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                     U.S. SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

(Mark one):

     [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
         ACT OF 1934.

                     For the fiscal year ended May 31, 1999.


     [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
         ACT OF 1934.

         For the transition period from ____________ to _______________

                           COMMISSION FILE NO. 0-24919

                             MDI ENTERTAINMENT, INC.
                             -----------------------
                 (Name of small business issuer in its charter)


         DELAWARE                                          73-1515699
         --------                                          ----------
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
incorporation or organization)


                             MDI ENTERTAINMENT, INC.
                                 201 ANN STREET
                           HARTFORD, CONNECTICUT 06103
               (Address of principal executive offices) (Zip Code)

                    Issuer's telephone number (860) 527-5359


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

        Title of each Class            Name of each exchange on which registered

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


                     COMMON STOCK, PAR VALUE $.001 PER SHARE
                     ---------------------------------------
                                (Title of Class)


                      ------------------------------------
                                (Title of Class)



================================================================================



<PAGE>


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

     State issuer's revenues for its most recent fiscal year. $7,204,712
                                                              -----------

     Aggregate market value of voting stock held by non-affiliates of registrant
as of August 23, 1999: $ 3,973,314
                        ----------
     Shares of Common Stock outstanding as of August 23, 1999: 7,776,500
                                                               ----------


                       DOCUMENTS INCORPORATED BY REFERENCE

                                 Not Applicable

     Transitional Small Business Disclosure Format (check one): Yes ; No X
                                                                      ----


<PAGE>


                                     10-KSB

                                TABLE OF CONTENTS
                                -----------------

                                     PART I

Item 1.  Description of Business

Item 2.  Description of Property

Item 3.  Legal Proceedings

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

                                    PART II

Item 5.  Market for Common Equity and Related Stockholder Matters

Item 6.  Management Discussion and Analysis or Plan of Operation

Item 7.  Financial Statements

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

                                    PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons;
         Compliance with Section 16(a) of the Exchange Act

Item 10. Executive Compensation

Item 11. Security Ownership of Certain Beneficial Owners and Management

Item 12. Certain Relationships and Related Transactions

Item 13. Exhibits and Reports on Form 8-K



                                      -1-
<PAGE>


     This Annual Report on Form 10-KSB contains statements which constitute
forward-looking statements. These statements appear in a number of places in
this Form 10-KSB and include statements regarding the intent, belief or current
expectations of MDI Entertainment, Inc. together with its subsidiaries (referred
in this report as "we","us" and "our") with respect to (i) our financing plans,
(ii) trends affecting our financial condition or results of operations, (iii)
the impact of competition, and (iv) the expansion of certain operations.
Investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
the actual results may differ materially from those in the forward-looking
statements as a result of various factors. The information contained in this
Form 10-KSB, including, without limitation, the information under "Risk
Factors," "Management's Discussion and Analysis or Plan of Operations" and
"Description of Business" identifies important factors that could cause or
contribute to such differences. See "Description of Business--Risk Factors--All
forward-looking statements should be read with caution."



                                     PART I


ITEM 1.  DESCRIPTION OF BUSINESS


     MDI Entertainment, Inc. specializes in creating, marketing and implementing
entertainment-based promotions to North American lotteries. Our principal
business has been the scratch ticket segment of the government lottery industry,
although we have run on-line entertainment-based promotions with a lotto and
daily numbers type games featuring our licensed Harley-Davidson(R) logo. Our
lottery promotions feature well-known brand names and entertainment properties
licensed to us and designed to attract new lottery players while providing a new
experience for existing lottery players. Our current promotions feature a wide
variety of such brand names and entertainment properties including:

o    Wheel of Fortune(R)
o    Jeopardy(TM)
o    Harley-Davidson(R)
o    Star Trek(TM)
o    Twilight Zone(TM)
o    Times Square 2000(TM)
o    Rock & Roll Hall of Fame(TM)
o    Betty Boop(TM)
o    Louisville Slugger(R)
o    Dick Clark's American Bandstand(R)
o    The Nashville Network(R)/TNN
o    Country Music Television(R)/CMT
o    Heroes of Space(TM)
o    James Bond 007(TM)
o    The Pink Panther(TM)
o    The Outer Limits(TM)
o    Dale Earnhardt



                                      -2-
<PAGE>


     The scratch tickets feature the licensed properties, usually displaying a
scene and/or logo from the entertainment-based and brand name properties. Prizes
awarded in such promotions typically include a number of "second chance" prizes
related to the licensed property, including collectible logo bearing merchandise
such as Harley-Davidson(R) T-shirts and caps, and other related merchandise such
as posters, money clips, telephones and, in the case of Harley-Davidson(R),
Harley-Davidson 1200 Sportster motorcycles. We currently derive most of our
revenues from the sale to the lotteries of such merchandise. Merchandise
associated with the licensed properties accounted for 90% of revenues for the
fiscal year ended May 31, 1999, 66.7% of revenues for the fiscal year ended May
31, 1998 and 0% of revenues for the fiscal year ended May 31, 1997, reflecting
our shift to licensed promotions.

     We offer a full range of services, including ticket and point of sale
design, prize structure development, promotional event planning, market
research, fulfillment services, customer service support and second chance
drawing assistance.


RECENT DEVELOPMENTS

     New Products and Web Site

     The New Jersey Lottery's Harley-Davidson game "Ticket to Ride" will debut
MDI's Lottery Prize Shop, which will afford players the opportunity to use their
non-winning ticket as a coupon for discounts off the purchase price of
Harley-Davidson merchandise. Players can purchase merchandise through a catalog
printed by MDI, by calling a toll-free 1-800 number, or through a special Web
Site, exclusively designed for this purpose, called www.nj.lotteryprizeshop.com.
"Ticket to Ride" is a third-chance opportunity for the players, and it marks the
first step in MDI's E-Commerce and catalog sales strategy.

     We recently launched our Corporate Web Site (www.mdientertainment.com) that
links directly to our SEC filings and to Finance Yahoo for stock trading
activity.

     Licensed Properties

     In the past two years, we have entered into 18 separate contracts with 14
lotteries based on the Harley Davidson(R) property and such contracts represent
a combined total of over $7.2 million in revenue, of which approximately $4.7
million was earned in fiscal 1999. A remaining $ 2.4 million should be earned in
fiscal 2000. Included is our first contract with a Canadian lottery, the British
Columbia Lottery Corporation. We secured the Harley Davidson(R) license in
December 1997 and will continue to aggressively market the property to lotteries
throughout the United States and Canada.

     Our Wheel of Fortune(R) license expired in November 1998. However, this
license was extended for another year at a cost of $10,000. Two additional
lotteries agreed to launch the Wheel of Fortune(R) game during the fiscal year
ended May 31, 1999.



                                      -3-
<PAGE>


     Our Star Trek(TM) property, which has been used or is scheduled to be used
by a total of ten lotteries, is beginning to decline in popularity. We do not
expect to renew this license, which expires in November, 1999.

     We have entered into a three-year licensing agreement with Universal
Spaceworks LLC for the property Heroes of Space(TM). Heroes of Space(TM) is a
group of 16 former astronauts aligned to call attention to the U.S. Space
program and their participation.

     We have entered into a 30-month contract with MGM Consumer Products for
James Bond 007(TM), The Pink Panther(TM) and The Outer Limits(TM). These rights
are U.S. only.

     We have entered into a contract with Hillerich and Bradsby for the property
Louisville Slugger(R). These rights are for government operated lotteries
anywhere in the world. In May 1999, the Iowa lottery implemented a Louisville
Slugger(R) promotion.

     We have entered into a three-year Agreement with dick clark productions,
inc. for worldwide rights to American Bandstand(R).

     We have entered into a three-year Agreement with CBS Cable for U.S. rights
to cable networks TNN and CMT.

     We have entered into a three-year Agreement with King Features Syndicate
for the worldwide rights to Betty Boop(TM) and associated characters.


INDUSTRY OVERVIEW

     Lotteries are operated by state, local and foreign governmental authorities
and their licensees in over 155 jurisdictions. Governments use lotteries
primarily as a means of generating non-tax revenues. In the United States,
lottery revenues frequently are designated for particular purposes, such as
education, economic development, conservation, transportation and aid to the
elderly. Many states have become increasingly dependent on lotteries as a
significant source of funding for these purposes.

     While the specific amounts vary substantially from state to state,
according to LaFleur's Lottery World 1998 Fast Facts (an industry report),
approximately 54% of gross lottery revenues in the United States is returned to
the public in the form of prizes. Approximately 33% of such revenues is used to
support specific public programs or is contributed to the state's general fund.
Typically, 5% to 6% of such revenues is reserved for point-of-purchase
commissions for the retailer, and the remainder of such revenues is used to fund
lottery operations, including the cost of advertising.

     Government lotteries can be categorized into two principal groups: on-line
games and "instant" or "scratch" ticket games. On-line varieties generally refer
to games such as lotto, sports pools, daily numbers and keno in which players
make their own selections. Instant ticket games consist of preprinted tickets in
which players scratch off a coating or pull off tabs to determine whether they
have purchased a winning ticket. Instant ticket games generally have several



                                      -4-
<PAGE>


tiers of cash prizes, ranging from $1.00 up to $100,000.00. Occasionally instant
ticket games provide for second chance drawings that give scratch ticket
purchasers a "second chance" to win prizes on non-winning tickets. Second chance
drawing prizes range from cash prizes or spots as contestants on game shows to
various types of merchandise and trips.

     We are a leader in designing and marketing instant scratch ticket games
based on licensed brand names (such as Harley-Davidson(R) or Louisville Slugger
(R)) and entertainment properties (such as James Bond 007(TM) or Wheel of
Fortune(R)). We attempt to identify properties for licensing that have a large
selection of logo bearing products available that appeal to the 18 years of age
and older population, and our instant ticket promotions typically include logo
bearing merchandise related to such promotion as prizes. In certain of our
lottery promotions, merchandise is awarded as first prizes, such as Harley
Davidson(R) motorcycles. In most of our designed games, second chance prizes
typically include logo bearing merchandise such as posters, T-shirts, caps,
jackets, watches, clocks, money clips, telephones, playing cards, film cells,
video and music collections, stadium blankets, carryall bags, credit cards with
prepaid credit, trips and electronic games. We generate most of our revenues
from the sale of such merchandise to the government agency sponsoring the
lottery.

     Cooperative marketing partnerships are not new to the lottery industry.
Lotteries have been securing licensed brand names in exchange for advertising
for years in hopes of expanding the player base by attracting non-players who
have positive feelings about a particular brand. Licensing the rights for
trademarked entertainment material, however, is relatively new. For the most
part, the practice of purchasing the right to place a popular brand name on a
lottery ticket gained acceptance with the introduction and subsequent sales
success of the Monopoly(R) game in 1989. Since then, lottery jurisdictions have
secured a wide variety of brands and properties for licensed lottery games. The
rights to use or license a particular property can be secured by a lottery
directly from the entity that owns the property or from companies like ours.

     The popularity and success of lotteries has increased worldwide in
recent years, and the popularity of instant lotteries has increased at a rate
that is greater than that of lotteries generally, although there was a slight
decrease from 1997 to 1998. Lotteries typically introduce between 25 and 50 new
instant games a year. Currently, lotteries operate in 37 states, the District of
Columbia and all provinces of Canada as compared to 29 states and all provinces
of Canada as of June 30, 1989. According to LaFleur's Lottery World 1998 Fast
Facts and LaFleur's 1991 North American Gambling Abstract, instant ticket games
now comprise approximately 44% of total lottery sales in the United States as
compared to approximately 26% in 1990. Factors contributing to the growth in the
popularity and success of such games include more sophisticated marketing
techniques, the introduction of new state instant ticket lotteries, lotteries
offering multiple games simultaneously, increased technological advances in the
distribution of instant tickets, lotteries offering a variety of instant ticket
price points (a $1.00 ticket, a $2.00 ticket, a $3.00 ticket, a $5.00 ticket and
a $10.00 ticket with related increases in the potential prize money) and higher
prize pay-outs to lottery consumers.



                                      -5-
<PAGE>


LOTTERY PROMOTIONS

     We believe that to achieve and sustain growth in the lottery business we
must offer promotions which will attract new or lapsed lottery players while
maintaining or increasing play by current lottery players. Our principal
strategy is to enhance the entertainment value and attractiveness of our
promotions by licensing well known brand names and entertainment properties and
designing games based on such properties. Such games are targeted to niche
markets (such as Pink Panther(TM) fans or Harley-Davidson(R) motorcycle
enthusiasts) to appeal to new or infrequent players while also appealing to the
core player base.


LICENSED-BASED GAMES

     Over the past two years, we have secured rights to and targeted specific
properties for instant lottery theme games and promotions that have broad appeal
and significant brand loyalty and that enable us to market collectible logo
bearing merchandise tied directly to the property or brand. The properties are
specifically selected because they possess a substantial following that can aid
a lottery in attracting new players while at the same time providing a different
experience for many existing players. Currently, we have licensing agreements
with 16 companies for 19 licenses. Licenses are generally held between one and a
half and three years. Two of our licenses that were due to expire during fiscal
1999 have been extended for another year. We hold three licenses with three
companies that each resulted in 10% or more of revenues and costs in fiscal
1999. Three of these licenses resulted in 10% or more of our revenues and costs
in fiscal 1998. We continually seek to add to our licensed properties and, to
this end, have contacted, and continue to contact, potential licensors.

     We derive most of our revenues from the sale to the lotteries of logo
bearing material (such as T-shirts, posters, hats, playing cards, telephones,
film cells, stadium blankets, carryall bags, money clips, jackets, electronic
games, watches, clocks, motorcycles and credit cards with prepaid credit) used
as second chance prizes. We typically order such merchandise directly from the
licensor or its authorized representatives at wholesale rates, thereby
generating additional income for the licensor either from direct sales or
royalty income. Typically, we rely on third parties for data entry and
verification of the names and addresses on winning tickets, and work with a
third party fulfillment house to deliver prizes to winning lottery players.
Inventory of prizes is typically held and shipped to prize winners by the
fulfillment house. See "-Risk Factors-We may be unable to provide necessary
merchandise to the lotteries when needed".

     Our licensing agreements for the targeted properties generally require us
to pay the licensor between 10% to 50% of the gross licensing fees we receive
from contracts with the lotteries. Certain agreements also require us to pay the
licensor an additional 20% of the gross royalty fees received by us from the
printing of the instant tickets, while certain other agreements increase the
percentage of the licensing fees instead. One licensing agreement requires a
50/50 share of gross profit. The agreements generally require an initial payment
upon signing, which is usually credited against other payments that become due
during the term of the license. While all the licensing agreements grant us the
right to market merchandise to the lotteries, certain agreements require that a
minimum amount of merchandise be purchased. The term of the license agreements



                                      -6-
<PAGE>


usually ranges between 1.5 to 3 years and are sometimes terminable upon the
occurrence of certain events. The licenses are typically exclusive for lottery
scratch tickets, and such exclusivity is generally for the United States and
Canada. In some cases, the licenses are limited to certain regions. We are
attempting to acquire worldwide rights for any new licenses and negotiating
worldwide rights on existing licenses.

     We have also obtained patents on play styles or formats for instant games
based on existing games of chance or probability games. Such games include Jacks
Or Better(TM), Bonanza Bingo(TM), Hold'Em Poker(TM), Black Jack, Roulette, Draw
Poker, and Spin 2 Pick(TM). See "-Intellectual Property." Promotions associated
with such games generate revenues from licensing fees and royalties rather than
from merchandise sales. We do not currently derive significant revenues from
such games.


CONTRACTS WITH LOTTERIES

     Our contracts with the lotteries provide for services that are tailored to
the preferences of the lotteries and include ticket and point of sale design,
prize structure development, promotional event planning, market research,
customer service support, second chance drawing assistance and fulfillment
services. The lottery contracts generally provide us with two sources of revenue
which consist of (1) license and royalty fees for the use of the entertainment
properties and (2) mark-up on the sale and fulfillment of collectible and logo
bearing merchandise. See "-Licensed-Based Games."

