB

[X]      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
         for the fiscal year ended December 31, 1997 or

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
         OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) for the
         transition period from _____ to _____

         COMMISSION FILE NUMBER 1-13084

                      BYRON PREISS MULTIMEDIA COMPANY, INC.
             ------------------------------------------------------
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

       New York                                         13-3676574
------------------------                   ------------------------------------
(STATE OF INCORPORATION)                   (I.R.S. EMPLOYER IDENTIFICATION NO.)

24 West 25th Street, New York, New York                    10010
---------------------------------------                 ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)                 (ZIP CODE)

Issuer's telephone number: (212) 989-6252

Securities registered under Section 12(b) of the Act.

      Title of each class             Name of each exchange on which registered

Common Stock, par value $.001                        Boston Stock Exchange
  per share
Redeemable Common Stock                              Boston Stock Exchange
  Purchase Warrants

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

        Units, each Unit consisting of two shares of Common Stock and two
                    Redeemable Common Stock Purchase Warrants
        -----------------------------------------------------------------
                                (Title of class)

                     Common Stock, par value $.001 per share
                     ---------------------------------------
                                (Title of class)

                    Redeemable Common Stock Purchase Warrants
                    -----------------------------------------

                                (Title of class)

CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION
13 OR 15(D) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH SHORTER
PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES /X/ NO / /

CHECK IF THERE IS NO DISCLOSURE OF DELINQUENT FILERS IN RESPONSE TO ITEM 405 OF
REGULATION S-B CONTAINED IN THIS FORM, AND NO DISCLOSURE WILL BE CONTAINED, TO
THE BEST OF

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REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PARTY III OF THIS FORM 10-KSB OR ANY AMENDMENT TO
THIS FORM 10-KSB.  [ ]

THE ISSUER'S REVENUES FOR YEAR ENDED DECEMBER 31, 1997 WERE $3,965,645.

THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES AT APRIL
13, 1998, WAS APPROXIMATELY $7,093,766, COMPUTED BY REFERENCE TO THE CLOSING
PRICE AS REPORTED ON THE NASDAQ SMALL CAP MARKET ON THAT DATE.

THE NUMBER OF SHARES OF THE ISSUER'S COMMON STOCK, PAR VALUE $.001 PER SHARE,
OUTSTANDING AS OF APRIL 13, 1998 WAS 7,799,438. THE NUMBER OF THE ISSUER'S
REDEEMABLE COMMON STOCK PURCHASE WARRANTS OUTSTANDING AS OF APRIL 13, 1997 WAS
1,207,500.

DOCUMENTS INCORPORATED BY REFERENCE.  PORTIONS OF THE ISSUER'S PROXY STATEMENT
FOR THE 1998 ANNUAL MEETING OF SHAREHOLDERS ARE INCORPORATED BY REFERENCE INTO
PART III HERETO.

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                                     PART I

Item 1.  Description of Business

         Overview.

                  Byron Preiss Multimedia Company, Inc., a New York company (the
"Company") specializes in the development and marketing of educational software
and is a publisher of books and software for the educational and consumer
markets. During 1997, the Company implemented its restructuring from a company
whose primary business was the development of entertainment and edutainment
software titles for sale at retail into a company whose primary business
strategies include: (i) offering appealing educational products marketed or
developed through the exploitation of brand-name licenses in such fields as
history (American Heritage), science (Scientific American) and popular culture
(Rhino); (ii) developing educational software for textbook publishers, such as
Prentice Hall and Houghton Mifflin, (iii) developing educational Internet
products, such as The Road, a tool for protecting students using the Internet at
school and (iv) direct marketing of educational software to schools. The Company
intends to focus its business activities in the following areas: (i) educational
software; (ii) the Internet and distance learning; and (iii) publishing.

         The principal elements of the Company's growth strategy are: (i)
promotion of its educational software and Internet business; (ii) internal
growth of its publishing business through maximization of its existing strategic
partnerships and the cultivation of new relationships; and (iii) the pursuit of
strategic acquisitions aimed at expanding or complementing its existing
educational businesses. However, there can be no assurance that the Company will
be successful in achieving its expansion goals.

         The Company's strategy of growth through acquisition has enabled the
Company to expand its activities in the education market, which has in turn
permitted the Company to begin meeting its objective of refocusing its core
business on education from a prior concentration in the development and
marketing of CD-ROM products, some of which were educational, for the consumer
market. The Company's acquisition of Dolphin, Inc., a New Jersey corporation
("Dolphin"), a producer of educational, computer-based training ("CBT") and
tutorial software, has allowed the Company to further penetrate the school,
textbook and CBT markets. The Company already has strategic domestic and
international publishing relationships in the software area with: (i) Simon &
Schuster ("S&S"), one of America's largest publishers; (ii) Von Holtzbrink, a
leading educational German publisher; and (iii) Anaya, one of the largest
Spanish language publishers in the world.

         In addition, as a result of the Company's recent acquisition of Multi
Dimensional Communications, Inc., a New York corporation ("MDC"), a publisher
and direct marketer of multimedia educational products to schools under the name
"Orange Cherry" and New Media Schoolhouse, Inc., a New York corporation ("NMS"),
a catalog marketer of educational software, the Company maintains some control
over the distribution of its educational titles for the first time. Through the
acquisition of MDC and NMS, the Company believes that it can market, publish and
distribute its own educational titles at margins better than retail sales. As

the Company develops its educational business and successfully integrates the
businesses recently

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purchased, it hopes to acquire other educational companies in order to become
prominent in this sector.

         The Company is devoting resources to establish an Internet-based
educational software store, using the NMS direct marketing catalog as its basis.
The Company has entered into an agreement to provide back end technology to
fulfill Internet orders in a secure credit-card environment. The Company has
further entered into a marketing agreement with the Family Education Network to
place a banner, linked to the NMS Internet Store, on Family Education Network's
popular website. The Company hopes to become one of the leading sellers of third
party educational software to schools and libraries on the Internet. The Company
intends to continue to expand its publishing business by exploiting current and
developing new strategic partnerships with a view to enhance the Company's
market penetration. The current partnerships include relationships with S&S,
including a distribution agreement with the Pocket Books division of S&S
("Pocket Books"), and with Penguin Putnam Group, Inc. ("Penguin Putnam"). The
products developed through these strategic partnerships include books intended
to exploit the synergies between traditional print books, multimedia and the
Internet, such as The Ultimate Einstein(TM), which was a selection of The Book
of the Month Club. The Company's forthcoming "The Ultimate Planets" is intended
to be a main selection of the Quality Paperback Club in mid-1998. Some of the
Company's books will allow the Company to re-package content of previously
developed products and hence derive additional revenue streams from the same
property. In addition, the Company is among the first to be selected by Intel to
develop the first DVD-ROM software products.

         The Company's historic concentration on traditional self-financed and
marketed consumer entertainment CD-ROMs is no longer a primary focus of the
Company's core business. The Company believes that the redirection of its core
business will reduce the historic losses incurred by the Company in the consumer
software market. The Company intends to continue the development of CD-ROMs with
strategic partners that are willing to assist in or completely underwrite the
financing of the costs of such efforts, such as its current X-Files:
Unrestricted Access, which is financed by Fox Interactive. If such partnerships
can be created, the Company will continue to develop and publish software for
use with personal computers, including Windows compatible and Apple Macintosh
PCs. The Company's restructuring has been underscored by a continuing reduction
in its traditional multimedia workforce and the expenses related thereto. The
Company closed its game division in December 1997. The Company also eliminated
the three positions of Senior Vice-President pursuant to the attrition in these
posts.

         The Company's Restructuring

                  During 1997, the Company implemented its restructuring from a
company whose primary business was the development of entertainment and
edutainment software titles for sale at retail into a company whose primary

business strategies include: (i) offering appealing educational products
marketed or developed through the exploitation of brand-name licenses in such
fields as history (American Heritage), science (Scientific American) and popular
culture (Rhino); (ii) developing educational software for textbook publishers,
such as Prentice Hall and Houghton Mifflin; (iii) developing educational
Internet products, such as The Road, a tool for protecting students using the
Internet at school; and (iv) direct marketing of educational software to
schools.

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                  As part of the Company's restructuring, the Company has:

                  (i)      developed, through acquisition, the capacity to
                           directly market its titles to the educational market
                           through New Media Schoolhouse;

                  (ii)     developed the capacity to produce educational
                           testing, training and evaluation software for schools
                           and corporations through the acquisition of Dolphin;
                           and

                  (iii)    developed the capacity to provide closed Internet
                           systems and distance learning by the Internet through
                           its acquisition of the Internet Education Group (see
                           below).

                  In addition, the Company has acquired over 100 educational
software titles through its acquisition of MDC. The Company has selected the
phrase, "The Education Company" to emphasize its restructured operations and has
used that phrase on its new website.

                  The Company has restructured its activities into 4 operating
divisions, which are (i) the Educational Services Group; (ii) the Educational
Marketing Group; (iii) the Multimedia Publishing Group; and (iv) the Internet
Education Group.

                  The Company's restructuring has been underscored by a
continuing reduction in its traditional multimedia workforce and the expenses
related thereto. The Company closed its game division in December 1997 (See
Note 3 - Discontinued Operations in the Company's Consolidated Financial
Statements included elsewhere in this document). The Company also eliminated the
three positions of Senior Vice-President pursuant to the attrition in these
posts.

                  The Company's reduced reliance on retail sales of its titles
coupled with an increase in its direct educational sales reduced its forward
exposure to the costly "co-op" fees charged by traditional retail accounts.
Finally, the Company has strived to consolidate the accounting, marketing and
bookkeeping operations of its acquired companies and is attempting to exploit
the synergies among them.

         Industry Background.

                  According to EduVentures, an industry analyst, 1997 was a
growth year for the education industry. Revenues by for-profit companies in

education grew over 23% over 1996 and totaled more than $64 billion. In
addition, there are currently over 90,000 schools in the Kindergarten to grade
12 sector in the United States and over 5.2 million students in these schools.

                  According to Nationsbank Montgomery Securities
technology-based training was a $1.1 billion market in 1996 and is projected to
grow to over $4 million in four years. Adult enrollment in higher education for
persons over 24 years old grew 44.4% from 1970 to 1994. In the United States,
education is a $650+ billion market, representing 9.2% of GDP, and is comprised
of the following market segments: consumer (6.3%); child reform (0.9%); Pre-K
(4.7%); K-12 (48.2%); Post-Secondary (31.4%); Workplace Training (8.1%); and
Other Services (0.3%).

                  The Company's acquisitions are targeted to reach segments of
this educational market. The Company anticipates that the growth of certain of
these educational market

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segments can be beneficial to the growth of the Company's educational services
and sales, although there is no assurance the market will grow as anticipated or
that the Company will capitalize on this growth.

Educational Services Group

                  On March 21, 1997, the Company acquired all of the issued and
outstanding capital stock (the "Dolphin Shares") of Dolphin, Inc. pursuant to
the terms of a Stock Purchase Agreement (the "Dolphin Stock Purchase
Agreement"), dated as of March 21, 1997 between the Company and Andrew K.
Gardner ("Gardner"). Dolphin is a provider of educational, tutorial and
corporate training software product development. The Company anticipates that
Dolphin's business will complement its existing business by, among other things,
enhancing the Company's capabilities to produce content for educational and
corporate clients and providing the Company with access to testing, tutorial and
training services for schools and corporations. The Company has also introduced
Dolphin to new clients through its existing relationships, including Prentice-
Hall and Silver Burdett.

                  Since 1984, Dolphin has produced more than 180 custom software
products for publishers, educational service companies, institutions, and
corporations. Dolphin's 20+ employees provide educational development services
in true programming languages and in popular authoring languages such as Ctt,
Macromedia Director, HTML, Shockware, Java and Visual Basic. Dolphin does
multi-platform development for Windows, Macintosh and Internet- based
environments and maintains a full-time, in-house testing department and
800-number hotline for client assistance. Their products include supplemental
software for textbooks, computer-based training for corporations, distance
learning software, and assessment and classroom manager software.

                  Pursuant to the terms of the Dolphin Stock Purchase Agreement,
the Company acquired from Gardner all of the Dolphin Shares in exchange for the
following consideration (collectively, the "Dolphin Consideration"): (a)

$580,000 in cash; (b) a convertible note (the "Gardner Convertible Note") in the
principal amount of $1.75 million, which is secured by a pledge of, among other
things, the Dolphin Shares pursuant to the terms of the Dolphin Pledge Agreement
(as defined below); and (c) approximately 395,947 shares (the "Purchaser
Shares") of unregistered Common Stock.

                  The Gardner Convertible Note bears interest at a rate of 7%
per annum from and after March 21, 1997 and is due on March 1, 2001 (the
"Gardner Maturity Date"). The outstanding principal balance of the Gardner
Convertible Note on December 31, 1997, together with interest accruing thereon,
shall be repaid in 39 equal monthly installments of approximately $53,087, which
commenced on January 2, 1998 and is continuing on the first business day of each
succeeding month. The principal amount of the Gardner Convertible Note, at the
holder's option, may be converted into the number of duly authorized, validly
issued, fully-paid and non assessable shares of Common Stock equal to the then
unpaid principal amount of the Gardner Convertible Note being converted, divided
by $5.75, as may be adjusted from time to time in accordance with the terms of
the Gardner Convertible Note.

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                  Pursuant to its terms, the entire unpaid principal amount of
the Gardner Convertible Note, together with accrued interest and charges thereon
shall be due and payable upon the occurrence of an "Event of Default" under the
Gardner Convertible Note. An "Event of Default" under the Gardner Convertible
Note shall include such things as, (a) the Company's failure to make any payment
due thereunder within 10 days after the due date therefor and failure to make
such payment for an additional 30 days after written notice of such non-payment;
(b) the Company's breach of any material obligation under Section 5 of the
Gardner Convertible Note, relating to conversion of the Gardner Convertible
Note, if such breach has not been cured within 60 days; (c) a Default (as
described below) under the Dolphin Pledge Agreement giving due recognition of
any notice and cure provisions thereof. The Gardner Convertible Note also
provides that the Gardner Maturity Date may be accelerated in the event that (i)
Gardner terminates his employment under the Gardner Employment Agreement (as
defined below) for "Good Reason" in certain circumstances or (ii) Dolphin
terminated Gardner's employment under the Gardner Employment Agreement without
"cause". The indebtedness evidenced by the Gardner Convertible Note is secured
by the Stock Pledge Agreement, dated as of March 21, 1997 between the Company
and Gardner (the "Dolphin Pledge Agreement").

                  Pursuant to the terms of the Dolphin Pledge Agreement, the
Company, among other things, granted to Gardner a continuing lien and security
interest in and to the Dolphin Shares and the proceeds thereof. The Company also
generally agreed, among other things, (i) to maintain certain levels of working
capital and stockholder's equity, (ii) not to liquidate, dissolve, merge or
consolidate Dolphin or sell substantially all of its assets, (iii) not to borrow
money from any person other than the Company or loan money to any person other
than the Company and (iv) not to sell, lease, assign or grant a lien on the
Dolphin Shares. In addition, the Dolphin Pledge Agreement generally provides

that a "Default" shall occur upon the occurrence of certain events including,
but not limited to: (i) any "Event of Default" under the Gardner Convertible
Note; (ii) failure to perform, observe or comply with a material provision of
the Dolphin Pledge Agreement and cure such breach after written notice thereof;
(iii) a breach of a representation or warranty contained in the Dolphin Pledge
Agreement or a breach of certain representations or warranties contained in the
Dolphin Stock Purchase Agreement or any officer certificate relating thereto;
(iv) liquidation, dissolution or termination of Dolphin; or (v) bankruptcy of
the Company. Upon and after the occurrence of a Default, Gardner may, among
other rights and remedies, exercise his right to sell the Dolphin Shares, or any
part thereof in accordance with and subject to the provisions described in the
Dolphin Pledge Agreement.

Educational Marketing Group

                  On November 26, 1997, the Company acquired all of the issued
and outstanding capital stock of each of Multi Dimensional Communications, Inc.
and New Media Schoolhouse, Inc., pursuant to the terms of a Stock Purchase
Agreement (the "MDC Stock Purchase Agreement"), dated as of November 26, 1997
among the Company and each of Nicholas S. Vazzana ("Nicholas") and Elaine
Vazzana ("Elaine") (Elaine and Nicholas are collectively referred to herein as
"Vazzana"). The Company anticipates that the businesses of MDC and NMS will
complement its existing businesses by, among other things, enhancing the
Company's capabilities to market content to the educational market. The Company
is currently reviewing some of over 100 titles acquired in this transaction for
potential reissue, revision or reuse. The

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Company has also introduced the products of certain publishers to such
Multidimensional catalogs, including Simon & Schuster Interactive and Fox
Interactive. The Company is overseeing the revision of the Company's catalog and
website. In mid-April it intends to introduce a fully functional Internet store
for sale of educational software.

