SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

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

                   For the Fiscal Year Ended December 31, 1997

                                       OR

               [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                        For the transition period from to

                     Commission File Number 001-12885 
                        AVENUE ENTERTAINMENT GROUP, INC.
                 (Name of Small Business Issuer in its charter)

            Delaware                                             95-4622429
(State or other jurisdiction                                (I.R.S.   Employer 
 of incorporation or organization)                           Identification No.)


11111 Santa Monica Blvd., Suite 2110, Los Angeles, CA              90025
(Address of principal executive offices)                           (Zip Code)

Registrant's telephone number, including area code:          (310) 996-6800

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class                   Name of each exchange on which registered:
Common Stock, $.01 Par Value                   American Stock Exchange, Inc.

Securities registered pursuant to Section 12(g) of the Act:         None

Check whether the Registrant  (1) has filed all reports  required to be filed by
Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during the 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 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.   $2,367,000

As of March 2, 1998,  the  aggregate  market value of the voting and  non-voting
common equity,  held by non-affiliates  (assuming for this calculation only that
all officers and directors are affiliates) was  approximately  $14,421,292 based
on the closing price of the Common Stock on the American Stock Exchange on March
2, 1998.

State the number of shares  outstanding of each of the  Registrant's  classes of
common stock, as of the most recent practicable date.

Class                                              Outstanding at March 2, 1998
-----                                              ----------------------------
Common Stock, par value $.01 per share                    4,072,838 shares

DOCUMENTS INCORPORATED BY REFERENCE:                        None


<PAGE>







                                                 TABLE OF CONTENTS
                                                                        Page
PART I

         Item 1.    Description of Business...............................1

         Item 2.    Description of Property..............................16

         Item 3.    Legal Proceedings....................................16

         Item 4.    Submission of Matters to a Vote of
                    Security Holders.....................................16

PART II

         Item 5.    Market for the Registrant's Common Equity
                    and Related Stockholder Matters......................17

         Item 6.    Management's Discussion and Analysis of
                    Financial Condition and Results of Operations........18

         Item 7.    Financial Statements................................F-1

         Item 8.    Changes In and Disagreements with Accountants
                    on Accounting and Financial Disclosure............III-1

PART III

         Item 9.    Directors, Executive Officers, Promoters
                    and Control Persons; Compliance with
                    Section 16(a) of the Exchange Act.................III-1

         Item 10.   Executive Compensation............................III-3

         Item 11.   Security Ownership of Certain
                    Beneficial Owners and Management..................III-6

         Item 12.   Certain Relationships and Related
                    Transactions......................................III-8

         Item 13.   Exhibits and Reports on Form 8-K..................III-10


<PAGE>


1

ITEM 1.       DESCRIPTION OF BUSINESS

General

         Avenue  Entertainment  Group,  Inc. (the  "Company") is an  independent
entertainment  company  which,  through its two operating  subsidiaries,  Avenue
Pictures,  Inc.  ("Avenue  Pictures") and Wombat  Productions,  Inc.  ("Wombat")
develops and produces motion pictures for theatrical exhibition, television, and
other ancillary markets, both domestically and internationally.

Share Exchange and Reincorporation

         Pursuant  to  a  Share   Exchange   Agreement   (the  "Share   Exchange
Agreement"), dated as of September 30, 1996, among Cary Brokaw, Avenue Pictures,
and The CineMasters Group, Inc. ("CineMasters"), CineMasters acquired all of the
outstanding  capital  stock of Avenue  Pictures from Mr.  Brokaw,  then the sole
shareholder of Avenue Pictures,  in exchange for 1,425,000 shares of CineMasters
common stock ("CineMasters Common Stock") (the "Business Combination").

         Following  the  Business  Combination,   the  Board  of  Directors  and
shareholders of CineMasters  approved a transaction pursuant to which (i) all of
the  assets of the  Wombat  Productions  division  (the  "Wombat  Division")  of
CineMasters   were   transferred,   subject  to  all  related   liabilities  and
obligations, to its newly-formed, wholly-owned Delaware subsidiary, Wombat, (ii)
CineMasters was merged with and into the Company (its newly-formed, wholly-owned
Delaware  subsidiary)  with the Company being the surviving  corporation  in the
merger  (the  "Reincorporation"),  and (iii)  each  stockholder  of  CineMasters
received an equal  number of shares of the Company in exchange for each share of
capital stock of CineMasters held by such stockholder  immediately  prior to the
effective time of the Reincorporation (the "Effective Time"). As a result of the
Reincorporation,  Avenue  Pictures  became  a  wholly-owned  subsidiary  of  the
Company.

Avenue Pictures

         Avenue  Pictures  was  founded by Cary Brokaw in 1991.  Mr.  Brokaw has
extensive experience in the motion picture industry.  He began his career in the
marketing  department at Twentieth Century Fox. He also served as executive vice
president at Cineplex  Odeon and was  president and chief  executive  officer of
Island Pictures.

         Mr.  Brokaw  has  particular  experience  in  producing  and  releasing
modestly  budgeted  independent  films  which  appeal to the more  sophisticated
theatergoer. He has enjoyed success with such films as Choose Me, El Norte, Kiss
of the Spider  Woman,  The Trip to  Bountiful,  Mona Lisa and Spike  Lee's first
film,  She's Gotta Have It. Mr. Brokaw is  responsible  for the  production  and
release of Gus Van Sant's Drug Store Cowboy,  James Foley's After Dark My Sweet,
Michael  Lindsay-Hogg's The Object of Beauty,  Jane Campion's  Sweetie,  and Jim
Sheridan's The Field. Mr. Brokaw was the producer of Robert Altman's The Player,
the  celebrated  and  successful  comedy  which was  nominated  for five Academy
awards,  including Best Picture.  Mr. Brokaw also produced Robert Altman's Short
Cuts, which was nominated for several Academy Awards. More recently,  Mr. Brokaw
produced  Restoration,  the Academy-Award  winning and critically acclaimed epic
adventure  directed by Michael  Hoffman and released by Miramax Films.  In 1996,
Mr.  Brokaw  produced  Sony  Pictures'  Voices from a Locked  Room,  directed by
Malcolm Clarke and starring Jeremy Northam and Tushka Bergen.  In February 1998,
Avenue Pictures  completed Finding Graceland  starring Harvey Keitel,  Johnathan
Schaech,  and Bridget Fonda based on an original screenplay  developed by Avenue
Pictures,  which was fully financed by Largo Entertainment Corp., a wholly owned
subsidiary of JVC Entertainment,  Inc. ("Largo").  Finding Graceland is expected
to be released in the Fall of 1998.  Largo is currently  negotiating  a domestic
distribution agreement.

         Avenue  Pictures  is  in  the  business  of  producing  feature  films,
television  films,  and series for  television.  As set forth in greater  detail
below,  Avenue Pictures is currently active in developing and producing projects
in each of its three areas of activity.

Business Approach

         As an independent producer of feature films and television programming,
Avenue Pictures does not have sufficient  capital to  independently  finance its
own  productions.  Accordingly,  most of its financial  resources are devoted to
financing  development  activities  which include the  acquisition of underlying
literary works such as books,  plays, or newspaper articles and commissioning of
screenplays  based upon such  underlying  literary  works.  A key element in the
success  of  the  development   process  is  Mr.  Brokaw's   reputation  in  the
entertainment business and his access to and relationships with creative talent.

         It is the ability to identify and develop  attractive  properties which
is instrumental to the success of independent producers such as Avenue Pictures.
In particular, the feature film industry relies heavily on independent producers
to  identify   projects  which  are  then  developed  further  or  produced  and
distributed by the major studios. Independent producers serve a similar function
in the  television  industry.  Avenue  Pictures  employs a flexible  strategy in
developing its motion picture and film properties. Wherever possible, it employs
its own capital and  financial  resources  in  developing a project to the point
where it is ready to go into production.  Typically, this means putting together
a "package"  which consists of the underlying  property,  a script that is ready
for  production,  and key talent,  including a director and principal  cast. The
benefit of developing a project to this advanced  stage is that Avenue  Pictures
will have maximum leverage in negotiating  production and financing arrangements
with a  distributor.  Nevertheless,  there are  occasions  when Avenue  Pictures
benefits from the financial  assistance of a studio at an earlier  stage.  These
occasions may be necessary as a result of lengthy  development of a script,  the
desirability of commissioning a script by a highly paid writer,  the acquisition
of an expensive  underlying  work,  or a significant  financial  commitment to a
director or star. Moreover, when developing a property for series television, it
is almost  essential  to  involve a network  at an  earlier  stage  inasmuch  as
development  and  production  of a  television  series  requires  a much  larger
financial commitment than production of a television movie.

         In addition to the  development  and  production  strategies  described
above, Avenue Pictures also considers various production financing  alternatives
which  are  available  whereby  commitments  from  various  end  users  such  as
independent domestic  distributors,  foreign distributors,  cable networks,  and
video  distributors  can be combined to finance a project without a major studio
financial commitment.  Set forth below are Avenue Pictures's current projects in
the  feature  film,  made-for-television,   and  series  television  categories,
including a brief  description  of the financial  arrangements  which pertain to
each type of production.

Feature Films

         Currently,  Mr. Brokaw serves as the producer or executive  producer of
all Avenue  Pictures films with overall  responsibility  for their  development,
financing, and production arrangements.  Avenue Pictures is paid a producing fee
for both the  services  of Mr.  Brokaw and for  Avenue  Pictures's  services  in
connection with the development and production of each feature film, in addition
to a negotiated profit participation.  The nature of the profit participation is
a function of Mr. Brokaw's standing as a producer and Avenue Pictures's relative
bargaining  position  with respect to each project.  As set forth above,  Avenue
Pictures's bargaining position is enhanced by the development and "packaging" of
a project to the fullest possible extent before seeking the financial assistance
of a studio or distributor.

         Current feature film projects for Avenue Pictures include the following
titles:  The  Diviners,  Angels in  America,  The  Moviegoer,  Mindhunters,  AKA
Goldfish and Stand by Your Man.

         Finding Graceland, an original screenplay developed by Avenue Pictures,
directed by David Winkler and starring  Harvey Keitel,  Johnathan  Schaech,  and
Bridget Fonda,  was completed in May 1997 and was delivered to Largo in February
1998. The $11 million film was fully financed by Largo. Largo currently plans to
distribute  the film in foreign  markets by  licensing  the rights to most major
territories and through a network of sales representatives in other territories.
In the  domestic  market,  principally  the United  States and Canada,  Largo is
currently  negotiating to license the film.  After Largo receives a distribution
fee for its services and recoups its  expenses and  investment  in the film plus
interest,  Avenue Pictures will receive a profit  participation of approximately
50% out of which all third party participants must be paid.

         Avenue  Pictures will produce the film Angels in America,  based on the
Pulitzer Prize and Tony Award winning play by Tony Kushner.  Director P.J. Hogan
of Muriel's Wedding and My Best Friend's  Wedding,  starring Julia Roberts,  has
agreed to direct the  picture.  Several  major  actors,  including Al Pacino and
Meryl Streep,  have agreed to star in the motion picture.  Developed at New Line
Cinema, Avenue is now negotiating with several studios with respect to financing
of the film. Avenue Pictures hopes to start filming in late 1998.

         Tri-Star Pictures has financed the development of a film based upon the
Walker  Percy  novel,  The  Moviegoer.  Actor  Julia  Roberts  is  contractually
committed  to the film  subject to  approval  of the final  script and choice of
director.  Terence Malik, director of Badlands, Days of Heaven, and the upcoming
The Thin Red Line,  has written the  screenplay  and may  direct.  Tri-Star  has
placed this  project in  turnaround  and Avenue is in  discussions  with several
other studios to finance the film.

         Woody  Harrelson  and Liv Tyler are  committed to star in The Diviners.
The  Diviners  is  based  on a play by Jim  Leonard,  Jr.  who  also  wrote  the
screenplay.  Avenue  Pictures  has an option to acquire  the  screenplay  and is
finalizing  financing  for the  film.  Avenue  Pictures  anticipates  commencing
filming in August 1998.

         Mindhunters  is a screenplay  developed by Avenue  Pictures and sold to
Twentieth Century Fox in a bidding war. Now on the fast track to production, the
story concerns a serial killer amidst the most elite unit of the FBI. The script
is out to several  directors and, subject to casting,  production is anticipated
for July 1998.

         The Company has recently acquired an option to the original  screenplay
Stand by Your Man by Andy  Borowitz,  creator of "The Fresh  Prince of Bel Air".
The Company is  simultaneously in the process of casting the film and securing a
director and financing for the film and production is anticipated for late 1998.

         The Company is  completing  the  financing of Yanqui  Dollar,  which is
expected to star Bob  Hoskins.  Based upon a screenplay  by Martin  Stellman and
Brian  Ward,  and to be  directed  by Brian Ward,  production  is  scheduled  to
commence in July 1998.

         Dimension  Pictures/Miramax  Films have recently  agreed to finance the
development of JINX and AKA Goldfish,  based on the acclaimed  underground comic
book by Brian  Michael  Bendis.  Mr.  Bendis has  completed a screenplay  of AKA
Goldfish which has been submitted to potential directors. Subject to the process
of selecting a director and cast, filming is anticipated for fall 1998.

         Although Avenue Pictures continues to pursue vigorously the development
and/or production of these projects, there can be no assurance that each project
will  be  produced  within  the  indicated  time  frame  and  budget  due to the
contingencies of securing talent, financing, and distribution.

         In addition to these projects,  Avenue Pictures is currently developing
approximately fifteen additional projects. However, no assurance can be given as
to when or if any of these projects will be completed.

Made-for-Television/Cable Movies

         Avenue  Pictures  has also  successfully  produced  made-for-television
movies and movies for cable television.  Movies produced for television include:
In The Eyes of a Stranger,  which  aired on CBS in the spring of 1992,  See Jane
Run,  based on the  best-selling  novel by Joy Fielding,  starring  Joanna Kerns
(ABC) which aired in January 1995 and was  rebroadcast  on ABC on June 15, 1997,
and A Stranger in Town, an adaptation of R.T.  Marcus's play starring Jean Smart
and Gregory Hines,  which aired on CBS in March of 1996.  More recently,  Avenue
Pictures  produced The Almost Perfect Bank Robbery  starring  Brooke Shields and
Dylan Walsh for CBS, Two Mothers for Zachary for ABC starring Valerie Bertinelli
and Vanessa  Redgrave,  and Tell Me No Secrets  starring Lori Loughlin and Bruce
Greenwood which aired on ABC in January 1997.

         For cable  television,  Avenue Pictures  produced  Amelia Earhart:  The
Final Flight for Turner Network Television, starring Diane Keaton, Rutger Hauer,
and Bruce Dern, and directed by Yves Simoneau which aired in June 1994, and Path
To  Paradise:  The  Untold  Story of the World  Trade  Center  Bombing  for HBO,
starring  Peter  Gallagher,  Marcia Gray  Hardin,  and Art Malik and directed by
Leslie Libman and Larry Williams. Path to Paradise aired on June 14, 1997.