     We have had contracts with over two-thirds of all North American lotteries,
and currently have approximately 19 promotions that are in progress or scheduled
for introduction during calendar 1999 in 13 state lotteries. In addition, we
launched our first Canadian promotion in British Columbia in March of 1999.
Those states in which we have or have previously had promotions are as follows:



                                      -7-
<PAGE>


<TABLE>
<CAPTION>



<S>                                      <C>                                   <C>
---------------------------------------- ------------------------------------- -------------------------------------
                 State                   Promotions In Progress or Scheduled       No Current Promotions (But
                                                   for Introduction                Promotions Previously Sold)

---------------------------------------- ------------------------------------- -------------------------------------
Arizona                                                   X

---------------------------------------- ------------------------------------- -------------------------------------
Colorado                                                                                        X

---------------------------------------- ------------------------------------- -------------------------------------
Connecticut                                               X

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Delaware                                                                                        X

---------------------------------------- ------------------------------------- -------------------------------------
Florida                                                   X

---------------------------------------- ------------------------------------- -------------------------------------
Georgia                                                                                         X

---------------------------------------- ------------------------------------- -------------------------------------
Idaho                                                                                           X

---------------------------------------- ------------------------------------- -------------------------------------
Illinois                                                                                        X

---------------------------------------- ------------------------------------- -------------------------------------
Indiana                                                                                         X

---------------------------------------- ------------------------------------- -------------------------------------
Iowa                                                      X

---------------------------------------- ------------------------------------- -------------------------------------
Kansas                                                                                          X

---------------------------------------- ------------------------------------- -------------------------------------
Louisiana                                                 X

---------------------------------------- ------------------------------------- -------------------------------------
Maryland                                                                                        X

---------------------------------------- ------------------------------------- -------------------------------------
Minnesota                                                                                       X

---------------------------------------- ------------------------------------- -------------------------------------
Missouri                                                  X

---------------------------------------- ------------------------------------- -------------------------------------
Montana                                                                                         X

---------------------------------------- ------------------------------------- -------------------------------------
New Hampshire                                             X

---------------------------------------- ------------------------------------- -------------------------------------
New Jersey                                                X

---------------------------------------- ------------------------------------- -------------------------------------
New York                                                  X

---------------------------------------- ------------------------------------- -------------------------------------
Ohio                                                                                            X

---------------------------------------- ------------------------------------- -------------------------------------
Oregon                                                                                          X

---------------------------------------- ------------------------------------- -------------------------------------
Pennsylvania                                              X

---------------------------------------- ------------------------------------- -------------------------------------
Rhode Island                                              X

---------------------------------------- ------------------------------------- -------------------------------------
South Dakota                                                                                    X

---------------------------------------- ------------------------------------- -------------------------------------
Texas                                                                                           X

---------------------------------------- ------------------------------------- -------------------------------------
Vermont                                                                                         X

---------------------------------------- ------------------------------------- -------------------------------------
Virginia                                                  X

---------------------------------------- ------------------------------------- -------------------------------------
Washington                                                                                      X

---------------------------------------- ------------------------------------- -------------------------------------
Wisconsin                                                 X

---------------------------------------- ------------------------------------- -------------------------------------
</TABLE>



                                      -8-
<PAGE>


     We derived more than 10% of our revenue in fiscal 1999 from contracts with
the following lotteries: Wisconsin Lottery (Harley-Davidson(R)) and Pennsylvania
(Harley-Davidson(R)). In fiscal 1998 we had contracts representing more than 10%
of our revenue with the following lotteries: Colorado Lottery (Wheel of
Fortune(R)); Wisconsin Lottery (Wheel of Fortune(R) and other licensed
properties); New Jersey Lottery (Twilight Zone(TM) and other licensed
properties). The principal reason that we had less individual contracts
contributing to over 10% of total revenue in fiscal 1999 was the significantly
higher total revenue this year.


GOVERNMENT REGULATION

     Lotteries are not permitted in the various states and jurisdictions of the
United States unless expressly authorized by legislation in the subject
jurisdiction. Currently, 37 states and the District of Columbia have enacted
legislation to allow for the operation of a lottery. The operation of the
lotteries in each of these jurisdictions is strictly regulated. The formal rules
and regulations governing lotteries vary from jurisdiction to jurisdiction but
typically authorize the lottery, create the governing authority administering
the lottery, dictate the prize structure, establish allocation of revenues,
determine the type of games permitted, detail appropriate marketing structures,
specify procedures for selecting vendors and define the qualifications of
lottery personnel.

     To ensure the integrity of the lottery, state laws provide for extensive
background investigations of each of the lottery's vendors and their affiliates,
subcontractors, officers, directors, employees and principal stockholders. These
investigations generally require detailed disclosure on a continuous basis with
respect to the vendors, affiliates, subcontractors, officers, directors,
employees and principal stockholders and, in the event the lottery deems any of
such persons to be unsuitable, the lottery may require the termination of such
persons. The failure of any such persons associated with us to obtain or retain
approval in any jurisdiction could have a material adverse effect on us.
Generally, regulatory authorities have broad discretion when granting such
approvals. Although we have never been disqualified from a lottery contract as a
result of a failure to obtain any such approvals, we cannot assure you that such
approvals will be obtained or retained in the future.

     We have retained governmental affairs representatives in various
jurisdictions of the United States to monitor legislation, advise us on contract
proposals, and assist with other issues that may affect us. We believe we have
complied with all applicable state regulatory provisions relative to disclosure
concerning the activities of itself and its advisors. We are not dependent on
any such representative for any material contract.

     We have employed registered lobbyists and retained paid consultants in
certain states. Failure to comply with state regulatory provisions relating to
the activities of our advisors could adversely affect our ability to bid
successfully upon lottery contracts.

     The international jurisdictions in which we intend to market our products
have similar legislation and regulations governing lottery operations. In



                                      -9-
<PAGE>


addition, restrictions are often imposed on foreign corporations seeking to do
business in such jurisdictions. Failure to comply with these provisions could
result in contract cancellation or the institution of legal proceedings.

     Laws and regulations of individual states and countries are subject to
change. We cannot assure you that any such change would not adversely affect us.
Our failure to comply with such laws and regulations could have an adverse
impact on our operations.


COMPETITION

     We are aware of several other companies which design and promote lottery
games based on licensed brands. However, each is marketing to a particular
niche. Telecom Productions, Inc. licenses a variety of brand name board games,
including Monopoly(R), Trivial Pursuit(R) and Battleship(R). Frost Productions
utilizes brand name puzzles and fortunes. Promo-Travel represents a cruise line,
various casinos and the casino game Let It Ride. More recently, Promo-Travel has
attempted to secure entertainment based licenses and has negotiated with several
of the same license holders that we have spoken with. Several other companies
have made one-shot or sporadic licensing efforts. To date, we have not failed to
acquire the rights to any brand name or entertainment property that we have
sought. However, it is possible that, as the potential for increased revenues
rise, new competitors may enter this market that have considerably greater
financial and other resources, experience and customer recognition than we do
and may compete with us in both obtaining licenses to brand names or
entertainment properties and supplying lottery products to the lottery
jurisdictions.

     In addition, to the best of our knowledge, no other company has ever
attempted to utilize substantial quantities of merchandise with a licensed
lottery game. We have positioned ourselves to utilize such merchandise prizes.
Between 1989-1996, the majority of our lottery business had been the
distribution of videos, compact discs and audiocassettes as second-chance
prizes. We distributed nearly five million such prizes and experienced little to
no competition in this area of the business. See "-Risk Factors-Intense
competition could reduce our market share."


INTELLECTUAL PROPERTY

     In 1996, we created our Licensed and Patented Games division. To launch
this division, we purchased the assets of a games development company, Vegas
Pull Tabs, Inc. d/b/a GameMakers and Consultants, an unaffiliated third party.
Those assets consisted primarily of (1) a U.S. patent for a series of instant
games; and (2) a U.S. patent application which was subsequently granted for
interactive bingo-like games and methods of play. Due to this acquisition, we
own patents for certain game formats or playstyles of Jacks Or Better(TM),
Bonanza Bingo(TM) and Hold'Em Poker(TM), (based on pre-existing games of chance)
Black Jack, Roulette and Draw Poker (based on pre-existing probability games).
We do not currently derive significant revenues from such games, but may seek to
develop them in the future.

     In 1998, we developed an on-line lottery game with the trademarked name
Pick 2 Spin(TM). We have the exclusive rights to the trademarked name and have
filed a patent application for certain game elements. The Pick 2 Spin(TM) is a
two-digit numbers game, which combines two random drawings with a wheel spin.
With top prize game odds of one in 10,000, the Pick 2 Spin(TM) features a top
prize of $20,000. We began marketing the game to North American lotteries



                                      -10-
<PAGE>


in January of 1999 and do not currently derive any revenues from the game.

     Bonus Games, a Tennessee partnership ("BG"), is the owner of the
trademarked name Jacks Or Better(TM). We have the exclusive use to the trademark
name as it pertains to scratch-off instant lottery tickets sold to North
American lotteries pursuant to an agreement with BG dated July 17, 1996. The
agreement terminates on August 1, 2000. Stuart Entertainment, Inc. ("Stuart") is
the owner of the trademarked name Bonanza Bingo(TM). We have the exclusive use
to the trademark name as it pertains to scratch-off instant lottery tickets sold
to North American lotteries (excluding the Canadian Province of Ontario)
pursuant to an agreement with Stuart dated September 24, 1996. This agreement
terminates on December 31, 1999. We cannot assure you that after such license
agreements terminate, we will be able to renew them on an exclusive basis, on
favorable terms or at all. Neither BG nor Stuart are affiliated with us.


HISTORY AND ORGANIZATION

     We are a Delaware corporation which was incorporated on December 29, 1994
under the name Puff Process, Inc. Our name was changed to MDI Entertainment,
Inc. and a one share for one hundred reverse stock split was effected in
connection with the purchase, in August 1997, of both Media Drop-In Productions
Inc., a Delaware corporation ("MDIP"), and MDI-Missouri, Inc., a Missouri
corporation ("MDIM" and collectively with MDIP, "MDI"), in exchange for
4,800,000 shares of its common stock, $.001 par value per share (the "Common
Stock"), and notes in the aggregate principal amount of $300,000. The
acquisition of MDI was effected through reverse mergers with two of our
wholly-owned subsidiaries. These transactions resulted in a change in control of
the Company, with Steven Saferin holding approximately 56% of the outstanding
shares of our Common Stock. See "-Risk Factors-Existing stockholders are able to
exercise control over us." Pre-merger holders of Puff Process, Inc. hold
approximately 32.1% of the outstanding shares of Common Stock in post-merger MDI
Entertainment, Inc.

     MDIP was incorporated in Texas in 1986 and reincorporated in Delaware in
1989. MDIM was incorporated in Missouri in 1995 to operate our Missouri lottery
program. MDIM was collapsed into MDIP after the Missouri Lottery Contract ended.
MDI-Texas, LLC ("MDIT"), a company of which MDIP owned 66.7%, was formed in 1995
to operate our Texas lottery program. MDIT was collapsed into MDIP after the
Texas lottery contract ended. The equity portion, as of May 31, 1999, of the
minority owners will be distributed in cash in an amount approximating $35,000.
The minority owners are unaffiliated with us.

     Steven M. Saferin, President, Chief Executive Officer and Director, founded
MDIP in 1986. Our initial mission was the production and sale of quality drop-in
or vignette programming (30-second programs produced in a donut format to allow
an advertiser to insert its commercial in the "hole" of the donut). MDIP
produced a series of vignettes which it sold to Fortune 500 companies, other
nationally known companies and government agencies.In 1989, MDIP began the
development of its first video premium promotion.

     MDIP began focusing on lottery promotions in 1987 when it marketed a
drop-in series titled "The New Millionaires" to state lotteries. In 1990 it



                                      -11-
<PAGE>


created and began marketing its Instant Entertainment Connection ("IEC") lottery
promotion. This promotion, tied to an instant or scratch ticket, allowed
lotteries to offer second-chance entertainment prizes, such as video tapes,
compact discs and audio cassettes, to players with non-cash winning tickets. To
date, this promotion has been utilized by 21 U.S. lotteries, with nearly 5
million prizes distributed to lottery players in those states. We have begun
marketing this promotion on a limited basis internationally. We expect to
implement such a promotion with the New South Wales Lottery in Australia in
fiscal year 2000. In 1996, we changed our focus to concentrate on lottery games
designed around licensed brand names and entertainment properties, leveraging
off of the experience and reputation gained from the IEC promotions.
See "-Lottery Promotions."


POTENTIAL EXPANSION OF BUSINESS

     We are currently evaluating several unrelated opportunities in the lottery
industry. Our reputation in the industry results in our receiving numerous
unsolicited approaches for joint ventures and other business relationships. We
anticipate that over the next several years we will attempt to introduce
additional unrelated products to the lottery industry, but there can be no
assurance that we will do so or that such efforts will be successful.

     We are beginning to analyze opportunities presented by our current and
potential products with international lotteries. Several of our current licenses
permit us to market the property outside the United States. We have had
discussions with certain of our other license holders about acquiring
international rights on a country-by-country basis. We cannot assure you that
such rights will be obtained. We are seeking full international rights, if
appropriate, for all new properties. We have commenced a limited international
marketing effort and expect to expand it in the year ahead.

     We have also begun to investigate licensing opportunities outside the
lottery industry. Specifically, we opened negotiations with license holders
relative to licensing their properties for radio station promotions. We cannot
assure you that such negotiations will be successful or, if successful, will
result in the actual development and sale of such promotions.

     We are also evaluating other non-licensing entertainment related
opportunities.

     We are at a preliminary stage with respect to the opportunities described
above, and we have not yet determined to pursue any such opportunities, the cost
associated therewith or the sources of funding therefor. We will likely pursue
opportunities with respect to international lotteries; however, such pursuits
depend upon our evaluation of the costs of international fulfillment, including
import and export duties, foreign taxation issues, currency exchange issues and
the costs of marketing and developing our reputation in international lottery
jurisdictions.

     We have invested significant resources in developing a catalog and
E-Commerce business strategy called "lotteryprizeshop.com". This initiative
permits lottery players of our licensed games to use non-winning tickets for
discounts off the purchase of branded merchandise. This initiative can only be
implemented with the approval of each lottery and we expect to compensate the
lottery for their approval.



                                      -12-
<PAGE>


EMPLOYEES

     As of August 23, 1999, we had 14 full-time employees and one part-time
employee, approximately five of whom were employed in the area of sales and
marketing, four in operations and six in administration. Our employees are not
represented by a union or governed by a collective bargaining agreement. We have
entered into employment agreements with Steven M. Saferin and Kenneth M.
Przysiecki. See "Executive Compensation-Employment Agreements." We have also
entered into a consulting agreement with 1010 Productions, Inc., the president
and sole shareholder of which is Linda Kesterson Saferin, spouse of Steven M.
Saferin, and former employee, officer and director of MDIP. See "Certain
Relationships and Related Transactions."


RISK FACTORS

     All forward-looking statements should be read with caution.
     -----------------------------------------------------------
          Statements in this Annual Report on Form 10-KSB under the captions
     "Description of Business," "Management's Discussion and Analysis or Plan of
     Operations," and elsewhere in this Form 10-KSB, as well as statements made
     in press releases and oral statements that may be made by us or by
     officers, directors or employees acting on our behalf, that are not
     statements of historical fact, constitute forward-looking statements within
     the meaning of the Private Securities Litigation Reform Act of 1995. Such
     forward-looking statements involve known and unknown risks, uncertainties
     and other factors, including those described in this Form 10-KSB under the
     caption "Risk Factors," that could cause our actual results to be
     materially different from the historical results or from any future results
     expressed or implied by such forward-looking statements. In addition to
     statements which explicitly describe such risks and uncertainties, readers
     are urged to consider statements labeled with the terms "believes,"
     "belief," "expects," "plans," "anticipates," or "intends," to be uncertain
     and forward-looking. All cautionary statements made in this Form 10-KSB
     should be read as being applicable to all related forward-looking
     statements wherever they appear. Investors should consider the following
     risk factors as well as the risks described elsewhere in this Form 10-KSB.

     We have had losses.
     --------------------
          Although we had net income for the fiscal year ended May 31, 1999, we
     incurred a net loss of $2,118,893 for the fiscal year ended May 31, 1998.
     We cannot assure you that we will operate profitably in the near future or
     at all.

     We have a negative net worth.
     ------------------------------
          We have a negative net worth of $1,499,657, as of May 31, 1999. We
     cannot assure you that we will be able to operate profitably in the future
     or at all.