                  It is the intention of the Company to grow its Educational
Marketing Group through the following three primary initiatives, although there
can be no assurance that such goals can be reached:

         (i)      expanding the products to be sold by MDC and NMS to include
                  videos, books, and software from additional sources such as
                  those described above as well as titles previously developed
                  by the Company;

         (ii)     increasing the number of proprietary products sold by MDC
                  under its own labels, either by low-cost development or by
                  purchase or joint ventures with third parties for direct
                  marketers; and

         (iii)    selling educational software products through an internet 
                  store.


                  Pursuant to the terms of the MDC Stock Purchase Agreement, the
Company acquired from Vazzana all of the issued and outstanding capital stock of
each of MDC and NMS (the "Orange Cherry Shares"), in exchange for the following
consideration: (a) $36,133; (b) convertible notes of the Company (the "Vazzana
Convertible Notes") in the aggregate principal amount of $375,000, which are
secured by a pledge of, among other things, the Orange Cherry Shares, pursuant
to the terms of the Orange Cherry Pledge Agreements (as defined below); and (c)
225,000 shares (the "Vazzana Purchaser Shares") of unregistered Common Stock.
Pursuant to the terms of the MDC Stock Purchase Agreement, the Company agreed to
guarantee an aggregate selling price of the Vazzana Purchaser Shares at $2.00
per share, before commissions or other transaction fees, for each such share
actually sold on a bona fide trade on the NASDAQ Small Cap Market or such other
exchange that the Common Stock is then listed or traded during the period
beginning one year and ending two years from November 26, 1997.

                  The Vazzana Convertible Notes bear interest at a rate of 6%
per annum and are due on January 2, 2000 (the "Vazzana Maturity Date"). The
outstanding principal balance of the Vazzana Convertible Notes on December 31,
1997, together with interest accruing thereon, shall be repaid in 24 equal
monthly installments commencing February 1, 1998 and continuing on the first
business day of each succeeding month. The principal amount of the Vazzana
Convertible Notes, at the holder's option, may be converted into the number of
duly authorized, validly issued, fully-paid and non assessable shares of Common
Stock (the "Vazzana Conversion Shares") equal to the then unpaid principal
amount of the Vazzana Convertible Notes being converted, divided by $5.75, as
may be adjusted from time to time in accordance with the terms of the Vazzana
Convertible Notes. The Vazzana Convertible Notes may be prepaid at the Company's
option.

                  Pursuant to the terms thereof, the entire unpaid principal
amount of the Vazzana Convertible Notes, together with accrued interest and
charges thereon shall be due and payable upon the occurrence of an "Event of
Default" under the Vazzana Convertible Notes. An "Event of Default" under the
Vazzana Convertible Notes includes, such things as, (a) the Company's

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failure to make any payment due thereunder within 20 business days after the due
date therefor and failure to make such payment for an additional 20 business
days after written notice of such non-payment; (b) the Company's breach of any
material obligations under Section 5 of the Vazzana Convertible Notes, relating
to conversion of the Vazzana Convertible Notes, if such breach has not been
cured within 30 days; (c) a "Default" (as described below) under the Orange
Cherry Pledge Agreements giving due recognition of any notice and cure
provisions thereof.

                  The indebtedness evidenced by the Vazzana Convertible Notes
are secured by each of the Stock Pledge Agreement dated as of November 26, 1997
between the Company and Elaine relating to the pledge of all of the outstanding
shares of NMS, and the Stock Pledge Agreement, dated as of November 26, 1997
between the Company and Nicholas relating to the pledge of all of the
outstanding shares of MDC (collectively, the "Orange Cherry Pledge Agreements").


                  Pursuant to the terms of the Orange Cherry Pledge Agreements,
the Company, among other things, granted a continuing lien and security interest
in and to the Orange Cherry Shares and the proceeds thereof. The Company also
agreed, among other things, (i) not to liquidate, dissolve, merge or consolidate
MDC or NMS or sell substantially all of their assets, (ii) not to borrow money
from any person other than the Company or loan money to any person other than
the Company and (iii) not to sell, lease, assign or grant a lien on the Orange
Cherry Shares. In addition, the Orange Cherry Pledge Agreements generally
provide that a "Default" shall occur upon the occurrence of certain events
described in the Orange Cherry Pledge Agreements, such as: (i) any "Event of
Default" under the Vazzana Convertible Notes; (ii) failure to perform, observe
or comply with a material provision of the Orange Cherry Pledge Agreements and
cure such breach after written notice thereof; (iii) liquidation, dissolution or
termination of MDC or NMS; (iv) bankruptcy of the Company, or (v) the Company's
dissolution or inability to pay debts or appointment of a trustee of the
Company. Upon and after the occurrence of a Default, Vazzana may, among other
rights and remedies, exercise their right to sell the Orange Cherry Shares, or
any part thereof in accordance with and subject to the provisions described in
the Orange Cherry Pledge Agreements.

                  On February 13, 1998, Byron Preiss Multimedia Holdings, Inc.
("BPMH"), a wholly-owned subsidiary of the Company, pursuant to an Asset
Purchase Agreement with High Text Interactive, Inc. ("High Text") has acquired
any rights that High Text has to certain computer software programs known as
"Crash Course" and tangible embodiments thereof (the "Crash Course Assets"),
including the inventory of High Text related to the Crash Course assets. The
purchase price for the Crash Course Assets was 150,000 shares of the Company's
Common Stock. The Company has agreed to guarantee an aggregate selling price of
such shares at $1.33 per share, before commissions on other transaction fees,
during the period beginning one year and exceeding 18 months after the closing.
There is no assurance that the acquisition of the Crash Course Assets will not
result in any claims being brought against the rights acquired by BPMC to the
Crash Course Assets. The Company intends to sell the Crash Course titles,
including, among other titles, Statistics, Physics, Accounting and Algebra, to
schools through its MDC and NMS catalogs and Internet store and to consumers
under its distribution agreement with Simon and Schuster. The Company also hopes
to re-purpose the products for the Internet through distance learning channels.

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Multimedia Publishing Group

                  The Company's New York-based print publishing and multimedia
development operations currently produce book, video software and Internet
related titles. The group is responsible for coordinating production with
outside suppliers, and foreign publishing licensees. Among the products and
services recently in development or completed by the group are X-Files:
Unrestricted Access for Fox Interactive; Total Titanic, a book and a separate
reissue of an existing third-party software product; the design and
implementation of the NMS webstore; two sports education videos, a sports
website and sports book under contract with Genesis Direct; and over 15 new

titles in its book program with Marvel Comics and 12 new titles under the
distribution agreement with Pocket Books.

Internet Education Group

                  In February, 1998, the Company acquired OnRamp School
Productions, Inc., a Colorado corporation ("OnRamp"), pursuant to the terms of a
Merger Agreement, dated as of February 27, 1998, between the Company, Internet
Education Group, Inc., a Delaware corporation which is wholly owned by the
Company ("IEG"), Neal Tomblyn, David Workman and OnRamp. Pursuant to the terms
of the Merger Agreement, OnRamp merged with and into IEG and became a
wholly-owned subsidiary of the Company, known as Internet Education Group, Inc.
("IEG").

                  IEG is a developer of closed Internet systems for schools and
corporations, allowing students and employees access to pre-screened websites,
but protecting them from inappropriate and obscene pages. IEG's proprietary
technology and services address the needs of schools who desire access to
Internet content without exposing them to content that is deemed "inappropriate"
to minors. According to U.S.A. Today, for purposes of funding schools and
libraries' access to be the Internet, "up to $2.25 billion a year will be
distributed to schools and libraries through a fund administered by the Federal
Communications Commission, with an estimated $20 billion to be given in the next
10 years." IEG's business plan targets the government spending in this area by
providing tools for screening Internet content. The Company will require
additional capital to implement IEG's business plan for said closed Internet
systems.

                  IEG also provides the Company with up-to-date Internet skills
and seasoned management that has worked on technology projects for TCI/Reuters'
co-venture Ingenius, Xerox and Bell Atlantic. Neal Tomblyn, CEO & IEG was named
an Executive Vice President of the Company and David Workman, President of IEG
was named a Vice President of the Company. The IEG management was involved in
the development and content for Yahoo's popular children's website, Yahooligans!
IEG has contributed to the development of the Company's NMS internet store.

         Virtual Comics.

                  The Company has produced an on-line service, Virtual Comics,
primarily on the World Wide Web and initially in limited form under an
independent content provider agreement

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with the Microsoft Network. During 1996, the Company further developed its
Virtual Comics division. Virtual Comics(TM), which provides comics on-line in an
interactive format, features comic book illustrations of new super-heros
developed for digital medium. The Company's has released They Call Me...the
SKUL(TM), and THE SUIT(TM) and anticipates releasing THE 6(TM). See Brand
Strategy - Virtual Comics(TM). The Company has also published print comic books
featuring these characters. During 1997, Virtual Comics, Inc., a subsidiary of
the Company, entered into arrangements with America On-Line, Inc. and its

affiliate ("AOL") pursuant to which Virtual Comics, Inc. agreed to issue 19.9%
of the common stock of Virtual Comics, Inc. to AOL. In connection therewith,
Virtual Comics entered into a confidential interactive services agreement with
AOL pursuant to which Virtual Comics will provide a comics and comics commerce
site through the AOL network. Furthermore, in December 1997, Virtual Comics
entered into a letter of intent regarding a proposed private offering by Virtual
Comics of, between $2.0 million and the maximum of $5.0 million, which may
result in a substantial dilution of the Company's interest in Virtual Comics,
Inc. The Company believes that, among other things, that such reduction in its
equity interest is required to raise sufficient capital necessary to provide
adequate working capital for Virtual Comics in the manner contemplated. There
can be no assurance that the private placement will be completed. In such event,
the Company may elect to implement a reduced business plan focused on Virtual
Comics on-line store. There is no assurance that the delays in capital-raising
for Virtual Comics will not have an impact on its launch on AOL.

                  In March 1998, the management of the Company approved a plan
to sell Virtual Comics. The Company's Financial Statements included herein
reflect the Virtual Comics operations as discontinued based on management's
intent to sell Virtual Comics.

         Services of Byron Preiss.

                  Byron Preiss, the President, Chief Executive Officer and a
principal shareholder of the Company, is also president, chief executive officer
and the principal shareholder of Byron Preiss Visual Publications, Inc. ("BPVP")
and of General Licensing Company Inc., which are private companies that perform
the same type of services as performed by BPVP. In the course of their book
production activities and obtaining book publications rights, BPVP and its
related entities often have the opportunity to acquire CD-ROM and other audio
and visual rights to authors' works.

                  Since inception, the Company has relied upon the availability
of Mr. Preiss to serve as its Chief Executive Officer and President. The Company
has licensed from BPVP and related entities the rights to certain materials
which have provided or will provide content for some products which the Company
has developed, is developing or plans to develop in the near future. The Company
does not rely on BPVP or its related entities to acquire rights, and the Company
has and continues to actively acquire rights in its own name. Nevertheless, the
Company's acquisition of properties and licenses from sources other than BPVP
has often been dependent upon Mr. Preiss' experience and contacts in the book
publishing and software fields. The Company believes that it has benefitted and
will continue to benefit from Mr. Preiss' book publishing and software
experience, from the ability to acquire CD-ROM rights from BPVP and related
entities and from the publication and publicity by BPVP and its book publisher
licensees and distributors of works for which the Company will be publishing
CD-ROM products. Certain licenses acquired by the Company, such as the Company's
licenses with American Heritage and Forbes have occurred simultaneously with
BPVP's acquisition of book rights to the same

                                       11

<PAGE>

property from the same licensor. For example, in connection with the Company's
license with American Heritage, in the same year that the Company released its

CD-ROM title for American Heritage History of the Civil War, BPVP packaged a
related book for Viking.

         Content Licenses.

                  To date, the Company has sought to acquire licenses from
publishers, popular authors, artists and film and television companies; and the
Company intends to continue to acquire rights to properties and talent which
will support its educational and publishing marketing strategy. In licensing
agreements, the Company seeks: (i) reasonably long terms for the license, at
least 3 to 5 years, (ii) customary advances, guarantees and royalty rates, and
(iii) artistic and editorial cooperation of the licensor. Due to the multimedia
nature of certain of the Company's products, licenses are required for audio,
video, cinematic, and written materials to supplement original content provided
by the Company, for each particular product being developed, the Company seeks
to obtain content licenses from various authors and other rights holders
(including guilds and unions controlling rights to certain properties) as the
development of the product progresses.

                  The Company's current licenses typically run for terms of
approximately 3 to 5 years, cover world English or all world rights, and usually
provide for an upfront payment to the rights holder plus a royalty of from 5% to
10% on revenues received from CD-ROM sales.

                  The Company has also acquired certain print and on-line rights
with respect to their licenses. The Company is also exploring broadcast
applications for certain of its titles.

         History of Releases

                  The Company's first product, Isaac Asimov's The Ultimate
Robot(R) was released by the Company in November 1993 and received a prestigious
Invision Award. The Company's next CD-ROM products, which were released during
1994, were: the Seinfeld Screensaver & Planner; the R. Crumb Screensaver and
Companion; The Multimedia Cartoon Studio; The Essential Frankenstein: The
Multimedia Experience; Trouble Is My Business: The Raymond Chandler Library; The
World of Totty Pig; Gahan Wilson's The Ultimate Haunted House; The Ultimate
Frank Lloyd Wright: America's Architect; and Kurt Vonneguts's - Slaughterhouse
Five. During 1995, the Company released approximately fifteen (15) titles,
including but not limited to, The Melrose Place Companion; Beverly Hills 90210;
The Frasier Companion; The Baywatch Companion; Hard Hat; Ray Bradbury's The
Martian Chronicles; American Heritage History of the Civil War; Exploring the
Planets; Robot City; "Not Now!" Said the Cow; Baby Rom; The Ultimate Einstein;
Will Eisner's The Spirit; Seinfeld 95 and John Steinbeck - Of Mice and Men. The
Company developed approximately sixteen (16) titles, during 1996, including,
Scientific American Library The Universe and Illusion; Timetables of Technology;
The Way Baseball Works; Total Television; American Heritage: Lincoln; American
Heritage History of the United States for Young People; The Twelve Circus Rings;
Spider-Man; Private Eye Game; Westworld 2000; Forbes Corporate Warrior, a
business simulation game; The John Steinbeck Library: The Pearl and The Red
Pony. Although a completed version of each of these titles was developed during
1996, certain of the co-published titles were released during 1997, including
Scientific
                                       12


<PAGE>

American Library. During 1998, the Company currently anticipates releasing
several previously developed titles including, but not limited to, Spider-Man:
The Venom Factor, My Cool Diner, Inside-Outside World Tour Game, and The Grapes
of Wrath. In addition, during 1997, Simon and Schuster Interactive re-released
certain of the titles developed by the Company by bundling them together, such
as the American Heritage Lincoln being packaged with the existing American
Heritage History of the Civil War.

                  Pursuant to certain agreements that the Company has entered
into with Marvel Entertainment Group, Inc., the Company has co-published books
including Spider-Man; The Venom Factor; The Ultimate Spider-Man; Iron Man: The
Armor Trap; Spider-Man Carnage In New York; The Incredible Hulk: What Savage
Beast; and Fantastic Four: To Free Atlantis. In 1996, the Company co-published
with Putnam/Berkley the following books: Stan Lee's Riftworld: Odyssey;
Daredevil: Predator's Smile; X-Men: Mutant Empire Book 1 Siege; Spider-Man &
The Incredible Hulk: Rampage; Spider-Man: Goblin's Revenge; Spider-Man: The
Octopus Agenda; The Ultimate Super-Villains; The Ultimate X-Men; X-Men: Mutant
Empire Book 2: Sanctuary; and Iron Man: Operation A.I.M. The Company also
co-published with Pocket Books three Spider-Man Super Thriller books and the
Spider-Man "You Are Spider-Man" book. During 1997, the Company released various
X-Men titles, Spider-Man titles including The Octopus Agenda, and a hardcover
book featuring The Fantastic Four. See "Marketing & Distribution -- Marvel Comic
Book Characters."

                  In addition, in 1997, the Company released three trade books
with Pocket Books distribution including, but not limited to, Battlestar
Galactica, The Ultimate Einstein and The Rhino History of Rock and Roll: The
70's, four Virtual Comics paperbacks and two paperbacks with the National
Basketball Hall of Fame and others.