         Typically, the domestic broadcaster of a made-for-television movie pays
a license fee which entitles it to a limited number of airings of the movie over
a designated  period of time  (generally 2-5 years).  The initial  network/cable
license  fees  generally  range  from  $2.5  -$3.5  million  dependent  upon the
broadcaster  and the nature and content of the  programming.  Producers  such as
Avenue Pictures have  historically  been required to expend  production costs in
excess of the initial domestic network/cable broadcast license fee. The practice
of incurring  production costs in excess of the initial  domestic  network/cable
broadcast  license fee is  generally  referred to as "deficit  financing."  This
deficit    financing   is   generally    recovered    through   sales   of   the
made-for-television   movie  in  media  and  territories   other  than  domestic
network/cable  broadcasting,  such as international  free  television,  domestic
syndication  (post initial  broadcast  license),  domestic and international pay
television,  and domestic and international  home video.  Unlike many television
producers who must seek licensing arrangements on a project-by-project  basis to
cover its deficit  financing,  Avenue  Pictures  has  historically  entered into
output  arrangements  which  provide it the ability to assemble  financing  more
easily  and  enable it to move  forward  more  efficiently  with its  television
projects.  Avenue Pictures had an output agreement which expired in October 1997
with RHI  Entertainment,  Inc., a  distribution  company which is a wholly owned
subsidiary of Hallmark Entertainment, Inc. ("Hallmark"). Avenue Pictures retains
100% ownership in its made-for-television  movies subject to the rights licensed
to the initial domestic network/cable broadcaster and Hallmark.

         In March  1998,  Avenue  Pictures  Television  concluded a new two year
distribution agreement with Pearson Television,  a division of Pearson Plc. With
vast  interests  in  publishing,  media and  television,  Pearson  is one of the
world's largest and most  prestigious  distributors  of television  programming.
Like the  Hallmark  agreement,  Avenue has granted  Pearson the right to license
Avenue Pictures Television programs (i) internationally and (ii) in the domestic
market  subsequent  to the initial  network  license  period.  Like the previous
arrangement with Hallmark, Avenue holds the copyright to its television programs
and  Pearson  pays  Avenue  a  substantial  predetermined  advance  against  its
distribution  rights to all such movies. In addition,  Pearson provides Avenue a
recoupable  contribution  to its  operating  overhead  on a monthly  basis and a
development fund on an annual basis.

         Neither the Hallmark nor Pearson  agreements  cover  television  movies
which Mr. Brokaw or other Avenue Pictures  executives  produce  pursuant to "for
hire" arrangements with programmers. In such producer-for-hire arrangements, Mr.
Brokaw and Avenue Pictures do not have financing responsibility or ownership for
the films.  Mr. Brokaw receives a substantial  producer's fee for such services.
Mr.  Brokaw  has  provided  services  to HBO as a  producer-for-hire  on Path to
Paradise.  Mr.  Brokaw has also been asked to  executive  produce  Drugs,  Inc.:
Sympathy  for the Devil,  a two hour movie  about the  infamous  drug lord Pablo
Escobar  for HBO.  Sympathy  for the  Devil,  which is still in the  development
stage, is expected to begin principal photography in late 1998 or early 1999.

         Avenue  Pictures  has  approximately   fifteen   television  movies  in
development, including Don't Cry Now (ABC), based on Joy Fielding's best selling
novel,  and Spree,  The Andrew Cunanan Story (ABC) and The  Replacement  Husband
(NBC). In addition,  in March 1998, Avenue Pictures  Television secured an order
from CBS to develop a script for a three night,  six hour  mini-series  entitled
American  Country.  Based  upon  the  upcoming  book  American  Country  by  Bud
Schaetzle,  the mini-series  will be accompanied by a three compact disc release
featuring the program's  exceptional  country music soundtrack.  The mini-series
tells the story of four  generations of one extended  musical family whose lives
are  interwoven  with the  development  of  country  music and the events of the
twentieth century.  It is the story of the  quintessential  American family with
the rich backdrop of the evolution of country music from its pre-radio  roots to
its phenomenal current popularity. Although Avenue Pictures is actively pursuing
these  projects,  there can be no  assurance  that each or any  project  will be
produced  due  to  Avenue  Pictures's   reliance  upon  the  network  and  cable
programmers  who must  approve and order the films in order to provide  adequate
financing.

Series Television

         Currently,  Avenue Pictures is in development  with several  television
series.  In conjunction with New Line Television,  Avenue Pictures has developed
and produced a one-hour pilot for a television  series based upon the movie, The
Player, for which Mr. Brokaw serves as Executive Producer.  ABC has financed the
pilot with New Line Television. The pilot was delivered to ABC in late May 1997.
ABC has  declined  to  produce a series  based on the pilot.  However,  New Line
Television is currently negotiating with another network interested in producing
the series.

         Avenue Pictures is also working on three other television  series which
are in the developmental stage,  including Street Life written by Joseph Cacaci,
which is a one hour series being developed with Warner Brothers Television,  and
Sports Freaks.

Competition

         The motion picture industry is extremely  competitive.  The competition
comes  from both  companies  within the same  business  and  companies  in other
entertainment  media which create  alternative  forms of leisure  entertainment.
Avenue Pictures competes with several "major" film studios which are dominant in
the motion picture industry, as well as with numerous independent motion picture
and television  production  companies,  television networks,  and pay television
systems for the acquisition of literary  properties,  the services of performing
artists,  directors,  producers, and other creative and technical personnel, and
production  financing.  Many of the  organizations  with which  Avenue  Pictures
competes have  significantly  greater  financial and other  resources  than does
Avenue  Pictures.  In addition,  Avenue  Pictures's  films  compete for audience
acceptance with motion pictures produced and distributed by other companies.  As
a result, the success of Avenue Pictures's  production is also heavily dependent
on public taste,  which is both  unpredictable and susceptible to change without
warning.

         A limited  number of independent  production  companies are as actively
involved in the  production of both feature  films and  television  movies.  The
management of Avenue Pictures believes that its established track record of high
quality,   critically  acclaimed  films  attracts  some  of  the  best  writing,
directing, and acting talent in the industry. In addition, Mr. Brokaw's years of
experience in the business and strong reputation further enhance the competitive
edge of Avenue Pictures.

Major Customers

         Avenue  Pictures's  revenue  has  historically  been  derived  from the
production  of a  relatively  small  number of  programs.  Given this fact,  the
limited  number  of  outlets  for  the  Avenue  Pictures  productions,  and  the
individually  significant  license  fees  generated  from  certain of its sales,
certain  customers  have  historically  accounted for a  significant  portion of
Avenue Pictures's revenue.  Avenue Pictures derived approximately 40% and 15% of
the Company's total revenue from Hallmark and Largo, respectively,  for the year
ended December 31, 1997.

Employees

         Avenue  Pictures  has  nine  full  time  employees  and one  part  time
employee.


Wombat

         Wombat was  formed in March  1997 to  acquire  all of the assets of the
Wombat  Division of  CineMasters,  founded in 1969 by Gene Feldman and his wife,
Suzette St. John  Feldman.  Historically,  Wombat's  primary  focus has been the
production  of one hour motion  picture  profiles of  Hollywood's  biggest stars
which are aired by the major cable  networks.  Gene Feldman and Suzette St. John
Feldman have produced films together for over twenty years.



<PAGE>


         The following  titles,  produced since 1982, are included in the Wombat
program library:

                    Program Library- The Hollywood Collection

  "Hollywood's Children"                  "Clint Eastwood: The Man From Malpaso"
  "The Horror Of It All"                  "Audrey Hepburn Remembered . . ."
  "Ingrid"                                "Mae West ..And The Men Who Knew Her"
  "Marilyn Monroe:  Beyond The Legend"    "The Story Of Lassie"
  "Steve McQueen:  Man On the Edge"       "Charlton Heston:  For All Seasons"
  "Grace Kelly:  The American Princess"   "Roger Moore:  A Matter of Class"
  "Cary Grant:  The Leading Man"          "Yul Brynner:  The Man Who Was King"
  "Gregory Peck:  His Own Man"            "Ingrid Bergman Remembered"
  "William Holden:  The Golden Boy"       "Burt Lancaster:  Daring To Reach"
  "Vivien Leigh:  Scarlett And Beyond"*   "Jack Lemmon:  America's Everyman"
  "Anthony Quinn:  An Original"           "Joan Crawford:  Always The Star"
  "Robert Mitchum:  The Reluctant Star"   "Fred MacMurray:  The Guy Next Door"
  "Michael Caine:  Breaking The Mold"     "Intimate Portrait:  Shirley MacLaine"
  "Shirley Temple:  America's Little      "Barbara Stanwyck: Straight Down the
                    Darling"                                 Line"
  "Walter Matthau:  Diamond in the Rough" "Gary Cooper:  The Face of a Hero"
  "Alan Ladd:  The True Quiet Man" **

* Turner Broadcasting  System owns the copyright on "Vivien Leigh:  Scarlett and
Beyond." All other copyrights are owned by Wombat.

** Wombat recently completed "Alan Ladd: The True Quiet Man".

         Wombat recently completed the last two one-hour documentaries under its
agreement with the A&E Cable Network  ("A&E").  Walter  Matthau:  Diamond in the
Rough which was delivered on May 23, 1997,  and Gary Cooper:  The Face of a Hero
which was delivered on October 10, 1997. Wombat recently completed production on
a  self-financed  program,  Alan  Ladd:  The  True  Quiet  Man.  Wombat  is also
self-financing  a  90-minute  pilot  for a new  series  on  performance  artists
entitled  Betty  Buckley:  In  Performance & In Person.  This program will be an
intimate look at the talent and life of this Tony award-winning  stage, film and
television actress.  Wombat is currently seeking distribution  arrangements with
cable or public  television  companies  which would license these  programs from
Wombat. To date, Gene Feldman and Suzette St. John Feldman have produced 30 film
star biographies.  Among their awards was a Cable Ace award for a film on Robert
Mitchum and an Emmy nomination for a program on Audrey Hepburn.

         The process of preparing a biography  generally  takes four months from
start to finish.  In preparing the biography,  Wombat uses interview  materials,
film clips, public domain films, trailers, still photos, archival materials, and
newsreels.  Wombat conducts interviews with the subject of the biography,  if he
or she is still alive,  and various family members,  friends,  and associates of
the individual.  Additional  research on the figures  involves the gathering and
reading  of any  publicly  available  information,  including  biographical  and
autobiographical  materials and  interviews  with  biographers.  Generally,  all
interviewees  sign  releases and  participate  willingly in the  compilation  of
materials for the biography at no cost to Wombat.

         Gene Feldman and his wife, Suzette St. John Feldman, do all research on
the figures as well as produce, write, and direct the biographies.  In addition,
Wombat employs a staff cameraperson/  editor and an associate producer.  Budgets
for the films  range  from  $200,000  to  $250,000  per  film.  Once the film is
completed, Wombat submits the film to the principal licensee for its content and
technical approval.

Production Arrangements

         Wombat  has  in  the  past  substantially  relied  upon  the  financial
commitments  of A&E and other United States  television  and cable  companies to
fund the  production  of its  programs  and upon  Janson  Associates  for  their
world-wide  distribution  once  completed.  At  present,  Wombat does not have a
distribution  arrangement  with a domestic  television  or cable  company and is
producing its current projects with deficit  financing.  Although Wombat has had
preliminary  discussions with respect to the sale of its self-financed  projects
and with other  parties  for  similar  types of  arrangements,  no such sales or
agreements  have been entered  into,  and there can be no assurance  that Wombat
will be able to enter  into  arrangements  with  other  parties  on  similar  or
otherwise acceptable terms. Wombat's future production activities will depend on
its ability to sell the projects it is currently self-financing or to enter into
future production arrangements.

         A&E: In 1997,  Wombat  completed  the last two  one-hour  documentaries
under its agreement with A&E. Pursuant to an Agreement,  dated as of December 5,
1994 and amended as of June 27, 1995 and as of October 1, 1996, A&E commissioned
the production of seven one-hour motion picture profiles by Wombat, all of which
have now been  completed.  A&E paid an  advance  on each  program  for  which it
received  an  exclusive  five-year  exhibition  period per program in the United
States and its territories and  possessions  and, in the English  language only,
Canada,  Mexico,  Central America, and the Caribbean.  In addition,  A&E had two
successive options, each to order up to five additional programs.  A&E exercised
its first  option  for three  additional  programs,  for which  Wombat  received
increased advances.  A&E has determined not to exercise additional options.  A&E
also has two  successive  options  to extend  the  exhibition  periods  of their
ordered programs for an additional  payment.  To date, A&E has not exercised any
of its extension options.

Distribution Arrangements

         Pursuant to a Distribution  Agreement (the  "Distribution  Agreement"),
dated July 1, 1995 and  amended  on April 28,  1996,  between  Wombat and Janson
Associates,  Inc.  ("Janson"),  Janson was granted the sole and exclusive right,
subject to the production arrangements described above, to license substantially
all of the Wombat film library for all forms of television  and video  worldwide
for a  period  of ten  years,  subject  to  automatic  renewals  in  three  year
increments.  In  consideration  of  Janson's  services  under  the  Distribution
Agreement,  Janson is entitled to retain a distribution fee, ranging from 25% to
40%,  depending  upon  whether  such  distribution  is via  domestic  television
network,  syndication,  international  television,  or home video,  of the gross
receipts derived from the licensing of each program.

         In addition, Janson is reimbursed for certain distribution expenses out
of gross receipts.  The remaining  balance is remitted to Wombat as its licensor
royalty. See Item 12 "Certain Relationships and Related Transactions." There has
been  a  downturn  in  revenues  derived  from  Janson  as a  result  of  recent
consolidations  among major media  conglomerates  seeking to control  content as
they expand their international  distribution  channels with new and proprietary
cable and satellite networks and program services.



<PAGE>


Competition

         Wombat was one of the first  production  companies  specializing in the
distribution  of profiles of movie stars and has since  established  itself as a
market  leader.   Competitors  include  independent   production  companies  and
subsidiaries of major studios.  Although some of the Wombat competitors have the
advantage of being  affiliated  with  established  studios,  and, as such,  have
greater financial  resources,  Wombat has developed a reputation in the industry
for producing quality biographies with a personal touch.

Major Customers

         Wombat  has  in  the  past  substantially  relied  upon  the  financial
commitments  of A&E and other United States  television  and cable  companies to
fund  the  production  of its  programs  and upon  Janson  for  their  worldwide
distribution once completed.  Wombat derived  approximately 17% of the Company's
total  revenues  from A&E for the twelve  months  ended  December  31,  1997 and
approximately  24% of the  Company's  total  revenues from Janson for the twelve
months ended December 31, 1997

Employees

         Wombat has four full time employees and one part time employee.


Business Strategy

         The Company's  primary goal is significant and sustained growth through
an  increased  level of  development  and  production  activity  in both  motion
pictures and television.  Future revenues and  profitability  will depend on the
Company's ability to successfully develop and finance viable film and television
properties.

         In order to  increase  its  production  activity in cable and long form
television,  the Company will attempt to form exclusive  arrangements with other
established independent producers to work within Avenue Television's aegis. Such
relationships  would allow the Company to significantly  increase its production
activity  and  to  more  fully   capitalize   on  its   favorable   distribution
relationships.  The  Company  recently  hired an  individual  to  spearhead  its
television  division with  responsibility  for TV  production  and an additional
focus on miniseries and "event television."

         In series television,  the Company will continue to explore development
and  production   opportunities   based  on  its  film  properties,   television
properties,  and writer relationships  without committing  significant financial
resources to this area of its business.

         Wombat will continue to produce its film  biographies on a more limited
basis  utilizing its own capital while  continuing to explore new production and
distribution arrangements.  A&E has expressed preliminary interest in dramatized
biographical films, including some of Wombat's previously profiled subjects. The
expanding international marketplace,  as well as the enhanced brand awareness of
the Avenue  Pictures/Wombat  label,  may have the potential to expand the market
and potential  licensing revenue for the Wombat library.  However,  no assurance
can be given that additional  production talent will be available when needed by
the Company. Further, no assurance can be given that additional funding, whether
from financial  markets or  collaborative or other  arrangements  with corporate
partners  or from  other  sources,  will be  available  when  needed or on terms
acceptable to the Company.