     We may continue to need financing or additional equity to meet our
     ------------------------------------------------------------------
     future capital requirements.
     ----------------------------
          As of May 31, 1999, our current liabilities (including "billings in
     excess of costs and estimated earnings on uncompleted contracts" and
     "deferred income" which totals $1,964,300) exceeded our current assets by
     $1,790,600 and our total liabilities exceeded our total assets by
     $1,499,700. We have raised $1,750,000 on August 4, 1999, through the sale
     of Series A Convertible Preferred Stock in a private sale to an investor.
     See "Liquidity and Capital Resources" for details on this transaction.
     However, we may still seek additional financing sources to meet our needs.
     We have not determined the amount we may seek to raise or the form of this



                                      -13-
<PAGE>


     financing (i.e. debt or equity). We cannot assure you that we will obtain
     additional financing for future operations or capital needs on favorable
     terms if at all.

     We may be unable to maintain or renew all our current licenses.
     ---------------------------------------------------------------
          Our success will be dependent upon maintaining our current licenses
     for the rights to use names and well known logo bearing merchandise. Some
     of these licenses are terminable if Steven M. Saferin does not control at
     least 50% and will need to be renegotiated if we plan to expand through the
     acquisition of new companies through the issuance of stock or the issuance
     of securities to raise additional equity capital. The terms of the current
     licenses are generally for 1.5 to 3 years, although they may be terminated
     sooner under certain circumstances. We cannot assure you that the current
     licenses will be renewed once they expire.

     We may be unable to provide necessary merchandise to the lotteries when
     ---------------------------------------------------------------------------
     needed.
     ------
          We supply the lotteries with logo bearing merchandise related to
     existing contracts. We obtain approximately 95% of this merchandise from
     authorized representatives of the licensor. We cannot assure you that the
     logo bearing merchandise will be available from such authorized
     representatives when needed by us to satisfy our obligations to the
     lotteries.

     We may be unable to acquire new licenses.
     ------------------------------------------
          Our success is dependent on our ability to obtain rights to use well
     known entertainment and other similar properties for use on lottery tickets
     and related merchandise. We cannot assure you that we will continue to
     obtain such licenses on favorable terms or at all.

     We depend on customer relationships with North American lotteries.
     -------------------------------------------------------------------
          Many of our licensing rights are, by design, currently limited to
     United States, North American or worldwide lotteries. There are currently
     38 United States lotteries and five additional Canadian lotteries. The
     extremely limited potential customer base means that if any target lottery
     refuses to purchase a particular promotion from us or if it only uses a
     promotion once, there may be a significant negative impact on our revenue
     and earnings. The three state lotteries that purchased promotions
     accounting for the highest percentage of our revenues during fiscal 1999
     were Wisconsin, Pennsylvania and New Jersey with 30%, 19% and 16%,
     respectively. We cannot assure you that these lotteries will maintain the
     same level of promotions or that other lotteries will increase promotions
     beyond current levels, if at all.

     We have no on-going sources of revenue.
     ----------------------------------------
          Our revenues are derived on a contract-by-contract basis from state
     lotteries. There are no regular on-going sources of revenue at the present
     time and we continually create and market new promotions to our lottery
     customers. Lotteries frequently move start dates for promotions thereby
     causing gaps in our cash flow. Moreover, the useful life of a license is
     generally relatively short as the novelty of the game or the popularity of
     the licensed material wanes over time. We may depend on a particular
     promotion in any given year, and a decrease in sales of the promotion or
     the loss of the underlying license would seriously impact our revenues and
     earnings.

     We may be adversely affected by government regulation of lotteries and
     ----------------------------------------------------------------------
     gambling.
     ---------
          Since most lotteries are government agencies with lottery executives
     appointed by the state's governor or other high ranking official,
     opportunities or projects in progress can be slowed after an election if
     the incumbent governor is not reelected.
          There is a growing concern in the United States about the explosion of
     gaming. The creation of The National Gambling Impact Study Commission and
     its recently released report, may negatively impact state lotteries and



                                      -14-
<PAGE>


     other gaming activities and hence our business. We cannot assure you that
     there will not be an adverse change in the lottery laws of any jurisdiction
     in which we do business. In addition, we cannot predict the nature of the
     regulatory process in any jurisdiction that may authorize the use of
     instant tickets in the future. Any such regulatory process may be
     burdensome to us and our customers or their key personnel and could include
     requirements that we would be unable to satisfy. See "Government
     Regulation."

     Existing stockholders are able to exercise control over us.
     ------------------------------------------------------------
          Our officers and directors beneficially own approximately 61% of the
     outstanding Common Stock and Steven M. Saferin owns approximately 56%. Our
     Certificate of Incorporation does not provide for cumulative voting for the
     Board of Directors. As a result, Steven M. Saferin and management have the
     ability to control the election of a majority of our directors and the
     outcome of issues submitted to a vote of our stockholders. See "Security
     Ownership of Certain Beneficial Owners and Management."

     The loss of the services of Steven M. Saferin could harm our business.
     ----------------------------------------------------------------------
          Our success depends to a significant extent on the performance and
     continued service of Steven M. Saferin, an officer and director. MDIP has
     entered into an employment agreement with Mr. Saferin which expires on
     August 8, 2002 or three years from the date we first file a registration
     statement with the SEC, whichever is later. We do not carry key man
     insurance. See "Executive Compensation-Employment Agreements."

     Intense competition could reduce our market share.
     ---------------------------------------------------
          We acquire exclusive rights to license entertainment and other
     properties to the U.S. lottery industry. To date, we have not faced
     substantial competition in acquiring such rights. However there are several
     organizations that also design and promote lottery games and promotions
     based on licensed brands. One company has, to date, limited itself to board
     games and another, puzzles and fortunes. There is no guarantee these
     companies would not more aggressively pursue the types of entertainment
     properties we have targeted. In addition, it is possible that potential
     licensors may design their own lottery games and seek to market them
     directly to the lotteries, thus bypassing us. Another potential source of
     competition are the printers of instant tickets who, to improve their own
     competitive standing, might attempt to acquire licensing rights for various
     properties to offer exclusively to their lottery customers and enhance
     their competitive bidding for lottery printing contracts. See
     "Competition."

     We do not anticipate paying any dividends.
     -------------------------------------------
          We have never paid any cash or other dividends on our Common Stock. At
     present, we do not anticipate paying dividends on our Common Stock in the
     foreseeable future and intend to devote any earnings to the development of
     our business. Investors who anticipate the need for immediate income from
     their investment should refrain from purchasing our Common Stock.

     Our Common Stock may lack liquidity.
     ------------------------------------
          Our Common Stock is not traded on the NASDAQ Stock Market or any stock
     exchange. We cannot assure you that a stockholder would be able to buy or
     sell shares when desired.

     We indemnify our directors and officers against certain expenses and
     --------------------------------------------------------------------
     liabilities.
     -------------
          So far as permitted by the Delaware General Corporation Law, our
     Certificate of Incorporation and By-Laws provide that we will indemnify our



                                      -15-
<PAGE>


     directors and officers against expenses and liabilities they incur to
     defend, settle or satisfy any civil or criminal action brought against them
     on account of their being or having been directors or officers unless, in
     any such action, they are adjudged to have acted with gross negligence or
     to have engaged in willful misconduct. As a result of such provisions,
     stockholders may be unable to recover damages against our directors and
     officers for actions taken by them which constitute negligence or a
     violation of their fiduciary duties, which may reduce the likelihood of
     stockholders instituting derivative litigation against directors and
     officers and may discourage or deter stockholders from suing our directors,
     officers, employees and agents for breaches of their duty of care, even
     though such action, if successful, might otherwise benefit us and our
     stockholders.

     If the Internet does not grow as a medium for commerce, our E-commerce
     -----------------------------------------------------------------------
     sales strategy could be materially adversely affected.
     -------------------------------------------------------
          We have invested resources in developing our E-Commerce and catalog
     sales strategy. See "--Recent Developments." However, a portion of our
     future revenues and profits in connection with this strategy are partially
     dependent upon the widespread acceptance and use of the Internet and
     on-line services as an effective medium for commerce. Rapid growth in the
     use of and interest in the Internet is a recent phenomenon, and we cannot
     assure you that acceptance and use will continue to develop or that a
     sufficiently broad base of consumers will adopt, and continue to use, the
     Internet as a medium for commerce. In addition, critical issues concerning
     the commercial use of the Internet, such as ease of access, security,
     reliability, cost and quality of service, remain unresolved and may affect
     the growth of Internet use. If use of the Internet does not continue to
     grow or grows more slowly than expected or if the Internet does not become
     a viable commercial marketplace, the E-Commerce portion of our E-Commerce
     and catalog sales strategy could be materially adversely affected.

     We have certain registration obligations to our Series A Preferred
     -------------------------------------------------------------------
     Stockholders.
     -------------
          We are obligated to register the underlying Common Stock issuable upon
     conversion of our Series A Preferred Stock. We will be subject to severe
     penalties if we do not timely fulfill our registration obligations with
     respect to such stock, including penalties for failing to timely file such
     registration statement and having it declared effective by the Securities
     and Exchange Commission.

     Future sales of common stock by our existing stockholders could adversely
     --------------------------------------------------------------------------
     affect our stock price.
     ------------------------
          The market price of our Common Stock could decline as a result of
     sales of a substantial number of shares of our Common Stock in the market,
     or the perception that such sales could occur. Such sales also might make
     it more difficult for us to sell equity securities in the future at a time
     and at a price that we deem appropriate. As of the date of this Form
     10-KSB, we had 7,776,500 outstanding shares of Common Stock, as well as
     2,027 shares of Series A Preferred Stock. Of these shares, 3,289,322 shares
     of Common Stock are freely tradeable.

          As of the date of this Form 10-KSB, options to purchase a total of
     967,500 shares of our Common Stock are outstanding. Of such options,
     options to purchase 300,000 shares are currently exercisable while the
     remaining options vest and are exercisable in three installments over a
     period of three years commencing November 18, 1999. In addition, warrants
     to purchase a total of 596,875 shares of our Common Stock are outstanding.
     Of such warrants, warrants to purchase 30,000 shares are currently



                                      -16-
<PAGE>


     exercisable while the remaining warrants become exercisable on October 5,
     1999. The Series A Preferred Stock is convertible into 2,027,000 shares of
     our Common Stock. Shares issued upon the exercise of such options and
     warrants or conversion of the Series A Preferred Stock will be eligible for
     resale in the public market from time to time.

          We are obligated to file a registration statement covering
     approximately 2,027,000 shares of our Common Stock reserved for issuance in
     connection with the conversion of our Series A Preferred Stock. Upon the
     effectiveness of that registration statement, all shares covered by that
     registration statement will be freely tradeable. If a large number of such
     shares are sold in the public market, the price of our Common Stock may
     fall.


ITEM 2.  DESCRIPTION OF PROPERTY.

     We maintain our executive offices in approximately 5,179 square feet of
space in Hartford, Connecticut pursuant to a lease expiring on December 31,
2004. We do not have an option to renew. Monthly lease payments average
approximately $5,826 per month.


ITEM 3.  LEGAL PROCEEDINGS.

     We are involved in various lawsuits incidental to our business. We believe
that these proceedings, in the aggregate, will not have a material adverse
effect on our operations or financial position.


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

         There were no matters submitted to a vote of stockholders during the
fourth quarter of the fiscal year ended May 31, 1999.

                                     PART II


ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.


PRICE RANGE OF COMMON STOCK

     The Common Stock commenced trading on the OTC Bulletin Board on August 8,
1997 under the symbol "MDIH." The following table sets forth, for the fiscal
periods indicated, the high and low bid prices of a share of Common Stock as
reported by the OTC Bulletin Board for periods on and subsequent to August 8,
1997. Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.


                                      -17-
<PAGE>


                                                        High      Low
    FISCAL YEAR 1998

             1st Quarter (commencing August 8, 1997)   $2 7/8      $   5/8
             2nd Quarter ...........................   $2 1/8      $ 43/64
             3rd Quarter ...........................   $  3/4      $ 21/64
             4th Quarter ...........................   $  1/2      $ 17/64

    FISCAL YEAR 1999

             1st Quarter ...........................   $1          $   1/4
             2nd Quarter ...........................   $  3/4      $  5/16
             3rd Quarter ...........................   $1 9/32     $ 33/64
             4th Quarter ...........................   $1 5/8      $ 17/32


     As of August 23, 1999, the high and low bid prices per share of Common
Stock were $1.375 and $ 1.25, respectively and there were approximately 1,110
holders of record of the Common Stock.

     We have not paid dividends on the Common Stock since inception and do not
intend to pay any dividends to our stockholders in the foreseeable future. We
currently intend to retain earnings, if any, for the development of our
business. The declaration of dividends in the future will be at the election of
the Board of Directors and will depend upon our earnings, capital requirements,
financial position, general economic conditions, and other factors the Board of
Directors deems relevant.


SALE OF PREFERRED STOCK

     We received gross proceeds of $1,750,000 on August 4, 1999 from the private
sale to an investor of 2,027 shares of Series A Preferred Stock (the "Preferred
Stock"), representing approximately 20% of our outstanding Common Stock on an as
converted basis. The Preferred Stock has a liquidation preference of $1,750,000,
pays a dividend at the rate of 10% per annum, payable in cash or Common Stock at
our option and is convertible into an aggregate of 2,027,000 shares of Common
Stock, subject to adjustment under certain circumstances. As long as 2,027
shares of the Preferred Stock remain outstanding, the holders of a majority of
such shares may elect one of our directors. In addition, such holders are
entitled to a right of first refusal on new securities issued by us, subject to
certain exclusions. We may not create or increase the authorized number of
shares of any class or series of stock ranking prior to or on parity with the
Preferred Stock either as to dividends or liquidation without approval of a
majority of the holders of the Preferred Stock.

     We have agreed to file a registration statement with respect to the resale
of the Common Stock underlying the Preferred Stock within 45 days following
closing, which is required to be declared effective within 120 days of closing,
subject to certain exceptions. If such filing and effectiveness are not achieved
by the deadlines, the investor may be entitled to certain penalties. In
addition, upon effectiveness of such registration statement, the Preferred Stock
will pay a reduced dividend at the rate of 5% per annum. If not previously



                                      -18-
<PAGE>


converted by the investor, the Preferred Stock will automatically convert into
common stock in quarterly installments over a period of one year following the
effectiveness of the registration statement.

     In connection with the placement, MDI paid Venture Partners Capital, LLC, a
registered broker-dealer, a $140,000 cash fee and seven-year warrants to
purchase 566,875 shares of Common Stock at $1.31 per share.


WARRANTS

     During the fiscal year ended May 31, 1999, we issued warrants to purchase
30,000 shares of Common Stock at an exercise price of $0.28 to a public
relations firm and one of its key executives for services related to investor
relations.

     In addition, we issued 566,875 warrants in connection with the preferred
stock sale discussed above. These warrants and the 30,000 warrants discussed
above are outside of our 1998 Stock Options and Award Plan.


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

     All statements contained herein that are not historical facts, including
but not limited to, statements regarding our current business strategy and our
plans for future development and operations, are based upon current
expectations. These statements are forward-looking in nature and involve a
number of risks and uncertainties. Generally, the words "anticipates,"
"believes," "estimates," "expects" and similar expressions as they relate to us
and our management are intended to identify forward looking statements. Actual
results may differ materially. Among the factors that could cause actual results
to differ materially are those set forth under the caption "Description of
Business-Risk Factors." We wish to caution readers not to place undue reliance
on any such forward-looking statements, which statements speak only as of the
date made.

     Our principal business has been the scratch ticket segment of the
government lottery industry. We are a leader in designing and marketing instant
scratch ticket games based on licensed brand names and entertainment properties
and our lottery promotions feature such properties licensed by us. Prizes
awarded in such promotions typically include a number of "second chance" prizes
related to the licensed property, including collectible logo bearing merchandise
such as logo bearing T-shirts and caps, and other related merchandise such as
posters, money clips, telephones, playing cards, film cells, stadium blankets,
carryall bags, jackets, electronic games, video and music collections, watches,
clocks, credit cards with prepaid credit, trips and, in the case of
Harley-Davidson(R), Harley-Davidson 1200 Sportster motorcycles.

     We developed our strategy of identifying such properties in early 1996.
Prior to that time, we had developed a series of promotions that utilized
popular videotapes, compact discs and audiocassettes as second chance lottery
prizes. Those promotions enabled us to develop an expertise in sourcing and
distributing products as second chance lottery prizes and to develop a
reputation with lottery personnel as a reliable organization attuned to the
special needs of lotteries and their players.