                  In 1998, the Company intends to release a minimum of ten books
under its distribution agreement with Pocket Books, including The Ultimate
Universe and Pop Culture, a 100th Anniversary book about Pepsi, produced in
conjunction with Pepsi.

                  There can be no assurance that the Company will be able to
meet its current schedule or that interruptions outside of the Company's control
will not impede the Company's current scheduled delivery plans and delay the
release dates or any of the Company's pending projects. Any delays in planned
delivery, advance or licensing payments, or release dates will correspondingly
delay the Company's receipt and recognition of revenues, and could place the
Company in default under certain of its content license and joint venture
agreements.

                  In the Multimedia Publishing Group, software product
development is managed directly or indirectly by the Company which utilizes
outside talent to develop certain titles from time to time. The Company has
considered using its Dolphin division for certain product development. Each
project is assigned to an internal team, a freelance team or independent
contractor for all or a part of the production based on the particular skills
and knowledge required. Project teams normally consist of one or more

programmers, designers, editors, animators, sound suppliers, video engineers,
quality controllers and production assistants, all of whom receive direction
from full-time staff personnel. In general, actual development time is estimated
to average 9 to 12 months elapsed time (but may be as short as six months or as
long as two years) and to employ no less than 4 persons per title. The Company's
staff is engaged in supervision and direction of teams of outside consultants,
freelance programmers and software

                                       13

<PAGE>

designers with responsibility for separate development projects. Company staff
members also work on internal development of certain titles.

                  The Company believes that the continuation of internal
development, outside developers and freelancers allows it to work with the best
available talent on certain projects, while reducing continuing overhead.
However, there can be no assurance that freelance development personnel will be
as loyal or effective as full-time employees. In order to ensure quality and
timely production, in-house staff supervise every project from start to finish
and coordinate development with licensing, product testing, marketing and
translating for use on different computer systems.

                  Books are developed in-house editorially and with text and
illustrations commissioned from freelance writers and illustrators. Editing has
sometimes been provided by staff from BPVP. See "Services of Byron Preiss"

         Marketing & Distribution.

                  General. To date, the Company has entered into several
domestic and international agreements relating to distribution of the Company's
products. In connection with the Company's domestic distribution agreements, the
Company generally is required to pay fees to distributors, for rendering
distribution, warehousing, manufacturing, and technical support services
provided by the distributor, and or its designee, which, in the aggregate
amount, 12% generally ranges from approximately 12% to 25% as a percentage of
the distributors net sales of the Company's products. Each of the Company's
domestic distribution agreements fall within this range. The Company has
executed a book distribution agreement to cover books, which have been
distributed through Simon & Schuster's Pocket Books division commencing in 1997.

                  With respect to the Company's international distribution
agreements, the Company has entered into two types of distribution agreements.
In the first type, which is often referred to as a localization and distribution
agreement, the Company grants to the distributor a license to replicate CD-ROMs
in a language and to manufacture and distribute said CD-ROMs in a given
territory. With respect to such localization and distribution agreements, the
Company generally receives from the distributor a percentage of sales, which
generally ranges from 5% to 25% of the distributor's net sales relating to the
Company's products, with most agreements providing for approximately 20% of net
sales. Each of the localization and distribution agreements entered into by the
Company fall within this range. In the second type of international distribution
agreement, the Company grants the distributor the right to license, market, and

sell CD-ROMs, which are purchased by the distributor directly from the Company.
In this type of agreement, the Company earns revenues based upon its sales of
products to the distributor.

                  The Company is dependant on Simon and Schuster's Pocket Books
division and Putnam Berkley for distribution of its book products and to Simon
and Schuster's Macmillan Distribution Services for its software retail sales
(see below). Any change in such relationships could have a material adverse
effect on the Company.

                                       14

<PAGE>

                  Simon & Schuster Agreements. The Company entered into a
Software Development Agreement dated as of March 21, 1995 (the "Development
Agreement") with Simon & Schuster Interactive ("S&S"), a division of Simon &
Schuster, Inc. Pursuant to the terms thereof, the Company and S&S have jointly
developed products in digital electronic media to be based upon pre-existing
third party and original works. These products will be developed by the Company
and S&S through the joint contribution of their respective properties,
resources, names, talent and know-how.

                  Pursuant to the Development Agreement, S&S and the Company
shall share equally, the net income (if any), resulting from the joint work
developed, which net income will take into account deductions, which include,
but are not limited to, certain costs for obtaining the rights to the content
used in the joint work, certain out-of-pocket and internal costs allocated by
S&S to the joint work, including warehousing, distribution and marketing of the
joint works, the development fee paid by S&S to the Company and certain
out-of-pocket expenses incurred by the Company.

                  Pursuant to the terms of the Development Agreement, each of
the Company and S&S has the right and license (subject to any agreed upon third
party license restrictions) to copy, reproduce, manufacture, market, publish,
distribute, sell for rental and sell any joint works and to sublicense the
rights to do the same in all markets and through all channels of distribution
throughout the world. In connection with the joint work developed the Company is
responsible for developing such joint work in accordance with the terms of the
Development Agreement and is required to provide certain end-user support to
S&S. All aspects of the promotion, marketing and distribution of the joint works
will be under S&S's sole and exclusive control including, but not limited to,
the pricing and sublicensing of the joint works. See "Viacom Purchase
Agreement."

                  In June 1995, the Company and S&S amended the Development
Agreement to co- publish the following three CD-ROM titles, which are Ray
Bradbury's The Martian Chronicles based on the beloved science fiction novel;
Scientific American Library's The Planets, based on the book, Exploring
Planetary Worlds and Raymond Chandler's Philip Marlowe: Private Game, which is
an interactive game based on the novel The Little Sister by the classic American
mystery writer, that was originally planned to be named Raymond Chandler's
Philip Marlowe: The Little Sister Game. Although the foregoing three titles were
partially developed pursuant to the Microsoft Agreement (as hereinafter

defined), the Company believes that Ray Bradbury's The Martian Chronicles and
Scientific American Library's The Planets were approximately one-half developed
and Raymond Chandler's Philip Marlowe: Private Game was only approximately 10%
developed. See "Microsoft Agreement." In January 1996, the Company entered into
a further extension of the Development Agreement to include additional mutually
agreed upon titles and to provide a profit margin calculated upon the
development fee.

                  The Company has also entered into a Distribution Services
Agreement (the "S&S Distribution Agreement"), dated as of January 1, 1996 with
S&S Interactive Distribution Services (now known as Simon & Schuster Interactive
Macmillan Distribution Services) ("S&S Distribution") pursuant to which the
Company granted to S&S Distribution certain rights to market and distribute
titles, and to provide inventory, warehousing and fulfillment services for the
titles. The S&S Distribution Agreement initially identified six (6) titles which
shall be distributed by S&S Distribution, including The Frasier Companion; The
Baywatch Companion

                                       15

<PAGE>

with Screensaver; The Ultimate Einstein; My Cool Diner; and Westworld. In
addition, the Company agreed to grant S&S Distribution the right to distribute
any and all titles that the Company develops, publishes or for which the Company
gains distribution rights throughout the term of the S&S Distribution Agreement,
with permitted exceptions. There can be no assurance that S&S Distribution will
be successful in promoting and selling the Company's titles. In December 1996,
the Company entered into an agreement with The Learning Company for distribution
of jewel case versions of Virtual Comics The Skul and The Suit games and for
Scientific American Library: The Planetarium and in 1997, for a jewel case
version of Multimedia Cartoon Studio.

                  Penguin. In October, 1995 the Company entered into an
agreement (the "Penguin Agreement") with Penguin Electronic Publishing, a
division of Penguin Books USA, Inc. ("Penguin") pursuant to which, the Company
and Penguin will develop five (5) CD-ROM projects tentatively titled: The John
Steinbeck Library, (which shall consist of a CD-ROM edition of each of the
following works by John Steinbeck: Of Mice and Men, The Pearl and The Red Pony
and The Grapes of Wrath; Total Television by Alex McNeil and The Inside-Outside
World Tour based on The Inside-Outside Book of New York City, The Inside-Outside
Book of Washington, D.C., The Inside-Outside Book of London and The
Inside-Outside Book of Paris by Roxie Monroe. Penguin was appointed the
exclusive distributor of such CD-ROMs in the English language and all markets in
the US, its territories and Canada and a non-exclusive right throughout most of
the world. Penguin shall obtain the rights and clearances for the literary
materials published by Penguin to be used in the CD-ROMs. The Penguin Agreement
runs for a period of seven (7) years from the initial publication of each CD-ROM
project, respectively and shall continue thereafter until terminated upon thirty
(30) days notice by either party. In late 1996, Penguin Electronic Publishing
reduced its operations and the division was closed in December 1996. In 1997,
excluding book-and-disk package rights which were retained by Penguin, the
Company successfully negotiated the reversion of rights of software distribution
for its titles previously to be co-published with Penguin Electronic Publishing.

The Company issued Total TV, in conjunction with Nick at Nite's TV Land in the
fourth quarter of 1997 and intends to distribute the remaining titles to the
educational market through NMS/MDC during 1998.

                  Marvel Comic Book Characters. Pursuant to an Agreement dated
as of September 1, 1994 (the "Marvel Agreement") entered into by the Company
with Marvel Entertainment Group, Inc. ("Marvel"), the company obtained the
exclusive license in the United States and Canada to publish novels in hard
cover and paperback formats for ages 15 and up based on certain comic book
characters owned by Marvel including, among others, Spider-Man(R), The
Incredible Hulk(R), and The Fantastic Four(R). The Company has and will continue
to create these novels through the services of freelancers supervised by the
Company. Marvel has the right to approve each stage of development of the books
and is under no obligation to do so.

                  The Company is obligated to publish at least 4 novels in each
twelve-month period. The first two titles were published in 1994 and the Company
has co-published with Putnam Berkeley Group, Inc. eight books including
Spider-Man; The Venom Factor, a mass market paperback; The Ultimate Spider-Man,
a mass market paperback; Iron Man: The Armor

                                       16

<PAGE>

Trap; Spider-Man Carnage In New York; The Incredible Hulk: What Savage Beast;
and Fantastic Four: To Free Atlantis. In 1996, the Company released the
following books: Stan Lee's Riftworld: Odyssey; Daredevil: Predator's Smile;
X-Men: Mutant Empire Book 1 Siege; Spider-Man & The Incredible Hulk: Rampage;
Spider-Man: Goblin's Revenge; Spider-Man: The Octopus Agenda; The Ultimate
Super-Villains; The Ultimate X-Men; X-Men: Mutant Empire Book 2: Sanctuary; and
Iron Man: Operation A.I.M.. The Company released 17 new titles during 1997
including, but not limited to, various X-Men titles and Spider-Man titles such
as The Octopus Agenda. The Company has also been granted the right of first
refusal on audio titles to the Marvel books which it publishes and produced one
audio tape in 1996 under contract with Simon and Schuster Audio. The Marvel
Agreement has an initial term of three years and may be renewed upon the mutual
agreement of Marvel and the Company. The Company renewed this Agreement with
Marvel in September 1996 for a period ending December 2000. Marvel is entitled
to royalties based on the sale of books under the Marvel Agreement.

                  On September 26, 1994 the Company entered into a Co-Publishing
Agreement (the "Putnam Agreement") with Putnam Berkeley Group, Inc. ("Putnam")
pursuant to which the Company and Putnam agreed to jointly publish all books
subject to the Marvel Agreement. The Company and Putnam will share in all
profits and losses from the acquisition, development, publication, sale and
distribution from such books, as specifically provided in the Putnam Agreement.
The Company and Putnam have agreed to consult with each other on the number of
copies for all printings in excess of 10,000 for hardcopies and 25,000 for
paperback editions, subject to certain provisions.

                  Putnam has agreed to publish at least one anthology and four
paperback books for each twelve-month period during the term of the Putnam
Agreement. The Company is obligated to make all payments to Marvel and the

freelance writers and illustrators contracted to develop the Marvel books while
Putnam is fully responsible for all printing, manufacturing, advertising,
selling and distributing of such books. The Putnam Agreement had an initial term
through December 31, 1996 but was extended through January 15, 1999. If the
Putnam Agreement is not terminated and the Marvel Agreement is renewed, then at
Putnam's option the term of the Putnam Agreement may be extended on the same
terms and conditions and for the same period as the Marvel Agreement is in
effect.

                  Pursuant to an agreement, dated as of February 15, 1995,
between the Company and Marvel (the "Marvel CD-ROM Agreement"), Marvel granted
to the Company the exclusive right to publish, distribute and sell in all
languages throughout the world three (3) different CD-ROM titles of interactive
adventures which visually recreate plots and/or storylines of novels previously
published by the Company or to be published by the Company pursuant to the
Marvel Agreement. The Marvel CD-ROM Agreement continues through January 31, 2000
unless sooner terminated by the parties in accordance with the terms thereof.
Pursuant to the Marvel CD-ROM Agreement, as amended, the Company shall publish
three titles, the first title of which by August 31, 1997, the second title by
December 31, 1997 and the third title by December 31, 1998. The first title,
Spider-Man: The Sinister Six(TM), was published in November 1996. During

                                       17

<PAGE>

1998, the Company intends to distribute Spider-Man: The Venom Factor through a
third party distributor, but their can be no assurance such distribution will be
established.

                  In performing the Marvel CD-ROM Agreement, the Company is
permitted to use all commonly accepted multimedia elements, such as sound and
animation created exclusively for such CD-ROM titles. Marvel has retained the
sole right to approve various stages of creation of the CD-ROM titles that are
the subject of the Marvel CD-ROM Agreement. In connection with the Company's
restructuring, the Company does not intend to produce any further Marvel CD-ROM
games. The Company also is seeking to terminate other game licenses held by the
Company.

                  Pursuant to an agreement (the "Marvel Young Adults
Agreement"), dated as of June 15, 1995, entered into by the Company with Marvel,
the Company obtained the sole and exclusive right to print, publish, distribute
and sell in the United States and Canada as well as non-exclusive rights to
distribute and sell throughout most of the world, under the Company's own
imprint, young adult books including, mass-market size paperback books and
hardcover books, based on certain comic book characters owned by Marvel, known
as the "Marvel Superheroes", including, among others, Spider-Man(R). In
addition, the Company had been granted the right to manufacture and sell
throughout the world one (1) CD-ROM title of interactive adventures based upon
one or more of such books. The Marvel Young Adults Agreement runs through
January 15, 1999, unless sooner terminated in accordance with the terms thereof.
The Company suspended publication of Marvel Young Adult titles in 1997 due to
disappointing sales performance.


                  In addition, pursuant to an agreement (the "Marvel X-MEN
Agreement"), dated as of June 28, 1995, entered into by the Company with Marvel,
the Company obtained the exclusive license to print, publish, distribute and
sell in the United States and Canada as well as a non-exclusive right to sell
throughout most of the world, under the Company's own imprint, softcover novels
in mass-market size, hardcover novels and limited edition novels, for
approximately ages fifteen (15) and up, based upon certain comic book characters
owned by Marvel, known as the "X-MEN(R)". In addition, the Marvel X-MEN
Agreement provides that one or more of the books may be adopted to CD-ROM format
exclusively by the Company which shall be one of the three titles to be
published under the terms and conditions of the Marvel CD-ROM Agreement. The
Marvel X-MEN Agreement runs through January 15, 1999, unless sooner terminated
in accordance with the provisions thereof. In 1997, the Company successfully
extended this Agreement on a non-exclusive basis. The Agreement was amended to
provide for the additional publication of books based on Generation X, another
Marvel title.

                  During December 1996, Marvel Entertainment Group, Inc. filed a
voluntary petition for reorganization under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware in Wilmington (the "Marvel Bankruptcy"). Although, at this time, the
Company believes that such event should not effect the relationship between the
parties, there can be no assurance that such Marvel Bankruptcy will not
adversely effect the Company.

                                       18

<PAGE>

                  Retail and Direct Mail. The Company's titles distributed by
S&S pursuant to each of the Development Agreement and the S&S Distribution
Agreement, by certain international distributors and pursuant to other
relationships, may be sold through some or all of the following retail channels,
some of which are not currently significant distributors of computer software,
including: (i) traditional trade software wholesale distributors; (ii)
traditional trade book distributors; (iii) alternative distribution to target
markets, including sales over on-line services; (iv) CD-ROM samplers and mail
order; and (v) national electronics chains and other mass merchandisers. The
Company has emphasized marketing of its titles through its newly acquired
NMS/MDC catalogs and will market them through its new website.

                  Trade software wholesale distributors distribute primarily to
independent computer stores and chain outlets and sometimes to department and
electronics stores. Trade book distributors distribute to bookstores and chains,
as well as schools and libraries.