International Sales & Distribution

         As the global market for entertainment programming continues to expand,
the Company  foresees real  opportunity  in developing  an  international  sales
division.  With its own sales  organization the Company believes it can optimize
revenues  from  programming  both  produced  and  acquired by the  Company.  The
practice of pre-selling films  internationally  significantly  reduces financial
risk and  increases  both the cash flow and ability to finance  this area of the
Company's  business  activity.  Direct  involvement in international  sales also
provides favorable  opportunities in the areas of co-production and co-financing
which can  further  benefit the  Company.  No  assurance  can be given that such
co-production and co-financing opportunities will be available to the Company.

         Through an international sales division, the Company will either act as
its own sales  agent in  international  markets,  sell  foreign  rights to third
parties in the international marketplace, or sell certain rights while retaining
others  which the  Company  may  exploit on its own.  To the extent the  Company
retains any of these foreign  rights,  the Company's  financial  commitment with
respect to a particular motion picture may be substantially increased.  Although
the Company believes that its expansion into this area can provide opportunities
for future  growth,  foreign  distribution  creates  certain  additional  risks,
including  the  necessity  for  additional  capital,  an increase  in  operating
overhead,  fluctuation  in  currency  exchange  rates,  and  changes  in foreign
exchange  control  laws.  No assurance  can be given that Company  funds will be
available to create and develop an international sales division.


The Motion Picture Industry

General

         The motion  picture  industry  consists  of two  principal  activities:
production, which involves the development,  financing, and production of motion
pictures;  and  distribution,  which involves the promotion and  exploitation of
feature-length  motion  pictures  in a variety  of media,  including  theatrical
exhibition,   home  video,   television,   and  other  ancillary  markets,  both
domestically and  internationally.  The United States motion picture industry is
dominated by the "major" studios,  including The Walt Disney Company,  Paramount
Pictures,   Warner  Brothers,   Universal   Pictures,   Twentieth  Century  Fox,
Columbia/Tri-Star Pictures, and MGM/UA. The major studios are typically parts of
large  diversified  corporations  that have strong  relationships  with creative
talent,  exhibitors, and others involved in the entertainment industry and whose
non-motion  picture operations provide a stable source of earnings and cash flow
which offset the  variations  in the financial  performance  of their new motion
picture releases and other aspects of their motion picture operations. The major
studios have  historically  produced and  distributed  the vast majority of high
grossing theatrical motion pictures released annually in the United States.

Independent Film

         At the same time that films  released by the major  studios have become
more  expensive,  currently  with  average  budgets  exceeding  $40  million (as
reported by the Motion  Picture  Association  of America  ("MPAA")),  low budget
"independent films" have successfully entered the market.  Typically, such films
are more  character  driven than plot driven and  originally  they lacked  major
stars.  Miramax,  originally an independent  distributor  (now owned by Disney),
broke ground in this area with films like "My Left Foot" and "The Piano."

         Over  the  last   several   years   there  have  been   other   notable
"independent-type"  films such as "Four Weddings and A Funeral", "Pulp Fiction",
and "Scream." Indeed, given the relatively small financial risk of producing and
releasing such films,  all of the major studios have started or are studying the
feasibility   of  production  and   distribution   units  focusing  on  smaller,
independent-type films.

         The  growth  of  this  product  and  market   segment   should  provide
opportunities for Avenue Pictures which is one of the pioneers in this area.

Motion Picture Production and Financing

         The   production  of  a  motion  picture  begins  with  the  screenplay
adaptation of a popular novel or other literary work acquired by the producer or
the development of an original  screenplay having its genesis in a story line or
scenario  conceived or acquired by the producer.  In the development  phase, the
producer typically seeks production  financing and tentative  commitments from a
director,  the principal cast members and other creative  personnel.  A proposed
production schedule and budget are also prepared during this phase.

         Upon  completing the screenplay  and arranging  financing  commitments,
pre-production of the motion picture begins. In this phase, the producer engages
creative personnel to the extent not previously committed; finalizes the filming
schedule  and  production  budget;  obtains  insurance  and  secures  completion
guaranties,  if  necessary;   establishes  filming  locations  and  secures  any
necessary  studio  facilities  and stages;  and prepares for the start of actual
filming.  Principal photography (the actual filming of the screenplay) generally
extends  from  seven to twelve  weeks,  depending  upon such  factors as budget,
location, weather, and complications inherent to the screenplay.

         Following  completion  of  principal  photography  in what is typically
referred  to  as  post-production,  the  motion  picture  is  edited;  opticals,
dialogue,  music,  and any special effects are added;  and voice,  effects,  and
music sound tracks and pictures are synchronized. This results in the production
of a fully edited  negative from which release  prints of the motion picture are
made.

         Production  costs  consist of acquiring or developing  the  screenplay,
film studio rental, principal photography, post-production, and the compensation
of creative and other production personnel. Distribution expenses, which consist
primarily of the costs of  advertising  and preparing  release  prints,  are not
included in direct  production  costs and vary widely depending on the extent of
the release and promotional markets. Average studio budgets currently exceed $40
million. Average independents are far lower and are often less than $10 million.
The major studios  generally fund  production  costs from cash flow generated by
motion  picture  and  related  activities  or,  in some  cases,  from  unrelated
businesses or through  off-balance  sheet methods.  Substantial  overhead costs,
consisting  largely of salaries and related  costs of the  production  staff and
physical  facilities  maintained  by the major  studios,  also  must be  funded.
Independent  production  companies  generally avoid incurring  overhead costs as
substantial as those incurred by the major studios by hiring  creative and other
production   personnel   and   retaining   the  other   elements   required  for
pre-production,  principal  photography,  and  post-production  activities  on a
picture-by-picture  basis. Sources of funds for independent production companies
include bank loans,  "pre-licensing" of distribution  rights,  equity offerings,
and joint ventures. Independent production companies generally attempt to obtain
all or a  substantial  portion of their  financing of a motion  picture prior to
commencement of principal  photography,  at which point  substantial  production
costs begin to be incurred and require payment.

         "Pre-licensing"  of film  rights  is  often  used by  independent  film
companies to finance all or a portion of the direct production costs of a motion
picture.  By "pre-licensing"  film rights, a producer obtains amounts from third
parties in return for granting  such parties a license to exploit the  completed
motion  picture  in  various  markets  and  media.   Production  companies  with
distribution  divisions may retain the right to distribute the completed  motion
picture  either  domestically  or in one or more  international  markets.  Other
production companies may separately license theatrical,  home video,  television
and all other distribution rights among several licensees.

         In connection with the production and distribution of a motion picture,
major studios and independent  production  companies generally grant contractual
rights to actors, directors, screenwriters, owners of rights, and other creative
and  financial  contributors  to share in revenues or net profits (as defined in
their respective  agreements) from a particular  motion picture.  Except for the
most sought-after talent,  these third-party  participants are generally payable
after all distribution fees,  marketing  expenses,  direct production costs, and
financing costs are recouped in full.

         Major  studios  and   independent   film  companies   typically   incur
obligations to pay residuals to various  guilds and unions  including the Screen
Actors Guild, the Directors Guild of America,  and the Writers Guild of America.
Residuals are obligations  arising from the  exploitation of a motion picture in
markets other than the primary  intended market for such picture.  Residuals are
primarily  calculated  as a percentage  of the gross  revenues  derived from the
exploitation  of the picture in these secondary  markets.  The guilds and unions
typically obtain a security interest in all rights of the producer in the motion
picture which is usually subordinate to the financier of the motion picture, and
the  completion  bond  company if any.  The  producer  may transfer the residual
obligation to a distributor if the distributor  executes the  appropriate  guild
assumption agreement.

Motion Picture Distribution

         General.  Distribution  of  a  motion  picture  involves  domestic  and
international  licensing  of the  picture  for (a)  theatrical  exhibition,  (b)
non-theatrical  exhibition,  which  includes  airlines,  hotels and armed forces
facilities,  (c)  videocassettes  and video  discs,  (d)  television,  including
pay-per-view, pay, network, syndication or basic cable, and (e) marketing of the
other rights in the picture and underlying literary property,  which may include
books, merchandising,  and soundtrack albums. In recent years, revenues from the
licensing of rights to distribute motion pictures in secondary (i.e., other than
domestic  theatrical)   markets,   particularly  home  video  and  international
theatrical pay and free television, have increased significantly.

         The  distributor   typically  acquires  rights  from  the  producer  to
distribute  a  motion  picture  in one or more  markets  and/or  media.  For its
distribution  rights, the distributor  generally agrees to pay to the producer a
certain minimum  advance or guarantee upon the delivery of the completed  motion
picture,  which  amount is to be  recouped  by the  distributor  out of revenues
generated from the  distribution  of the motion  picture in particular  media or
territories. After the distributor's distribution fee is deducted from the gross
receipt of the picture,  the  distributor  recoups the amount  advanced (if any)
plus its distribution costs.

         Motion  pictures  may continue to play in theaters for up to six months
following their initial release.  Concurrently  with their release in the United
States,  motion  pictures  generally  are  released  in  Canada  and may also be
released  in one or more  other  international  markets.  A  motion  picture  is
typically  available for distribution  during its initial  distribution cycle as
follows:

<TABLE>

<CAPTION>
                                                      Months After Initial                  Approximate
        Marketplace                                Domestic Theatrical Release            Release Period

<S>                                                                                            <C>       
  Domestic theatrical                                        ----                              4-6 months
  International theatrical                                   ----                             6-12 months
  Domestic home video (initial release)                    4-6 months                            6 months
  Domestic pay-per-view                                    6-9 months                            2 months
  International Video (initial release)                   6-12 months                         6-12 months
  Domestic pay television                                12-15 months                           18 months
  International television (pay or free)                 18-24 months                        12-36 months
  Domestic free television*                              30-33 months                           1-5 years
-----------------------
* Includes network, barter syndication, syndication, and basic cable.
</TABLE>
     
         A substantial  portion of a film's ultimate revenues are generated in a
film's  initial  distribution  cycle  (generally  the first five years after the
film's initial domestic  theatrical  release).  Commercially  successful  motion
pictures,  however,  may continue to generate  revenues after the film's initial
distribution cycle from the relicensing of distribution rights in certain media,
including  television  and home video,  and from the  licensing of  distribution
rights with respect to new media and technologies.

         Theatrical.  The theatrical  distribution of a motion picture  involves
the licensing and booking of the motion  picture to theatrical  exhibitors,  the
promotion of the picture through  advertising and publicity  campaigns,  and the
manufacture of release  prints from the film  negative.  The size and success of
the  promotional  advertising  campaign  can  materially  affect  the  financial
performance  of the  film.  Moreover,  as  the  vast  majority  of  these  costs
(primarily  advertising  costs) are incurred  prior to the first  weekend of the
film's  domestic  theatrical  release,  there is not  necessarily  a correlation
between these costs and the film's ultimate box office performance. In addition,
the ability to distribute a picture during peak  exhibition  seasons,  including
the summer months and the Christmas holidays,  may affect the theatrical success
of the picture.

         The distributor and theatrical  exhibitor  generally enter into license
agreements  providing  for  the  exhibitor's  payment  to the  distributor  of a
percentage of box office receipts after deducting the exhibitor's  overhead or a
flat working amount. The percentage  generally ranges from 45-60% and may change
for each week the film plays in a specific theatre,  depending on the success of
the  picture at the box office  and other  factors.  The  balance  ("gross  film
rentals")  is  remitted  to the  distributor.  The  distributor  then  retains a
distribution  fee  from  the  gross  film  rentals  and  recoups  the  costs  of
distributing the film, which consist  primarily of advertising,  marketing,  and
production  cost, and the cost of manufacturing  release prints.  The balance of
film  rentals,  if  any,  after  recouping  any  advance  or  minimum  guarantee
previously  paid to producer and  interest  thereon is then paid to the producer
based on a predetermined split between the producer and distributor.

         Home  Video.  A  motion  picture   typically   becomes   available  for
videocassette  distribution within four to six months after its initial domestic
theatrical release.  Home video distribution  consists of the promotion and sale
of videocassettes to local,  regional and national video retailers which rent or
sell  videocassettes  to consumers  primarily for home  viewing.  The market for
videocassettes  for  home use has  expanded  rapidly  over  the past ten  years,
although  the rate of growth in this  market  has slowed in recent  years.  Most
films are initially made available in videocassette form at a wholesale price of
$55 to $60 and are sold at that price  primarily to video rental  stores,  which
rent the  cassettes  to  consumers.  Owners of films  generally  do not share in
rental  income.  Following  the initial  marketing  period,  selected  films are
remarketed  at a  wholesale  price of $10 to $15 or less for sale to  consumers.
These  "sell-through"  arrangements  are used most  often  with  films that will
appeal to a broad  marketplace or to children.  Some films are initially offered
at a price designed for sell-through rather than rental when it is believed that
the ownership  demand by consumers will result in a sufficient level of sales to
justify the reduced margin on each cassette  sold.  Home video  arrangements  in
international  territories are similar to those in domestic  territories  except
that the wholesale prices may differ.

         Television.   Television   rights  are  generally   licensed  first  to
pay-per-view  for an  exhibition  period  within  six to nine  months  following
initial domestic theatrical release, then to pay television approximately twelve
to fifteen  months after  initial  domestic  theatrical  release,  thereafter in
certain  cases to free  television  for an  exhibition  period,  and then to pay
television again. These films are then syndicated to either independent stations
or basic cable outlets.  Pay-per-view  television allows  subscribers to pay for
individual programs, including recently released movies and live sporting, music
and other events on a per use basis.  Pay  television  allows  cable  television
subscribers to view such services as  HBO/Cinemax,  Showtime/The  Movie Channel,
Starz,  or Encore Media Services  offered by their cable system  operators for a
monthly subscription fee. Since groups of motion pictures are typically packaged
and licensed for exhibition on television  over a period of time,  revenues from
these television licensing "packages" may be received over a period that extends
beyond five years from the initial domestic  theatrical  release of a particular
film. Motion pictures are also "packaged" and licensed for television  broadcast
in international markets.

         Non-Theatrical  and  Other  Rights.  Films may be  licensed  for use by
airlines,   schools,   public  libraries,   community   groups,   the  military,
correctional  facilities,   ships  at  sea,  and  others.  Musical  compositions
contained in a film which have been  commissioned  for that film may be licensed
for sound  recording,  public  performances,  and  sheet  music  publication.  A
soundtrack album may be released  including music contained in a film. Rights in
motion  pictures  may be  licensed  to  merchandisers  for the  manufacturer  of
products such as video games, toys,  T-shirts,  posters,  and other merchandise.
Rights may also be licensed to create  novelizations of the screenplay and other
related book publications.

         International Markets. Motion picture distributors and producers derive
revenue from  international  markets in the same media as domestic markets.  The
growth of foreign  revenues has been dramatic,  now accounting for more than 50%
of the total revenues of many films. The increase in revenues is currently being
driven primarily from the growth of television  abroad.  The increase in foreign
television  values and foreign  revenues  is likely to  continue.  Although  the
increased level of foreign values affects the revenues of most films, the effect
is not  uniform.  Action  films and films with  major  stars  benefit  most from
foreign  revenues;  films with  uniquely  American  themes with  unknown  actors
benefit the least.

Regulation

         Distribution  rights to motion  pictures are granted  legal  protection
under the copyright laws of the United States and most foreign countries,  which
laws  provide   substantial  civil  and  criminal   sanctions  for  unauthorized
duplication and exhibition of motion pictures.  Motion pictures,  musical works,
sound recordings, art work, still photography, and motion picture properties are
separate  works subject to copyright  under most copyright  laws,  including the
United  States  Copyright  Act of 1976,  as amended.  The Company  plans to take
appropriate and reasonable measures to secure,  protect,  and maintain or obtain
agreements to secure, protect, and maintain copyright protection for all Company
pictures under the laws of applicable jurisdictions. Motion picture piracy is an
industry-wide  problem.  The MPAA operates a piracy hotline and investigates all
reports of such  piracy.  Depending  upon the  results  of such  investigations,
appropriate  legal  action may be brought by the owner of the rights.  Depending
upon the extent of the piracy, the Federal Bureau of Investigation may assist in
these investigations and related criminal prosecutions.