                                      -19-
<PAGE>


     The financial results of the last fiscal year are not comparable with or
indicative of the results of the current 1999 fiscal year or, we believe, other
future years. As we cut back our video and music promotions during FY98 in order
to shift to our current licensing strategy, revenue from such promotions
decreased at an accelerated rate. Our decision to embark on this licensing
strategy in mid-96 did not result in any appreciable revenues for us until the
fourth quarter of fiscal year 1998. Our shrinking revenues, combined with
one-time charges in fiscal year 1998 resulted in substantial losses for that
year. It should be noted, however, that at the conclusion of fiscal year 1998 we
had over $2.9 million in deferred revenues from license-based promotions, and
that fourth quarter revenue numbers were almost equivalent of revenues for the
rest of the year. Fiscal 1999 reflects full integration of our licensing
strategy.

     We derive over ninety-five percent (95%) of our revenues from lotteries in
two distinct ways. First, we will usually charge a lottery a license and royalty
fee to utilize a particular licensed property as a lottery game. License fees
are a fixed assessment while royalties are a percentage of the printing cost of
the tickets. Contracts for licensed properties typically include an up-front
license fee and a royalty based on the manufacturing cost of tickets.
Manufacturing costs of tickets usually range from $10.00 per thousand to $30.00
per thousand. Actual costs depend on the size of the ticket and the quantity
printed. Ticket quantities range from about one million to as many as 60 million
with an average quantity of about five million.

     Our second source of lottery revenue is the sale of logo bearing
merchandise to the lottery as second-chance prizes. In merchandise-based lottery
games, between 5% to 10% of a lottery's prize fund is typically used for the
purchase of merchandise related to the property the lottery is utilizing.
Typically, we purchase merchandise from other licensees of the property and
resell the merchandise to the lottery at a price that is designed to include
overhead costs, profit, shipping and handling and any marketing support we
provide the lottery such as brochures, posters or other advertising assistance
for which there are no separate charges.

     Our success is dependent on our ability to maintain and secure licensed
properties, sell these properties to lotteries and the performance of the
properties once they are introduced as lottery games to players. We believe that
revenues will fluctuate as individual license-based promotions commence or wind
down and terminate. In addition, our licenses (which are generally for 1.5 to 3
years) terminate at various times over the next several years. Moreover, the
useful life of a license is generally relatively short as the novelty of the
game or the popularity of the licensed material wanes over time. The timing of
agreements with the lotteries to run promotions, the acquisition of new licenses
and the commencement of new promotions is unpredictable. Accordingly, period to
period comparisons may not be indicative of future results.

     We are in continuous negotiations to obtain additional properties and
expect to reach several agreements over the next six to 12 months; however we
cannot assure you that such agreements will actually be reached. Some of these
agreements may require the expenditures of significant up-front advances.



                                      -20-
<PAGE>


<TABLE>
<CAPTION>

                                                   YEAR ENDED MAY 31
                                     ----------------------------------------------
                                         1999        %             1998           %
                                         ----        -             ----           -
<S>                                 <C>            <C>         <C>              <C>
Total revenue ...................   $ 7,204,712    100.0       $ 1,984,840      100.0
Cost of revenue .................     3,812,169     52.9         2,313,831      116.6
                                    -----------     ----       -----------     ------
Gross profit (loss) .............     3,392,543     47.1          (328,991)     (16.6)

Selling, general and
   administrative expenses ......     2,158,849     30.0         1,797,631       90.6
                                    -----------     ----       -----------     ------
Operating income (loss) .........     1,233,694     17.1        (2,126,622)    (107.2)
Interest expense ................        28,200      0.4            51,821        2.6
Interest income .................       (20,487)    (0.3)          (36,894)      (1.9)
Other expense ...................        10,976      0.1            12,405        0.6
Minority interest ...............          (341)     --            (31,936)      (1.6)
                                    -----------     ----       -----------     ------
Income (Loss) before income taxes     1,215,346     16.9        (2,122,018)    (106.9)
Income tax (expense) benefit ....       (55,700)    (0.8)            3,125        0.2
                                    -----------     ----       -----------     ------

Net income (loss) ...............   $ 1,159,646     16.1       $(2,118,893)    (106.7)
                                    ===========     ====       ===========     ======
</TABLE>


Year Ended May 31, 1999 Compared to Year Ended May 31, 1998
-----------------------------------------------------------

     Results for the fiscal year ended May 31, 1999 ("FY 99") reflected net
income of $1,159,646 compared to a net loss for the fiscal year ended May 31,
1998 ("FY 98") of $2,118,893. The net income in FY 99 was primarily attributable
to a complete phase-in of our licensing promotions compared to the phasing out
of our Instant Entertainment Connection ("IEC") video and music promotions.
However, we did begin earning substantial revenue in the early stages of
licensing promotions in the fourth quarter of FY 98.

     Total revenue for FY 99 was $7,204,712 as compared to $1,984,840 for FY 98,
an increase of $5,219,872 (263%). This revenue increase reflects the successful
shift of our business to licensed promotions. Revenue during this year was
derived primarily from sales based on four entertainment-based or brand name
properties including Harley-Davidson(R) (64% of revenue), Wheel of Fortune(R)
(13% of revenue), Star Trek(TM) (13% of revenue) and Pepsi Cola(R) (8% of
revenue).

     Cost of revenues as a percentage of sales for FY 99 was $3,812,169 (52.9%)
compared to $2,313,831 (116.6%) for the year ended May 31, 1998. The major costs
of revenue include merchandise awarded as prizes, fulfillment of the prizes to
lottery winners and project marketing costs associated with creating and
printing brochures, mailers, posters, and catalogs. However, $154,885 of
previous years commissions payable to Mr. Saferin were relinquished by him in FY
99 which reduced cost of revenue by that amount. Had this reduction in expense



                                      -21-
<PAGE>


not occurred, cost of revenue would have been $3,967,054 (55.1%). This FY99 cost
to revenue ratio more accurately reflects our business cost for licensed
promotions.

     Certain marketing promotion costs that are fixed or partially fixed could
not be properly absorbed during FY 98, as a result of lower revenues, resulting
in a higher cost to revenue ratio of 116.6%. Additionally, in FY 98 we expensed
$786,000 of commissions related to an agreement for procurement services related
to video and audio entertainment media. The contract began in 1994 and was to be
paid on a formula basis over a number of years. Due to the strategic change in
our business, which included the phase out of the IEC promotions, we expensed
the remainder of the contract obligation. Had we not expensed the remaining
commissions for procurement services, cost of revenue would have been $1,527,831
(77% of sales).

     Gross profit increased to $3,392,543 (47.1% of revenue) for FY 99 compared
to a gross loss in FY 98 of $328,991 (16.6% of revenue). This was due to the
significantly higher revenue and the improved profit margin of licensed
promotions.

     Selling, general and administrative expenses for FY 99 were $2,158,849 (30%
of revenue) compared to $1,797,631 (90.6% of revenue) in FY 98. Although revenue
increased by 263% for FY 99, actual expenses increased by only 20% as compared
to FY 98. This 20% increase, or approximately $350,000, is due to added costs of
being a SEC reporting company and added human resources to properly manage our
growth for FY 99. Investor relations costs, legal and accounting were
approximately $167,000 higher this year due to reporting requirements. Salary
and employee fringe expenses accounted for most of the remaining increased
costs.

     Operating income was $1,233,694 (17.1% of revenue) for FY 99 as compared to
an operating loss of $2,126,622 for FY 98. This was principally due to the
factors described above.

     Interest expense was $28,200 for FY 99 compared to $51,800 for FY 98. This
decrease was attributable to a reduction in the principal amount of debt
outstanding for most of the year. However, in January 1999, we converted accrued
commissions of $600,000 into a 24-month note bearing interest at 10.75% per
annum. This is discussed more fully in "Liquidity and Capital Resources."

     Interest income was approximately $20,500 for the FY 99 period compared to
approximately $37,000 for FY 98. The interest income for FY 99 was principally
from savings interest. The interest income for FY 98 was principally from a
$7,000 per quarter charge for the debt owed by Steven M. Saferin, the Company's
President and CEO, which was paid in full in February 1998.

     Other expense for FY 99 was approximately $11,000 compared to $12,400 for
FY 98. The expense for FY 99 was due to the disposal of a fixed asset at less
than recorded book value. Other expense for FY 98 was associated with our
efforts in going public prior to the mergers and primarily represents legal
expenses.



                                      -22-
<PAGE>


     The minority interest of MDIT owned by third parties (66.7% owned by MDIP
and 33.3% owned by third parties) (the "Minority Interest") was reduced in FY 99
by $300 as compared to $31,900 in FY 98 due to net losses of MDIT. These amounts
are income to us as losses reduce the amount of remaining accumulated Minority
Interest obligations owed by us, as shown on the balance sheet. Final year taxes
was the only activity for this year. Last year was the final operating year for
MDIT.


LIQUIDITY AND CAPITAL RESOURCES

     As of May 31, 1999, we had cash of $340,400 compared to $960,400 as of May
31, 1998. However, receivables from lottery clients were $817,600 as of May 31,
1999 compared to $317,600 as of May 31, 1998. This is a $120,400 decrease in
combined cash and receivables at May 31, 1999 compared to May 31, 1998. This
decrease is due to receiving large contract amounts for promotions which
launched in the fourth quarter of FY 98, increasing cash significantly at May
31, 1998.

     On May 31, 1999, we had a net working capital deficit of $1,790,600.
However, $1,964,300 of this deficit were "billings in excess of costs and
estimated earnings on uncompleted contracts" and "deferred revenue." Both
"billings in excess of costs and estimated earnings on completed contracts" and
"deferred revenue" represent unrecognized revenue (i.e., revenue which we have
already been paid for but which cannot be recognized until we purchase and ship
the contracted merchandise after game drawings have occurred). Accordingly, such
liability will not adversely impact cash flow and, without such liability,
working capital would have been $173,700.

     Our indebtedness as of May 31, 1999 was $595,600, primarily represented by
a note with a remaining balance of $485,400, bearing interest at 10.75% per
annum and payable in monthly installments of $27,895 with the final payment date
of December 15, 2000. The note is secured by liens on substantially all of our
assets. This note resulted from the conversion of $600,000 of accrued
commissions due to a third party, which allows the Company to better manage its
cash flow requirements.

     The cash requirements of funding our growth have historically exceeded cash
flow from operations. Accordingly, we have satisfied our capital needs primarily
through debt and equity financing, as well as cash flow from operations.
Therefore, to address our immediate needs, we received gross proceeds of
$1,750,000 on August 4, 1999 from the private sale to an investor of 2,027
shares of Series A Preferred Stock (the "Preferred Stock"), representing
approximately 20% of our outstanding Common Stock on an as converted basis. The
Preferred Stock has a liquidation preference of $1,750,000, pays a dividend at
the rate of 10% per annum, payable in cash or common stock at our discretion,
and is convertible into an aggregate of 2,027,000 shares of our Common Stock,
subject to adjustment under certain circumstances. As long as 2,027 shares of
the Preferred Stock remain outstanding, the holders of a majority of such shares
may elect one director. In addition, such holders are entitled to a right of
first refusal on new securities issued by us, subject to certain exclusions. We
may not create or increase the authorized number of shares of any class or
series of stock ranking prior to or on parity with the Preferred Stock either as



                                      -23-
<PAGE>


to dividends or liquidation without approval of a majority of the holders of the
Preferred Stock.

     We have agreed to file a registration statement with respect to the resale
of the Common Stock underlying the Preferred Stock within 45 days following
closing, which is required to be declared effective within 120 days of closing,
subject to certain exceptions. If such filing and effectiveness are not achieved
by the deadlines, the investor may be entitled to certain penalties. In
addition, upon effectiveness of such registration statement, the Preferred Stock
will pay a reduced dividend at the rate of 5% per annum. If not previously
converted by the investor, the Preferred Stock will automatically convert into
Common Stock in quarterly installments over a period of one year following the
effectiveness of the registration statement.

     We do not have any material specific capital commitments and do not
currently anticipate making any substantial expenditures other than in the
normal course of business. We have undertaken an aggressive program of acquiring
new licenses, some of which may require substantial up front payments. Several
such licenses have been obtained recently and others are in the process of being
finalized.


RECENTLY ISSUED ACCOUNTING STANDARDS

     Statement of Financial Accounting Standards (SFAS No. 133) "Accounting for
Derivative Instruments and Hedging Activities." In June 1998, the FASB issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities".
This statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. Adoption of SFAS No. 133 is required
beginning with the first quarter of fiscal 2000. The adoption of SFAS No. 133 is
not expected to have a material impact on our financial condition or results of
operations.

     In June 1999, the FASB issued SFAS No. 137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No.
133." Adoption of SFAS No. 133 has been deferred to fiscal years beginning after
June 15, 2000.



                                      -24-
<PAGE>


YEAR 2000

     We have commenced an assessment of the hardware, software and network
components of our information technology systems. To date, we have replaced all
of our 22 CPUs with those that, according to manufacturers' representations, are
Year 2000 compliant. We also purchased a new server less than a year ago which,
according to manufacturer's representations, is Year 2000 compliant. The
operating systems we use are Windows 95 and Microsoft Office 97, which are both
Year 2000 compliant according to manufacturers' representations. We have
upgraded our network as well.

     New accounting and operational "SBT" software has been obtained which,
according to manufacturer's representations, is Year 2000 compliant and which is
expected to be installed by September 1999 to safeguard against delays in
meeting financial reporting requirements. Peripheral operational software, which
was customized, is being reviewed for integration with the "SBT" accounting and
operational software. Due to our shift to licensed promotions, it is anticipated
that the customized software previously required does not have to be completely
rewritten. FoxPro which houses the additional database required to operate the
customized software is being upgraded to Version 6.0 which, according to
manufacturer's representations, is Year 2000 compliant. We have retained a Year
2000 compliance service provider (the "Compliance Service Provider") to make the
required changes and integrate this software accordingly. Scheduling of this
work has been undertaken by the Compliance Service Provider.

     We utilize two third-party subcontractors. One is a fulfillment facility
and the other a data collection house. We have historically provided the
software needed to support these two functions. This software is also being
upgraded by the Compliance Service Provider to be Year 2000 compliant. Both
subcontractors have provided us with assurances that their hardware will also be
Year 2000 compliant.

     The original budget for Year 2000 compliance work was $50,000. As of May
31, 1999, we had incurred expenses of $45,600. We have revised this budget to
$65,000.

     Our most substantial foreseeable risk in respect of the Year 2000 is with
third-party subcontractors and their own customized software which supports
them. To insure our ability to function in this period of uncertainty, we have
developed a contingency plan to permit fulfillment to be accomplished by
alternate procedures utilizing existing third-party subcontractors. Similar
contingency plans have been developed to manage inventory and data management
and accounting.



                                      -25-
<PAGE>


     We believe we have taken appropriate steps to be Year 2000 compliant. We
have also prepared a contingency plan to handle as many risks as we can
reasonably address. However, we cannot assure you that problems will not be
encountered in connection with the date change from December 31, 1999 to January
1, 2000. We do not believe these problems will have a material adverse effect on
operations.


ITEM 7.  FINANCIAL STATEMENTS.

     The Financial Statements and Notes thereto can be found beginning on page
F-1, "Index to Financial Statements," following Part III of this Annual Report
on Form 10-KSB.