                  International Distribution. The Company believes that foreign
countries offer significant potential markets for its products due to increasing
worldwide demand for interactive multimedia and educational software. The
Company entered into a localization and Distribution Agreement with a
distributor of multimedia products in Korea pursuant to which, in general, the
Company, among other things, has granted the distributor the right and license
to replicate certain CD-ROMs in the Korean language and to manufacture,
distribute and sell those CD- ROMs in Korea.


                  The Company entered into a CD-ROM Distribution and Replication
Agreement dated February 12, 1996 with Macmillan Publishers Limited
("Macmillan") pursuant to which the Company granted to Macmillan for a five year
term the sole and exclusive right throughout the UK and Ireland to manufacture,
sell and distribute certain CD-ROM products including, but not limited to,
Scientific American Library The Planets and The Ultimate Einstein. The Company
recently received notice that Macmillan was assigning such rights to Marshall
Editions, Ltd.

                  The Company entered into a Localization and Distribution
Agreement dated as of February 23, 1996 with Systhema, A.G. ("Systhema")
pursuant to which the Company granted to Systhema an exclusive license, through
December 31, 1999, throughout the Republic of Germany, Austria, German speaking
Switzerland and Liechtenstein to manufacture, sell and distribute certain CD-ROM
products including, but not limited to, Scientific American Library The Planets
and The Ultimate Einstein. The Company extended this relationship in 1997 to
include the Company's Timetable of Technology.

                                       19
<PAGE>

                  The Company entered into a binding Letter of Agreement with
Anaya Multimedia S.A., pursuant to which the parties agreed to enter in an
Agreement whereby the Company will grant to Anaya the exclusive rights for
localization, publishing, and distribution of the Spanish language version of
the Scientific American titles, "The Planets", "The Universe" and "Illusion",
(collectively, the "Spanish Titles"), and Anaya will grant to the Company the
exclusive license to publish, license and sublicense such Spanish Titles outside
of Spain. The Company extended this relationship in 1997 to include additional
titles.

                  In addition, the Company has entered into distribution
agreements with certain distributors of multimedia products in each of Norway,
Sweden, Finland, Israel, France, Netherlands, Belgium and Germany and others in
which the Company, among other things, has granted to the distributor the right
and license to market, distribute and sell certain of the Company's CD-ROMs in a
given territory.

                  There can be no assurance that the Company will be able to
achieve international success with its products.

                  Competition.

                  Competition in the CD-ROM software, educational, book
publishing and on-line service markets and comic books is intense. The Company's

competitors include several large software and publishing companies with
substantial financial and personnel resources and numerous small companies with
lesser resources. The software market is now facing enhanced competition as a
result of two factors which are (i) reduced prices as a result of reduced price
publishing and (ii) the development of new electronic distribution technologies
including, certain "on-line" services, which are discussed below and (iii) a
reduction in the number of stores selling CD-ROMs.

                  There are various publishers and distributors which market
their own multimedia products, including companies such as The Learning Company,
Cenolast, and Broderbund. The current number of published titles in the
categories of interest to the Company approximates several thousand, and the
quality of available titles is expected to increase during the next several
years. The Company will compete for educators' software expenditures with other
software companies targeting the educational segments of the multimedia market.

                  In the K-12 educational software market, the Company's
children's educational products may encounter strong competition from
established products in that field, and similar competition may be met in other
specialized areas. The Company has attempted to differentiate itself from its
competitors through its focus on licensing high quality products based upon
recognized works of popular authors and artists, and by acquisition MDC/NMS.
There can be no assurance that this strategy will enable the Company to compete
successfully in its targeted markets. The Company also competes with other
publishers and developers for content licenses

                                       20

<PAGE>

and for talented development personnel. Dolphin competes with other development
companies as well as divisions of large companies. IEG faces competition from
such products as Net Nanny, Cyberpatrol and third party on-line solutions. NMS
faces competition from such catalogs as Educational Resources and The Learning
Company's recent acquisition of TEC Direct.

         Manufacturing.

                  To date, manufacturing of program discs and packages have been
contracted out to third party manufacturers. There are numerous manufacturing
sources available throughout the United States and the Company is not dependent
on any one source. Simon and Schuster and Putnam Berkley provide manufacturing
services to the Company on the books they distribute through the regular
suppliers.

         Technical Support.

                  Technical and customer support standards are very high in the
computer software market. In order to remain competitive, the Company maintains
telephone technical assistance for its customers with respect to certain of its
products. Technical support personnel will work in-house, offsite or be
contracted for through third-party independent fulfillment houses or to
individual subcontractors. The Company has established a dedicated telephone
line to answer such technical support calls. Pursuant to the S&S Distribution

Agreement, the Company is responsible for technical support unless the Company
otherwise elects to utilize the technical support services provided by S&S
Distribution.

         Intellectual Property.

                  The Company's future success will be heavily dependent upon
its content, its distributed software and books and the performance of its
acquired divisions. The Company will rely on a combination of contractual
rights, trademarks, trade secrets and copyright laws to establish or protect its
products in the countries where it will conduct business. There can be no
assurance that the steps taken by the Company to protect its rights will be
adequate to deter misappropriation. Furthermore, there can be no assurance that
claims relating to the Company's alleged infringement on the intellectual
property of others will not be asserted against the Company. Copyright and other
proprietary rights to the use of CD-ROM and on-line material and material
licensed for use on CD-ROM and on-line is a relatively new area and there is the
possibility of legal challenges in respect of all such rights. Moreover, as is
the case in the music recording industry, CD-ROM software is capable of being
reproduced by unauthorized persons. Any such unauthorized reproduction might be
difficult to police and could detrimentally affect the Company. In addition, the
laws of some foreign countries do not protect proprietary rights in products and
technology to the same extent as to the laws of the United States.

                                       21

<PAGE>

                  In addition, practically all of the content (text, excerpts,
artwork, film, photographs, plot, concepts, music, talent, programming and
software) of the Company's products will be used by the Company pursuant to
rights obtained in licensing agreements from others or under contracts with
creative talent including programmers, some of whom will be employees of the
Company and others which shall be third party suppliers. The Company will,
therefore, necessarily be dependent upon the validity of its licensors' rights
and the agreement and financial capability of each licensor to indemnify the
Company against any claims, litigation and eventual damages from any such
claims. This exposure is increased by reason of the fact that some of the
Company's products are expected to include materials based upon rights obtained
from a variety of different licensors.

                  Although the Company implements protective measures by
primarily filing copyright and trademark applications when deemed appropriate in
order to defend its material proprietary rights, there can be no assurance that
such efforts will be successful. The failure and ability of the Company to
effectively protect its proprietary information could have an adverse effect on

the Company's business.

         Employees

                  As of the date hereof, the Company's New York office had
approximately 20 full-time employees and 1 part-time employee. In addition, as
of the date hereof, Dolphin, Inc. had approximately 22 employees and the
Company's Educational Marketing Group division had approximately 6 employees.
The Company also uses the services of freelance software developers,
consultants, programmers and designers on an "as needed" basis. The Company
believes that its future success will depend, in part, upon its ability to
attract, retain and motivate qualified personnel and independent contractors.
Competition for such personnel is intense. There can be no assurance that the
Company will be successful in attracting and retaining such personnel.

FINANCING TRANSACTIONS

8% Convertible Debentures due January 31, 1999

                  On February 5, 1997, the Company completed the sale to certain
European investors of its 8% Convertible Debentures due January 31, 1999 (the
"European Debentures")

                                       22

<PAGE>

in aggregate principal amount of $2.0 million, in reliance upon the exemption
from registration afforded under Regulation S of the Securities Act.

                  In connection with the transaction, the Company received net
proceeds in the amount of approximately $1.84 million. The European Debentures
are convertible, at the holders option, anytime commencing 45 days after the
issue thereof, into shares of Common Stock, at a conversion price per share
equal to the lower of (a) 70% of the average closing bid price of the Common
Stock for the five business days immediately preceding the conversion date or
(b) 75% of the average of the closing bid price of the Common Stock for the five
business days immediately preceding the date of subscription by the holder
thereof, in each case as reported by the NASDAQ Small Cap Market. The Company is
entitled, at its option, to redeem all or part of the European Debentures being
converted by paying to the holder thereof the product of (i) the average market
price for the five consecutive trading days as reported by the NASDAQ Small Cap
Market prior to the notice of conversion, and (ii) the number of shares of
Common Stock that would be issuable if the European Debentures were converted.

                  In addition, as part of its issuance of the European
Debentures, the Company issued to VenGua Capital Markets, Ltd., the
European-based broker involved in such transaction, warrants (the "VenGua
Warrants") to purchase 50,000 shares of Common Stock. The VenGua Warrants are
exercisable for shares of Common Stock at any time from and after February 1,
1998 to and including January 31, 1999, at a purchase price of $2.40 per share,
which price may be adjusted upon the occurrence of certain events.

                  On or about April 22, 1997, in accordance with the notices of

conversion of the European Debentures presented to the Company by each of the
holders of the European Debentures, the Company issued and delivered 785,176
shares of Common Stock to Allied Balken, 219,849 shares of Common Stock to AT
Investments, 753,769 shares of Common Stock to Baybridge Securities and 753,769
shares of Common Stock to Blue Chip Securities. In the aggregate, the Company
issued shares of Common Stock, representing, at that time, approximately 35% of
the Company's issued and outstanding shares of Common Stock.

6% Convertible Debentures due October 31, 1999

                  On October 17, 1997, October 29, 1997 and November 18, 1997,
the Company completed the sale of its 6% Convertible Debentures due October 31,
1999 (the "6% Debentures") to two investors in the aggregate principal amount of
$300,000, in reliance upon exemption from registration afforded under Regulation
S of the Securities Act.

                  In connection with the transaction, the Company received net
proceeds in the amount of approximately $227,500 (excluding legal, accounting
and other miscellaneous expenses). The proceeds are net of commissions and
unaccountable expense allowances paid to Heritage Equities Ltd. The 6%
Debentures are convertible, at the holders option, anytime commencing 60 days
after the issue thereof, into shares of Common Stock, at a conversion price per
share equal to the lower of (a) 75% of the average closing bid price of the
Common Stock for the five business days immediately preceding the conversion
date or (b) 80% of the average of the closing bid price of the Common Stock for
the five business days immediately preceding the date of subscription, in each
case as reported on the NASDAQ Small Cap Market. The

                                       23

<PAGE>

Company is entitled, at its option, to redeem part or all of the 6% Debentures
being converted by paying to the holder thereof the product of (i) the aggregate
principal amount of the 6% Debentures being redeemed, and (ii) 130%.

                  In addition, the Company issued to warrants Reva Trading
(Proprietary) Limited , an investor in the 6% Debentures (the "Reva Warrants")
to purchase an aggregate of 50,000 shares of Common Stock. The Reva Warrants are
exercisable for shares of Common Stock at any time through October 31, 1999, at
a purchase price of $1.00 per share, which price may be adjusted upon the
occurrence of certain events.

6% Convertible Debentures due November 30, 1999

                  On December 8, 1997, the Company completed the sale to
Bushinghall Limited ("Bushinghall") of its 6% Convertible Debentures due
November 30, 1999 (the "Bushinghall Debentures") in the aggregate principal
amount of $1.3 million, in reliance upon the exemption from registration
afforded under Regulation D of the Securities Act.

                  In connection with such transaction, the Company received net
proceeds in the amount of approximately $1,189,500 million (excluding legal,
accounting and other miscellaneous expenses), which, at this time, the Company

intends to use to complete acquisitions and for additional working capital. The
proceeds are net of a 8% commission and 0.5% unaccountable expense allowance
paid to Trautman Kramer & Company, Incorporated ("Trautman"). The Bushinghall
Debentures are convertible, at Bushinghall's option, anytime commencing 90 days
after the issue thereof, into shares of Common Stock, at a conversion price per
share equal to the lower of (i) the lowest three consecutive trading day average
Market Price (as hereinafter defined) for the 60 trading days ending on the day
prior to the conversion date or (ii) 125% of the Market Price on the issue date.
With respect to the Bushinghall Debentures, the term the "Market Price"
generally shall be the average closing bid price of the Common Stock as
reported, at the option of the holder, by Bloomberg, LP or by the National
Association of Securities Dealers or the closing bid price on the
over-the-counter market. The Company also issued to Bushinghall a warrant (the
"Bushinghall Warrants") to purchase an aggregate of 130,000 shares of Common
Stock. The Bushinghall Warrants are exercisable for shares of Common Stock at
any time through November 30, 2002 at purchase prices that range from 2.25 to
3.0375, which prices may be adjusted upon the occurrence of certain events.

                  In addition, the Company issued to Trautman and certain of its
employees warrants (the "Trautman Warrants") to purchase an aggregate of 182,000
shares of Common Stock. The Trautman Warrants are exercisable for shares of
Common Stock at any time through November 30, 2002, at a purchase price of $2.70
per share, which price may be adjusted upon the occurrence of certain events.

                  At this time, the Company is pursuing various potential
acquisitions. In order to complete such acquisitions and to fund the future
operations of these acquisitions, as well as, to fund current on-going
operations of the Company in order to support its current working capital
requirements, the Company is required to raise additional capital. There can be
no assurance that the Company will be successful in raising such additional
capital or that such additional capital will be available on a timely basis or
available on commercially acceptable terms to the

                                       24

<PAGE>

Company. The failure by the Company to currently raise capital for each of the
purposes discussed above will result in a material adverse effect to the
business and operations of the Company. Furthermore, there can be no assurance
that the Company will be able to pay the approximate $3.7 million owed under its
convertible notes and convertible debentures in the event that the holders
thereof demand payment of the amounts due pursuant to the terms thereof or even
make required payments thereunder on a timely basis. Since it is highly unlikely
that the Company would have the funds needed to repay the amounts outstanding
under these debt instruments, non-payment would be an event of default which
could materially adversely affect the Company's ability to continue its
business.

                  As a result of its issuance of certain convertible notes and
convertible debentures, including the Gardner Convertible Note and the Vazzana
Convertible Notes (each as hereinafter defined), the Company is indebted to
various third parties in an amount equal to approximately $3.7 million. As
security for certain of these obligations, the Company has pledged the shares of

Dolphin, Inc. pursuant to the Dolphin Pledge Agreement (as hereinafter defined)
and the shares of Multi Dimensional Communications, Inc. and New Media
Schoolhouse, Inc. pursuant to the Orange Cherry Pledge Agreements (as
hereinafter defined). Events of default under these debt instruments include,
among other things, (i) the failure by the Company to pay any principal of, or
interest on, these debt instruments, or (ii) the failure by the Company to
observe certain terms, covenants or agreements, such as maintaining net worth
and working capital requirements, and observing capital expenditure limitations.
Upon the occurrence of an event of default, the holders of these debt
instruments could foreclose on their security interest in the Company's assets,
the shares of Dolphin, Inc., Multi Dimensional Communications, Inc. and New
Media Schoolhouse, Inc. Such action would have a material adverse effect on the
Company's business. See "Business--Educational Services Group," and
Business--Educational Marketing Group."

Item 2.  Description of Property

         As of March 31, 1998, the locations of the Company's principal
facilities are as follows:

<TABLE>
<CAPTION>

                                                                                                  Approximate Square
Location                       Principal Use/User                                                    Feet of Space
--------------------------------------------------------------------------------------------------------------------------
<S>                            <C>                                                                <C>
LEASED:

New York, NY                   Principal executive office of the Company                                12,000

Cherry Hill, NJ                Office facilities/Dolphin                                                 6,584

Pound Ridge, NY                Office warehouse and fulfillment facilities/MDC/NMS                       1,300

</TABLE>

         The Company's facilities are substantially fully utilized. The Company
believes that its facilities are reasonably suitable for the purpose to which
they are put and that, subject to possible changes to accommodate centralization
and consolidation of its business activities, they are adequate for the
Company's immediate foreseeable needs.

                  On November 1, 1993, the Company entered into a lease (the
"Initial Lease") for approximately 5,000 square feet of office space for a term
of four and one-half years, at 24

                                       25
<PAGE>

West 25th Street, New York, New York. The lease provides for an initial annual
rental of $51,970, with an annual escalation adjustment of 4%. In July 1995, the
Company entered into a second lease (the "Second Lease") for approximately 5,000
square feet of additional office space on the fifth floor at 24 West 25th

Street. The Second Lease, which runs through April 1998, contains substantially
the same terms and conditions as the Initial Lease. The Second Lease provides
for minimum annual rent of $48,750 throughout the term. The Company extended the
Initial Lease and the Second Lease (collectively, the "Leases") until March 31,
1997 and subsequently renewed such Leases for space on the fifth, tenth and
one-half of the eleventh floor at 24 West 25th Street, New York, New York for a
term of five years with a two-year cancellation clause.

Items 3. Legal Proceedings.