         Motion  picture  piracy  is an  international  as  well  as a  domestic
problem.  Motion  picture  piracy  is  extensive  in many  parts  of the  world,
including  South  America,  Asia  (including  Korea,  China,  and  Taiwan),  the
countries of the former Soviet Union,  and other former Eastern bloc  countries.
In addition to the MPAA,  the Motion Picture  Export  Association,  the American
Film Marketing Association, and the American Film Export Association monitor the
progress and efforts made by various  countries to limit or prevent  piracy.  In
the past, these various trade  associations have enacted voluntary  embargoes of
motion picture exports to certain countries in order to pressure the governments
of those  countries  to become more  aggressive  in  preventing  motion  picture
piracy. In addition,  the United States government has publicly considered trade
sanctions against specific countries which do not prevent copyright infringement
of United  States  produced  motion  pictures.  There can be no  assurance  that
voluntary industry embargoes or United States government trade sanctions will be
enacted.  If enacted,  such actions  could impact the amount of revenue that the
Company  realizes from the  international  exploitation  of its motion  pictures
depending  upon the  countries  subject to such action and the  duration of such
action.  If not enacted or if other  measures are not taken,  the motion picture
industry (including the Company) may continue to lose an indeterminate amount of
revenues as a result of motion picture piracy.

         The  Code  and  Ratings  Administration  of the  MPAA  assigns  ratings
indicating age-group suitability for theatrical distribution of motion pictures.
The Company has followed and will  continue to follow the practice of submitting
its pictures for such ratings.

         United  States  television  stations and  networks,  as well as foreign
governments,  impose  additional  restrictions on the content of motion pictures
which may restrict in whole or in part  theatrical or  television  exhibition in
particular  territories.  Management's  current  policy  is  to  produce  motion
pictures for which there will be no material  restrictions  on exhibition in any
major  territories or media.  This policy often  requires  production of "cover"
shots or different  photography and recording of certain scenes for insertion in
versions of a motion picture  exhibited on television or theatrically in certain
territories.

         There can be no assurance that current and future  restrictions  on the
content of the Company's  pictures may not limit or affect the Company's ability
to exhibit certain of its pictures in certain territories and media.



<PAGE>


ITEM 2.       DESCRIPTION OF PROPERTY

         The  Company's  philosophy  on  real  estate  investments  is to  lease
required  properties  and  invest  in the  development  of film  and  television
properties.  The Company presently subleases for itself and Avenue Pictures on a
month-to-month  basis  approximately  3,700  square feet of office  space at its
corporate headquarters at 11111 Santa Monica Boulevard, Suite 2110, Los Angeles,
California 90025. The rent for such space is approximately $8,000 per month.

         Wombat presently leases approximately 2,000 square feet of office space
at 250 West 57th Street,  Suite 2421,  New York,  New York,  10019 pursuant to a
lease  that  expires  on  April  30,  1999.  Wombat's  rent  for  such  space is
approximately $5,000 per month.

         Management  believes the  properties  herein  described are adequate to
handle current and short term projected business.

ITEM 3.       LEGAL PROCEEDINGS

           The Company is not involved in any material legal proceedings.

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

         No matters  were  submitted  to a vote of security  holders  during the
fourth quarter of the fiscal year covered by this report.


<PAGE>



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

                          MARKET PRICE OF COMMON STOCK

         The Common  Stock  commenced  trading on the  American  Stock  Exchange
("AMEX") on July 16, 1997 under the symbol  "PIX." Prior to July 16,  1997,  the
Common Stock was traded on the Over-the-Counter  Bulletin Board under the symbol
"FLIK."  The  following  table sets forth the high and low sales  prices for the
Common Stock on the AMEX since July 16, 1997,  and, for periods  prior  thereto,
the high and low bid prices for the Common Stock.  Quotations  for periods prior
to July 16, 1997 represent bid prices between  dealers and do not include retail
mark-up, mark-down, or commissions, and do not represent actual transactions.

                    1997                        Low Bid              High Bid
                 1st Quarter                     $2 3/4               $ 4 1/2
                 2nd Quarter                     $3 3/4               $ 6
       3rd Quarter (to July 15, 1997)            $6 5/8               $ 6 5/8

                                               Low Sale              High Sale
       3rd Quarter (from July 16, 1997
           to September 30, 1997)                $5 1/2               $10 1/4

                 4th Quarter                    $51/16                $ 8 1/2

                    1996                        Low Bid              High Bid
                    ----                        -------             --------
                 1st Quarter                     $1 3/4               $ 2 1/2
                 2nd Quarter                     $2 1/4               $ 3 3/4
                 3rd Quarter                     $2 1/4               $ 3 1/2
                 4th Quarter                     $1 3/4               $ 3 1/2


         As of March 2, 1998, there were 165 holders of record of Common Stock.

         On March 2, 1998, the closing price of the Common Stock on the American
Stock Exchange was $5.875.

                                 DIVIDEND POLICY

         The Company anticipates that, for the foreseeable future, earnings will
be retained for the development of its business.  Accordingly,  the Company does
not anticipate  paying dividends on the Common Stock in the foreseeable  future.
The payment of future  dividends will be at the sole discretion of the Company's
Board of Directors  and will depend on,  among other  things,  future  earnings,
capital  requirements,  the general  financial  condition  of the  Company,  and
general  business  conditions.  Payment of dividends  may also be limited by the
terms of any  Preferred  Stock or debt  the  Company  may  issue or  incur.  See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations -- Liquidity and Capital Resources".


<PAGE>


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

         The following  discussion  and analysis  should be read in  conjunction
with the Company's consolidated financial statements and related notes thereto.

General

         The Company is an independent  entertainment company which, through its
two  operating  subsidiaries  (Avenue  Pictures  and  Wombat),  produces  motion
pictures for theatrical  exhibition,  television,  and other ancillary  markets,
both domestically and internationally.

Share Exchange and Reincorporation

         Pursuant  to  a  Share   Exchange   Agreement   (the  "Share   Exchange
Agreement"), dated as of September 30, 1996, among Cary Brokaw, Avenue Pictures,
and The CineMasters Group, Inc. ("CineMasters"), CineMasters acquired all of the
outstanding  capital  stock of Avenue  Pictures from Mr.  Brokaw,  then the sole
shareholder of Avenue Pictures,  in exchange for 1,425,000 shares of CineMasters
common stock  ("CineMasters  Common  Stock") (the  "Business  Combination").  In
connection with the Business Combination,  GP Strategies Corporation, a Delaware
corporation,   (formerly   National   Patent   Development   Corporation)   ("GP
Strategies"),   a  significant  shareholder  of  CineMasters,   made  a  capital
contribution to CineMasters of 90,566 shares of registered GP Strategies  common
stock  valued at $815,000  in the  aggregate,  based upon the closing  price per
share of GP  Strategies  common  stock on the AMEX on  September  30,  1996,  in
exchange  for  407,500  shares  of  CineMasters   Common  Stock.   Such  capital
contribution  was  made  by GP  Strategies  for  investment  purposes  and was a
condition  to  closing  pursuant  to the  Share  Exchange  Agreement.  Prior  to
completion of the Business  Combination,  in August 1996, certain affiliates and
employees of GP Strategies and CineMasters  contributed  $185,000 in cash to the
capital of CineMasters in exchange for 123,338 shares of restricted  CineMasters
Common Stock in a private placement transaction.  In furtherance of the Business
Combination,  CineMasters  entered  into a  stockholders  agreement  and certain
employment agreements.

         Following  the  Business  Combination,   the  Board  of  Directors  and
shareholders of CineMasters  approved a transaction pursuant to which (i) all of
the  assets of the  Wombat  Productions  division  (the  "Wombat  Division")  of
CineMasters   were   transferred,   subject  to  all  related   liabilities  and
obligations, to its newly-formed, wholly-owned Delaware subsidiary, Wombat, (ii)
CineMasters was merged with and into the Company (its newly-formed, wholly-owned
Delaware  subsidiary)  with the Company being the surviving  corporation  in the
merger  (the  "Reincorporation"),  and (iii)  each  stockholder  of  CineMasters
received an equal  number of shares of the Company in exchange for each share of
capital stock of CineMasters held by such stockholder  immediately  prior to the
effective time of the Reincorporation (the "Effective Time"). As a result of the
Reincorporation,  Avenue  Pictures  became  a  wholly-owned  subsidiary  of  the
Company.

         The  consolidated  financial  statements  of the Company for the period
ended  December 31, 1996 include the results of  operations  of Avenue  Pictures
from the date of acquisition.




<PAGE>


Year Ended December 31, 1997, Five Months Ended December 31, 1996 and Year
Ended July 31, 1996

Revenues

         Revenues for the twelve months ended December 31, 1997 were $2,367,000,
of which $967,000 were  attributable to Wombat and $1,400,000 were  attributable
to Avenue.  Avenue's  revenues were derived  primarily  from the  completion and
delivery to Hallmark  Entertainment  of "Tell Me No Secrets" as well as $275,000
of producer fees  generated from the production and delivery of the feature film
"Finding  Graceland."  Wombat's  revenues were generated from the completion and
delivery to A&E of three one hour features which led to  approximately  $411,000
of revenue from A&E and $506,000 of revenue  earned from  licensing of rights to
Wombat programming in secondary markets through Janson Associates.

         Revenues for the five months ended  December 31, 1996 were  $3,509,000.
The revenues were derived from revenues  generated by Avenue  Pictures which was
acquired on September 30, 1996 and the  operations of Wombat.  Revenues from the
operations of Avenue  Pictures from the  acquisition  date through  December 31,
1996 amounted to  approximately  $2,727,000 and were primarily  derived from the
completion and availability to ABC of the made-for-television  movie "Tell Me No
Secrets." Revenues from Wombat operations for the five months ended December 31,
1996 were  approximately  $782,000.  Of this amount  approximately  $454,000 was
derived from the  completion  and  availability  of four one hour motion picture
profiles to A&E and  Lifetime  Productions,  Inc.  ("Lifetime").  The  remaining
revenue was derived from licensing of rights to Wombat  programming in secondary
markets.  No revenues were derived from the  operations of Kaufman  Films,  Inc.
("Kaufman  Films")  during the five month period ended  December 31, 1996 due to
the  Kaufman  Termination  Agreement  (as  defined  below;  see  Note  8 to  the
Consolidated Financial Statements).

         One customer,  ABC,  accounted for  approximately 77% of total revenues
during the five  months  ended  December  31,  1996.  During  fiscal  1996,  A&E
accounted  for  approximately  12% of total  revenues and Janson  accounted  for
approximately 40% of total revenues, respectively.

Film Production Costs

         Film  production  costs  for the year  ended  December  31,  1997  were
$1,482,000  which can be attributed to the film  amortization  related to Avenue
Pictures'  television  product  in the  amount  of  $904,000  and  approximately
$424,000  related to Wombat's  operations.  Wombat's  expense included a $70,000
reserve  taken on the one hour film,  "The Story of Lassie",  due to the reduced
revenue stream forecast in the future.

         Film production  costs for the five months ended December 31, 1996 were
$2,752,000 which can be attributed to the film  amortization  relating to Avenue
Pictures'  television  product in the  amount of  $2,496,000  and  approximately
$256,000 from Wombat's operations.

Selling, General, and Administrative

         Selling,  general and  administrative  expenses ("SG&A") for the twelve
months ended December 31, 1997 were $2,718,000.  Included in SG&A for the period
is  approximately  $280,000 of  amortization  of goodwill  related to the Avenue
acquisition on September 30, 1996. In addition,  the Company incurred $37,500 of
stock option  compensation  expense relating to previously  issued stock options
and  $100,000 of deferred  compensation  recognized  on stock (see Note 5 to the
consolidated financial statements).  The remaining SG&A costs for 1997 relate to
salaries, occupancy costs and professional fees.

         SG&A expenses for the five months ended December 31, 1996 was $662,000.
Included in the five months  ended  December  31, 1996  expenses are $262,000 of
SG&A  expenses  related  to  Avenue  Pictures  operations  and were  principally
salaries and related benefits and occupancy expenses.  SG&A expenses,  exclusive
of  Avenue  Pictures,   for  the  five  months  ended  December  31,  1996  were
approximately $400,000 and were primarily salary and related benefits, occupancy
costs, and professional fees.

Income Taxes

         For the year ended  December  31,  1997,  the Company had an income tax
benefit of $208,000.  The benefit was derived from the carry back of the current
years  loss,  as well as an offset of the  balance of the income tax  payable at
December  31,  1996.  The  Company  currently  has a July  31  year  end for tax
purposes, which led to the recording of a payable at December 31, 1996.

Liquidity and Capital Resources

         At December 31, 1997, the Company had approximately  $1,158,000 of cash
and approximately $562,000 of short term investments.

         On May 27, 1997, the Company entered into an unsecured demand note (the
"Note") which  provides the Company with  borrowings in the principal  amount of
$250,000, at prime plus 1%, with Fleet Bank, National  Association.  The Note is
payable on demand,  but in any event not later than May 27, 1998. As of December
31, 1997,  $127,500 had been borrowed under the Note. The Company  believes that
it will be able to extend the note for an additional period on similar terms and
conditions.

         The Company  believes it has  adequate  capital  resources  to meet its
short-term needs covering at least twelve months.  The Company expects to expand
its production activities.  Management believes that the existing cash and short
term  investments  are  adequate  to fund  the  Company's  operations.  However,
management may seek to raise  additional  funds,  through the issuance of Common
Stock or debt, to expand the Company's  business at a greater rate.  There is no
guarantee  that such funding will be available,  or available  under terms which
are  acceptable to the Company.  The Company's  rate of growth and investment in
projects will be adjusted as necessary based on available financing and existing
capital resources.

Recent Accounting Developments

         In February  1997,  the  Financial  Accounting  Standards  Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share"
which  established  standards for computing  and  presenting  earnings per share
(EPS).  The Statement  simplifies the standards for computing EPS,  replaces the
presentation  of primary EPS with a presentation  of basic EPS and requires dual
presentation of basic and diluted EPS on the face of the income statement.  This
Statement  was  effective  for  financial  statements  issued for periods  after
December  15,  1997  and  required  restatement  of all  prior-period  EPS  data
presented.  The  adoption  of SFAS No.  128 did not have a  material  impact  on
previously reported EPS data.

         The Financial  Accounting  Standards Board issued Accounting  Standards
(SFAS 130),  "Reporting  Comprehensive  Income",  in June 1997 which  requires a
statement of comprehensive income to be included in the financial statements for
fiscal  years  beginning  after  December  15,  1997.  The Company is  presently
designing such statement, and accordingly, will include such statement beginning
with the first quarter of 1998.

         In addition,  in June of 1997,  the FASB issued SFAS 131,  "Disclosures
About  Segments of an  Enterprise  and Related  Information".  SFAS 131 requires
disclosure of certain  information  about operating  segments and about products
and  services,  geographic  areas in which a company  operates,  and their major
customers. The Company is presently in the process of evaluating the effect that
this new standard will have on disclosures in the Company's financial statements
and the required  information  will be reflected in the year ended  December 31,
1998 financial statements.

         The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive  and complex as virtually  every  computer  operation
will be affected in some way by the  rollover of the two digit year value to 00.
The issue is whether  computer  systems will properly  recognize  date sensitive
information  when  the  year  changes  to  2000.  Systems  that do not  properly
recognize such  information  could generate  erroneous data or cause a system to
fail.