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

         Not applicable



                                    PART III


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

              Our directors and executive officers are as follows:

       Name                     Age               Position
       ----                     ---               --------
Steven M. Saferin               50        President, Chief Executive Officer and
                                          Director
Kenneth M. Przysiecki           55        Chief Financial Officer, Secretary and
                                          Director
Robert J. Wussler               62        Director
S. David Fineman                53        Director
Todd P. Leavitt                 48        Director
Charles W. Kline                39        Vice President of Sales and Marketing
Robert R. Kowalczyk             52        Vice President and General Manager



                                      -26-
<PAGE>


COMMITTEES

     The Board of Directors at their April 27, 1999 quarterly meeting
established the following committees and appointed members:

Audit Committee:                S. David Fineman
                                Robert J. Wussler

Compensation Committee:         Steven M. Saferin
                                Todd P. Leavitt

Executive Committee:            Steven M. Saferin
                                S. David Fineman
                                Kenneth M. Przysiecki


BIOGRAPHIES

Steven M. Saferin
-----------------

     Mr. Saferin has been the President, Chief Executive Officer and a
member of our Board of Directors since August 1997. Since January 1986, Mr.
Saferin has been President and Chief Executive Officer of MDIP, which today is
our wholly-owned subsidiary. In this capacity, Mr. Saferin has been primarily
responsible for product development, marketing and sales. Mr. Saferin conceived
and led MDIP's entry into the lottery industry and has since been the key
employee in revising, refining and creating new products and marketing
initiatives for us to offer to the lottery industry. Prior to founding MDIP, Mr.
Saferin was Director of Program Acquisitions at ESPN from 1982 to 1986. He
supervised a 16 person department in the areas of product acquisition and
scheduling. From 1978 to 1982, Mr. Saferin was active in cable television
franchising as a Vice President with both Viacom Communications and Warner Amex
Cable. In those capacities, he supervised cable television franchising
activities in dozens of major markets. Prior to entering business, Mr. Saferin
was an Attorney-Advisor to the Cable Television Bureau of the Federal
Communications Commission, as well as a member of the law department at Viacom
International, Inc. Mr. Saferin received a B.A. in journalism from American
University and received his J.D. after attending the Georgetown University and
the University of Maryland Schools of Law.


Kenneth M. Przysiecki
---------------------

     Mr. Przysiecki has been our Chief Financial Officer, Secretary and a member
of our Board of Directors since August 1997. Since August 1994, Mr. Przysiecki
has been Chief Financial Officer of MDIP. Prior to joining MDIP, Mr. Przysiecki
was involved in several business start-ups that required his financial planning,
negotiating and systems implementation skills. He was a Senior Manager for
Noreika, Rosenfeld and Hupp, a C.P.A. firm, from 1989 to 1992 and was employed
as Vice President of Finance for Keeney Manufacturing Company, from 1976 until
1988. He received his C.P.A. while employed at Arthur Andersen & Co. from 1972
to 1976; and received his B.S. in Business Administration from American
International College.



                                      -27-
<PAGE>


Robert J. Wussler
-----------------

     Mr. Wussler has been a member of our Board of Directors since August 1997.
He has been Chairman of the Board of Directors of U.S. Digital Communications,
Inc., a telecommunications company, since March 1997, and President and Chief
Executive Officer of such company since June 1998. He has also been President
and Chief Executive Officer of The Wussler Group, which owns several
telecommunications ventures, since February 1992. From June 1995 to June 1998,
Mr. Wussler served as President and Chief Executive Officer of Affiliate
Enterprises, Inc., a privately held company which acts as the syndication branch
of 51 media companies. Prior to his current activities he was the President and
CEO of Comsat Video, the international satellite telecommunications company from
1990 to 1993. Mr. Wussler is one of the founders of CNN (Cable News Network)
having founded the network when he was Senior Executive Vice President with
Turner Broadcasting from 1980 to 1990. During his tenure with Turner
Broadcasting, he was also President of the Atlanta Braves professional baseball
team and the Atlanta Hawks professional basketball team. Prior to joining the
Turner organization, Mr. Wussler was President of Columbia Broadcasting System
(CBS) Television, a position he attained from his start in the CBS mail room
through being the President of CBS Television. Mr. Wussler is also an
independent business consultant having directed such projects as the
establishment of a French-Kuwaiti television network in 1993 and the acquisition
of MetroMedia Enterprises. He was the founding Chairman of International TelCell
which later became a part of MetroMedia International Group in 1993. Mr. Wussler
also advised and guided the first African American professional basketball
ownership group in the finance, purchase, management and resale of the Denver
Nuggets franchise of the National Basketball Association. Mr. Wussler also
serves on the Board of Directors of Beachport Entertainment Corp., The
Translation Group, Ltd. and EdNet Inc.


S. David Fineman
----------------

     Mr. Fineman has been a member of our Board of Directors since November
1998. He is the managing attorney and founder of Fineman & Bach, P.C., a
Philadelphia, PA law firm since 1986. Mr. Fineman represents a variety of
clients, including governmental authorities and private clients dealing with the
government. He has an active litigation practice and represents clients
throughout the United States and Japan in both the Federal and State courts. Mr.
Fineman presently serves as special counsel to the Philadelphia Parking
Authority, the Secretary of Banking of the Commonwealth of Pennsylvania, and the
Insurance Commissioner of the Commonwealth of Pennsylvania. In 1995, he was
nominated by President Clinton and confirmed by the United States Senate to a
nine-year term on the Board of Governors of the United States Postal Service, a
nine member Board which directs and controls the expenditures, reviews practices
and policies, and establishes basic objectives and long-range goals for the
Postal Service. In 1994, Mr. Fineman was appointed to the Industry Policy
Advisory Committee, a CEO-level committee which advises the Secretary of
Commerce and the U.S. Trade Representative on international trade policy issues.
Mr. Fineman received a B.A. from American University and received his J.D. from
George Washington University Law School.



                                      -28-
<PAGE>


Todd P. Leavitt
---------------

     Mr. Leavitt has been a member of our Board of Directors since November
1998. He founded and has been Managing Director of Tulip Media Ltd.("Tulip
Media") since May 1998. Tulip Media furnishes services in areas of feature film,
television and video production and distribution as well as media consulting
services to a variety of United States and international companies engaged in
the entertainment industry. Prior to establishing Tulip Media, Mr. Leavitt
served as Chairman of the Alliance Television Group, supervising all television
production and distribution activities on behalf of Alliance Communications
Corporation, from 1995 to May 1998. Previously, Mr. Leavitt was Executive Vice
President of NBC Production Studios, the in-house production arm of the NBC
Television Network, from 1990 to 1995. Prior to joining NBC, Mr. Leavitt had
been Executive Vice President of Reeves Entertainment Group. Mr. Leavitt is a
Phi Beta Kappa graduate of Kenyon College, Gambier, Ohio, and received a law
degree from the New York University of Law.


Charles W. Kline
----------------

     Mr. Kline joined us Vice President of Sales and Marketing in February 1998.
Prior to joining us, Mr. Kline was Executive Director of the Pennsylvania State
Lottery, the nation's sixth largest lottery from 1992 to 1997. As Executive
Director, Mr. Kline oversaw the entire $1.7 billion sales operation. During his
five year tenure, Mr. Kline was credited with not only reversing a 3-year slide
in sales, but also engineering and implementing a program that caused the
lottery to undergo five consecutive years of sales growth. Prior to this post,
Mr. Kline served in a variety of key positions in state government. Mr. Kline
received a B.A. in Public Service and a Masters in Public Administration, both
from the Pennsylvania State University.


Robert R. Kowalczyk
-------------------

     Mr. Kowalczyk joined us as Vice President and General Manager in November
1997. Prior to joining us from 1995 to 1997, Mr. Kowalczyk was Vice President
and Management Supervisor of Yaffe and Company Advertising of Southfield,
Michigan ("Yaffe"). At Yaffe, Mr. Kowalczyk supervised the $10 million
advertising and promotions account and aided the product planning for the
Michigan State Lottery. Mr. Kowalczyk also supervised the agency's business
development and research functions, and participated in the account planning and
management for clients including health care, financial services and various
retail chains. Prior to his time in Michigan, Mr. Kowalczyk managed product
planning and marketing, research and the $32 million advertising and promotional
budgets for the Florida Lottery from 1991 to 1995. Under his direction, the
lottery reversed a decline in sales growth in that category. Previous to that,
Mr. Kowalczyk was the Marketing Director for the Ohio Lottery Commission from
1987 to 1991. He successfully expanded the entire lottery market by introducing
instant scratch-off game marketing strategies that have been emulated by
virtually every lottery in the years that followed. During his tenure, Ohio
Lottery sales increased an average of 16% per year, instant ticket sales
increased at 58% per year and profitability increased at the rate of 4% per
year. Mr. Kowalczyk received his Associate Degree from Lorain County Community
College and earned his Executive M.B.A. from the Weatherhead School of
Management, Case Western Reserve University, Cleveland, Ohio.



                                      -29-
<PAGE>


     Each director holds office until our annual meeting of stockholders and
until his successor is duly elected and qualified. Officers are elected by the
Board of Directors and hold office at the discretion of the Board of Directors.
There are no family relationships between any of our directors or executive
officers.


SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.

     Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires our directors and executive officers, and persons who
beneficially own more than ten percent of a registered class of our equity
securities, to file with the SEC initial reports of ownership and reports of
changes in ownership of Common Stock and our other equity securities . Officers,
directors, and persons who beneficially own more than ten percent of a
registered class of our equities are required by the regulations of the
Commission to furnish us with copies of all Section 16(a) forms they file. To
our knowledge, based solely on review of the copies of such reports furnished to
the Company, during the fiscal year ended May 31, 1999, all Section 16(a) filing
requirements applicable to our officers, directors, and greater than ten percent
beneficial owners were complied with, except that a Form 3 was filed late by
Todd P. Leavitt and Forms 4 were filed late by Steven M. Saferin, Kenneth M.
Przysiecki, Charles W. Kline and Robert R. Kowalczyk.


ITEM 10. EXECUTIVE COMPENSATION.

EXECUTIVE COMPENSATION

     The following table sets forth the annual and long-term compensation for
services in all capacities for the fiscal year ended May 31, 1999 paid to Steven
M. Saferin, President and Chief Executive Officer and a director, Kenneth M.
Przysiecki, Chief Financial Officer, Secretary and a director, Robert R.
Kowalczyk, Vice President and General Manager and Charles W. Kline, Vice
President of Sales and Marketing. No other executive officer received
compensation exceeding $100,000 during the fiscal year ended May 31, 1999.



                                      -30-
<PAGE>


<TABLE>

                                                  SUMMARY COMPENSATION TABLE
                                                  --------------------------
<CAPTION>

 NAME AND PRINCIPAL   FISCAL                                                LONG-TERM COMPENSATION
      POSITION         YEAR             ANNUAL COMPENSATION                         AWARDS

                                  SALARY            BONUS         OTHER ANNUAL    RESTRICTED    SECURITIES  LONG-TERM   ALL OTHER
                                                                 COMPENSATION      STOCK        UNDERLYING  INCENTIVE  COMPENSATION
                                                                 (1) AND (2)       AWARD(S)      OPTIONS/     PLAN         (3)
                                                                                                   SARS      PAYOUTS

------------------------------------------------------------------------------------------------------------------------------------

<S>                    <C>        <C>               <C>         <C>                  <C>            <C>         <C>       <C>
Steven Saferin,        1999       $300,000(4)         --         $(154,885)(5)       -              -           -         $5,029
President/CEO and      1998       $300,000(4)         --         $ 114,885           -              -           -         $3,654
Director



Kenneth M Przysiecki,  1999       $136,000          $4,000       $  29,084           -              -           -         $4,080
Chief Financial        1998       $102,000          $2,500       $  37,106           -              -           -         $3,030
Officer, Secretary
and Director



Robert R. Kowalczyk,   1999       $104,000          $2,300            --             -              -           -         $3,120
Vice President and     1998       $ 69,238            --              --             -              -           -         $1,200
General Manager



Charles W. Kline,      1999       $108,000          $2,000            --             -              -           -         $  540
Vice President of      1998       $ 29,077            --              --             -              -           -            --
Sales and Marketing

</TABLE>

(1)     Represents revenue-based commissions accrued pursuant to employment
        agreements. As of May 31, 1999, $147,762 of accrued commissions were
        owed to Mr. Saferin and $5,918 of accrued commissions were owed to Mr.
        Przysiecki.

(2)     Excludes prerequisites and other personal benefits, securities and
        properties otherwise categorized as salary or bonuses which, in the
        aggregate, did not exceed the lesser of either $50,000 or 10% of the
        total annual salary reported for such person.

(3)     Represents amounts contributed pursuant to our 401(k) Savings Plan.

(4)     Excludes amounts paid to Mr. Saferin's mother and the company owned by
        his spouse. Such amounts aggregated $110,000 in fiscal 1999 and $110,000
        in fiscal 1998.

(5)     Such amount reflects a reduction of commissions owed to Mr. Saferin that
        he has relinquished.



                                      -31-
<PAGE>


<TABLE>

                                  OPTIONS TABLE

                       Options Granted in Last Fiscal Year

                                Individual Grants
<CAPTION>

                          Number of Securities      % of Total Options
                           Underlying Options       Granted to Employees      Exercise or Base        Expiration
      Name                       Granted                 in Fiscal Year           Price($/Sh)              Date
------------------------- ---------------------- ----------------------- ---------------------- ----------------------

<S>                            <C>                       <C>                     <C>                  <C>
Steven M. Saferin              225,000(1)                61.2%                   0.33                 11/18/08

Kenneth M. Przysiecki           30,000(2)                 8.2%                   0.33                 11/18/08

Robert Kowalczyk                30,000(3)                 8.2%                   0.33                 11/18/08

Charles W. Kline                20,000(4)                 5.4%                   0.33                 11/18/08

</TABLE>

(1)     Options to purchase 75,000 shares of Common Stock vest and are
        exercisable commencing November 18, 1999 and an additional 75,000 shares
        of Common Stock vest and are exercisable on each November 18, 2000 and
        November 18, 2001.

(2)     Options to purchase 10,000 shares of Common Stock vest and are
        exercisable commencing November 18, 1999 and an additional 10,000 shares
        of Common Stock vest and are exercisable on each November 18, 2000 and
        November 18, 2001.

(3)     Options to purchase 10,000 shares of Common Stock vest and are
        exercisable commencing November 18, 1999 and an additional 10,000 shares
        of Common Stock vest and are exercisable on each November 18, 2000 and
        November 18, 2001.

(4)     Options to purchase 6,666 shares of Common Stock vest and are
        exercisable commencing November 18, 1999 and an additional 6,667 shares
        of Common Stock vest and are exercisable on each November 18, 2000 and
        November 18, 2001.


DIRECTOR COMPENSATION

     Upon election or appointment to the Board of Directors, non-employee
directors are granted non-qualified options to purchase 150,000 shares of Common
Stock at the fair market value of the Common Stock on the date of grant. In
September 1998, Mr. Wussler received stock options outside of the Plan (defined
below) for 300,000 shares of Common Stock at an exercise price of $0.37 per
share as compensation for his services as one of our outside directors. Messrs.
Leavitt and Fineman each received stock options pursuant to the Plan (defined
below) for 150,000 shares of Common Stock at an exercise price of $0.33 per
share as compensation for their services as outside directors.



                                      -32-
<PAGE>


OPTION AND AWARD PLAN

     On September 22, 1998, our Board of Directors adopted our 1998 Stock Option
and Award Plan (the "Plan") The stockholders approved the Plan on February 9,
1999. The Plan provides for the grant of stock awards and options for up to
800,000 shares of Common Stock to those employees, officers, directors,
consultants or other individuals or entities eligible under the Plan (as
defined) to receive stock awards or options (each, a "Plan Participant").
Options may be either "incentive stock options" within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
non-qualified options. Incentive stock options may be granted only to our
employees, while non-qualified options may be issued to non-employee directors,
consultants and others, as well as to our employees. Stock awards consist of the
sale or transfer by us to a Plan Participant of one or more shares of Common
Stock which, unless otherwise determined by the Board of Directors or committee
administering the Plan, are subject to transfer restrictions and our right to
repurchase if certain conditions specified in the award are not satisfied prior
to the end of a restriction period. The plan provides for automatic grants of
non-qualified stock options to purchase 150,000 shares of Common Stock to each
non-employee director upon his election or appointment to the Board of Directors
at the fair market value of the Common Stock on the date of the grant. Such
options vest in equal installments over three years. No Plan Participant may
receive more than an aggregate of 250,000 shares of Common Stock by grant of
options and/or stock awards during the term of the Plan.

     The Plan is administered by the Board of Directors or a committee thereof
(the "Plan Administrator), which determines, among other things, those
individuals who receive options or awards, the time period during which the
options may be partially or fully exercised, the terms of the restrictions, if
any, on awards, the number of shares of Common Stock issued as an award or
issuable upon the exercise of each option and the option exercise price and the
award and repurchase prices.