         The Company is not a party to any pending legal proceeding.

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

         None during the fourth quarter of the year ended December 31, 1997.


                                     PART II

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

                   The Company's Common Stock trades on the National Association
of Securities Dealers Automated Quotation System (NASDAQ) Small Cap Market under
the symbol "CDRM" and on the Boston Stock Exchange under the symbol "BYP".
In early 1998, the Company's Common Stock was listed on each of the Frankfurt
Stock Exchange and the Berlin Stock Exchange. Set forth below are the range of
reported high and low bid and ask quotations for the Company's Common Stock for
each of the quarters indicated as reported on the NASDAQ Small Cap Market. All
over-the-counter market price quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not necessarily represent
actual transactions.

                                                   Price Per Share
                                                   Of Common Stock
                                                  ------------------
                                                        Bid     Ask
                                                       -----   -----
Year Ended December 31, 1996

First Quarter                                    High  8.50    9
                                                 Low   7.125   7.375

Second Quarter                                   High  6.875   7.25
                                                 Low   5.50    6

Third Quarter                                    High  4.25    4.75
                                                 Low   3.50    3.875

                                       26

<PAGE>

                                                   Price Per Share
                                                   Of Common Stock
                                                  ------------------
                                                        Bid     Ask
                                                       -----   -----

Fourth Quarter                                   High  3.50    3.75

                                                 Low   1.875   2.25

Year Ended December 31, 1997

First Quarter                                    High  2.50    2.75
                                                 Low   1.00    1.75

Second Quarter                                   High  2.00    2.063
                                                 Low    .875   1.00

Third Quarter                                    High  1.188   1.375
                                                 Low    .406    .469

Fourth Quarter                                   High  2.719   2.813
                                                 Low    .813    .844

                  Holders. As of December 31, 1997, the Company, to its
knowledge, had approximately 109 shareholders of record of its Common Stock
(representing approximately 1100 beneficial owners of the Common Stock).

                  Dividends. The Company has not paid dividends on its Common
Stock since its inception and has no intention to pay any dividends to its
shareholders in the foreseeable future. The Company currently intends to
reinvest earnings, if any, in the development and expansion of its business. The
declaration of dividends in the future will be at the election of the Board of
Directors, and will depend upon the earnings, capital requirements and financial
position of the Company, plans for expansion, general economic conditions and
other pertinent factors. In addition, under the terms of the Viacom Purchase
Agreement, the Company may not pay any cash dividends to its shareholders
without Viacom's prior written consent. See "DESCRIPTION OF BUSINESS--Viacom
Purchase Agreement."

                  During 1997, and in the early part of 1998, the Company issued
securities, including convertible debentures, common stock and warrants in
connection with various financing transactions and the acquisitions of Dolphin,
MDC and NMS, OnRamp School Productions, and the assets of HighTech Interactive,
Inc. See Business--Financing Transactions,--Educational Services
Group--Educational Marketing Group--Multimedia Publishing Group--Internet
Education Group. The issuance of such securities was exempt from registration
provisions of the Securities Act of 1933 pursuant to Section 4(2) thereof and
the rules promulgated thereunder, and the securities issued in connection
therewith redeemed to be restricted securities, except with respect to the
issuance by the Company of certain of the Convertible Debentures pursuant to
Regulation S. See "Business--Financing Transactions". No underwriter was engaged
in connection with such sales of securities.

                                       27

<PAGE>

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

                  The following discussion and analysis should be read in

conjunction with the Company's Consolidated Financial Statements and Notes
thereto (the "Financial Statements") included elsewhere in the Form 10-KSB.

                  Byron Preiss Multimedia Company, Inc., a New York Corporation,
was incorporated in July 1992. In March 1995, Viacom International Inc., a
subsidiary of Viacom Inc. and an affiliate of Simon & Schuster, Inc., purchased
a 20% interest in the Company. Initially, the Company was founded to develop,
publish and distribute interactive multimedia software on CD-ROM (Compact
Disc-Read Only Memory) in addition to multimedia formats, including books and
online. In 1997, the Company was restructured to specialize in the development
and marketing of educational software as well as a publisher of books and
software for the educational and consumer markets. The Company has also
established international co-publishing relationships with some of the largest
European educational software publishers including companies located in Germany
and Spain. In March 1998, the management of the Company has approved a plan to
discontinue its operations of developing, marketing and selling entertainment
software to the consumer market and to sell or close operations of its
majority-owned subsidiary Virtual Comics, Inc., all of which is expected to be
completed prior to April 1999. The Company does not anticipate any future
material gains or contingencies relating to the discontinued operations.

                  Under the Company's co-publishing arrangement with Simon &
Schuster, the Company's completed the CD-ROM title, My Teacher Is An Alien,
during 1997.

                  Under its co-publishing and distribution arrangements with
Pocket Books, a division of Simon & Schuster, the Company completed and
distributed approximately eleven books including The Ultimate Einstein, Is Your
Teacher An Alien, Battlestar Galactica #1, 100 Greatest Basketball Players Of
All Time, How To Raise A Non-Smoking Kid, Rhino's History of Rock & Roll: 70's,
three Marvel young adult books and Dragon School.

                  Under the Company's agreements with Marvel Entertainment
Group, the Company co-published and distributed with The Putnam Berkley Group,
Inc. approximately 17 books in fiscal 1997 including Spider-Man: Goblin's
Revenge, X-Men #2 - The Sanctuary, Spider-Man/Iron Man: Doomsday #2, X-Men #3:
Slavation, Fantastic Four: Redemption, Generation X: Ghosts, Spider-Man: Octopus
Agenda, Incredible Hulk: Abominations, x-Men: Smoke & Mirrors, The Ultimate
Silver Surfer and X-Man: Empire's End.

                  Net Revenues from Continuing Operations. Revenue from
continuing operation in 1997 was $3,965,645 as compared to $4,932,991 in 1996.
This decrease was principally attributable to a decrease of approximately
$3,130,000 of sales of educational content CD-ROMs developed under co-publishing
agreements with large media companies. This decrease was offset by revenues of
approximately $1,550,000 of Dolphin, Inc., an educational software developer
acquired in March of 1997, and increases in book publishing revenues of
approximately $398,000. On November 26, 1997, the Company also acquired Multi
Dimensional Communications, Inc. and New Media Schoolhouse, Inc., which are
publishers and distributors of education titles. Revenue from these acquisitions
in 1997 was approximately $66,000 from the date of acquisition.

                                       28
<PAGE>

                  Cost of Revenues from Continuing Operations. Cost of revenues

from continuing operations decreased to $2,856,106 for fiscal 1997, down from
$4,489,668 in fiscal year 1996. As a percentage of revenues from continuing
operations cost of revenue from continuing operations declined during fiscal
year 1997 to 72% as compared to 91% for fiscal year 1996. The dollar decline in
the cost of revenues from continuing operations is attributed to a substantial
decline in the number of CD-ROMs completed during the year which is slightly
offset by a greater number of book titles completed as well as the inclusion of
cost of revenues from continuing operations of its subsidiary Dolphin Inc. As a
percentage of revenues from continuing operations cost of revenues from
continuing operations declined during fiscal year 1997 as compared to fiscal
year 1996 due to lower development costs for book publishing and custom
development work as compared to development costs associated with certain retail
CD-ROM titles developed in the fiscal year 1996.

                  Selling, General and Administrative Expenses from Continuing
Operations. Selling, General and Administrative expenses from continuing
operations increased by $634,123 to $3,109,581 in fiscal year 1997, up from
$2,475,458, in fiscal year 1996. As a percentage of revenues from continuing
operations selling, general and administrative expenses from continuing
operations also increased to 78% of total revenues from continuing operations in
fiscal year 1997 from 50% in the prior year. The increase can be principally
attributable to the inclusion of Selling, General and Administrative expenses
from continuing operations of the newly acquired subsidiary, Dolphin Inc.
totalling approximately $415.000 as well as higher corporate relations fees of
approximately $152,000.

                  Interest Expense/Income. Net interest expense totalled
$1,031,275 in fiscal year 1997 as compared to net interest income of $132,927 in
fiscal year 1996. The increase in interest expense is principally due to the
non-cash imputed interest costs associated with the issuance of $2.3 million in
convertible notes due in 1999, of approximately $931,000.

                  Liquidity and Capital Resources. The Company has approximately
$2,154,000 of cash and cash equivalents and accounts receivables as of December
31, 1997. The Company's working capital deficit of approximately $1,511,000 at
December 31, 1997, includes deferred income of $720,278, which management
expects to be earned during fiscal 1998.

                  During 1997, the Company had net cash provided by operating
activities of approximately $286,000 as compared to $1,679,000 in 1996. This
decrease is the result of an increase in the Company's net loss of approximately
($4,159,000) in 1997 from that of 1996 offset by a decrease in accounts
receivable of approximately $1,088,000, as compared to an increase of
($1,234,000) in 1996, and increases in current liabilities in 1997.

                  Net cash used in investing activities was approximately
($3,748,000) in 1997 as compared to ($5,190,000) in 1996. The decrease in net
cash used of approximately $1,442,000 is due to a decrease in the purchase of
prepublication costs and rights during 1997 offset by the fact that the Company
did not have any sales of marketable securities in 1997.

                  Net cash provided by financing activities was approximately
$3,273,000 in 1997 as compared to $300,000 in 1996. This increase of
approximately $2,973,000 is due to the issuance of several debentures by the
Company during 1997.


                                       29

<PAGE>

                  In December 1997, the Company entered into a Securities
Purchase Agreement, whereby it may issue up to $2.8 million in convertible
debentures subject to certain conditions. Under this agreement, the Company
issued in December 1997 $1.3 million of 6% convertible debentures due November
30, 1999. At this time, management of the Company believes that this
convertible debt will be converted into shares of common stock in the near
future and well before maturity. (See Note 7 to Financial Statements).
Management of the Company is taking cost cutting actions including the
elimination of non-essential personnel and the reduction of selling, general and
administrative expenses where appropriate and feasible. At this time, the
Company is pursuing various potential acquisitions. In order to complete such
acquisitions and to fund the future operations of these acquisitions, the
Company will be required to raise additional capital. There can be no assurance
that the Company will be successful in raising such additional capital, that
such additional capital will be available on a timely basis or available on
commercially acceptable terms to the Company or without causing substantial
dilution to the shareholders. The failure by the Company to currently raise
capital for each of the purposes discussed above may result in a material
adverse effect to the business and operations of the Company.

                  Management believes that its liquid assets of cash, cash
equivalents and accounts receivable, the expected cash flows from its newly
acquired subsidiaries, the consolidation of administrative back-room facilities
and available outside sources of financing will provide enough funds necessary
to continue operating its existing businesses through April 1999.

                  Year 2000 Compliance. The Company is currently in the process
of evaluating its information technology for the Year 2000 compliance. The
Company does not expect that the cost to modify its information technology
infrastructure to be Year 2000 compliant will be material to its financial
condition or results of operations. The Company does not anticipate any material
disruption in its operations as a result of any failure by the Company to be in
compliance.

Item 7.  Financial Statements.

The following financial statements are furnished as part of this Annual Report
on Form 10-KSB:

Index to Financial Statements.                                          Pages
                                                                        -----

         Report of Independent Public Accountants                        F-1

         Consolidated Balance Sheet as of December 31, 1997              F-2

         Consolidated Statements of Operations For the Years             F-3
         Ended December 31, 1997 and December 31, 1996


         Consolidated Statements of Changes in Shareholders'             F-4
         Equity for the Years Ended December 31, 1997 and
         December 31, 1996

                                       30

<PAGE>

         Consolidated Statements of Cash Flows for the Years             F-5
         Ended December 31, 1997 and December 31, 1997

         Notes to Consolidated Financial Statements                      F-6

<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of
Byron Preiss Multimedia Company, Inc.:

We have audited the accompanying consolidated balance sheet of Byron Preiss
Multimedia Company, Inc. (a New York corporation) and subsidiaries as of
December 31, 1997, and the related consolidated statements of operations,
changes in shareholders' equity and cash flows for the years ended December 31,
1997 and 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Byron Preiss
Multimedia Company, Inc. and subsidiaries as of December 31, 1997, and the
results of their operations and their cash flows for the years ended December
31, 1997 and 1996 in conformity with generally accepted accounting principles.

New York, New York                     ARTHUR ANDERSEN LLP
April 10, 1998

                                     F-1

<PAGE>

             BYRON PREISS MULTIMEDIA COMPANY, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET

                                DECEMBER 31, 1997

                                     ASSETS

<TABLE>
<CAPTION>
<S>                                                                                                    <C>
CURRENT ASSETS:
    Cash and cash equivalents                                                                          $     1,193,246
    Accounts receivable, net                                                                                   960,896
    Inventory                                                                                                  146,956
    Other current assets                                                                                       149,453
                                                                                                       ---------------
                 Total current assets                                                                        2,450,551

PREPUBLICATION COSTS AND RIGHTS PURCHASED                                                                    1,343,922

EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net                                                                      544,191

GOODWILL, net of accumulated amortization                                                                    3,180,602

OTHER ASSETS                                                                                                   369,487
                                                                                                       ---------------

                 Total assets                                                                          $     7,888,753
                                                                                                       ===============

                      LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
    Accounts payable and accrued expenses                                                              $     1,476,502
    Current maturities of long-term debt                                                                       678,274
    Liabilities from discontinued operations                                                                   715,182
    Deferred income                                                                                            720,278
    Other current liabilities                                                                                  370,524
                                                                                                       ---------------
                 Total current liabilities                                                                   3,960,760

LONG-TERM DEBT, less current maturities                                                                      3,046,726

OTHER LONG-TERM LIABILITIES                                                                                     69,457
                                                                                                       ---------------
                 Total liabilities                                                                           7,076,943
                                                                                                       ---------------

COMMITMENTS AND CONTINGENCIES (Note 11)

MINORITY INTEREST                                                                                              193,969


SHAREHOLDERS' EQUITY:
    Preferred stock, 5,000,000 shares authorized; 0 shares issued and outstanding
    Common stock, 30,000,000 shares authorized; 7,399,438 shares issued and outstanding,                         7,399
        $.001 par value
    Additional paid-in capital                                                                              14,618,221
    Accumulated deficit                                                                                    (14,007,779)
                                                                                                       ---------------
                 Total shareholders' equity                                                                    617,841
                                                                                                       ---------------
                 Total liabilities and shareholders' equity                                            $     7,888,753
                                                                                                       ===============
</TABLE>

 The accompanying notes are an integral part of this consolidated balance sheet.

                                     F-2

<PAGE>

             BYRON PREISS MULTIMEDIA COMPANY, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>

                                                                                          1997              1996
                                                                                     --------------    --------------
<S>                                                                                  <C>               <C>
NET REVENUES                                                                         $    3,965,645    $    4,932,991

COST OF REVENUES                                                                          2,856,106         4,489,668
                                                                                     --------------    --------------
                 Gross profit from continuing operations                                  1,109,539           443,323

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                                              3,109,581         2,475,458
                                                                                     --------------    --------------
                 Loss from continuing operations before interest                         (2,000,042)       (2,032,135)

INTEREST EXPENSE (INCOME)                                                                 1,031,274          (132,927)
                                                                                     --------------    --------------
                 Loss from continuing operations                                         (3,031,316)       (1,899,208)

DISCONTINUED OPERATIONS (Note 3):

    Loss from discontinued operations                                                    (4,687,358)       (1,660,659)
                                                                                     --------------    --------------
                 Net loss                                                            $   (7,718,674)   $   (3,559,867)
                                                                                     ==============    ==============

NET LOSS PER SHARE INFORMATION:

BASIC NET LOSS PER SHARE:

    Continuing operations                                                            $        (0.47)    $       (0.45)
    Discontinued operations                                                                   (0.74)            (0.39)
                                                                                     --------------    --------------
                 Total                                                               $        (1.21)    $       (0.84)
                                                                                     ==============     =============

DILUTED NET LOSS PER SHARE:

    Continuing operations                                                            $        (0.47)    $       (0.45)
    Discontinued operations                                                                   (0.74)            (0.39)
                                                                                     --------------    --------------
                 Total                                                               $        (1.21)    $       (0.84)
                                                                                     ==============     =============

COMMON SHARES USED IN COMPUTING PER SHARE AMOUNTS:
       Basic                                                                              6,365,995         4,261,875
                                                                                     ==============    ==============
       Diluted                                                                            6,365,995         4,261,875
                                                                                     ==============    ==============

</TABLE>

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

                                     F-3

<PAGE>

             BYRON PREISS MULTIMEDIA COMPANY, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
                                                        Common         Additional            Accumulated
                                                        Stock        Paid-in Capital           Deficit                 Total
                                                        ------       ---------------         -----------               -----
<S>                                                     <C>            <C>                   <C>                    <C>
BALANCE, December 31, 1995                              $4,262         $10,723,371           $ (2,729,238)          $ 7,998,395

    Compensation expense                                   -                66,070                 -                     66,070

    Net loss for the year ended December 31, 1996          -                  -                (3,559,867)           (3,559,867)
                                                        ------         -----------           ------------           -----------

BALANCE, December 31, 1996                               4,262          10,789,441             (6,289,105)            4,504,598

    Purchase of Dolphin, Inc.                              400             399,600                 -                    400,000

    Conversion of debentures, net of                     2,512           1,667,836                 -                  1,670,348
       issuance costs of $329,652

    Discount of FMV on convertible debentures              -               936,310                 -                    936,310

    Purchase of Multi Dimensional                          150             283,717                 -                    283,867
       Communications, Inc.