         The Company is  utilizing  both  internal  and  external  resources  to
identify,  correct  or  reprogram  and  test  the  systems  for  the  year  2000
compliance.  It is anticipated  that the project will be completed by the middle
of 1999.  Management has not yet assessed the year 2000  compliance  expense and
related  potential effect on the Company's  earnings.  However,  there can be no
assurance  that the systems of other  companies on which the  Company's  systems
rely  also will be timely  converted  or that any such  failure  to  convert  by
another company would not have an adverse effect on the Company's systems.

Forward-Looking Statements

         This report  contains  certain  forward-looking  statements  reflecting
management's   current  views  with  respect  to  future  events  and  financial
performance.  These forward-looking  statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking  statements,  including,  but not limited to, the ability of
the  Company to reverse  its  history of  operating  losses;  production  risks;
dependence on contracts  with certain  customers;  future  foreign  distribution
arrangements  and dependence on certain key management  personnel.  All of these
above factors are  difficult to predict,  and many are beyond the control of the
Company.

Inflation

         Inflation is not expected to have a significant impact on the Company's
business.



<PAGE>


                                                        F-4


ITEM 7.     FINANCIAL STATEMENTS

                                                                        Page
Avenue Entertainment Group, Inc.

        Independent Auditors' Reports                                   F-2

        Consolidated Balance Sheet as of December 31, 1997              F-4

        Consolidated Statements of Operations for the year 
          ended December 31, 1997, the five months ended
          December 31, 1996 and the year ended July 31, 1996            F-5

        Consolidated  Statement  of  Stockholders'  Equity
          for the  year  ended December 31, 1997, the five 
          months ended December 31, 1996 and the year ended 
          July 31, 1996                                                 F-6

        Consolidated  Statement  of Cash Flows for the year 
          ended December  31,   1997, the five months ended
          December 31, 1996 and the year ended July 31, 1996            F-7

        Notes to Consolidated Financial Statements                      F-9



<PAGE>


                          INDEPENDENT AUDITORS' REPORT


         The Board of Directors and Stockholders
         Avenue Entertainment Group, Inc.:

         We have audited the accompanying  consolidated  balance sheet of Avenue
         Entertainment  Group,  Inc.  as of  December  31,  1997 and the related
         consolidated  statements of operations,  stockholders'  equity and cash
         flows for the year ended  December 31, 1997 and the  five-month  period
         ended December 31, 1996. These  consolidated  financial  statements are
         the responsibility of the Company's  management.  Our responsibility is
         to express an opinion on these consolidated  financial statements based
         on our audit.

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

         In our opinion, the consolidated financial statements referred to above
         present fairly,  in all material  respects,  the financial  position of
         Avenue  Entertainment  Group,  Inc.  as of  December  31,  1997 and the
         results  of its  operations  and its  cash  flows  for the  year  ended
         December 31, 1997 and the five-month  period ended December 31, 1996 in
         conformity with generally accepted accounting principles.


                                                  KPMG Peat Marwick LLP
         New York, New York
         April 9, 1998


<PAGE>


                          INDEPENDENT AUDITORS' REPORT



         The Board of Directors and Stockholders
         Avenue Entertainment Group, Inc.:


         We  have   audited   the   accompanying   statements   of   operations,
         stockholders' equity and cash flows of Avenue Entertainment Group, Inc.
         for the year ended July 31, 1996.  These  financial  statements are the
         responsibility of the Company's  management.  Our  responsibility is to
         express an opinion on these financial statements based on our audit.

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

         In our opinion,  the  financial  statements  referred to above  present
         fairly,  in all material  respects,  the results of operations and cash
         flows of Avenue  Entertainment  Group, Inc. for the year ended July 31,
         1996 in conformity with generally accepted accounting principles.



                                           Israeloff, Trattner & Co., CPAs, P.C.

         Valley Stream, New York
         October 10, 1996, except for note 9,
         which is as of October 28, 1996.



<PAGE>


                        AVENUE ENTERTAINMENT GROUP, INC.

                           Consolidated Balance Sheet

                                December 31, 1997

                                     Assets

Cash                                                              $   1,158,347
Short-term investment                                                   562,711
Accounts and other receivables                                          126,492
Income tax receivable                                                   235,000
Film costs, net                                                       1,481,571
Property and equipment, net                                             102,356
Goodwill                                                              2,454,549
Other assets                                                             18,709
                                                                  -------------

Total assets                                                       $  6,139,735
                                                                   ============

                      Liabilities and Stockholders' Equity

Accounts payable and accrued expenses                               $   916,419
Loan payable                                                            127,500
Capitalized lease obligations                                             8,459
Due to related party                                                     94,480
                                                                   ------------

Total liabilities                                                     1,146,858

Commitments and contingencies

Stockholders' equity:
  Preferred stock, par value $.01 per share.  Authorized
   2,000,000 shares, none issued
  Common stock, par value $.01 per share.  Authorized
    15,000,000 shares; issued and outstanding, 4,072,838 shares          40,728
  Class B common stock, no par value.  Authorized
    1,000,000 shares; none issued
  Additional paid-in capital                                          6,232,256
  Deficit                                                            (1,327,818)
  Unrealized gain on marketable securities                              197,711
  Note receivable for common stock                                     (150,000)
                                                                   -------------

Total stockholders' equity                                            4,992,877

Total liabilities and stockholders' equity                          $ 6,139,735
                                                                    ===========

See accompanying notes to consolidated financial statements.


<PAGE>


                        AVENUE ENTERTAINMENT GROUP, INC.

                      Consolidated Statements of Operations

<TABLE>


<CAPTION>

                                                      Year ended           Five months ended        Year ended
                                                     December 31,            December 31,            July 31,
                                                         1997                    1996                  1996
                                                         ----                    ----                  ----

<S>                                                  <C>                    <C>                <C>          
Operating revenues                                   $  2,367,215           $    3,508,967     $   1,961,333
                                                     ------------           --------------      ------------

Costs and expenses:
  Film production costs                                 1,463,822                2,752,307         1,103,291
  Selling, general and administrative expenses          2,718,028                  661,766           733,243
                                                    -------------           --------------      ------------

Total costs and expenses                                4,181,850                3,414,073         1,836,534
                                                    -------------            -------------      ------------

Income (loss) from operations                          (1,814,635)                  94,894           124,799

Gain on sale of investments                                55,000

Income (loss) before income taxes                      (1,759,635)                  94,894           124,799

Income tax benefit (expense)                              207,816                  (74,945)          (51,230)
                                                   --------------         -----------------   ---------------

Net income (loss)                                    $ (1,551,819)          $       19,949       $    73,569
                                                     =============          ==============       ===========

Basic and diluted earnings (loss)
 per common share                               $           (.41)         $             .01   $           .04
                                                -----------------         -----------------   ---------------

See accompanying notes to consolidated financial statements.
</TABLE>




<PAGE>


                                       


                        AVENUE ENTERTAINMENT GROUP, INC.
<TABLE>

                 Consolidated Statement of Stockholders' Equity
                       Year ended December 31, 1997, five
          months ended December 31, 1996 and year ended July 31, 1996

                                  Common Stock
                                                                                                Unrealised
<CAPTION>                                                                                       gain (loss)
                                                                    Additional   Retained          on       Stock
                                            Number of                 paid-in     earnings      marketable  subscription
                                             Shares     Amount        capital     (deficit)     securities  receivable       Total
                                             ------     ------        -------      --------    ----------   ----------       -----

<S>                                         <C>         <C>         <C>          <C>            <C>                                 
Balance, July 31, 1995                      1,795,000   $ 17,950    $ 703,423    $  130,483     $            $            $ 851,856
  Shares redeemed - net                       (80,000)      (800)     (72,911)                                              (73,711)
  Issuance of stock                           123,338      1,233      183,767                                               185,000
  Net income - year ended July 31, 1996                                              73,569                                  73,569
                                           ----------   ---------   ---------    ----------    ----------   ----------    ----------
Balance, July 31, 1996                      1,838,338     18,383      814,279       204,052                               1,036,714
  Exercise of stock options                     2,000         20          620                                                   640
  Stock option compensation expense                                     9,375                                                 9,375
  Issuance of common stock                    407,500      4,075      810,925                                               815,000
  Purchase of Avenue Pictures, Inc.         1,450,000     14,500    2,885,500                                             2,900,000
  Contribution of payable, net of tax                                 110,553                                               110,553
  Net unrealized loss on marketable
   securities                                                                                   (118,850)                  (118,850)
  Net income - five months ended
    December 31, 1996                                                                19,949                                  19,949
                                           ----------   ---------   ---------    ----------     ---------   -----------   ----------
Balance, December 31, 1996                  3,697,838     36,978    4,631,252       224,001     (118,850)                 4,773,381
  Net loss                                                                       (1,551,819)                             (1,551,819)
  Issuance of common stock                    225,000      2,250    1,122,750                                             1,125,000
  Net unrealized gain on marketable 
  securities                                                                                     316,561                    316,561
  Stock option compensation expense                                    37,500                                                37,500
  Proceeds from previously issued stock                                92,254                                                92,254
  Deferred compensation                                               100,000                                               100,000
  Exercise of warrants                        100,000      1,000       99,000                                               100,000
  Stock subscription receivable                50,000        500      149,500                               (150,000)
                                           ----------   ---------   ---------   ------------    --------    ----------
Balance, December 31, 1997                  4,072,838   $ 40,728   $6,232,256   $(1,327,818)    $197,711    $(150,000)   $4,992,877
                                           ==========   =========  ===========  ============    ========    =========     ==========

See accompanying notes to consolidated financial statements.
</TABLE>

<PAGE>




                        AVENUE ENTERTAINMENT GROUP, INC.
<TABLE>

                      Consolidated Statements of Cash Flows


<CAPTION>

                                                         Year ended         Five months ended        Year ended
                                                        December 31,          December 31,            July 31,
                                                            1997                  1996                  1996
                                                            ----                  ----                  ----

Cash flows from operating activities:
<S>                                                     <C>                    <C>              <C>         
  Net income (loss)                                     $  (1,551,819)         $     19,949     $     73,569

Adjustments to reconcile net income to net cash 
  provided by (used for) operating
  activities:
  Depreciation                                                 32,499                10,046           51,232
  Amortization - film production costs                      1,276,629             2,624,627          351,801
  Amortization - goodwill                                     280,520                70,130
  Gain on sale of investments                                 (55,000)
  Stock compensation                                          137,500                 9,375
  Changes in assets and liabilities which
    affect net income:
     Accounts receivable                                       22,991               302,398         (133,090)
     Film costs                                              (759,874)           (1,569,655)        (592,995)
     Other assets                                                                    56,132           19,674
     Accounts payable and accrued expenses                    174,209               101,083          (65,070)
     Due to GP Strategies                                      94,480
     Income taxes receivable                                 (235,000)
     Income taxes payable                                    (330,891)                                13,550
     Advances from customers                                 (577,730)           (1,716,001)         311,000
     Other                                                     62,354                                (11,000)
                                                       --------------     -----------------         ---------


              Net cash provided by (used for)
                operating activities                       (1,429,132)              (91,916)          18,671
                                                           -----------             --------           ------

Cash flows from investing activities:
     Purchase of equipment                                    (17,363)               (5,731)         (25,340)
     Proceeds from sale of marketable securities              505,000
     Cash acquired in purchase transaction                                          620,714
                                                          ---------------          ------------

              Net cash provided by (used for)
                investing activities                          487,637               614,983          (25,340)
                                                          ---------------          --------           ------

                                   (Continued)
</TABLE>





<PAGE>


                        AVENUE ENTERTAINMENT GROUP, INC.
<TABLE>

                Consolidated Statements of Cash Flows, Continued
<CAPTION>

                                                         Year ended         Five months ended        Year ended
                                                        December 31,          December 31,            July 31,
                                                            1997                  1996                  1996
                                                            ----                  ----                  ----

Cash flows from financing activities:
<S>                                                     <C>                   <C>                     
   Proceeds from short-term borrowings                  $     127,500         $                      $
   Stock subscription                                                               150,000
   Proceeds from the issuance of common stock               1,217,254                   640           35,000
   Exercise of warrants                                       100,000
   Principal payments of capital lease obligation             (31,992)               (7,906)         (35,613)
   Due to officers                                                                                   (10,000)
   Repayment of loan payable                                                        (20,000)
                                                  -------------------       ----------------
              Net cash provided by (used for)
                financing activities                        1,412,762               122,734          (10,613)
                                                        -------------       ---------------      ------------

              Net increase (decrease) in cash                 471,267               645,801          (17,282)

Cash at beginning of year                                     687,080                41,279           58,561
                                                     ----------------      ----------------     ------------

Cash at end of year                                    $    1,158,347        $      687,080      $    41,279
                                                       ==============        ==============      ===========

Supplemental cash flow information: Cash paid during the year for:
     Interest                                        $         46,061        $        3,082    $      11,428
     Income taxes                                             201,694                38,910           33,775

Noncash  transactions: 
         During the five months  ended  December  31,  1996,  $815,000 of common
stock  was  issued  for  short-term   investments,   $184,255  of  payables  was
contributed  to capital,  net of a $73,702 tax liability,  and Avenue  Pictures,
Inc. was acquired resulting in the following:

       Fair value of assets acquired                  $    5,528,733
       Liabilities assumed                                (2,662,066)
       Common stock issued                                (2,866,667)
                                                      ---------------

              Net cash paid

       Cash acquired                                         620,714
                                                     ---------------
                 Net cash acquired                    $      620,714
                                                      ==============

See accompanying notes to consolidated financial statements.


<PAGE>


                        AVENUE ENTERTAINMENT GROUP, INC.

                   Notes to Consolidated Financial Statements

 (1)   Summary of Significant Accounting Policies

       Description of Business

       Avenue  Entertainment  Group, Inc. (formerly The CineMasters Group, Inc.)
       (the "Company"), through its Wombat Production Division, writes, produces
       and distributes  film star  biographies for television and other markets.
       On  September  30,  1996,  the Company  acquired  all of the  outstanding
       capital stock of Avenue Pictures, Inc. ("Avenue") (see note 9). Avenue is
       an  independent  producer of feature  films and  television  programming.
       Subsequent to July 31, 1996, the Company changed its year-end to December
       31.

       Principles of Consolidation

       The  Company's  financial  statements  include the accounts of all wholly
       owned   subsidiaries.   All   significant   intercompany   accounts   and
       transactions have been eliminated.

       Reclassifications

       Certain   reclassifications   have  been  made  to  the  July  31,   1996
       consolidated financial statements to conform to the current presentation.

       Cash and Cash Equivalents

       Cash and cash  equivalents  include all highly  liquid  investments  with
       original maturities, to the Company, of three months or less.

       Short-Term Investment

       Short-term  investment consists of marketable equity securities which are
       recorded at fair market value.  All marketable  securities are classified
       as   available-for-sale.   In  accordance  with  Statement  of  Financial
       Accounting Standards No. 115, "Accounting for Certain Investments in Debt
       and Equity Securities,"  unrealized holding gains or losses are reflected
       as  an  adjustment  to  stockholders'   equity.  At  December  31,  1997,
       short-term  investment is comprised of registered shares of GP Strategies
       Corporation  (GP  Strategies),   formerly  National  Patent   Development
       Corporation, a stockholder of the Company.

       Film Costs

       The  Company  capitalizes  costs  incurred  to  produce  a film  project,
       including the interest  expense funded under the production  loans.  Such
       costs  also  include  the  actual  direct  costs of  production,  certain
       exploitation costs and production overhead.  Capitalized  exploitation or
       distribution  costs  include  those  costs that  clearly  benefit  future
       periods such as film prints and prerelease and early release  advertising
       that is expected to benefit the film in future  markets.  These costs, as
       well as expected revenue or profit  participations  and talent residuals,
       are  amortized  each period on an  individual  film program  basis in the
       ratio that the current period's gross revenues from all sources for



<PAGE>


                        AVENUE ENTERTAINMENT GROUP, INC.