     The exercise price per share of Common Stock subject to an incentive option
may not be less than the fair market value per share of Common Stock on the date
the option is granted. The per share exercise price of the Common Stock subject
to a non-qualified option may be established by the Plan Administrator. The
aggregate fair market value (determined as of the date the option is granted) of
Common Stock for which any person may be granted incentive stock options which
first become exercisable in any calendar year may not exceed $100,000. No person
who owns, directly or indirectly, at the time of the granting of an incentive
stock option to such person, 10% or more of the total combined voting power of
all our classes of stock (a "10% Stockholder") shall be eligible to receive any
incentive stock options under the Plans, unless the exercise price is at least
110% of the fair market value of the shares of Common Stock subject to the
option, determined on the date of grant. Non-qualified options are not subject
to such limitation.

     No stock option may be transferred by a Plan Participant other than by will
or the laws of descent and distribution, and, during the lifetime of a Plan



                                      -33-
<PAGE>


Participant, the option will be exercisable only by the Plan Participant. In the
event of termination of employment other than by death or disability, the Plan
Participant will have no more than three months after such termination during
which the Plan Participant shall be entitled to exercise the option, unless
otherwise determined by the Plan Administrator. Upon termination of employment
of a Plan Participant by reason of death or permanent disability, such Plan
Participant's options remain exercisable for one year thereafter to the extent
such options were exercisable on the date of such termination.

     Options under the Plan must be issued within 10 years from the Plan's
effective date which is September 22, 1998. Incentive stock options granted
under the Plan, cannot be exercised more than 10 years from the date of grant.
Incentive stock options issued to a 10% Stockholder are limited to five-year
terms. All options granted under the Plan provide for the payment of the
exercise price in cash or by delivery to us of shares of Common Stock having a
fair market value equal to the exercise price of the options being exercised, or
by a combination of such methods. Therefore, a Plan Participant may be able to
tender shares of Common Stock to purchase additional shares of Common Stock and
may theoretically exercise all of such Plan Participant's stock options with no
investment.

     Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed by us become available again for issuance under the Plan.

     As of August 23, 1999, we have issued options to purchase 667,500 shares of
Common Stock under the Plan, which includes grants to (1) the Chief Executive
Officer and President for options to purchase 225,000 shares of Common Stock,
(2) other executive officers for options to purchase 80,000 shares of Common
Stock, (3) employees for options to purchase 62,500 shares of Common Stock and
(4) two outside directors for options to purchase a total of 300,000 shares of
Common Stock. As of such date, options to purchase 300,000 shares of Common
Stock have been issued outside of the Plan. None of the options granted have
been exercised.


401(k) SAVINGS PLAN

     In fiscal 1996, we adopted a 401(k) savings plan whereby participants can
elect to defer up to a specified maximum of their compensation and we will match
their contribution up to 3% of the employee's base salary. In fiscal 1999 and
1998, we contributed $14,687 and $9,429 to the plan, respectively.


EMPLOYMENT AGREEMENTS

Steven M. Saferin

     MDIP has entered into an employment agreement with Mr. Saferin, guaranteed
by us, which expires on the later of August 8, 2002 or three years from the date
we first file a registration statement with the SEC registering all of the
shares of common or preferred stock owned by Mr. Saferin, and our shares are
being traded on the New York Stock Exchange, the American Stock Exchange or the



                                      -34-
<PAGE>


NASDAQ Stock Market. See "Description of Business-Risk Factors-The loss of the
services of Steven M. Saferin could harm our business." Pursuant to his
employment agreement, Mr. Saferin receives an annual base salary of $300,000,
which may be increased each year in an amount between 5% and 10% of the salary
of the immediately preceding year. In addition, Mr. Saferin is entitled to a
bonus equal to 2% of the gross revenues, up to a maximum amount of $335,000 over
the term of the agreement. The employment agreement is terminable by MDIP for
"good cause" and by Mr. Saferin for "good reason" upon the occurrence of certain
events. In the event that MDIP terminates Mr. Saferin's employment without "good
cause" or Mr. Saferin resigns for "good reason," MDIP shall pay an amount equal
to the present value sum of the salary fixed at the salary rate on the date of
termination or resignation which Mr. Saferin would have received through August
7, 2002 had his employment not been terminated. The agreement does not contain
any terms regarding non-competition after the termination of Mr. Saferin's
employment.


Kenneth M. Przysiecki

     MDIP and Mr.Saferin have entered into an employment agreement with
Mr. Przysiecki, as amended, on a year to year basis starting from October 1 of
each year. Pursuant to his employment agreement, Mr. Przysiecki receives an
annual base salary of $136,000. Mr. Przysiecki is entitled to a bonus equal to
0.5% of all trade revenue. Mr. Przysiecki's employment may be terminated by him
or MDIP at any time upon sixty days' prior written notice. However, if
employment is terminated by MDIP upon notice, or because of Mr. Przysiecki's
death or disability, Mr. Przysiecki is entitled to severance pay equal to one
year of his current base salary. The employment agreement provides that Mr.
Przysiecki will not compete with MDIP in North America for eighteen months after
the termination of his employment. A state court, however, may determine not to
enforce such non-compete clause as against public policy.


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

PRINCIPAL STOCKHOLDERS

     The following table sets forth information known to us, as of August 23,
1999, regarding the beneficial ownership of our voting securities by (i) each
person who is known by us to own of record or beneficially more than 5% of the
outstanding Common Stock, (ii) each of our directors and the Named Executive
Officers, as defined in Item 6, and (iii) all directors and executive officers
of as a group. Unless otherwise indicated, each of the stockholders listed in
the table below has sole voting and dispositive power with respect to shares
beneficially owned by such stockholder.



                                      -35-
<PAGE>


                                         NUMBER OF SHARES           PERCENT
NAME OF BENEFICIAL OWNER (1)             BENEFICIALLY OWNED         OF CLASS (2)
----------------------------             ------------------         ------------

Steven M. Saferin                           4,366,124                56.1%
International Capital Partners, LLC         2,027,000(3)             20.7%
Agostino T. Galluzzo                          433,876                 5.6%
Robert J. Wussler                             300,000(4)              3.7%
Kenneth J. Przysiecki                         231,400(5)              3.0%
Charles Kline                                   1,725                 0%
Robert R. Kowalczyk                                 0                 0%
Todd P. Leavitt                                     0                 0%
S. David Fineman                                    0                 0%
All directors and executive
officers as a group (7 persons)             4,899,249                60.6%


(1)     The address for Messrs. Saferin, Galluzzo, Wussler, Przysiecki, Kline,
        Kowalczyk, Leavitt and Fineman is c/o MDI Entertainment, Inc., 201 Ann
        Street, Hartford, Connecticut 06103. The address for International
        Capital Partners, LLC is c/o Foley, Hoag & Eliot, LLP, One Post Office
        Square, Boston, MA 02109.

(2)     Shares of Common Stock are deemed outstanding for purposes of computing
        the percentage of beneficial ownership if such shares of Common Stock
        are exercisable or convertible within 60 days of the date of this Form
        10-KSB.

(3)     Includes 2,027,000 shares of Common Stock receivable upon conversion
        of 2,027 shares of Series A Preferred Stock.

(4)     Includes 300,000 shares of Common Stock which are subject to currently
        exercisable stock options.

(5)     Includes 1,400 shares owned by adult son as to which Mr. Przysiecki
        disclaims beneficial ownership.



         ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     Many of the following transactions occurred before, or as a result of, the
reverse mergers of MDIP and MDIM with and into us in August 1997.



                                      -36-
<PAGE>


     Since August 1994, our subsidiary, MDIP, has retained 1010 Productions,
Inc. ("1010") to consult in the areas of trade show activities, software
development, systems design, purchasing and product fulfillment. The president
and sole shareholder of 1010 is Linda Kesterson Saferin, spouse of Steven M.
Saferin, and former employee, officer and director of MDIP. 1010 is currently
paid $8,167 per month plus expenses and is retained until February 1, 2000
pursuant to its current consulting agreement with us.

     MDIT, a company of which MDIP owns 66.7%, and MDIM, a company of which Mr.
Saferin previously owned 91%, have paid MDIP an aggregate management fee of
$10,200 in fiscal 1999 and $198,000 in fiscal 1998, to operate the Texas and
Missouri lottery programs. MDIT and MDIM have both been collapsed into MDIP now
that the Texas and Missouri lottery contracts have ended.

     MDIT incurred a commission expense of $0 for fiscal 1999 and $10,663 in
fiscal 1998, respectively, to Steven M. Saferin in connection with the Texas
lottery.

     As a result of the reverse mergers of MDIP and MDIM with and into us in
August 1997, we executed a promissory note to Agostino T. Galluzzo in the amount
of $27,000. The note has an annual interest rate of 10% (which started on
December 7, 1997) and will be paid in thirty-six equal monthly installments
(beginning September 1998). Mr. Galluzzo was a minority stockholder of MDIP and
MDIM. In addition, Mr. Galluzzo received 433,876 shares of our Common Stock in
such mergers.

     On June 1, 1998, Steven M. Saferin guaranteed our $500,000 performance bond
provided to the Wisconsin lottery.

     On September 23, 1998, Steven M. Saferin guaranteed our $130,000
performance bond provided to the Louisiana lottery.

     Fineman & Bach, P.C., a Philadelphia PA law firm that S. David Fineman,
Director is associated with, from time to time does legal work for us.



                                      -37-
<PAGE>


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


  EXHIBIT NO.     DESCRIPTION

3.1     Certificate of Incorporation of MDI Entertainment, Inc. (f/k/a Puff
        Process Inc.) dated December 29, 1994, as amended.(2)
3.2     Certificate of Amendment to the Certificate of Incorporation of MDI
        Entertainment, Inc. dated February 28, 1999.(3)
3.3     Amended and Restated By-Laws of MDI Entertainment, Inc. dated April
        27, 1999.(5)
3.4     Certificate of Designations, Preferences and Rights of Series A
        Preferred Stock, dated August 4, 1999.(4)
4.1     Registration Rights Agreement dated August 8, 1997, between MDI
        Entertainment Inc., Steven M. Saferin and Agostino T. Galluzzo.(1)
4.2     1998 Stock Option and Award Plan, dated September 22, 1998.(1)
4.3     Registration Statement dated August 4, 1999 between MDI
        Entertainment, Inc. and International Capital Partners, LLC.(4)
4.4     Stock Purchase Agreement dated August 4, 1999 between MDI
        Entertainment, Inc. and International Capital Partners, LLC.(4)
10.1    Second Amended and Restated Employment Agreement dated August 8,
        1997, as amended, between Media Drop-In Productions, Inc. and Steven M.
        Saferin.(1)
10.2    Employment Agreement dated April 30, 1996, as amended, between
        Media Drop-In Productions, Inc., Kenneth Przysiecki and Steven M.
        Saferin.(1)
10.3    First Amended and Restated Consulting Agreement dated August 8,
        1997, between Media Drop-In Productions, Inc. and 1010 Productions,
        Inc.(1)
10.4    Lease dated June 1992, as amended, between Ann Street Limited
        Partnership by Tunxis Management Co., II, and Media Drop-In Productions,
        Inc.(1)
10.5    Amended Lease Agreement between KWK IV, LLC. and Media Drop-In
        Productions,Inc. dated March 25, 1999.(5)
10.6    Agreement and Plan of Reorganization dated August 8, 1997, between
        MDI Entertainment, Inc., MDI-Connecticut, Inc., MDI-Missouri, Inc. (DE),
        Media Drop-In Productions, Inc., MDI-Missouri, Inc. (MO), Steven M.
        Saferin and Agostino T. Galluzzo.(2)
10.7    Commission Agreement dated December 20, 1994, between Media Drop-In
        Productions, Inc. and Stamford Media Group, LLC.(2)
10.8    Letter of Intent dated July 31, 1998, between MDI Entertainment,
        Inc., Fancaster, Inc. and Craig Krueger.(2)
11.1    Statement Regarding Computation of Per Share Earnings (included in
        Note 1 of the "Notes to Consolidated Financial Statements").(5)
21.1    Subsidiaries of MDI Entertainment, Inc.(5)
27.1    Financial Data Schedule.(5)

        --------------------------



                                      -38-
<PAGE>


(1)     Incorporated by reference from the Company's Form 10-SB, filed
        September 28, 1998.
(2)     Incorporated by reference from the Company's Amendment No. 1 to the
        Form 10-SB, filed February 1, 1999.
(3)     Incorporated by reference from the Company's Form 10-QSB for the
        period ended February 28, 1999.
(4)     Incorporated by reference from the Company's Form 8-K filed August
        12, 1999.
(5)     Filed herewith.



                                      -39-
<PAGE>


                                 SIGNATURE PAGE

                  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.

  MDI ENTERTAINMENT, INC.
<TABLE>
<CAPTION>

 SIGNATURE                   TITLE                                            DATE
<S>                          <C>                                              <C>
/s/Steven M. Saferin         President, Chief Executive Officer and           August 23,1999
                             Director
</TABLE>

                  In accordance with the Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>

     SIGNATURE                            TITLE                                      DATE
     ---------                            -----                                      ----
<S>                          <C>                                              <C>
/s/Steven M. Saferin         President, Chief Executive Officer               August 23, 1999
--------------------         and Director
                                (Principal Executive Officer)

/s/Kenneth M. Przysiecki     Chief Financial Officer, Secretary               August 23, 1999
------------------------     and Director
                                (Principal Financial Officer)

/s/Robert J. Wussler         Director                                         August 23, 1999
---------------------

/s/Todd P. Leavitt           Director                                         August 23, 1999
-------------------

/s/S. David Fineman          Director                                         August 23, 1999
--------------------
</TABLE>



                                      -40-
<PAGE>


















                         INDEX TO FINANCIAL STATEMENTS
                         -----------------------------


     F-3   Report of Independent Public Accountants

     F-4   Consolidated Balance Sheets

     F-6   Consolidated Statements of Operations

     F-7   Consolidated Statement of Shareholder's Deficit

     F-8   Consolidated Statement of Cash Flows

     F-9   Notes to Consolidated Financial Statements



































                                      F-1
<PAGE>


















                    MDI ENTERTAINMENT, INC. AND SUBSIDIARIES

                    ----------------------------------------

            (FORMERLY MEDIA DROP-IN PRODUCTIONS, INC. AND AFFILIATES)

                        CONSOLIDATED FINANCIAL STATEMENTS

                           AS OF MAY 31, 1999 AND 1998

                                  TOGETHER WITH

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS







































                                      F-2
<PAGE>


                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Board of Directors and Shareholders of
MDI Entertainment, Inc.:

We have audited the accompanying consolidated balance sheets of MDI
Entertainment, Inc. and subsidiaries (formerly Media Drop-In Productions, Inc.
and Affiliates) as of May 31, 1999 and 1998, and the related consolidated
statements of operations, shareholders' deficit and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our 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 MDI Entertainment,
Inc. and subsidiaries as of May 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.