    Purchase of New Media Schoolhouse, Inc.                 75             166,058                 -                    166,133

    Issuance of warrants to purchase common                -               375,259                 -                    375,259
       stock

    Net loss for the year ended December 31, 1997          -                  -                (7,718,674)           (7,718,674)
                                                        ------         -----------           ------------           -----------

BALANCE, December 31, 1997                              $7,399         $14,618,221           $(14,007,779)          $   617,841
                                                        ======         ===========           ============           ===========

</TABLE>

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

                                     F-4

<PAGE>

             BYRON PREISS MULTIMEDIA COMPANY, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                                          1997              1996
                                                                                          ----              ----
<S>                                                                                    <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss                                                                           $(7,718,674)      $(3,559,867)
    Adjustments to reconcile net loss to net cash provided by operating
       activities-
          Depreciation and amortization                                                    472,521           223,087
          Amortization of prepublication costs and rights purchased                      4,601,826         5,881,732
          Compensation expense                                                                  -             66,070
          Gain on sale of investment in subsidiary                                        (100,434)               -
          Minority interest in loss of consolidated subsidiary                             (70,595)               -
          Amortization of discount on convertible debentures                               931,587                -
          Amortization of debt issuance costs                                               44,252                -
    Changes in operating assets and liabilities-
       Accounts receivable                                                               1,088,414        (1,233,511)
       Inventory                                                                           247,044          (122,064)
       Other current assets                                                                (85,397)               -
       Other assets                                                                        108,981          (192,708)
       Accounts payable and accrued expenses                                              (334,138)          918,111
       Liabilities from discontinued operations                                            715,182                -
       Other current liabilities                                                           235,599          (177,494)
       Deferred income                                                                      80,281          (124,770)
       Other long-term liabilities                                                          69,457                -
                                                                                       -----------       -----------
                 Net cash provided by operating activities                                 285,906         1,678,586
                                                                                       -----------       -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Net cash paid for acquisitions                                                        (445,407)               -
    Investment in minority interest of consolidated subsidiary                              65,000                -
    Purchase of equipment and leasehold improvements                                      (166,580)         (201,890)
    Sale of marketable securities                                                               -            982,710
    Prepublication costs and rights purchased                                           (3,200,531)       (5,970,528)
                                                                                       -----------       -----------
                 Net cash used in investing activities                                  (3,747,518)       (5,189,708)
                                                                                       -----------       -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Net proceeds from convertible debentures                                             3,272,860                -
    Proceeds from minority investment in consolidated subsidiary                                -            300,000
                                                                                       -----------       -----------
                 Net cash provided by financing activities                               3,272,860           300,000

                                                                                       -----------       -----------
                 Net (decrease) in cash and cash equivalents                              (188,752)       (3,211,122)

CASH AND CASH EQUIVALENTS, beginning of year                                             1,381,998         4,593,120
                                                                                       -----------       -----------

CASH AND CASH EQUIVALENTS, end of year                                                 $ 1,193,246       $ 1,381,998
                                                                                       ===========       ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
       Cash paid during the year for-
          Interest                                                                     $        -        $    20,750
                                                                                       ===========       ===========
          Income taxes                                                                 $     2,500       $     2,785
                                                                                       ===========       ===========

SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
       Debt issued for acquisition                                                     $ 2,125,000       $        -
                                                                                       ===========       ===========
       Stock issued for acquisition                                                    $   850,000       $        -
                                                                                       ===========       ===========
       Debentures converted to common stock, net                                       $ 2,000,000       $        -
                                                                                       ===========       ===========
       Royalty payable converted to equity in minority investment of
          consolidated subsidiary                                                      $   300,000       $        -
                                                                                       ===========       ===========
</TABLE>

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

                                     F-5

<PAGE>
             BYRON PREISS MULTIMEDIA COMPANY, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 1997 AND 1996

1.  ORGANIZATION

Byron Preiss Multimedia Company, Inc. and its subsidiaries (the "Company" or
"BPMC") was incorporated in the State of New York in July 1992. In March 1995,
Viacom International Inc., a subsidiary of Viacom Inc. and an affiliate of Simon
& Schuster, Inc., purchased a 20% interest in the Company. Initially, the
Company was founded to develop, publish and distribute interactive multimedia
software on CD-ROM (Compact Disc-Read Only Memory) in addition to multimedia
formats, including books and online. In 1997, the Company was restructured to
specialize in the development and marketing of educational software as well as a
publisher of books and software for the educational and consumer markets. The
Company has also established international co-publishing relationships with some
of the largest European educational software publishers including companies
located in Germany and Spain. In March 1998, the management of the Company
approved a plan to discontinue its operations of developing, marketing and
selling entertainment software to the consumer market and to sell its
majority-owned subsidiary Virtual Comics, Inc., all of which is expected to be
completed prior to April 1999. The Company does not anticipate any future
material gains or contingencies relating to the discontinued operations.

A significant portion of the Company's products employ interactive multimedia
technology designed to make them easy to use. This new direction has been
initiated through the acquisition of Dolphin, Inc. ("Dolphin"), Multi
Dimensional Communications, Inc. ("MDC"), and New Media Schoolhouse, Inc.
("NMS"), and is continuing subsequent to December 31, 1997 with the acquisition
of the assets of High Text Interactive and OnRamp School Productions (Note 15).
In addition, the Company signed a letter of intent to purchase New Century
Education Corporation in 1998 (Note 15). The Company's operations also include
the publishing of books and other print materials. The Company has entered into
copublishing agreements in the United States and has established copublishing
relationships with several European educational software publishers.

The Company has sustained net losses of approximately $7,719,000 and $3,560,000
for the years ended December 31, 1997 and 1996, respectively. Management
believes that its liquid assets of cash, cash equivalents and accounts
receivable, the expected positive cash flows from its newly acquired
subsidiaries and existing businesses, the consolidation of administrative
back-room facilities and available outside sources of financing (Note 7) will
provide enough funds necessary to continue operating its existing businesses
through April 1999.

                                     F-6
<PAGE>

2.  SUMMARY OF SIGNIFICANT
    ACCOUNTING POLICIES

Basis of Consolidation


The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Dolphin, MDC, NMS, its majority-owned
subsidiary, Virtual Comics, Inc. ("VCI") and two wholly-owned inactive
subsidiaries, Byron Preiss Multimedia On-Line Services, Inc. and Byron Preiss
Multimedia Holdings, Inc. All significant intercompany accounts and transactions
have been eliminated in consolidation.

Utilization of Estimates

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

Revenue Recognition

      Development Revenue - Revenues related to the development of CD-ROM and
      book titles are recorded upon completion and delivery of each title.
      Revenues from the sale of CD-ROM and book titles to end-users are recorded
      upon shipment.

      Sale of Titles - Revenues related to the sale of titles not covered by
      copublishing agreements (which are generally made by distributors) are
      recorded upon shipment to end users, subject to appropriate reserve for
      returns. According to distributor agreements, accounts receivable from
      distributors for such sales are to be remitted net of return reserves. As
      of December 31, 1997, the Company has accounts receivable from
      distributors net of return reserves of approximately $1,302,954.
      Subsequent to the delivery of the titles, the Company does not have any
      material or significant obligations. The Company's sales of titles occur
      primarily with two of its distributors under agreements described in Note
      13.

      Software Contract Revenues - Software contract revenues are recognized on
      the percentage-of-completion method based on the costs incurred relative
      to total estimated costs. Full provision is made for any anticipated
      losses.

Cash and Cash Equivalents

Highly liquid investments purchased with a maturity of three months or less when
purchased are considered cash equivalents.

Inventory

Inventory is stated at the lower of cost (first-in, first-out) or market.

                                     F-7
<PAGE>

Prepublication Costs and Rights Purchased


Prepublication costs are capitalized and represent the time and expenses
relating to work performed in order to prepare a working product ready for sale.
For financial reporting purposes, these costs will be charged to operations as
revenues are earned on the related titles, but in no event over a period longer
than eighteen-months.

Rights purchased represent prepaid royalty expenses and relate to contracts
between the Company and various third parties, which enable the Company to use
the said parties' material to create and produce products that contain such
material. For financial reporting purposes, these costs will be charged to
operations as revenues are earned on the related titles, but in no event over a
period longer than eighteen-months.

The Company continually evaluates whether events and circumstances have occurred
that indicate the remaining useful life of prepublication costs or rights
purchased may warrant revision or that the remaining balances may not be
recoverable, using an estimate of undiscounted cash flows over the remaining
life of the related products. The Company's management believes, based on these
continuing analyses, that all remaining capitalized prepublication costs and
rights purchased will be fully realized.

Equipment and Leasehold Improvements

Equipment is stated at cost. Equipment and furniture and fixtures are being
depreciated over five years using the straight-line method. Leasehold
improvements are amortized over the shorter of the term of the lease or the
useful life of the improvement.

Goodwill

Goodwill, which represents the excess of the purchase price over the fair value
of the net assets acquired, is presently being amortized over a period of ten
years on a straight-line basis. These amortization periods are evaluated by
management on a continuing basis, and will be adjusted if the lives of the
underlying net assets are impaired.

Accounting for Long-Lived Assets

The Company accounts for long-lived assets under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This
statement establishes financial accounting and reporting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used, and for long-lived assets and
certain identifiable intangibles to be disposed of. The Company adopted this
statement in 1996, and the effect of the adoption was not material to the
Company's consolidated financial statements.

Deferred Income

Deferred income primarily represents amounts received under copublishing
relationships (Note 13). These amounts are recorded as deferred income pending
the final testing and acceptance of each title.


                                     F-8
<PAGE>

Income Taxes

The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes," which requires recognition of deferred tax liabilities and assets for
the estimated future tax effects of events that have been recognized in the
financial statements or income tax returns. Under this method, deferred tax
liabilities and assets are determined based on (1) differences between the
financial accounting and income tax bases of assets and liabilities, and (2) net
operating loss carry-forwards, using enacted tax rates in effect for the years
in which the differences and carry-forwards are expected to reverse and be
utilized, respectively (Note 10).

Net Loss Per Share

During 1997, the Company adopted SFAS No. 128, "Earnings Per Share." In
accordance with SFAS No. 128, net loss per share ("Basic EPS") is computed by
dividing net loss by the weighted average number of common shares outstanding
and contingently issuable shares (which satisfy certain conditions) and
excluding any potential dilution. Net loss per share amounts, assuming dilution
("Diluted EPS"), is computed, under SFAS No. 128, by reflecting potential
dilution from the exercise of stock options and warrants. SFAS No. 128 requires
the presentation of both Basic EPS and Diluted EPS on the face of the
consolidated statements of operations. Net loss per share amounts for prior-year
periods have been restated to conform with the provisions of SFAS No. 128,
however, the result of that restatement was not material.

Basic net loss per common share is computed by dividing the Company's net loss
by the weighted average common shares outstanding for each year presented.
Diluted net loss per common share is equal to Basic net loss per common share
for each year presented as the effect of all outstanding stock options and
warrants outstanding was antidilutive.

Stock-Based Compensation

In 1996, the Company adopted the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," and elected to continue the accounting set forth in
Accounting Principles Board No. 25 ("APB No. 25"), "Accounting for Stock Issued
to Employees," and to provide the necessary pro forma disclosures as if the fair
value method had been applied (Note 9).

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents approximates fair value
because of the short-term maturity of these instruments. The fair value of
long-term debt, including current portion, approximates fair value.

Reclassifications

Certain reclassifications have been made to the prior year's consolidated
financial statements to conform to the current year presentation.

                                     F-9
<PAGE>

3.  DISCONTINUED OPERATIONS


In March 1998, the Company adopted a plan to discontinue operations dedicated to
the development, marketing and sale of entertainment software in the retail
market, which includes the sale of VCI. Management has restructured the Company
to specialize in the development and marketing of educational software as well
as the publishing of books and software for the educational and consumer
markets. This decision was made due to declining revenues, high operating costs,
and increased competition in the entertainment software marketplace. As a
result, the Company has recorded a charge against earnings of approximately
$4,700,000 at December 31, 1997. The Company plans to fully carry out its plan
to exit the entertainment software market in the ensuing twelve months.

Summary operating results from discontinued operations for the years ended
December 31, 1997 and 1996 were as follows:

<TABLE>
<CAPTION>

                                                                               1997              1996
                                                                          -------------     -------------
<S>                                                                       <C>               <C>
             Revenues                                                     $    792,860      $  1,958,314
             Cost of revenues                                                3,885,466         2,459,369
                                                                          ------------      ------------
                        Loss                                                (3,092,606)         (501,055)

             Selling, general and administrative expenses                    1,594,752         1,159,604
                                                                          ------------      ------------
                        Net loss from discontinued operations             $ (4,687,358)     $ (1,660,659)
                                                                          ============      ============

</TABLE>

4.  ACQUISITIONS

On March 21, 1997, the Company acquired all the issued and outstanding stock of
Dolphin, a custom software development company serving customers in need of
high-quality, interactive education and training software products. Such
tailored products are used for educational and training purposes of students,
teachers, researchers, medical professionals, and workers across a broad range
of industries. The purchase price consisted of $600,000 in cash, a 7%
convertible note in the aggregate principal amount of $1,750,000, and 400,000
shares of the Company's common stock, valued at $1.00 per share, which was the
fair market value of the Company's common stock at the date of acquisition. The
acquisition has been accounted for as a purchase, and the excess of the purchase
price over the net assets acquired of $2,593,628 is being amortized over a
period of ten-years.

On November 26, 1997, the Company acquired all the issued and outstanding stock
of MDC, a publisher and distributor of educational software titles for the
grades K-12 marketplace, and NMS, a catalog publishing and distribution company.
The aggregate purchase price for these two acquisitions consisted of $125,480 in
cash and a 6% convertible note in the aggregate principal amount of $375,000 and
225,000 shares of the Company's common stock valued at $2.00 per share, which
was the fair market value of the Company's common stock at the date of

acquisition. These acquisitions have been accounted for as purchases, and the
excess of the purchase price over the net assets acquired of $788,064 is being
amortized over a period of ten-years.

                                     F-10

<PAGE>

The following unaudited pro forma consolidated results of operations have been
prepared as if the acquisitions of Dolphin, MDC and NMS had occurred as of the
beginning of fiscal 1997 and 1996.

<TABLE>
<CAPTION>
                                                                              December 31,
                                                                          --------------------
                                                                          1997          1996
                                                                          ----          ----
                                                                              (unaudited)
<S>                                                                  <C>             <C>
             Net revenues                                            $   6,319,887   $   9,529,101
                                                                     =============   =============
             Net loss                                                   (7,893,668)     (3,759,969)
                                                                     =============   =============

             Net loss per share - basic and diluted                  $       (1.24)   $      (0.77)
                                                                     =============    ============

</TABLE>

The pro forma consolidated results do not purport to be indicative of results
that would have occurred had the acquisitions been in effect for the period
presented, nor do they purport to be indicative of the results that will be
obtained in the future.

5.  RELATED PARTY TRANSACTIONS

Byron Preiss, a principal shareholder and CEO of the Company, is also the owner
and CEO of Byron Preiss Visual Publications ("BPVP") and co-owner of General
Leasing Company, Inc. and Byron Preiss/Richard Ballantine, Inc. These companies
function as book producers, acquiring licenses from authors and institutions.
BPMC has purchased several such licenses from said companies upon terms,
including royalties in certain cases, which the Company believes are as
favorable as the terms which the Company could have obtained in dealing with
unaffiliated parties, and will have the opportunity to purchase additional
licenses under similar terms and conditions. No purchases were made during 1997
and 1996, respectively.

The Company was party to a Management Services Agreement with BPVP covering the
use of certain services, office space, employees and office equipment. This
agreement terminated in 1996 and for the year ended December 31, 1996, $185,319
was paid to BPVP. No amounts were incurred during 1997.