              Notes to Consolidated Financial Statements, Continued


       the program  bear to  management's  estimate of  anticipated  total gross
       revenues for such film or program from all sources. Revenue estimates are
       reviewed  periodically  and adjusted where  appropriate and the impact of
       such adjustments could be material.

       Film  property  costs  are  stated at the  lower of  unamortized  cost or
       estimated  net   realizable   value.   Losses  which  may  arise  because
       unamortized  costs of individual  films exceed  anticipated  revenues are
       charged to operations through additional amortization.

       Property, Equipment and Depreciation

       Property  and  equipment  are  stated  at cost.  Major  expenditures  for
       property  and  those  which  substantially   increase  useful  lives  are
       capitalized.  Maintenance,  repairs and minor  renewals  are  expensed as
       incurred.  When assets are retired or otherwise  disposed of, their costs
       and related  accumulated  depreciation  are removed from the accounts and
       resulting  gains or  losses  are  included  in  income.  Depreciation  is
       provided by the  straight-line  method over the estimated useful lives of
       the assets.

       Goodwill

       Goodwill,  representing  the  excess  of the  purchase  price  of  Avenue
       Pictures,  Inc. over its net assets,  is being  amortized over a ten-year
       period on a straight line basis. Accumulated amortization at December 31,
       1997 was $350,650.

       The carrying value of intangible  assets is periodically  reviewed by the
       Company based on the expected future undiscounted operating cash flows of
       the  related  business  unit.  Based upon its most recent  analysis,  the
       Company believes that no material impairment of intangible assets exists.

       Fair Value of Financial Instruments

       The Company's  carrying value of cash,  accounts  receivable and accounts
       payable and accrued  expenses and due to related party  approximate  fair
       value because of the short-term maturity of these instruments.

       Revenue and Cost Recognition

       Revenues from feature film and television program distribution  licensing
       agreements  are  recognized on the date the completed  film or program is
       delivered  or  becomes   available   for   delivery,   is  available  for
       exploitation  in the relevant media window  purchased by that customer or
       licensee and certain  other  conditions of sale have been met pursuant to
       criteria specified by Statement of Financial  Accounting Standards (SFAS)
       No. 53,  "Financial  Reporting by Producers  and  Distributors  of Motion
       Picture Films."



<PAGE>


                        AVENUE ENTERTAINMENT GROUP, INC.

              Notes to Consolidated Financial Statements, Continued

       Production  costs of released  films are amortized  based on the ratio of
       revenues  earned during the current  period to  management's  estimate of
       total  revenues  to  be  derived  from  the  related  productions.  It is
       anticipated  that production costs will be amortized over various periods
       of generally up to 15 years although for certain films,  the amortization
       period may be longer. The market trend of each film is regularly examined
       to determine the estimated future revenues and  corresponding  lives. Due
       to the nature of the industry,  management's estimates of future revenues
       may change within the next year and the change could be material.

       Revenues   from   producer-for-hire   contracts   are   recognized  on  a
       percentage-of-completion  method,  measured  by the  percentage  of costs
       completed to date to estimated  total cost for each contract.  Provisions
       for estimated  losses on uncompleted  contracts are made in the period in
       which such losses are determined.

       Use of Estimates

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

       Significant  estimates  include  those  related to  valuation of accounts
       receivable  and  inventories  of  released  productions.  It is at  least
       reasonably  possible  that the  significant  estimates  used will  change
       within the next year.

       Income (loss) per Common Share

       The Company has  adopted  Statement  of  Financial  Accounting  Standards
       (SFAS) No. 128,  "Earnings per Share",  which  established  standards for
       computing  and  presenting   earnings  per  share  (EPS).  The  statement
       simplifies the standards for computing EPS,  replaces the presentation of
       primary  EPS  with a  presentation  of  basic  EPS  and  requires  a dual
       presentation  of  basic  and  diluted  EPS on  the  face  of  the  income
       statement. Basic EPS are based upon the weighted average number of common
       shares  outstanding  during the  period.  Diluted  EPS are based upon the
       weighted  average  number of common  shares  for all  dilutive  potential
       common shares outstanding.  At December 31, 1997, 1996 and July 31, 1996,
       the Company did not include any potential common stock in its calculation
       of diluted EPS, because all options and warrants are anti-dilutive.

       Concentration of Credit Risk

       The  Company's  accounts   receivable  are  due  from  companies  in  the
       entertainment industry (see Note 10).

       Stock Option Plan

       Prior to January 1, 1996, the Company accounted for its stock option plan
       in accordance  with the provisions of Accounting  Principles  Board (APB)
       Opinion No. 25,  "Accounting  for Stock Issued to Employees," and related
       interpretations.  As such,  compensation expense would be recorded on the
       date of grant only if the current  market price of the  underlying  stock
       exceeded the exercise price. On January 1, 1996, the Company adopted SFAS
       No. 123, "Accounting for Stock-Based Compensation,"which permits entities



<PAGE>


                        AVENUE ENTERTAINMENT GROUP, INC.

              Notes to Consolidated Financial Statements, Continued

       to  recognize  as expense  over the vesting  period the fair value of all
       stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
       allows entities to continue to apply the provisions of APB Opinion No. 25
       and  provide  pro  forma net  income  and pro  forma  earnings  per share
       disclosures  for  employee  stock  option  grants made in 1995 and future
       years as if the fair-value-based  method defined in SFAS No. 123 had been
       applied.  The Company has elected to continue to apply the  provisions of
       APB Opinion No. 25 and provide  the pro forma  disclosure  provisions  of
       SFAS No. 123.


(2)    Film Costs

       Film costs consist of the following:


                                                                   December 31,
                                                                       1997

       In process or development                                   $     47,955
       Released, net of accumulated amortization of $11,753,074       1,433,616
                                                                     ----------

                                                                   $  1,481,571

       Based upon the Company's present estimates of anticipated future revenues
       at December  31,  1997,  approximately  75% of the film costs  related to
       released  product will be amortized  during the three-year  period ending
       December 31, 2000.


 (3)   Property and Equipment

       The major classes of property and equipment consist of the following:

                                              Useful              December 31,
                                               life                 1997

       Machinery and equipment             4 to 5 years             $ 228,985
       Furniture and fixtures              10 years                    15,641
       Leasehold improvements              Lease term                  20,489
                                                                  -----------
                                                                      265,115
       Less accumulated depreciation and amortization                (162,759)
                                                                    $ 102,356


       Depreciation  expense was $32,499 for the year ended  December  31, 1997,
       $10,046 for the five months  ended  December 31, 1996 and $51,232 for the
       year ended July 31, 1996.

                        AVENUE ENTERTAINMENT GROUP, INC.


              Notes to Consolidated Financial Statements, Continued


(4)    Commitments and Contingencies

       Leases

       The Company is obligated  under a lease for office space,  expiring April
       30, 1999, which requires minimum annual rentals,  plus increases based on
       real estate taxes and operating costs.

       Rent  expense  was  $143,782,  $10,002  and  $56,340  for the year  ended
       December 31, 1997,  the five months ended  December 31, 1996 and the year
       ended July 31, 1996,  respectively.  These  amounts are net of $0 for the
       year ended  December 31, 1997,  $9,127 for the five months ended December
       31,  1996 and $45,142 for the year ended July 31,  1996,  capitalized  as
       film costs.

       Minimum  annual  rental  commitments  at  December  31,  1997  under  the
noncancelable operating and capital leases are as follows:

                                                         Operating      Capital
        Year ending December 31:
        1998                                                42,938        8,459
        1999                                                14,313         --
                                                         ---------      --------

        Total minimum obligations                        $  57,251        8,459
                                                         =========

        Less amount representing interest                                   373
        Present value of minimum lease obligation                      $  8,086
                                                                        =======


       Interest  expense  relating to the capital  lease  obligations  was $373,
       $2,806 and $11,428 for the year ended  December 31, 1997, the five months
       ended December 31, 1996 and the year ended July 31, 1996, respectively.

       Employment Agreements

       Effective  September  30,  1996,  the  Company  entered  into  employment
       agreements  with its President  and its Chairman  providing for an annual
       salary of $450,000,  plus benefits  (which base salary may be funded from
       any Company source other than net cash generated by the Wombat  Division)
       and  $150,000,  plus benefits  (provided  that such base salary is funded
       solely  out  of  net  cash  flow  generated  by  the  Wombat   Division),
       respectively.  Increases to base  salaries and bonuses  (limited to twice
       the base salary) will be determined at the discretion of the Compensation
       Committee of the Board of Directors.



<PAGE>


                        AVENUE ENTERTAINMENT GROUP, INC.


              Notes to Consolidated Financial Statements, Continued


(5)    Common Stock and Stock Option Plan

(a)    In 1995, the Company  adopted a  Non-Qualified  Stock Option Plan whereby
       certain employees and related parties were granted  non-qualified options
       to purchase up to 600,000 shares of common stock of the Company. In March
       1997,  the Company  adopted The Avenue  Entertainment  Group,  Inc. Stock
       Option and Long Term Incentive  Compensation  Plan which provides for the
       grant of an aggregate of 1,750,000 shares of common stock of the Company.
       The options may be exercised subject to continued  employment and certain
       other  conditions.  The options  vest over a five-year  period and expire
       five to ten years from the date of grant.  At December 31, 1997,  577,100
       options are exercisable.

       Option activity was as follows:

</TABLE>
<TABLE>
<CAPTION>

                                                                                Weighted
                                                                                 average
                                                Number of          Exercise     exercisable
                                                  shares             price         price

       Options granted during the year ended
<S>                                               <C>         <C>      <C>      <C>     
         July 31, 1996                            393,500     $  .32 - 1.00     $    .49
                                                ---------     -------------     ---------

       Outstanding at July 31, 1996               393,500        .32 - 1.00          .49
       Options granted                            500,000              1.70         1.70
       Options exercised                           (2,000)              .32          .32
                                                -----------   -------------     ---------

       Outstanding at December 31, 1996           891,500        .32 - 1.70         1.29
                                                ---------     --------------    ---------
       Options granted                            573,000       3.00 - 6.31         3.05
       Options exercised                         (100,000)             1.00         1.00
                                                ----------    --------------    --------

       Outstanding at December 31, 1997         1,364,500        .32 - 6.31         1.97
                                                ---------     --------------    --------

</TABLE>

       The  Company  recorded  compensation  expense  related  to stock  options
       granted at prices less than market value totaling  $37,500 and $9,375 for
       the year ended  December 31, 1997 and the five months ended  December 31,
       1996.

       At December 31, 1997, the weighted average remaining  contractual life of
       all outstanding options was 8.9 years.

       Prior to January 1, 1996, the Company accounted for its stock option plan
       in accordance  with the provisions of Accounting  Principles  Board (ABP)
       Option No. 25,  "Accounting  for Stock Issued to Employees,"  and related
       interpretations.  As such,  compensation expense would be recorded on the
       date of grant only if the current  market price of the  underlying  stock
       exceeded the exercise price.



<PAGE>


                        AVENUE ENTERTAINMENT GROUP, INC.

              Notes to Consolidated Financial Statements, Continued

       In 1996, the Company  adopted SFAS No. 123,  "Accounting  for Stock-Based
       Compensation,"  which  permits  entities to recognize as expense over the
       vesting  period the fair value of all  stock-based  awards on the date of
       grant.  Alternatively,  SFAS No. 123 also allows  entities to continue to
       apply the  provisions  of APB  Opinion  No. 25 and  provide pro forma net
       income and pro forma  earnings per share  disclosures  for employee stock
       option  grants made in 1995 and future  years as if the  fair-value-based
       method defined in SFAS No. 123 had been applied.  The Company has elected
       to continue to apply the  provisions  of APB Opinion No. 25 in accounting
       for its Plan, and accordingly,  no compensation  cost has been recognized
       for its stock  options  granted at fair market value in the  consolidated
       financial statements.  Compensation cost will continue to be recorded for
       options granted below fair market value.

       Had the Company  determined  compensation cost based on the fair value at
       the grant date for its stock  options  under SFAS No. 123, the  Company's
       net income  (loss)  would have been reduced or increased to the pro forma
       amounts indicated below:
<TABLE>

<CAPTION>
                                                           December 31,     December 31,   July 31,
                                                               1997             1996       1996
                                                               ----         ------------   --------

<S>                                                        <C>              <C>            <C>    
        Net income (loss)               As reported        (1,551,819)      $ 19,949       $73,569
                                        Pro forma          (2,090,005)      (138,461)       (2,901)

        Basic and diluted
         earnings (loss) per share      As reported              (.41)           .01           .04
                                        Pro forma                (.55)          (.05)         (.01)
</TABLE>


       Pro forma net  income  reflects  only  options  granted in the year ended
       December 31, 1997,  the five months ended  December 31, 1996 and the year
       ended  July  31,  1996.   Therefore,   the  full  impact  of  calculating
       compensation  cost for stock  options under SFAS No. 123 is not reflected
       in the pro forma net income amounts presented above because  compensation
       cost is  reflected  over the  options'  vesting  period of five years and
       compensation  cost for  options  granted  prior to  August 1, 1994 is not
       considered.

       At  December   31,  1997,   1996  and  July  31,  1996,   the  per  share
       weighted-average fair value of stock options granted was $2.75, $1.58 and
       $.46, respectively, on the date of grant using the modified Black-Scholes
       option-pricing  model with the  following  weighted-average  assumptions:
       December 31, 1997- expected dividend yield 0%, risk-free interest rate of
       6.3%,  expected  volatility  of 87.4%  and an  expected  life of 8 years,
       December 31, 1996 - expected  dividend yield 0%, risk-free  interest rate
       of 6.5%,  expected  volatility of 73.2%, and an expected life of 9 years;
       July 31, 1996 - expected  dividend yield 0%,  risk-free  interest rate of
       6.2%, expected volatility of 94.7%, and an expected life of 2.9 years.

(b)    In October 1995, as part of a consulting  agreement,  the Company  issued
       options  to  acquire  100,000  shares of common  stock at $1.00 per share
       (note 7). The options were immediately  exercisable and were exercised in
       October 1997.



<PAGE>


                        AVENUE ENTERTAINMENT GROUP, INC.

              Notes to Consolidated Financial Statements, Continued

(c)    In July 1994,  the Company  issued  options to acquire  200,000 shares of
       common  stock at $.25 per  share to  Kaufman  Films,  Inc.  (Kaufman)  in
       conjunction with an acquisition (note 8). These options were subsequently
       returned to the Company.  This  activity has been excluded from the table
       of stock option activity above.  These options were issued outside of the
       Non-Qualified Stock Option Plan. Such options were subsequently  canceled
       (note 8).

(d)    In April 1997,  the Company  issued 50,000  shares of  restricted  common
       stock to a  consultant  pursuant to a private  placement  transaction  in
       exchange for a promissory note in the principal amount of $150,000 due on
       demand but in no event later than December 31, 1998. The Company recorded
       $100,000  as deferred  compensation  expense,  based upon the  calculated
       value of the restricted common stock issued in 1997.

(e)    In the fourth  quarter of 1997,  the Company  adopted the  provisions  of
       Statement of Financial Accounting Standards No. 128, "Earning per Share".
       (SFAS 128), as required,  and restated the previously  reported  earnings
       per share in  conforming  with SFAS 128. The new standard  specifies  the
       computation,  presentation  and disclosure  requirements for earnings per
       share.