Hartford, Connecticut
July 19, 1999, except for Note 11,
  as to which the date is August 4, 1999








                                      F-3
<PAGE>


                    MDI ENTERTAINMENT, INC. AND SUBSIDIARIES

                    ----------------------------------------

            (FORMERLY MEDIA DROP-IN PRODUCTIONS, INC. AND AFFILIATES)

                           CONSOLIDATED BALANCE SHEETS

                           AS OF MAY 31, 1999 AND 1998




                                     ASSETS
                                     ------

                                                          1999            1998
                                                          ----            ----

CURRENT ASSETS:

  Cash                                               $  340,350      $  960,398
  Accounts receivable                                   817,614         317,598
  Inventories                                            57,596         417,651
  Other current assets                                   58,253          30,203
                                                    -----------      ----------
      Total current assets                            1,273,813       1,725,850
                                                    -----------      ----------

PROPERTY AND EQUIPMENT, at cost:
  Equipment                                             354,890         330,052
  Furniture and fixtures                                101,737         100,571
                                                    -----------      ----------
                                                        456,627         430,623
  Less:  Accumulated depreciation                      (350,605)       (322,771)
                                                    -----------      ----------
                                                        106,022         107,852
                                                    -----------      ----------

OTHER ASSETS:
  Licensing costs (Note 2)                              189,488         213,077
  Other (Note 1 and 11)                                 260,039          52,643
                                                    -----------      ----------
      Total other assets                                449,527         265,720
                                                    -----------      ----------
                                                     $1,829,362      $2,099,422
                                                    ===========      ==========





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



                                       F-4
<PAGE>


                    MDI ENTERTAINMENT, INC. AND SUBSIDIARIES

                    ----------------------------------------

            (FORMERLY MEDIA DROP-IN PRODUCTIONS, INC. AND AFFILIATES)

                           CONSOLIDATED BALANCE SHEETS

                           AS OF MAY 31, 1999 AND 1998






                      LIABILITIES AND SHAREHOLDERS' DEFICIT
                      -------------------------------------

                                                          1999            1998
                                                          ----            ----
CURRENT LIABILITIES:
  Billings in excess of costs and estimated
    earnings on uncompleted contracts (Note 1)      $ 1,695,886     $      -
  Deferred revenue (Note 1)                             268,405       2,906,047
  Current portion of long-term debt (Note 3)            365,911         123,754
  Accounts payable                                      364,909         346,491
  Accrued expenses (Note 7)                             313,550       1,170,165
  Income taxes payable                                   55,729            -
                                                    -----------      ----------
          Total current liabilities                   3,064,390       4,546,457


LONG-TERM DEBT, less current portion
  above (Note 3)                                        229,702         177,000


MINORITY INTEREST                                        34,927          35,268
                                                    -----------      ----------
          Total liabilities                           3,329,019       4,758,725
                                                    -----------      ----------


COMMITMENTS AND CONTINGENCIES (Notes 1, 5, 6 and 11)

SHAREHOLDERS' DEFICIT:
  Common stock                                            7,777           7,777
  Additional paid-in capital                            348,348         348,348
  Accumulated deficit                                (1,855,782)     (3,015,428)
                                                    -----------      ----------
          Total shareholders' deficit                (1,499,657)     (2,659,303)
                                                    -----------      ----------
                                                    $ 1,829,362     $ 2,099,422
                                                    ===========      ==========





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



                                       F-5
<PAGE>


<TABLE>


                              MDI ENTERTAINMENT, INC. AND SUBSIDIARIES

                              ----------------------------------------

                      (FORMERLY MEDIA DROP-IN PRODUCTIONS, INC. AND AFFILIATES)

                                CONSOLIDATED STATEMENTS OF OPERATIONS

                              FOR THE YEARS ENDED MAY 31, 1999 AND 1998
<CAPTION>



                                               1999      %               1998       %
                                               ----      -               ----       -
<S>                                       <C>           <C>         <C>             <C>
REVENUES                                  $ 7,204,712   100.0       $ 1,984,840     100.0

COST OF REVENUES                            3,812,169    52.9         2,313,831     116.6
                                          -----------    ----       -----------    ------
      Gross profit (loss)                   3,392,543    47.1          (328,991)    (16.6)

SELLING, GENERAL AND ADMINISTRATIVE
  EXPENSES                                  2,158,849    30.0         1,797,631      90.6
                                          -----------    ----       -----------    ------
      Operating profit (loss)               1,233,694    17.1        (2,126,622)   (107.2)

INTEREST EXPENSE, net                           7,713     0.1            14,927       0.7

OTHER EXPENSE                                  10,976     0.1            12,405       0.6

MINORITY INTEREST                                (341)    --            (31,936)     (1.6)
                                          -----------    ----       -----------    ------
      Income (loss) before (provision)
        benefit for income taxes            1,215,346    16.9        (2,122,018)   (106.9)

(PROVISION) BENEFIT FOR INCOME TAXES          (55,700)   (0.8)            3,125       0.2
                                          -----------    ----       -----------    ------
      Net income (loss)                   $ 1,159,646    16.1       $(2,118,893)   (106.7)
                                          ===========    ====       ===========    ======

Basic Earnings (Loss) Per Common
  Share (Note 1)                          $       .15               $      (.37)
                                          ===========               ===========

Diluted Earnings (Loss) Per Common
  Share (Note 1)                          $       .14               $      (.37)
                                          ===========               ===========


</TABLE>



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



                                      F-6
<PAGE>


<TABLE>

                                                  MDI ENTERTAINMENT, INC. AND SUBSIDIARIES

                                                  ----------------------------------------

                                           (FORMERLY MEDIA DROP-IN PRODUCTIONS, INC. AND AFFILIATES)

                                              CONSOLIDATED STATEMENTS OF SHAREHOLDER'S DEFICIT

                                                  FOR THE YEARS ENDED MAY 31, 1999 AND 1998
<CAPTION>



                                                      Common Stock
                                 ------------------------------------------------------
                                               Par**      Par***     Par                    Additional
                                     *        Value      Value      Value      Treasury      Paid-In      Accumulated
                                   Shares     $.01        $1        $.001       Stock        Capital        Deficit         Total
                                   ------     ----        --        -----       -----        -------       ---------        -----

<S>                                <C>        <C>      <C>         <C>       <C>          <C>           <C>             <C>
BALANCE, May 31, 1997               3,073     $ 10     $ 2,000     $  -      $(81,988)    $     90     $  (511,847)    $  (591,735)

Redemption of old shares           (3,073)     (10)     (2,000)       -        81,988          (90)        (79,888)           -
Issuance new shares             7,300,000       -          -        7,300        -           8,624        (304,800)       (288,876)
Proceeds from sale of
  common stock                    476,500       -          -          477        -         339,724            -           340,201
Net loss                             -          -          -          -          -            -         (2,118,893)     (2,118,893)
                               ----------     ----     -------     ------    --------     ---------     -----------     -----------
BALANCE, May 31, 1998           7,776,500       -          -        7,777        -         348,348      (3,015,428)     (2,659,303)

Net income                           -          -          -          -          -            -          1,159,646       1,159,646
                               ----------     ----     -------     ------    --------     ---------     -----------     -----------
BALANCE, May 31, 1999           7,776,500     $ -      $   -       $7,777    $   -        $348,348     $(1,855,782)    $(1,499,657)
                               ==========     ====     =======     ======    ========     =========     ===========     ===========

</TABLE>

  * - 25,000,000 shares authorized
 ** - 10,000 shares authorized, 1,073 shares issued and outstanding
*** - 100,000 shares authorized, 2,000 shares issued and outstanding




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



                                       F-7
<PAGE>


                    MDI ENTERTAINMENT, INC. AND SUBSIDIARIES

                    ----------------------------------------

            (FORMERLY MEDIA DROP-IN PRODUCTIONS, INC. AND AFFILIATES)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                    FOR THE YEARS ENDED MAY 31, 1999 AND 1998



                                                         1999           1998
                                                         ----           ----
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                 $ 1,159,646     $(2,118,893)
  Adjustments to reconcile net income (loss)
    to net cash (used for) provided by operating
    activities:
      Minority interest                                    (341)        (31,936)
      Depreciation and amortization                     140,412         283,792
      Loss on disposal of assets                         10,976             -
      Change in assets and liabilities:
        Increase in accounts receivable                (500,016)       (117,023)
        Decrease (increase) in inventories              360,055        (284,677)
        Increase in licensing costs                     (80,339)       (249,064)
        Increase in other assets                       (235,446)        (25,175)
        Increase (decrease) in accounts payable          18,418        (174,815)
        (Decrease) increase in accrued expenses        (256,615)        540,031
        Increase (decrease) in taxes payable             55,729         (44,321)
        (Decrease) increase in deferred revenue      (2,637,642)      2,906,047
        Increase in billings in excess of costs
          and estimated earnings on uncompleted
          contracts                                   1,695,886             -
                                                    -----------      ----------
      Net cash (used for) provided by operating
        activities                                     (269,277)        683,966
                                                    ------------     ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment, net               (45,630)        (27,041)
                                                    -----------      ----------
      Net cash used for investing activities            (45,630)        (27,041)
                                                    -----------      ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Repayment of debt                                    (305,141)       (344,918)
  Borrowings from long-term debt                           -            350,000
  Repayments of borrowings from stockholder                -           (110,000)
  Borrowings from stockholder                              -             60,000
  Proceeds from sale of stock                              -            340,201
                                                    -----------      ----------
      Net cash provided by financing activities        (305,141)        295,283
                                                    -----------      ----------

NET (DECREASE) INCREASE IN CASH                        (620,048)        952,208

CASH, beginning of the year                             960,398           8,190
                                                    -----------      ----------
CASH, end of the year                               $   340,350      $  960,398
                                                    ===========      ==========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid for
    Interest                                        $    34,237     $    48,734
    Income taxes                                    $     2,319     $     1,317
  Non-cash items:
    Conversion of accrued expense to note payable   $   600,000     $      -
    Reduction of loan to officer due to
      note payable and commissions owed to him      $      -        $   456,023
    Issuance of note in connection with exchange
      transaction                                   $      -        $   300,000
    Reduction of accrued expenses used to offset
      loan to officer                               $      -        $   183,023



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



                                       F-8
<PAGE>


                    MDI ENTERTAINMENT, INC. AND SUBSIDIARIES

                    ----------------------------------------

            (FORMERLY MEDIA DROP-IN PRODUCTIONS, INC. AND AFFILIATES)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              MAY 31, 1999 AND 1998




1.   Summary of Significant Accounting Policies:
     -------------------------------------------

     Organization -
     --------------

     MDI Entertainment, Inc. (the "Company") is a Delaware corporation
     incorporated on December 29, 1994 under the name Puff Process, Inc. In
     August 1997, the Company purchased 100% of the shares of Media Drop-In
     Productions, Inc., a Delaware corporation (Media Drop-In Productions, Inc.
     has a 66.7% owned subsidiary, MDI-Texas, Inc.,) and MDI-Missouri, Inc., a
     Missouri corporation (herein collectively referred to as "MDI"), in
     exchange for 4,800,000 shares of the Company's common stock and notes
     payable to the shareholders of MDI for an aggregate of $300,000. In
     connection with this acquisition, the name of the Company was changed to
     MDI Entertainment, Inc.

     All intercompany transactions have been eliminated in the accompanying
     financial statements. Since the Company had minimal assets, liabilities and
     no business activities prior to its acquisition of MDI, this transaction
     was accounted for as a "reverse merger," with MDI as the successor
     corporation. Therefore, these financial statements reflect the historical
     cost basis of MDI.

     MDI's principal activity has been the development and sale of entertainment
     based promotions to North American lotteries. MDI is positioned to create a
     wide variety of additional entertainment promotions. MDI has established
     itself as a source for the creation, supply and administration of
     entertainment based lottery promotions.

     In 1996, MDI created its Licensed and Patented Games division ("LPG"). MDI
     capitalized on current trends in the lottery industry to base some instant
     games on pre-existing games of chance and well known brands and logos. MDI
     has acquired the rights to several well known entertainment properties to
     license as lottery theme games and promotions. Included among the
     properties already licensed are "Star Trek," "Wheel of Fortune,"
     "Jeopardy," "Twilight Zone," "Rock and Roll Hall of Fame and Museum" and
     "Harley-Davidson."

     Inventories -
     -------------

     Inventories represent merchandise used in the Company's fulfillment
     operations. The inventory is stated at the lower of cost or market using
     the first-in, first-out method.



                                       F-9
<PAGE>


     Property and equipment -
     ------------------------

     Property and equipment are recorded at cost. Expenditures for repairs and
     maintenance are charged to expense as incurred. For assets sold or
     otherwise disposed of, the cost and related accumulated depreciation are
     removed from the accounts, and any resulting gain or loss is reflected in
     income for the period.

     Depreciation is calculated on a straight-line basis over the estimated
     useful life of the asset. Furniture and fixtures are depreciated over seven
     years and office equipment is depreciated over five years.

     Long-lived assets -
     -------------------

     The Company reviews its capitalized marketing costs quarterly to determine
     if an impairment has occurred. The Company recognizes that an impairment
     has occurred when the proposed lottery promotion is not expected to result
     in a contract with positive cash flow.

     Other assets -
     --------------

     Other assets are primarily comprised of prepaid financing costs related to
     the convertible preferred stock offering (Note 11).

     Revenue and cost recognition -
     ------------------------------

     Revenue is derived from various lottery game contracts (mainly with states)
     between MDI and the lotteries. MDI has agreed to provide second chance
     prize packages consisting of grand prizes and various merchandise prizes.
     MDI also provides marketing support related to each of the games and
     obtains the appropriate licenses for the right to use these properties.
     Many of the lottery contracts require the lotteries to pay MDI upon signing
     of the contract; therefore, MDI defers this revenue and recognizes the
     revenue based on the terms of the applicable game.

     Revenues from the lottery game contracts that are greater than one year are
     recognized on the percentage-of-completion method, determined by the
     percentage of costs incurred to date to estimated total costs on a specific
     contract basis. This method is utilized as management considers costs
     incurred to be the best available measure of progress on these contracts.
     Contract costs include all direct costs. General and administrative costs
     are charged to expense as incurred. Provisions for estimated losses on
     uncompleted contracts are made in the period in which such losses are
     determined. As of May 31, 1999, no losses were expected from existing
     contracts.



                                       F-10
<PAGE>


     The liability "billings in excess of costs and estimated earnings on
     uncompleted contracts" represents billings in excess of revenues
     recognized.

     As of May 31, 1999, billings in excess of costs and estimated earnings on
     uncompleted contracts was as follows:
<TABLE>
<CAPTION>

                                                                        Billings in Excess of
                                                                         Estimated Earnings
                                            Billings      Revenue   (Cost in Excess of Billings)
     Lottery            Game                to Date       Earned      on Uncompleted Contracts
     -------            ----                -------       ------      ------------------------
<S>              <C>                      <C>          <C>                 <C>
     Wisconsin     Wheel of Fortune       $  510,000   $  303,920          $  206,080
     Wisconsin     Star Trek                 475,000      242,312             232,688
     Wisconsin     Holiday Harley            525,688      441,700              83,988
     Wisconsin     Harley Davidson         1,276,100    1,105,370             170,730
     Wisconsin     Pepsi                   1,012,215      608,498             403,717
     Virginia      Star Trek                 310,500      239,273              71,227
     Virginia      Harley Davidson           400,014      157,148             242,866
     Louisiana     Harley Davidson           129,847       84,262              45,585
     Arizona       Star Trek                 130,250      104,960              25,290
     New Hampshire Harley Davidson           128,250        9,446             118,804
     Rhode Island  Harley Davidson           126,000       26,346              99,654
     Iowa          Louisville Slugger         63,672       14,136              49,536
     Australia     Instant Entertainment
                           Connection            -            -               (54,279)
                                          ----------   ----------          ----------
                       Total              $5,087,536   $3,337,371          $1,695,886
                                          ==========   ==========          ==========
</TABLE>

     Earnings (loss) per share -
     ---------------------------

     Basic earnings (loss) per common share are based on the average number of
     common shares outstanding during the year. Diluted earnings (loss) per
     common share assumes, in addition to the above, a dilutive effect of common
     share equivalents during the year. Common share equivalents represent
     dilutive stock options using the treasury method. The number of shares used
     in the earnings (loss) per common share and earnings (loss) per
     dilutive share and warrants computation for 1999 and 1998 was as follows:

                                                   1999           1998
                                                   ----           ----
     Basic
       Average common shares outstanding         7,776,500     5,791,351

     Dilutive
       Dilutive effect of options and warrants     528,078         -
                                                 ---------     ---------
       Average dilutive common shares
       outstanding                               8,304,578     5,791,351
                                                 =========     =========



                                      F-11
<PAGE>


     Recent accounting pronouncements -
     ----------------------------------

     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
     Instruments and Hedging Activities" ("SFAS No. 133").  This statement
     establishes accounting and reporting standards for derivative
     instruments and for hedging activities.  Adoption of SFAS No. 133 is
     required beginning with the first quarter of fiscal 2000.  The adoption
     of SFAS No. 133 is not expected to have a material impact on the
     Company's financial condition or results of operations.

     In June 1999, the FASB issued SFAS No. 137 "Accounting for Derivative
     Instruments and Hedging Activities - Deferral of the Effective Date of SFAS
     No. 133." Adoption of SFAS No. 133 has been deferred to fiscal years
     beginning after June 15, 2000.

     Use of estimates in preparation of financial statements -
     ---------------------------------------------------------

     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 at
     the date of the financial statements and the reported amounts of revenues
     and expenses during the reported period. Actual results could differ from
     those estimates.

     Reclassifications -
     -------------------

     Certain reclassifications have been made to the 1998 consolidated financial
     statements to conform with the 1999 presentation.

2.   Licensing Costs:
     ----------------

     The Company capitalizes costs associated with obtaining the exclusive right
     to use and to sublicense the use of licensed properties, as defined in the
     license agreements. These costs are amortized over the life of the license.