6.  EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements consist of the following at December 31,
1997:

             Equipment                                           $    1,289,078
             Furniture and fixtures                                     166,124
             Leasehold improvements                                     151,441

                                                                 --------------
                                                                      1,606,643
             Less- Accumulated depreciation and amortization          1,062,452
                                                                 --------------
                                                                 $      544,191
                                                                 ==============

                                       F-11

<PAGE>

7.  LONG-TERM DEBT

<TABLE>
<CAPTION>
                                                                                   December 31, 1997
                                                                                   -----------------
<S>                                                                                <C>
Acquisition Financing:
    7% convertible note payable in 39 monthly installments commencing January       $    1,750,000
       2, 1998 (a)

    6% convertible notes payable in 24 monthly installments commencing February            375,000
       1, 1998 (b)

Financing:
    Convertible debentures (c)                                                             300,000
    Convertible debentures (d)                                                           1,300,000
                                                                                         ---------
                                                                                         3,725,000

Less- Current maturities                                                                  (678,274)
                                                                                    --------------
                                                                                    $    3,046,726
                                                                                    ==============
</TABLE>

(a)   In connection with the March 21, 1997 acquisition of Dolphin, the Company
      issued a convertible note with principal of $1,750,000 payable to the
      former owner, bearing interest at a rate of 7% per annum. The principal
      amount of the convertible note is convertible, at the holder's option,
      into common stock equal to the unpaid principal amount at the date of
      conversion at a share price of $5.75.

(b)   In connection with the November 26, 1997 acquisitions of MDC and NMS, the
      Company issued convertible notes in aggregate principal of $375,000
      payable to the former owners, bearing interest at a rate of 6% per annum.
      The principal amounts of the convertible notes are convertible, at the
      holder's option, into common stock equal to the unpaid principal amount at
      the date of conversion at a share price of $5.75.

(c)   In October and November 1997, the Company completed three sales of 6%
      convertible debentures, due in 1999, in the aggregate principal amount of
      $300,000, in reliance upon the exemption from registration under
      Regulation S of the Securities Act of 1933. The Company received net
      proceeds of approximately $227,000 from these sales. The debentures are
      convertible sixty-days from the date of issuance at the option of the
      holder. The conversion feature on the debentures affords a discount below
      the fair market value at the time of conversion into the Company's common
      stock. As such, the Company has recorded additional interest expense of
      approximately $74,000 as of December 31, 1997 for the intrinsic value of
      the discounted conversion feature. In connection with these sales, the
      Company issued warrants to one investor to purchase 50,000 shares of the

      Company's common stock at a purchase price of $1.00 per share, expiring in
      October 1999. The Company recorded the fair value of these warrants as
      debt issuance costs at the sale date and will amortize the costs over the
      life of the debentures. No debentures have been converted and no warrants
      have been exercised under these transactions as of December 31, 1997.

(d)   In December 1997, the Company approved an offering of $2,800,000, 6%
      convertible debentures. The Company sold $1,300,000 of the debentures to
      an investor, in reliance upon the exemption from registration under
      Regulation D of the Securities Act of 1933. The Company received net
      proceeds of approximately $1,190,000 from the sale. The debentures are
      convertible ninety-days from the date of issuance, at the option of the
      holder, at or above the fair market value of the Company's common stock at
      the date of conversion.

                                     F-12

<PAGE>

      As part of the debenture sales agreement, the investor has the option to
      purchase an additional $1,500,000 of debentures, under the same terms as
      the previous sale, contingent upon the Company meeting certain covenants
      as stated in the agreement.

      In connection with these sales, the Company issued warrants to the
      investor to purchase 130,000 shares of the Company's common stock at an
      exercise price ranging from $2.25 - $3.04 per common share, expiring in
      November 2002. In addition, the Company issued warrants to the underwriter
      to purchase 182,000 shares of the Company's common stock at an exercise
      price ranging from $2.25 - $3.04 per common share, expiring in November
      2002. The Company recorded the fair value of these warrants as debt
      issuance costs at the sale date and will amortize the costs over the life
      of the debentures. No debentures have been converted and no warrants have
      been exercised under these transactions.

On February 5, 1997, the Company completed the sale of 8.0% convertible
debentures due January 31, 1999 in an aggregate principal amount of $2,000,000
in reliance upon the exemption from registration under Regulation S afforded by
the Securities Act of 1933. In connection with the sale, the Company received
net proceeds in the amount of approximately $1,840,000. The debentures were
subsequently converted into 2,512,563 shares of common stock of the Company, in
April 1997, at a conversion price of $.795 per share. The conversion feature on
these debentures afforded a discount below fair market value at the time of
conversion of the debentures into common stock. The Company recorded additional
interest expense of approximately $857,000 for the value discount generated upon
conversion below market value.

In connection with the sale, the Company issued warrants to the underwriter to
purchase 50,000 shares of the Company's common stock at an exercise price of
$2.40 per share, exercisable between February 1998 and January 1999. The Company
recorded the fair value of these warrants as additional interest expense.

Scheduled maturities of all long-term debt instruments at December 31, 1997 are
as follows:

                          1998                    $    678,724
                          1999                       2,325,859
                          2000                         571,261
                          2001                         149,156
                                                  ------------
                                                  $  3,725,000
                                                  ============

Total interest expense on long-term debt was $1,083,862 and $0 in 1997 and 1996,
respectively.

8.  MINORITY INTEREST IN
    CONSOLIDATED SUBSIDIARY

During 1997, based upon a letter of intent entered into in 1996, America Online,
Inc. ("AOL") invested $365,000 in the Company's subsidiary, VCI, for a 19.9%

ownership interest in VCI. The Company and AOL had previously agreed to fund the
development costs of VCI and AOL's investment based on a proposed joint venture.
As such, the Company has recorded AOL's minority interest of $193,969, in the
accompanying consolidated balance sheet.

In December 1997, VCI entered into a letter of intent regarding a proposed
private offering of 10% convertible debentures by VCI between $2,000,000 and a
maximum of $5,000,000. No amounts have been sold under this proposed offering.

                                       F-13
<PAGE>

9.  SHAREHOLDERS' EQUITY

Warrants

The Company has 1,934,500 outstanding warrants, issued in previous stock
purchase agreements, financing transactions and the Company's initial public
offering exercisable for one share of the Company's common stock ranging from
$1.00 to $7.00 per share and expiring in May 1999.

Stock Options

The Company's 1993 stock option plan (the "1993 Plan"), as amended, provided for
the granting of stock options to employees, officers, directors, consultants and
others to purchase up to 425,000 shares of common stock. On April 15, 1996, the
shareholders approved an amendment to the 1993 Plan to increase the number of
shares of common stock available for issuance by 100,000 shares. On April 16,
1997 the 1993 Plan was amended again to provide for an additional 200,000 shares
of common stock for a total of 725,000 shares of common stock of the Company.

Options may be either "incentive stock options" within the meaning of Section
422A of the United States Internal Revenue Code of 1986, as amended, or
nonqualified options. Incentive stock options may be granted only to employees
of the Company.

The per share exercise price of the common stock subject to an incentive stock
option may not be less than the fair market value of the common stock on the
date the option is granted. The per share exercise price of the common stock
subject to a nonqualified option may be established by the Board of Directors of
the Company, except that the Company will not grant nonqualified options at an
exercise price of less than 50% of the fair market value of the common stock on
the date the option is granted. No person who owns, directly or indirectly, at
the time of the granting of an incentive stock option to him, 10% or more of the
total combined voting power of all classes of stock of the Company (a "10%
Stockholder") will be eligible to receive any incentive stock options under the
Plan unless the option price is at least 110% of the fair market value of the
common stock subject to the option, as determined on the date of grant.

An optionee other than by will or the laws of descent and distribution may not
transfer stock options, and, during the lifetime of an optionee, the option will
be exercisable only by him or by his legal guardian or legal representative. In
the event of termination of employment other than by death or for cause, the
optionee will have three months after such termination during which he can
exercise the option. Upon termination of employment of an optionee by reason of
death, his option remains exercisable for one year thereafter to the extent it
was exercisable on the date of such termination.

No options under the 1993 Plan are permitted to be granted after the tenth

anniversary of the effective date of the 1993 Plan. Under the 1993 Plan, the
Company has granted 602,640 options through December 31, 1997. The majority of
such options are five-year options and vest equally over three years. All
options granted under the 1993 Plan provide for the payment of the exercise
price in cash or, with the approval of the Board of Directors of the Company, by
delivery to the Company of shares of common stock already owned by the optionee
having a fair market value equal to the exercise price of the options being
exercised, or by a combination of those methods of payment. Therefore, an
optionee may be able to tender shares of common stock to purchase additional
shares of common stock and may theoretically exercise all of his stock options
with no additional investment other than his original shares.

                                     F-14
<PAGE>

Any unexercised option that is terminated, canceled or expires for any reason
without being exercised in full may again become available for issuance under
the 1993 Plan, unless the 1993 Plan has been terminated.

The Company accounts for awards granted to employees and directors under APB
No. 25. Had compensation cost for these stock options been determined consistent
with SFAS No. 123, the Company's net loss and loss per share would have been
adjusted to the following pro forma amounts:

                                                1997               1996
                                           ------------      --------------
          Net loss:
              As reported                  $(7,718,674)      $  (3,559,867)
              Pro forma                     (7,783,451)         (3,617,477)

          Basic net loss per share:
              As reported                  $     (1.21)      $        (.84)
              Pro forma                          (1.22)               (.85)

          Diluted net loss per share:
              As reported                  $     (1.21)      $        (.84)
              Pro forma                          (1.22)               (.85)

The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts as additional awards in future years are anticipated.

During 1996, the Company granted 25,640 options to outside consultants under the
1993 Plan. All transactions with individuals other than those considered
employees, as set forth within the scope of APB No. 25, must be accounted for
under the provisions of SFAS No. 123. Under SFAS No. 123, the fair value of the
options granted to consultants in 1996, as of the date of grant using the Black
Scholes pricing model, was $128,547. The 1996 nonqualified stock options
("NQSOs") were granted to the consultants for terms of up to five years, at an
exercise price of $3.63. As of December 31, 1997, all of the NQSOs granted to
consultants were exercisable.

                                     F-15

<PAGE>

Option activity for the years ended December 31, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                              1997                                               1996
                           -------------------------------------------      --------------------------------------------
                                      Weighted    Weighted    Weighted                 Weighted     Weighted    Weighted
                                      Average     Average     Average                  Average      Average     Average
                                      Exercise    Exercise    Exercise                 Exercise     Exercise    Exercise
                                       Price       Price       Price                    Price        Price       Price
                                      Discount      FMV       Premium                  Discount       FMV       Premium
                           Shares      Options    Options     Options       Shares     Options      Options     Options
                           ------     --------    --------    --------      ------     --------     --------    --------
<S>                       <C>         <C>         <C>         <C>           <C>        <C>         <C>          <C>
Outstanding, begin-        260,140    $   4.50    $   3.92    $   5.50      263,000    $   4.28    $   4.02     $   5.57
   ning of year

     Granted               285,000        -           2.00        1.64       30,640        3.63        -            7.88
     Exercised                  -                                                -         -           -            -
     Forfeited            (119,000)       4.00        2.18        5.46      (33,500)       4.00        5.50         6.04
     Expired                    -                                                -         -           -            -
                          --------                                          -------

Outstanding, end of        
   year                    426,140                                          260,140
                           =======                                          =======

Exercisable, end of        
   year                    161,680                                          155,986

Weighted average FV of    
   discount options
   granted                $    -                                             $ 5.01

Weighted average FV of    
   FMV options granted    $   1.37                                           $    -

Weighted average FV of    
   premium options
   granted                $    .94                                           $ 4.25

</TABLE>

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997 and 1996, respectively: risk-free interest
rate of 6.07% and 6.30%; expected life of 5 years; expected volatility of 79%
and 58% and expected dividend yield of zero percent.

The following table summarizes information with respect to stock options
outstanding at December 31, 1997:


<TABLE>
<CAPTION>

                                           Options Outstanding                              Options Exercisable
                         ------------------------------------------------------    -----------------------------------
                                                  Weighted
                              Number of            Average                            Number of
                               Options            Remaining         Weighted           Options            Weighted
Range of Exercise          Outstanding at        Contractual        Average        Outstanding at          Average
     Prices              December 31, 1997          Life         Exercise Price    December 31, 1997    Exercise Price
-----------------        -----------------       -----------     --------------    -----------------    --------------
<S>                      <C>                     <C>             <C>               <C>                  <C>
   $1.31 - $2.17               230,000               2.78           $ 1.57               17,115            $ 1.33
    2.18 -  3.27                82,000               1.55             2.08               39,500              1.55
    3.28 -  4.92                25,640                 -              3.63               25,640              3.63
    4.93 -  7.40                88,500                .31             5.54               79,425              5.49
   -------------               -------               ----           ------              -------             -----
   $1.31 - $7.40               426,140               2.04           $ 2.46              161,680             $3.79

</TABLE>

                                     F-16

<PAGE>

10. INCOME TAXES

At December 31, 1997, deferred taxes consisted of the following:

              Net operating loss carryforwards           $    5,328,000
              Reserve for product returns                       586,000
              Other                                              97,000
                                                         --------------
                                                              6,011,000

              Valuation reserve                              (6,011,000)
                                                         --------------
                               Net deferred tax asset    $           -
                                                         ==============

The Company has incurred net operating loss ("NOL") carryforwards of
approximately $9,557,000 which will begin to expire in 2012 unless utilized or
limited. The benefit from the Company's net operating losses for income tax
purposes has been fully reserved for because future realization is not
considered to be "more likely than not." These NOL carryforwards are subject to
audit and may be limited due to current IRS audit. A change in ownership under
Section 382 of the Internal Revenue Code (as amended) could significantly limit
the future utilization of the Company's net operating losses.

11.  COMMITMENTS AND CONTINGENCIES

The Company leases office facilities under several operating lease agreements
expiring through 2002. Future minimum lease payments under noncancelable
operating leases at December 31, 1997 were as follows:

                    1998        $275,326
                    1999         283,084
                    2000         231,815
                    2001         164,858
                    2002          41,615

The Company may be subject to an additional future liability for royalties
depending on the sales volume of its titles.

12.  EMPLOYMENT AGREEMENTS

In April 1994, the Company entered into an employment agreement with its chief
executive officer. The employment agreement, as amended, provides for
compensation of $300,000 in 1996; $350,000 in 1997; and $350,000 plus such
additional amount as is determined by the Board of Directors in 1998.

In March 1997, the Company entered into an employment agreement with the
president of Dolphin. The employment agreement has a term of four years and
provides for annual compensation of $150,000 plus bonuses not to exceed $50,000
if Dolphin meets certain income levels.

In November 1997, the Company entered into employment agreements with each of

the presidents of MDC and NMS. Their employment agreements have a term of three
years and provide for annual compensation of $100,000 and $60,000, respectively,
plus bonuses based upon the achievement of consolidated income of MDC and NMS
and sales levels of NMS, respectively, above predetermined bases.

                                     F-17
<PAGE>

13.  DEVELOPMENT, DISTRIBUTION, AND
     COPUBLISHING AND DISTRIBUTION AGREEMENTS

Development Agreements

The Company entered into a Software Development Agreement (the "Simon & Schuster
Agreement"), dated as of March 21, 1995, with Simon & Schuster Interactive
("S&S"), a division of Simon & Schuster, Inc. Pursuant to the terms thereof, the
Company and S&S will jointly develop a minimum of four (4) products in digital
electronic media, based upon preexisting third-party and original works, using
and contributing their joint property, resources, names, talent and know-how. It
is anticipated that the joint works will initially consist of CD-ROM computer
software products. In connection with each joint work developed, S&S is to pay
the Company a fee of up to $450,000 unless otherwise agreed to by both parties.
For the products developed under the Simon & Schuster Agreement, S&S has the
exclusive right and license (subject to any agreed-upon third-party license
restrictions) to copy, reproduce, manufacture, market, publish, distribute, sell
for rental and sell any joint works and to sublicense the rights to do the same
in all markets and through all channels of distribution throughout the world.
All aspects of the promotion, marketing and distribution of the joint works is
in S&S's sole and exclusive control, including, but not limited to, the pricing
and other terms and conditions of the marketing or sublicensing of the joint
works.