       Earnings  per share  (EPS) for the year ended  December  31,  1997,  five
       months  ended  December  31,  1996 and year  ended  July 31,  1996 are as
       follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>

                                                December 31,     December 31,     July 31,
                                                    1997             1996           1996
                                                    ----             ----           ----

        Basic and diluted EPS
<S>                                             <C>              <C>            <C>       
           Net income                           $ (1,551,819)    $   19,949     $   73,569
           Weighted average shares outstanding     3,790,146      3,321,251      1,788,525
           Basic and diluted EPS                $        .41     $      .01     $      .04
</TABLE>


       Basic  earnings per share are based upon the weighted  average  number of
       common shares outstanding  during the period.  Diluted earnings per share
       are based upon the weighted  average number of common shares  outstanding
       during  the  period,  assuming  the  issuance  of common  shares  for all
       dilutive potential common shares outstanding.


 (6)   Income Taxes

       Components of income taxes expense (benefit) are as follows:

                                  December 31,       December 31,     July 31,
                                      1997               1996           1996
                                      ----               ----           ----
            Federal               $(146,698)         $  58,737        $ 18,725
            State and local         (61,118)            16,208          32,505
                                  ----------         ---------        --------

                                  $(207,816)         $  74,945        $ 51,230
                                  ==========         =========        ========




<PAGE>


                        AVENUE ENTERTAINMENT GROUP, INC.

              Notes to Consolidated Financial Statements, Continued



       Reconciliation  of the statutory Federal income tax rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>

                                                        December 31,       December 31,         July 31,
                                                            1997               1996               1996
                                                            ----               ----               ----

       Tax expense (benefit)
<S>                                                      <C>               <C>                <C>       
         at Federal statutory rate of 34%                $ (598,276)       $    32,264        $   48,639
       Increase (decrease) in taxes resulting from:
       State and local income taxes, net of
         Federal income tax benefit                         (35,377)            10,697            21,453
       Surtax exemption                                                                          (11,580)
       Nondeductible goodwill amortization                   95,377             28,052
       Other                                                  3,400              3,932            (7,282)
       Change in valuation allowance                        327,060

       Total                                             $ (207,816)        $   74,945         $  51,230
                                                         ===========        ==========         =========

</TABLE>


       The tax effects of temporary  differences between the financial reporting
and tax bases of assets and liabilities are as follows:

                                                                December 31,
                                                                    1997
       Deferred tax assets

       Stock options                                            $   (63,156)
       Film cost write-down                                         (30,100)
       NOLs                                                        (366,970)
                                                                ------------
                                                                   (460,226)
       Valuation allowance                                          430,919
       Net assets                                                   (29,307)

       Deferred tax liabilities

       State liabilities                                            (29,307)

       Net tax assets                                          $


<PAGE>


                        AVENUE ENTERTAINMENT GROUP, INC.

              Notes to Consolidated Financial Statements, Continued


(7)    Related Party Transactions

       Transactions with GP Strategies

       In July  1996,  the  Company  had a  private  placement  in which it sold
       123,338  shares of common  stock at $1.50 per share to people  affiliated
       with the Company and GP Strategies.  At July 31, 1996, 23,334 shares were
       paid. The remaining subscribed shares were paid for in September 1997.

       In September 1996, GP Strategies made a capital  contribution of $815,000
       to the Company (see note 9). At December  31,  1997,  the Company owed GP
       Strategies  $94,480  related to the  payment of certain  expenses  of the
       Company by GP Strategies.

       Distribution Agreement

       On March 1, 1994,  the  Company  entered  into an  agreement  with Janson
       Associates  whereby Janson  Associates (the distributor) was granted sole
       and  exclusive  rights to license  essentially  all the  programs  of the
       Company's  Wombat  Production  Division for all forms of  television  and
       video  worldwide.  The  distributor  also gained the  exclusive  right to
       execute all contracts for the  exploitation of these rights.  Included in
       operating  expenses was $216,845,  $89,978 and $277,764 of commissions to
       Janson  Associates  incurred in the year ended  December 31,  1997,  five
       months  ended  December  31,  1996 and the  year  ended  July  31,  1996,
       respectively.  The President of Janson  Associates  was a director of the
       Company and is related to the Company's Chairman through marriage.

       Consulting Agreement

       In October 1995,  the Company  entered into a two-year  agreement  with a
       financial consultant.  The consultant will provide financial advisory and
       investment  banking related services.  The agreement provides for monthly
       payments of $4,000 per month,  plus a two-year option to purchase 100,000
       shares of the  Company's  common stock at an exercise  price of $1.00 per
       share.  The 100,000 options were exercised in October 1997.  Either party
       could elect to  terminate  the  agreement  upon 30 days  written  notice.
       Pursuant to its termination  agreement with Kaufman (see note 8), Kaufman
       agreed to  reimburse  the Company  $1,000 per month for  services of such
       consultant.


(8)    Acquisition and Disposition of Kaufman Films, Inc.

       On July 26, 1994,  the Company  acquired the net assets of Kaufman Films,
       Inc. (Kaufman). Kaufman is a media company specializing in the production
       of  corporate  and  commercial  films.  The net assets  were  acquired in
       exchange for 160,000 shares of the Company's class A common stock, valued
       at $.25 per share and an option for  Kaufman  to  acquire  an  additional
       200,000  shares at $.25 per share which may be  exercised no earlier than
       two years from the  closing  nor more than five  years from the  closing.
       These options were not ascribed a value.




<PAGE>


                        AVENUE ENTERTAINMENT GROUP, INC.

              Notes to Consolidated Financial Statements, Continued


       On July 3, 1996,  the Company  entered into a termination  agreement with
       Kaufman.  The agreement terminated an employment agreement dated July 26,
       1994 with Kevin Kaufman and canceled the stock options granted to him and
       Kaufman Films,  none of which have been  exercised.  It also assigned the
       lease at  Leonard  Street and  returned  certain  acquired  net assets to
       Kaufman.  In addition,  Kaufman  returned 80,000 shares of the previously
       issued 160,000 shares of the Company's common stock. Kevin Kaufman agreed
       to provide the Company  with  one-half of the  proceeds  from the sale of
       18,000 of the remaining 80,000 shares.  In 1997, the Company received net
       proceeds of $92,254 from the sale of the 18,000  shares of the  Company's
       common  stock.  The cash  received  has been  reflected as an increase in
       Additional   Paid  in   Capital.   Stockholders'   equity   was   charged
       approximately  $74,000,  the fair value of assets returned to Mr. Kaufman
       and  of  the  80,000  shares  of  common  stock   returned  by  him,  and
       subsequently canceled by the Company.


(9)    Acquisition of Avenue Pictures, Inc.

       On October 28, 1996, the Company acquired Avenue Pictures, Inc. (Avenue),
       effective  September 30, 1996, in  consideration  for 1,425,000 shares of
       its common stock which were ascribed a value of $2.00 per share.

       In  connection  with the  purchase,  the  Company has changed its name to
       Avenue  Entertainment  Group, Inc. In conjunction with the acquisition of
       Avenue, GP Strategies, together with its affiliates, contributed $815,000
       in the form of its common stock in exchange for 407,500  shares of common
       stock ($2.00 per share) of the Company prior to the  consummation of this
       business combination.  In addition,  accrued expenses due to the Chairman
       and  President of the Wombat  Production  Division  amounting to $185,000
       were forgiven.  The  forgiveness,  net of the related tax liability,  was
       recorded as a capital  contribution.  An  additional  25,000  shares were
       issued to the  Company's  legal  counsel  for  services  rendered  to the
       Company and Avenue relating to the acquisition.  The portion of the legal
       fees relating to the Company was  capitalized as part of the  transaction
       cost.  The portion of the legal fees  relating  to  services  provided to
       Avenue was expensed.

       Goodwill,  relating to the  acquisition  of Avenue  Pictures,  Inc. is as
       follows:

         Purchase Price                                            $2,866,667
         Fair Market value of net assets
           acquired:
             Assets                          $ 2,723,534
             Liabilities                       2,662,066
                                             -----------
         Net assets acquired                                           61,468

         Goodwill                                                  $2,805,199
                                                                  ===========




<PAGE>


                        AVENUE ENTERTAINMENT GROUP, INC.

              Notes to Consolidated Financial Statements, Continued

       The pro forma results listed below are unaudited, reflect the acquisition
       of Avenue using purchase  accounting and assume the acquisition  occurred
       at the beginning of each of the periods:

                                 Five months ended             Year ended
                                 December 31, 1996            July 31, 1996
                                 -----------------            -------------

       Revenues                     $   3,651,925               6,357,802
       Net loss                           (58,055)               (247,560)
       Net loss per share                    (.02)                   (.07)


       The pro  forma  financial  information  is  presented  for  informational
       purposes only and is not necessarily  indicative of the operating results
       that would have occurred had the Avenue  acquisition  been consummated as
       of the above date, nor are they indicative of future operating results.

       Postretirement Benefit

       Pursuant  to an  agreement  dated  September  30,  1996,  the  Company is
       obligated to pay its Chairman, his spouse, or estate, as the case may be,
       commencing upon the termination of his  employment,  monthly  payments of
       $8,333, for the greater of five years or the remainder of his life. Under
       certain circumstances, a reduced benefit may be payable to the Chairman's
       wife for a period not to exceed five years from the date of his death.

       The  Company is accruing  $640,000,  the  present  value of the  expected
       benefit payments at December 31, 2001, on a straight-line  basis over the
       term of the  Chairman's  employment  contract,  which  covers  the period
       September 30, 1996 to December 31, 2001.

       This  agreement  also gives the Chairman  the option to purchase  certain
       assets of the Wombat  Production  Division  of the  Company at book value
       following the termination of his employment, and a right of first refusal
       if the  Company  wishes to sell the  Wombat  film  library.  The  Company
       retained the rights to acquire any future productions of the Chairman for
       normal  consideration,  subject to reasonable  producer  fees,  rights of
       licensees and existing distribution rights.


(10)   Significant Customers

       Significant  customers,  exceeding  10% of  revenue,  were as follows (in
       percents):

                                         Year         Five months       Year
                                         ended           ended          ended
                                     December 31,     December 31,     July 31,
                                         1997           1996            1996
                                         ----           ----            ----

       ABC                                               77
       A&E Television Networks            17                             12
       Janson Associates                  24                             40
       Hallmark Entertainment             40
       Largo Entertainment Corp.          15


<PAGE>


                        AVENUE ENTERTAINMENT GROUP, INC.


              Notes to Consolidated Financial Statements, Continued


 (11)  Preferred Stock

       The Company has  authorized  2,000,000  shares of preferred  stock with a
       $.01 par value. No preferred stock has been issued.



<PAGE>



                                     III-13

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

         The Board of Directors  recommended and approved,  effective January 1,
1997,  the  selection  of KPMG Peat  Marwick  LLP to audit the  accounts  of the
Company for the five months ending December 31, 1996 and the year ended December
31, 1997. KPMG Peat Marwick LLP has no financial  interest in the Company or any
of its  subsidiaries,  and neither it nor any member or employee of the firm has
had any connection  with the Company or any of its  subsidiaries in the capacity
of promoter,  underwriter,  voting trustee,  director,  officer or employee. The
decision to engage KPMG Peat Marwick LLP did not result from  disagreements with
the Company's prior accountants,  Israeloff,  Trattner & Co., who were dismissed
effective January 1, 1997. The accountant's reports of Israeloff, Trattner & Co.
on the financial statements of the Company for the years ended July 31, 1996 and
1995 were unqualified and no disagreements or reportable  events occurred during
such period and the subsequent interim period.

                                    PART III

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

Directors and Executive Officers

         The  following  table sets forth  certain  information  concerning  the
directors and officers of the Company:

Name                    Age      Position
Gene Feldman            71       Chairman of the Board, President of Wombat
Cary Brokaw             46       President, Chief Executive Officer and Director
Michael Feldman         30       Executive Vice President and Director
Sheri L. Halfon         41       Senior Vice President, Chief Financial 
                                   Officer and Director
Doug Rowan              59       Director
James A. Janowitz       51       Director

         Gene  Feldman  has served as  Chairman  of the Board of the Company and
President of Wombat since their respective formations on March 7, 1997. Prior to
the Reincorporation, Gene Feldman served as Chairman of the Board of CineMasters
and  President of the Wombat  Division  for more than the past five years.  Gene
Feldman is a Class III Director whose term expires at the 2000 annual meeting of
the Company.

         Cary  Brokaw has  served as  President,  Chief  Executive  Officer  and
Director  of the  Company  since its  formation  on March 7, 1997.  Prior to the
Reincorporation,  Mr. Brokaw served as President,  Chief  Executive  Officer and
Director of CineMasters from September 30, 1996 and Chairman and Chief Executive
Officer of Avenue  Pictures  since its formation in 1991.  Mr. Brokaw is a Class
III Director whose term expires at the 2000 annual meeting of the Company.

         Michael  Feldman has served as Executive Vice President and Director of
the Company since its formation on March 7, 1997. Prior to the  Reincorporation,
Michael  Feldman  had  served  as  Executive  Vice  President  and  Director  of
CineMasters  from  September 30, 1996.  Michael  Feldman served as an officer of
General  Physics  Corporation  from  1991 to 1996  and has  been a  Director  of
International  Business  Development  at National  Patent  since  1995.  Michael
Feldman is a Class II Director  whose term expires at the 1999 annual meeting of
the Company.

         Sheri L. Halfon has served as Senior Vice  President,  Chief  Financial
Officer and Director of the Company since its formation on March 7, 1997.  Prior
to the  Reincorporation,  Ms.  Halfon  served as Senior  Vice  President,  Chief
Financial Officer and Director of CineMasters from September 30, 1996 and Senior
Vice  President  and  Chief  Financial  Officer  of  Avenue  Pictures  since its
formation in 1991.  Ms. Halfon is a Class II Director  whose term expires at the
1999 annual meeting of the Company.

         Doug Rowan served as President  and Chief  Executive  Officer of Corbis
Corporation, a company which is building a library of digital images, from April
1994 to July 1997.  Prior to his position at Corbis,  Mr. Rowan served as Senior
Vice  President of Worldwide  Customer  Operations  of  Ungermann-Bass,  Inc., a
networking  product company,  from November 1993 to April 1994, and President of
AXS, a software corporation for the new digital content industry,  from April 1,
1991 through December 31, 1992. Mr.
Rowan is a Class I Director whose term expires at the 1998 annual meeting of the
Company.

         James  A.  Janowitz  has  been  a  senior  partner  in  the  litigation
department  at Pryor,  Cashman,  Sherman & Flynn and head of its motion  picture
group for more than the past five  years.  Mr.  Janowitz  is a Class I  Director
whose term expires at the 1998 annual meeting of the Company.

         Directors of the Company are divided into three classes. At each annual
meeting of stockholders,  directors are elected to succeed those directors whose
terms  expire  and are  elected  for a term of  office  to  expire  at the third
succeeding  annual  meeting of  stockholders  after  their  election.  Under the
Company's  bylaws,  the number of  directors  constituting  the entire  Board of
Directors  shall be fixed,  from time to time, by the directors  then in office,
who may decrease or increase the number of directors by majority  action without
soliciting stockholder approval. The Company does not currently pay compensation
to directors for service in that capacity.

Section 16(a) Beneficial Ownership Reporting Compliance

         The  Company  believes  that during the most recent  fiscal  year,  all
filing requirements  applicable to its officers,  directors and greater than 10%
beneficial  owners were  complied  with,  except that Michael  Feldman  filed an
untimely report on Form 4.



<PAGE>


ITEM 10.      EXECUTIVE COMPENSATION

Executive Compensation

         The  following  table sets  forth the  aggregate  compensation  paid or
accrued to the Company's  executive  officers for the services rendered in 1997,
1996 and 1995.