     At May 31, 1999, the following costs have been capitalized:

                                     Capitalized    Accumulated       Net
                                        Costs      Amortization      Asset
                                        -----      ------------      -----

     Wheel of Fortune License        $ 10,000       $  7,848       $  2,152
     Star Trek License                 85,000         40,000         45,000
     Rock & Roll Hall of Fame
       License                         10,000           -            10,000
     Patented Games                    83,135         68,637         14,498
     Harley Davidson License          100,000         53,673         46,327
     Louisville Slugger License        20,000          4,012         15,988
     Time Square 2000 License          10,000           -            10,000
     Harley Davidson Commercial        48,666         15,643         33,023
     Heroes of Space License           10,000           -            10,000
     Hummer/Humvee License              2,500           -             2,500
                                     --------       --------       --------
                                     $379,301       $189,813       $189,488
                                     ========       ========       ========



                                      F-12
<PAGE>


     At May 31, 1998, the following costs have been capitalized:

                                     Capitalized    Accumulated       Net
                                        Costs      Amortization      Asset
                                        -----      ------------      -----

       Australia Lottery             $ 56,377       $ 35,500       $ 20,877
       Patented Games                  83,085         55,390         27,695
       Star Trek License               85,000         25,654         59,346
       Rock & Roll Hall of
         Fame License                  10,000           -            10,000
       Harley Davidson License        100,000          4,841         95,159
                                     --------       --------       --------
                                     $334,462       $121,385       $213,077
                                     ========       ========       ========


3.   Notes Payable:
     --------------

     Notes payable consists of the following:

                                                      1999           1998
                                                      ----           ----

       Promissory note payable bearing interest
         at a rate of 3% above prime
         rate; principal and interest of $27,895
         payable monthly through
         December 15, 2000 (Note 7).              $ 485,363     $     -

       Term note payable bearing no interest;
         principal of $5,000 payable monthly
         through December 1, 2000.                   90,000        150,000

       Promissory note payable bearing interest
         at 10%; principal of $750 payable
         monthly through August 2002.                20,250         27,000

       Term note payable bearing no interest;
         principal of $16,666 payable monthly
         through November 30, 1998.                     -          100,000

       Term notes payable bearing interest at
         20%; principal and interest of
         $12,199 payable monthly through
         December 15, 1997, however payment
         terms were extended to July 16, 1998.         -            23,754
                                                  ---------      ---------
                                                    595,613        300,754

       Less - current maturities                   (365,911)      (123,754)
                                                  ---------      ---------
                                                  $ 229,702      $ 177,000
                                                  =========      =========



                                      F-13
<PAGE>


     Repayments of long-term debt for each of the next 5 years and thereafter
     are as follows:

             Year Ending
               May 31,

                2000 .........................$365,911
                2001 ......................... 227,452
                2002 .........................   2,250
                                              --------
                                              $595,613
                                              ========

     The notes payable are secured by liens on substantially all of the
     Company's assets.

4.   Stock Option and Award Plan:
     ----------------------------

     On September 22, 1998, the Board of Directors approved the 1998 Stock
     Option and Award Plan (the Plan) which provides for up to 800,000 incentive
     and nonqualified common stock options. Options granted under the Plan to
     directors, selected employees, officers, agents, consultants, and
     independent contractors of the Company are exercisable for a period
     determined by the Company, but in no event longer than ten years from date
     of grant, subject to certain conditions.

     During fiscal 1999, the Company awarded stock options for 300,000 shares
     with an exercise price of $.37 outside the Plan. These options are
     exercisable for five years from date of grant, subject to certain
     conditions.

     The Company has adopted the provisions of Statement of Financial Accounting
     Standards No. 123, (Accounting for Stock-Based Compensation) (SFAS 123).
     SFAS 123 requires the measurement of the fair value of stock options or
     warrants to be included in the statement of operations or disclosed in the
     notes to financial statements. The Company has determined that it will
     account for stock-based compensation for employees under Accounting
     Principles Board Opinion No. 25 and elect the disclosure-only alternative
     under SFAS 123.

     The Company has computed the pro forma disclosures required under SFAS 123
     for options granted as of May 31, 1999 using the Black-Scholes option
     pricing model as prescribed by SFAS 123. For purposes of this calculation,
     the fair value of each option grant is estimated on the grant date using
     the Black-Scholes option-pricing model with the following assumptions:

           Risk free interest rate ....................5.10% - 5.62%
           Expected dividend yield ....................     0%
           Expected lives .............................5 - 10 years
           Expected volatility ........................    119%
           Fair value .................................$0.28 - $0.32

     In addition, the Company issued warrants to purchase 30,000 shares of
     Common Stock at an exercise price of $0.28 for services provided by third
     parties. The estimated fair market value of the warrants was not material.



                                      F-14
<PAGE>


     Had compensation cost for the Company's stock option plans been determined
     consistent with SFAS 123, the Company's pro forma net income would have
     been as follows:

                                                            1999
                                                            ----
         Net income:
           As reported .................................$1,159,646
           Pro forma ................................... 1,066,346

         Basic earnings per common shares:
           As reported .................................$      .15
           Pro forma ...................................       .14

         Diluted earnings per common shares:
           As reported .................................$      .14
           Pro forma ...................................       .13


     The pro-forma information is not indicative of future years.

     The following table summarizes both stock option activities under and
     outside the Plan during the year ended May 31, 1999.

                                                            Weighted Average
                                              Shares         Exercise Price
                                              ------         --------------

     Outstanding, May 31, 1998                   -              $  -

       Granted                                967,500           $0.34
       Exercised                                 -                 -
       Cancelled                                 -                 -
                                              -------           -----
     Outstanding, May 31, 1999                967,500           $0.34
                                              =======           =====
     Options exercisable at May 31, 1999      300,000           $0.37
                                              =======           =====
     Weighted average fair value options
       granted during the year                967,500           $ .34
                                              =======           =====

     The following table summarizes information about stock options at May 31,
     1999:

                                    Weighted
                                     Average                      Weighted
                                    Remaining                      Average
       Exercise      Number        Contractual       Number       Exercise
         Price     Outstanding        Life         Exercisable      Price
         -----     -----------    ------------     -----------      -----

        $0.37       300,000         5 years          300,000       $0.37
         0.33       667,500        10 years             -           0.33



                                      F-15
<PAGE>


5.   Income Taxes:
     -------------

     The Company accounts for income taxes in accordance with Statement of
     Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for
     Income Taxes" which requires that a deferred tax liability or asset be
     recognized for the estimated future tax effects attributable to temporary
     differences between the Company's financial statements and its tax return.
     SFAS No.109 provides for recognition of a deferred tax asset for all future
     deductible temporary differences that, more likely than not, will provide
     the Company a future benefit. As of May 31, 1999 and 1998, MDI had a
     deferred tax asset of approximately $1,780,000 and $2,515,000,
     respectively, primarily as a result of net operating loss carryforwards.
     MDI has established a valuation allowance for the full amount of this
     deferred tax asset.

     MDI has net operating loss carryforwards amounting to approximately
     $4,367,000 and $5,561,000 at May 31, 1999 and 1998. These carryforwards
     expire beginning in 2006. Useage of the NOL's is limited in the event
     certain ownership changes occur.

     The tax expense recorded by the Company for the years ended May 31, 1999
     and 1998 was primarily minimum state income taxes.

6.   Commitments:
     ------------

     The Company leases office equipment, office space and vehicles under
     long-term leases which expire during the next one to four years. Rent
     expense totaled $61,415 and $70,976 in 1999 and 1998, respectively. The
     following is a schedule of future minimum rental payments required under
     operating leases that have initial or remaining noncancelable lease terms
     in excess of one year as of May 31, 1999:


            2000 .......................$ 75,879
            2001 .......................  71,434
            2002 .......................  74,023
            2003 .......................  70,660
                                        --------
                                        $291,996
                                        ========


     MDI has agreed to provide the Wisconsin Lottery (the Lottery) a performance
     bond acceptable to the Lottery in the amount of $500,000. The Company has
     also provided a $130,000 performance bond to the Louisiana Lottery. Steven
     Saferin has personally guaranteed these performance bonds.



                                      F-16
<PAGE>


7.   Commission Agreement:
     ---------------------

     In December, 1994, MDI entered into a commission agreement with a media
     company to assist in the procurement of video and audio entertainment
     media. The term of the agreement was from December 15, 1994 through
     December 14, 1997. Commissions of 5.33% were required to be paid on monthly
     cash receipts in excess of $337,500. If at the end of the term, the
     aggregate cash collections were less than $27,300,000, then the media
     company could renew the Agreement for an additional year or periods of one
     year until MDI reaches $27,300,000. There were commissions of approximately
     $186,000 paid in 1999 and none were paid in 1998.

     MDI could have elected not to renew this agreement and would then be
     required to deliver to the media group a promissory note in the amount of
     $808,250, less previously paid commissions, bearing interest at a rate of
     3% above prime rate, payable over 24 months. MDI had renewed the agreement
     through December 14, 1998. However, since MDI had significantly reduced the
     utilization of this media company, they accrued the $786,287 minimum fee
     owed to them and charged it to cost of revenues for the year ended May 31,
     1998.

     During 1999, MDI entered into a formal note agreement with the media group
     to repay the remaining outstanding balance due to them in the amount of
     $600,000 (Note 3).

8.   Contingencies:
     --------------

     The Company is involved in various lawsuits incidental to its business. The
     Company and its outside counsel believe that these proceedings, in the
     aggregate, will not have a material adverse effect on the Company's
     operations or financial position.

9.   Related Party Transactions:
     ---------------------------

     MDI made a loan to the President of the Company which was due August 31,
     1997. This note receivable was offset against the commissions owed to this
     officer and a note payable which resulted from the reverse merger (Note 1).

     The President of the Company loaned MDI $60,000 in 1998. This loan was paid
     in full as of May 31, 1998.

     In 1999 and 1998, the Company incurred commission expense of $144,000 and
     $114,593 and wage expense of $300,000 and $300,000, respectively, to the
     President of the Company, in accordance with his Employment Agreement. The
     agreement allowed a $300,000 salary for the 12 month period through
     February 28, 1998. On March 1, 1998, and each anniversary thereafter, the
     President's salary may be increased by 5% or an equation based on the
     consumer price index. In no event shall the increase exceed 10% in any



                                      F-17
<PAGE>


     one year. In addition, the President receives a commission equal to 2% of
     gross revenues of the Company (not to exceed $335,000 over the term of the
     Employment contract). The President has waived the right to approximately
     $54,000 of commissions during 1999, as well as $100,000 of commissions
     relating to prior years. This has been reflected as a reduction in cost of
     revenue in fiscal 1999. The contract began August 8, 1997 and terminates
     the later of March 1, 2002 or three years from the date the Company files a
     registration statement with the Securities and Exchange Commission
     registering the shares of common stock, if its traded on NASDAQ.

     The Company has retained 1010 Productions, Inc. (1010) to consult in the
     areas of trade shows, software development, systems design, purchasing and
     product fulfillment. The president and sole shareholder of 1010 is the wife
     of the President of the Company. 1010 is currently paid $8,167 per month
     plus expenses and is retained until February 1, 2000 pursuant to a
     consulting agreement.

10.  Employee Benefit Plan:
     ----------------------

     In fiscal 1996, the Company adopted a 401(k) savings plan, whereby
     participants can elect to defer up to a specified minimum of their
     compensation and the Company will match their contribution up to 3% of the
     employee's base compensation. In fiscal 1999 and 1998, the Company
     contributed $14,687 and $9,429 to the plan, respectively.

11.  Subsequent Event:
     -----------------

     On August 4, 1999 the Company finalized a $1,750,000 private sale to an
     investor of 2,027 shares of Series A Preferred Stock,("Preferred Stock")
     representing approximately 20% of the outstanding common stock of the
     Company on an as converted basis. The Preferred Stock has a liquidation
     preference of $1,750,000, pays a dividend at the rate of 10% per annum
     payable in cash or Common Stock at the Company's option and is convertible
     into an aggregate of 2,027,000 shares of the Company's Common Stock,
     subject to adjustment under certain circumstances. As long as 2,027 shares
     of the Preferred Stock remain outstanding, the holders of a majority of
     such shares may elect one director of the Company. In addition, such
     holders are entitled to a right of first refusal on new securities issued
     by the Company, subject to certain exclusions. The Company may not create
     or increase the authorized number of shares of any class or series of stock
     ranking prior to or on parity with the Preferred Stock either to dividends
     or liquidation without approval of the majority of the holders of the
     Preferred Stock.

     The Company has agreed to file a registration statement with respect to the
     resale of the common stock underlying the Preferred Stock within 45 days
     following closing, which is required to be declared effective within 120
     days of closing, subject to certain exceptions. If such filing and
     effectiveness are not achieved by the deadlines, the investor may be
     entitled to certain penalties. In addition, upon effectiveness of such
     registration statement the Preferred Stock will pay a reduced dividend at
     the rate of 5% per annum. If not previously converted by the investor, the
     Series A Preferred Stock will automatically convert into Common Stock in
     quarterly installments over a period of one year following the
     effectiveness of the registration statement.



                                      F-18
<PAGE>


     In connection with the placement, the Company paid Venture Partners
     Capital, LLC, a registered broker-dealer, a $140,000 cash fee and
     seven-year warrants to purchase 566,875 shares of Common Stock at $1.31 per
     share.



                                      F-19
<PAGE>


                                 EXHIBITS INDEX
                                 --------------



EXHIBIT NO.       DESCRIPTION

3.1     Certificate of Incorporation of MDI Entertainment, Inc. (f/k/a Puff
        Process Inc.) dated December 29, 1994, as amended.(2)
3.2     Certificate of Amendment to the Certificate of Incorporation of MDI
        Entertainment, Inc. dated February 28, 1999.(3)
3.3     Amended and Restated By-Laws of MDI Entertainment, Inc. dated April
        27, 1999.(5)
3.4     Certificate of Designations, Preferences and Rights of Series A
        Preferred Stock, dated August 4, 1999.(4)
4.1     Registration Rights Agreement dated August 8, 1997, between MDI
        Entertainment Inc., Steven M. Saferin and Agostino T. Galluzzo.(1)
4.2     1998 Stock Option and Award Plan, dated September 22, 1998.(1)
4.3     Registration Statement dated August 4, 1999 between MDI
        Entertainment, Inc. and International Capital Partners, LLC.(4)
4.4     Stock Purchase Agreement dated August 4, 1999 between MDI
        Entertainment, Inc. and International Capital Partners, LLC.(4)
10.1    Second Amended and Restated Employment Agreement dated August 8,
        1997, as amended, between Media Drop-In Productions, Inc. and Steven M.
        Saferin.(1)
10.2    Employment Agreement dated April 30, 1996, as amended, between
        Media Drop-In Productions, Inc., Kenneth Przysiecki and Steven M.
        Saferin.(1)
10.3    First Amended and Restated Consulting Agreement dated August 8,
        1997, between Media Drop-In Productions, Inc. and 1010 Productions,
        Inc.(1)
10.4    Lease dated June 1992, as amended, between Ann Street Limited
        Partnership by Tunxis Management Co., II, and Media Drop-In Productions,
        Inc.(1)
10.5    Amended Lease Agreement between KWK IV, LLC. and Media Drop-In
        Productions,Inc. dated March 25, 1999.(5)
10.6    Agreement and Plan of Reorganization dated August 8, 1997, between
        MDI Entertainment, Inc., MDI-Connecticut, Inc., MDI-Missouri, Inc. (DE),
        Media Drop-In Productions, Inc., MDI-Missouri, Inc. (MO), Steven M.
        Saferin and Agostino T. Galluzzo.(2)
10.7    Commission Agreement dated December 20, 1994, between Media Drop-In
        Productions, Inc. and Stamford Media Group, LLC.(2)
10.8    Letter of Intent dated July 31, 1998, between MDI Entertainment,
        Inc., Fancaster, Inc. and Craig Krueger.(2)
11.1    Statement Regarding Computation of Per Share Earnings (included in
        Note 1 of the "Notes to Consolidated Financial Statements").(5)
21.1    Subsidiaries of MDI Entertainment, Inc.(5)
27.1    Financial Data Schedule.(5)

        --------------------------



<PAGE>


(1)     Incorporated by reference from the Company's Form 10-SB, filed
        September 28, 1998.
(2)     Incorporated by reference from the Company's Amendment No. 1 to the
        Form 10-SB, filed February 1, 1999.
(3)     Incorporated by reference from the Company's Form 10-QSB for the
        period ended February 28, 1999.
(4)     Incorporated by reference from the Company's Form 8-K filed August
        12, 1999.
(5)     Filed herewith.