Distribution Agreements

The Company entered into a Distribution Services Agreement (the "S&S
Distribution Agreement"), dated as of January 1, 1996 with S&S Interactive
Distribution Services (now known as Simon & Schuster Interactive Macmillan
Distribution Services) ("S&S Distribution") pursuant to which the Company
granted to S&S Distribution certain rights to market and distribute certain
titles, and to provide inventory, warehousing and fulfillment services for the
titles. The Company agreed to grant S&S Distribution the right to distribute any
and all titles that the Company develops, publishes or for which the Company
gains distribution rights throughout the term of the S&S Distribution Agreement,
with permitted exceptions. The S&S Distribution Agreement commenced on January
1, 1996 and continued for a term of two years through December 31, 1997. The S&S
Distribution Agreement is automatically renewable for successive one-year terms
unless either party thereto elects to terminate such S&S Distribution Agreement,
effective on the anniversary date of January 1, on not less than sixty (60)
days' prior written notice. Both parties have elected to renew S&S Distribution
agreement through December 31, 1998.

                                     F-18

<PAGE>

During 1997, S&S Distribution has distributed certain of the Company's books. In
connection therewith, on January 1, 1998, the Company and S&S Distribution
entered into a Distribution Services Agreement pursuant to which, among other
things, the Company granted to S&S Distribution the right to distribute 12 to 24
books per year through Pocket Books (the "Pocket Books Distribution Agreement").
Pursuant to the terms of the Pocket Books Distribution Agreement, Pocket Books
distributes a broad array of products under the Byron Preiss Multimedia Books
imprint on such topics as pop culture and sports, both in book format and CD-ROM
packages. Pocket Books will also provide a variety of other services to the
Company, including inventory, warehousing and fulfillment, billing and
collection services for the titles it distributes. The Company also has
co-published eight Marvel young adult books under a separate agreement with
Pocket Books.

Copublishing and Distribution Agreement

In September 1994, the Company entered into a copublishing agreement with the
Putnam Berkley Group ("Putnam") for the publication of hardcover and softcover
books. This agreement runs concurrently with a licensing agreement the Company
has entered into with Marvel Entertainment Group, Inc. ("Marvel") for the rights
to use Marvel's comic book characters in the publication of between four and
twelve books each year, for the three years beginning September 1, 1994. The
copublishing agreement stipulates that the Company and Putnam will share profits
and losses from the acquisition, development, publication, sale and distribution
of novels. The Company's responsibilities under the copublishing agreement
include payments to Marvel under the licensing agreement, payments to writers
and illustrators, and payments for edit, design and illustration of each book.
Upon publication of a Marvel novel, the Company is obligated to expend an
agreed-upon amount of advertising funds to promote sales. In addition to the
revenue generated from the book publishing, the Company uses the content of the
novels in the development of its CD-ROM titles.

14.  SEGMENT INFORMATION

Due to increased competition in the consumer entertainment software market and
increasing consumer demand in the Company's book titles, the Company changed its
strategy from a vertical approach of selling entertainment CD-ROMs to placing
more emphasis on its book publishing operations, and effectively segmented its
primary operations into educational multimedia development and book publishing.
Although certain of the published book titles may eventually migrate into
digital formats, operating information of all book titles has been included in
the book publishing segment detailed below as such titles have not been
specifically identified as of year-end.

The Company's educational multimedia operations are dedicated to the development
of products for use on digital mediums, including CD-ROMs, on-line services and
other electronic formats.

The book publishing operations are based on the creation of original material
using licensed trademarked characters.

                                     F-19

<PAGE>

In the table set forth below, information regarding operations for each of the
Company's industry segments as of December 31, 1997 and for the year then ended
is as follows (000's omitted):

<TABLE>
<CAPTION>
                                                          Educational
                                                          Multimedia            Book
                                                          Development        Publishing        Consolidated
                                                          -----------        ----------        ------------
<S>                                                      <C>                 <C>               <C>
1997:
    Net revenues                                         $     3,167          $   1,591        $     4,758
                                                                                               ===========

    Loss from continuing and discontinued                     (5,663)            (1,025)       $    (6,688)
       operations
    Interest expense                                                                                (1,031)
                                                                                               -----------
              Net loss                                                                         $    (7,719)
                                                                                               ===========

    Identifiable assets                                  $     6,478          $   1,316        $     7,794
    Corporate assets                                                                                    95
                                                                                               -----------
              Total assets                                                                     $     7,889
                                                                                               ===========

    Depreciation and amortization of equipment and       
       leasehold improvements                            $       157          $      78        $       235
    Capital expenditures                                          34                 17                 51

</TABLE>

15.  SUBSEQUENT EVENTS

Acquisitions

In February 1998, the Company acquired certain net assets of High Text
Interactive, Inc. for 150,000 common shares of the Company.

In February 1998, the Company entered into a letter of intent with New Century
Education Corporation ("NCEC") whereby the Company will acquire all the issued
and outstanding stock of NCEC for approximately $2,000,000 in cash, less any
outstanding debt of NCEC, and newly issued Preferred Stock of the Company with a
stated value of $9,375,000 and convertible into approximately $3,000,000 of the
Company's common stock.

On March 5, 1998, BPMC acquired OnRamp School Productions, Inc. ("OnRamp") for
400,000 common shares of the Company. Subsequent to the purchase, OnRamp changed
its name to the Internet Education Group, Inc. In connection with this
acquisition, a subsidiary of the Company entered into employment agreements with
two individuals providing for compensation of a minimum of $150,000 and
$157,500, respectively, per year, for a period of three years.

                                     F-20

<PAGE>

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

None.


                                    PART III

                  The information required by Part III, Items 9, 10, 11 and 12
of this Form 10-KSB are incorporated by reference from the Company's definitive
proxy statement (to be filed in accordance with ss.240.14a-101, Schedule 14A)
which involves the election of directors and which will be filed with the
Securities and Exchange Commission not later than 120 days after the end of the
fiscal year covered by this Form 10-KSB.

Item 13. Exhibits and Reports on Form 8-K

         (a)  Exhibits.

         The following documents heretofore filed by the Company with the
         Securities and exchange Commission ("SEC") are hereby incorporated by
         reference:

Exhibit No.                         Description

         The following documents heretofore filed by the Company with the
Securities and Exchange Commission ("SEC") are hereby incorporated by reference:

3.1      Restated Certificate of Incorporation and Amendment thereto(1)
3.2      Amended and Restated By-laws(1)
4.1      Specimen Common Stock Certificate(1)
4.2      Specimen Redeemable Warrant Certificate(1)
4.3      Underwriter's Warrant Certificate(1)
4.4      Form of Warrant Agreement between the Company and Continental Stock 
         Transfer and Trust Company(1) 
5.1      Opinion of Kane Kessler, P.C.(9) 
10.1     Employment Agreement, dated April 1, 1994, between the Company and
         Byron Preiss(1)+ 
10.2     Multimedia Publishing Agreement, dated July 1993, between the Company
         and Microsoft Corporation(1) 
10.3     1993 Stock Option Plan(1)+ 
10.4     Agreement of Lease, dated October 29, 1993, between the Company and
         24-28 West 25th St. Associates, L.P.(1)
10.5     Voting Trust Agreement, dated July 15, 1993, among Robert Oehler and 
         the voting trustees, as amended(1) 10.6 Form of Consulting Agreement
         between the Company and Thomas James Associates, Inc.(1) 

10.7     Amendment, dated March 21, 1994, to Multimedia Publishing Agreement,
         between the Company and Microsoft Corporation(1)
10.8     Letter Agreement, dated April 1, 1993, between Byron Preiss Visual
         Publications, Inc. ("BPVP"), and the Company.(1)
10.9     Letter Agreement, dated April 1, 1993, between Byron Preiss Electronic
         Books, Inc., and the Company.(1)

                                       31

<PAGE>

10.10    $700,00 principal amount Promissory Note, dated June 11, 1993, payable
         by the Company to the order of Berman CD-ROM Partnership, L.P., a New
         York limited partnership; $25,000 principal amount Promissory Note,
         dated June 25, 1993, payable by the Company to the order of Richard S.
         Meisenberg; and $30,000 principal amount Promissory Note, dated July
         27, 1993, payable by the Company to the order of Craig Gordon(1)
10.11    Agreement, dated March 1, 1993, between the Company and Doubleday, a
         division of Bantam Doubleday Dell Publishing Group, Inc.(1)
10.12    Agreement, dated June 16, 1993, between the Company and W.H. Freeman &
         Company, a division of Scientific American, Inc.(1)
10.13    Agreement, dated August 9, 1993, between the Company and David Larkin,
         Paul Rocheleau and Michael Freeman(1)
10.14    Letter Agreement, dated May 15, 1992, between BPVP and Gahan Wilson and
         letter agreement, dated July 14, 1993, between BPVP and Gahan Wilson(1)
10.15    Agreement, dated January 20, 1995, between Byron Preiss Video
         Production Inc. and Ray Bradbury, and amendment thereto(1)
10.16    Agreement, dated October 30, 1992, between the Company and Philip
         Marlowe, B.V.(1)
10.17    Letter Agreement (the "Letter Agreement"), dated April 1, 1994,
         among the Company, BPVP, and Byron Preiss Electronic Books, Inc.(1)
10.18    Agreement, dated February 1, 1994, between the Company and Gaga
         Communications, Inc.(1)
10.19    Letter Agreement, dated January 18, 1994, between the Company and 
         Marvel Entertainment Group, Inc.(1) 
10.20    Affiliate Label Distribution Agreement dated June 21, 1994 between Time
         Warner Interactive Group and the Company.(2)
10.21    Stock Purchase Agreement dated March 22, 1995 between Viacom 
         International Inc. and the Company.(2)
10.22    Registration Rights Agreement dated March 22, 1995 between Viacom
         International Inc. and the Company.(2)
10.23    Software Development Agreement dated March 21, 1995 between Simon &
         Schuster Interactive, a division of Simon & Schuster, Inc. and the
         Company.(2)
10.24    Amendment, dated March 22, 1995, to the Employment Agreement, dated
         April 1, 1994, between the Company and Byron Preiss(2)+
10.25    Agreement dated September 1, 1994 between Marvel Entertainment Group,
         Inc. ("Marvel") and the Company.(2)
10.27    Warrant Agreement and Certificate dated March 22, 1995 between Viacom
         International, Inc. and the Company.(2)
10.28    Warrant Agreement and Certificate dated March 22, 1995 between Viacom
         International, Inc. and the Company.(2)
10.29    Management Services Agreement dated January 1, 1995 between the Company
         and BPVP.(2) 

10.30    1993 Stock Option Plan, as amended.(2) 
10.31    Co-Publishing Agreement dated September 26, 1994 between Putnam
         Berkeley Group, Inc. and the Company.(3)
10.32    Agreement dated as of February 15, 1995, between the Company and
         Marvel.(3) 
10.33    Agreement dated as of June 15, 1995 between Marvel and the Company.(3)
10.34    Agreement dated as of June 28, 1995 between Marvel and the Company.(3)
10.35    Agreement of Lease, effective as of September 1, 1995, between the
         Company and 24-28 West 25th Street Associates, L.P.(3) 
10.36    Agreement dated October 20, 1995 between the Company and Penguin 
         Electronic Publishing, a division of Penguin Books USA Inc.(3)
10.37    Management Services Agreement dated as of January 1, 1996 between the
         Company and BPVP.(3) 
10.38    CD-ROM Distribution and Replication Agreement dated February 2, 1996
         between Macmillan Publishers Limited and the Company.(3)
10.39    Amended and Restated Distribution Agreement dated as of January 1, 1996
         between Simon & Schuster Interactive Distribution Services, a division
         of Simon & Schuster, Inc. and the Company.(3)
10.40    Amendment No. 3 to Multimedia Publishing Agreement, between the Company
         and Microsoft Corporation.(2)
10.41    Localization and Distribution Agreement dated as of February 23, 1996
         between the Company and Systhema, A.G.(2) 
10.42    Form of Offshore Securities Subscription Agreement regarding the 
         European Debentures.(4)

                                       32

<PAGE>

10.43    Form of European Debenture.(4)
10.44    Form of Warrant issued in connection with the European Debenture.(4)
10.45    Stock Purchase Agreement, dated as of March 21, 1997, between the
         Company and Andrew K. Gardner.(5) 
10.46    Convertible Note, dated March 21, 1997, in the principal amount of 
         $1,750,000 from the Company to Andrew K. Gardner.(5)
10.47    Dolphin Pledge Agreement, dated as of March 21, 1997, between the
         Company and Andrew K. Gardner.(5) 
10.48    Employment Agreement dated as of March 21, 1997 between Dolphin and 
         Andrew K. Gardner.(5) 
10.49    Gardner Registration Rights Agreement, dated as of March 21, 1997,
         between the Company and Andrew K. Gardner.(5)
10.50    Form of Offshore Securities Subscription Agreement regarding the 6%
         Debentures.(6) 
10.51    Form of 6% Debenture.(6) 
10.52    Form of Warrant issued in connection with the 6% Debenture.(6) 
10.53    Stock Purchase Agreement, dated as of November 26, 1997, among the
         Company and each of Nicholas Vazzana and Elaine Vazzana.(7)
10.54    Form of Vazzana Convertible Note, dated November 26, 1997. (7)
10.55    Form of Stock Pledge Agreement, dated as of November 26, 1997. (7)
10.56    Registration Rights Agreement, dated as of November 26, 1997, among the
         Company, Nicholas Vazzana and Elaine Vazzana.(7)
10.57    Securities Purchase Agreement, dated as of December 8, 1997 between the
         Company and Bushinghall Limited.(8)
10.58    Bushinghall Debenture(8)

10.59    Bushinghall Warrant(8)
10.60    Registration Statement dated as of December 8, 1997 between the Company
         and Bushinghall Limited.(8) 
10.61    Form of Trautman Warrants(1) 
10.62    Distribution Services Agreement, dated January 1, 1997 between Pocket
         Books, a division of Simon & Schuster and the Company.(8)

         1        Incorporated by reference to the Registration Statement on
                  Form SB-2 filed with the Commission on May 11, 1994 (No.
                  33-74990-NY).
         2        Incorporated by reference to the Post-Effective Amendment 
                  No. 1 to the Registration Statement on From SB-2 filed with
                  the Commission (No. 33-74990-NY)
         3        Incorporated by reference to the Company's Form 10-KSB for the
                  year ended December 31, 1995 filed with the Commission on
                  March 29, 1996.
         4        Incorporated by reference to the Current Report on Form 8-K
                  (Date of Event - February 5, 1997)
         5        Incorporated by reference to the Current Report on Form 8-K
                  (Date of Event - March 21, 1997)
         6        Incorporated by reference to the Current Report on Form 8-K
                  (Date of Event - October 17, 1997)
         7        Incorporated by reference to the Current Report on Form 8-K
                  (Date of Event - November 26, 1997)
         8        Incorporated by reference to the Registration Statement on
                  Form S-3 filed with the Commission on January 22, 1998 (No.
                  333-44695).

         The following documents are filed herewith:

21       Subsidiaries of the Company.
23.1     Consent of Arthur Andersen LLP
24.1     Power of Attorney (included on signature page)
27       Financial Data Schedule.

                  (b) Reports on Form 8-K. The Company filed the following
Current Reports on Form 8-K during the fourth quarter ended December 31, 1997.

                  Date of Report          Items Reported

                  October 17, 1997        The Company reported the sale of
                                          securities pursuant to regulation S
                                          (Item 9).

                                       33
<PAGE>

                  November 18, 1997       The Company reported the sale of
                                          securities pursuant to regulation S 
                                          (Item 9).

                  November 26, 1997       The Company reported the acquisition
                                          of MDC and NMS (Item 2).

                                       34

<PAGE>

                                   SIGNATURES

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

                                          BYRON PREISS MULTIMEDIA COMPANY, INC.


Date: April 14, 1998                      By: /s/ Byron Preiss
                                             -------------------------------
                                             Byron Preiss, Chief Executive
                                             Officer and President


                                POWER OF ATTORNEY

         KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints each of Byron Preiss and James R.
Dellomo, jointly and severally, his true and lawful attorney-in-fact and agent,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Annual Report on Form 10-KSB and all documents relating thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.

                                       35

<PAGE>

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


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

By: /s/ Byron Preiss                                            April 14, 1998
   ------------------------------------------------
   Name:   Byron Preiss
   Title:  Chief Executive Officer,
           President (Principal Executive
           Officer) and a Director

By: /s/ James R. Dellomo                                        April 14, 1998
   ------------------------------------------------
   Name:   James R. Dellomo
   Title:  Chief Financial Officer,
           (Principal Accounting Officer)
           and a Director

By: /s/ Matthew Shapiro                                         April 14, 1998
   ------------------------------------------------
   Name:   Matthew Shapiro
   Title:  Director

By: /s/ Jack Romanos                                            April 14, 1998
   ------------------------------------------------
   Name:   Jack Romanos
   Title:  Director

By: /s/ Roger Cooper                                            April 14, 1998
   ------------------------------------------------
   Name:   Roger Cooper
   Title:  Director

                                       36