<TABLE>

                           SUMMARY COMPENSATION TABLE
<CAPTION>

                                                                    Long-Term
                                                                  Compensation
                                                                     Awards
                                         Annual Compensation          Stock        All Other
                                        Salary          Bonus        Options     Compensation
Name and Principal Position     Year      ($)            ($)           (#)            ($)
---------------------------     ----   -------         ------       ---------    ------------

<S>                             <C>     <C>                 <C>     <C>                 
Cary Brokaw                     1997    450,000            -0-      100,000(1)        --
President, Chief Executive      1996    450,000(2)         -0-      300,000(1)        --
Officer and Director            1995    391,000            -0-           -0-          --

Gene Feldman                    1997    150,000            -0-       75,000(3)        --
Chairman of the Board,          1996    150,000            -0-           -0-          --
President of Wombat             1995    101,115         4,225       200,000(3)        --
Division of the Corporation

Sheri Halfon                    1997    120,000(4)         -0-       75,000(5)        --
Senior Vice President,          1996     95,000(2)(4)      -0-           -0-          --
Chief Financial Officer         1995     95,000(2)(4)      -0-           -0-          --
-------------------

 (1) Of the 100,000 stock options granted to Mr. Brokaw in 1997, only 40,000 are
 currently  vested and of the 300,000  stock  options  granted to Mr.  Brokaw in
 1996, only 120,000 are currently vested.

 (2) Prior to completion of the Business  Combination on September 30, 1996, Mr.
 Brokaw's and Ms. Halfon's compensation was paid directly by Avenue Pictures.

 (3) Of the 75,000 stock options granted to Mr. Feldman in 1997, only 30,000 are
 currently  vested and of the 200,000  stock options  granted to Mr.  Feldman in
 1995, all are currently vested.

 (4) Includes $65,539, $8,400 and $56,763 for 1997, 1996 and 1995, respectively,
 paid to Ms.  Halfon by certain  companies  whose  shows were in  production  or
 post-production by the Company.

 (5) Of the 75,000 stock options  granted to Ms. Halfon in 1997, only 30,000 are
 currently vested.

</TABLE>

<PAGE>


Option Grants in 1997

 The  following  table and notes  contain  information  concerning  the grant of
 non-qualified stock options in 1997 to the named executive officers pursuant to
 the 1997 Plan.

<TABLE>

                     STOCK OPTION GRANTS IN LAST FISCAL YEAR
<CAPTION>

                                            % of Total                             Market Price
                        Number of             Options                              of Underlying
                       Securities           Granted to            Exercise          Security on
                       Underlying            Employees              Price             Date of
                         Options             in Fiscal             ($ per          Grant ($ per        Expiration
Name                   Granted (1)             Year                share)             share)              Date
----                   -----------             ----                ------             ------              ----
<S>                       <C>                   <C>                 <C>                <C>               <C>  <C>
Gene Feldman              75,000                13                  3.00               3.125             2/19/07
Cary Brokaw              100,000                17                  3.00               3.125             2/19/07
Sheri Halfon              75,000                13                  3.00               3.125             2/19/07
-------------

(1) The options were granted pursuant to the terms of the Company's Stock Option
and Long Term Incentive  Compensation  Plan. The options are  exercisable at the
rate of 20% per annum  commencing  on the February  19, 1997,  date of grant and
expire on February 19, 2007.

</TABLE>
 The following table sets forth information  concerning the value of unexercised
 options as of  December  31, 1997 held by the  executives  named in the Summary
 Compensation Table above. No options were exercised during 1997.

<TABLE>
                AGGREGATED OPTION EXERCISES AT DECEMBER 31, 1997
                           AND YEAR-END OPTION VALUES

<CAPTION>
                             Number of Securities                             Value of Unexercised
                            Underlying Unexercised                           In-the-Money Options at
                          Options at Fiscal Year End                             Fiscal Year End
Name                  Exercisable (E)/ Unexercisable (U)              Exercisable (E)/ Unexercisable (U)(1)

<S>                       <C>                   <C>                     <C>                  <C>        
Gene Feldman              215,000(E)            60,000(U)               1,207,875(E)         $187,500(U)
Cary Brokaw               140,000(E)           260,000(U)                 593,500(E)        1,046,500(U)
Sheri Halfon               15,000(E)            60,000(U)                  46,875(E)          187,500(U)
----------

 (1)  Calculated  based on the  closing  price of the  Common  Stock  $6.125  as
 reported by the American Stock  Exchange on December 31, 1997,  which price was
 higher than the exercise price.
</TABLE>

 Employment  Contracts  and  Termination  of  Employment  and  Change in Control
 Arrangements

         Brokaw   Employment   Agreement.   In  connection   with  the  Business
Combination,  Mr.  Brokaw  entered into a five-year  employment  agreement  (the
"Brokaw  Employment  Agreement") with the Company pursuant to which, among other
things,  Mr.  Brokaw became the  President  and Chief  Executive  Officer of the
Company. The Brokaw Employment Agreement provides Mr. Brokaw with an annual base
salary of $450,000  (which base salary may be paid from any Company source other
than net cash flow  generated  by Wombat),  subject to such  increases as may be
made by the Compensation Committee of the Board of Directors. Mr. Brokaw is also
eligible for annual  bonuses  based upon the  performance  of Mr. Brokaw and the
Company during the previous  fiscal year. Such annual bonuses will be determined
in the discretion of the Compensation Committee. The dollar amount of the annual
bonus will not exceed two times the annual base  salary.  The Brokaw  Employment
Agreement  provides that the Company may only terminate Mr. Brokaw's  employment
with the Company for "cause." If Mr.  Brokaw's  employment is terminated  due to
death or  disability,  he will  receive  his  base  salary  through  the date of
termination  of  employment.  Any  vested  options  not  exercised  prior to the
termination  of employment for this reason will remain  exercisable  for the six
month  period  beginning  on the  date  of  termination.  If his  employment  is
terminated for "Cause" as defined in the Brokaw Employment Agreement, he will be
entitled  to the  base  salary  and any  accrued  annual  bonus  that  has  been
determined  and awarded,  but not paid,  through the date of  termination of his
employment.  Any  vested  options  not  exercised  prior to the  termination  of
employment for Cause will remain  exercisable until the end of the ninetieth day
following the date of  termination.  If Mr.  Brokaw  terminates  his  employment
following a "Change of Control" as defined in the Brokaw  Employment  Agreement,
he will  receive  (i) his earned but unpaid  compensation  as of the date of the
Change  of  Control;   (ii)  continued  benefits  for  the  remaining  unexpired
employment  term;  (iii) a lump sum payment on the date of the Change of Control
equal to the future base  salary  that he would have earned if he had  continued
working for the remaining  unexpired  employment  term;  and (iv) bonus payments
that  would have been made to Mr.  Brokaw if he had  continued  working  for the
Company during the remaining unexpired  employment term. The Company is entitled
to seek to obtain,  and has obtained,  $2,000,000 in "key-man" life insurance on
his life.  Pursuant to the Brokaw Employment  Agreement,  Mr. Brokaw was granted
options to purchase up to 300,000  shares of Common Stock for an exercise  price
of $1.70 per share. Such stock options will vest in equal  installments over the
first  five  years  of Mr.  Brokaw's  employment  with the  Company  and will be
exercisable  for a  period  of ten  years  from the date of  grant.  The  Brokaw
Employment  Agreement  provides for  accelerated  vesting of all of Mr. Brokaw's
stock  options  upon a "change  of  control"  of the  Company or upon a material
breach of the Brokaw Employment Agreement by the Company. As President and Chief
Executive  Officer of the Company,  Mr. Brokaw is entitled to certain  customary
perquisites,   including,   without  limitation,  a  car  allowance,  term  life
insurance,   and  reimbursement  of  all  reasonable  travel  and  entertainment
expenses.  In addition,  Mr. Brokaw is entitled to  participate  in all employee
benefit plans offered to executive officers of the Company.

         Gene Feldman  Employment  Agreement.  In  connection  with the Business
Combination,  Gene Feldman  entered into a five-year  employment  agreement (the
"Feldman Employment  Agreement") with CineMasters pursuant to which, among other
things,  Gene Feldman  became the Chairman of  CineMasters  and President of its
Wombat Division.  The Feldman Employment Agreement provides Gene Feldman with an
annual base salary of $150,000  (provided that such base salary is funded solely
out of net cash flow generated by the Wombat Division of  CineMasters),  subject
to such increases as may be made by the  Compensation  Committee of the Board of
Directors.  Gene  Feldman is also  eligible  for annual  bonuses  based upon the
performance  of Gene Feldman and  CineMasters  during the previous  fiscal year.
Such annual  bonuses will be  determined in the  discretion of the  Compensation
Committee.  The dollar  amount of the annual bonus will not exceed two times the
annual base salary. The Feldman  Employment  Agreement provides that CineMasters
may only terminate Gene Feldman's  employment  with  CineMasters for "cause." If
Mr.  Feldman's  employment is  terminated  due to death or  disability,  he will
receive  his base salary  through the date of  termination  of  employment.  Any
vested  options not exercised  prior to the  termination  of employment for this
reason will remain exercisable for the six month period beginning on the date of
termination.  If his  employment  is  terminated  for  "Cause" as defined in the
Feldman  Employment  Agreement,  he will be  entitled to the base salary and any
accrued annual bonus that has been determined and awarded, but not paid, through
the date of  termination  of his  employment.  Any vested  options not exercised
prior to the termination of employment will remain  exercisable until the end of
the ninetieth day following the date of termination.  If Mr. Feldman  terminates
his  employment  following  a "Change of  Control"  as  defined  in the  Feldman
Employment Agreement,  he will receive (i) his earned but unpaid compensation as
of the date of the Change of Control;  (ii) continued benefits for the remaining
unexpired employment term; (iii) a lump sum payment on the date of the Change of
Control  equal to the future  base  salary  that he would have  earned if he had
continued  working for the remaining  unexpired  employment term; and (iv) bonus
payments that would have been made to Mr.  Feldman if he had  continued  working
for the Company during the remaining  unexpired  employment term. As chairman of
CineMasters  and President of the Wombat  Division,  Gene Feldman is entitled to
certain customary perquisites,  including,  without limitation, a car allowance,
term  life  insurance,   and   reimbursement   of  all  reasonable   travel  and
entertainment  expenses. In addition, Gene Feldman is entitled to participate in
all employee  benefit plans  offered to executive  officers of  CineMasters.  In
connection with the  Reincorporation,  the Gene Feldman Employment Agreement was
amended  to  indicate  that Gene  Feldman  is the  Chairman  of the Board of the
Company and the President of Wombat.

ITEM 11.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

                             PRINCIPAL STOCKHOLDERS

         The only persons  known by the Board of Directors to be the  beneficial
owner of more than five percent of the outstanding shares of Common Stock of the
Corporation, as of March 2, 1998, are indicated below:

Name and Address                           Amount and Nature          Percent
of Beneficial Owner                    of Beneficial Ownership*       of Class

Cary Brokaw                                 1,571,350(1)               37.1%
c/o Avenue Pictures, Inc.
11111 Santa Monica Boulevard
Suite 2110
Los Angeles, CA 90025

GP Strategies Corporation                   1,067,100                  26.2%
9 West 57th Street
New York, New York 10019

Gene Feldman                                  396,700(2)                9.2%
c/o Avenue Entertainment Group, Inc.
250 West 57th Street
Suite 2421
New York, New York 10019
---------------------
 * As used in this Proxy  Statement,  "beneficial  ownership"  means the sole or
 shared power to vote, or to direct the voting of the Corporation's Common Stock
 of the sole or shared investment power with respect to such Common Stock.

(1) Includes  vested options to purchase up to 120,000 shares of Common Stock of
the Corporation at a price of $1.70 per share,  exercisable  until September 30,
2006 and vested  options to purchase up to 40,000  shares of Common Stock of the
Corporation at a price of $3.00 per share,  exercisable until February 19, 2007.
Does not include  unvested  options to  purchase up to 180,000  shares of Common
Stock of the  Corporation  at a price  of $1.70  per  share,  exercisable  until
September  30, 2006 and  unvested  options to  purchase  up to 60,000  shares of
Common Stock of the Corporation at a price of $3.00 per share, exercisable until
February 19, 2007.

(2) Does not include 17,500 shares of Common Stock of the Corporation and 30,000
vested stock options  which are owned by Mr.  Feldman's  wife,  Suzette St. John
Feldman, as to which Mr. Feldman disclaims beneficial ownership. Includes vested
options to purchase up to 200,000 shares of Common Stock of the Corporation at a
price of $0.32 per share,  exercisable  until August 11, 2000 and vested options
to purchase up to 30,000 shares of Common Stock of the Corporation at a price of
$3.00 per share,  exercisable until February 19, 2007. Does not include unvested
options to purchase up to 45,000  shares of the Common Stock of the  Corporation
at a price of $3.00 per share, exercisable until February 19, 2007.

          SECURITY OWNERSHIP OF DIRECTORS AND NAMED EXECUTIVE OFFICERS

         The  following  table  sets  forth,  as of  March 2,  1998,  beneficial
ownership of shares of Common Stock of the Company by each director, each of the
named executive officers and all directors and executive officers as a group:

                                Total Number of Shares              Percent of
                                   of Common Stock                    Common
Name                              Beneficially Owned                 Stock(1)

Gene Feldman                            396,700(2)                      9.2

Cary Brokaw                           1,571,350(3)                     37.1

Michael Feldman                         111,500(4)(5)                   2.7

Sheri L. Halfon                          30,100(6)                      *

Doug Rowan                                3,000(7)                      *

James A. Janowitz                            -0-(8)                     *

Directors and Executive               2,112,650(9)                     46.08
  Officers as a Group
  (6 persons)
----------
* The number of shares owned is less than one percent of the outstanding shares.

 (1) The percentage of class calculation  assumes for each beneficial owner that
all of the options are deemed to be exercised by any other stockholders.

(2) See footnote 2 to Principal Stockholders table.

(3) See footnote 1 to Principal Stockholders table.

(4) Includes  vested  options to purchase up to 60,000 shares of Common Stock of
the Corporation at a price of $1.70 per share, which option is exercisable until
September 30, 2006 and vested  options to purchase up to 30,000 shares of Common
Stock of the  Corporation  at a price  of $3.00  per  share,  exercisable  until
February 19, 2007.  Does not include  unvested  options to purchase up to 90,000
shares  of  Common  Stock of the  Corporation  at a price of  $1.70  per  share,
exercisable  until  September  30, 2006 and  unvested  options to purchase up to
45,000 shares of Common Stock of the  Corporation at a price of $3.00 per share,
exercisable until February 19, 2007.

(5) Michael Feldman is Gene Feldman's nephew.

(6) Includes  vested  options to purchase up to 30,000 shares of Common Stock of
the  Corporation at a price of $3.00 per share,  exercisable  until February 19,
2007.  Does not include  unvested  options to  purchase  up to 45,000  shares of
Common Stock of the Corporation at a price of $3.00 per share, exercisable until
March 10, 2007.

(7)  Includes  vested  options to purchase up to 2,000 shares of Common Stock of
the Corporation at a price of $5.00 per share,  exercisable  until July 1, 2007.
Does not include unvested options to purchase up to 8,000 shares of Common Stock
of the  Corporation  at a price of $5.00 per  share,  exercisable  until July 1,
2007.

(8) Does not include 25,000 shares of Common Stock of the Corporation  which are
owned by Pryor, Cashman,  Sherman & Flynn, a law firm in which Mr. Janowitz is a
    senior partner, as to which Mr. Janowitz disclaims beneficial ownership.

 (9) Includes 512,000 shares of Common Stock issuable upon exercise of currently
exercisable stock options.

Except for the shares of Avenue Common Stock subject to the options described in
footnotes  1 through 4, and 6 and 7 above,  none of such  shares is known by the
Corporation  to be shares with  respect to which such  beneficial  owner has the
right to acquire beneficial  ownership.  The Corporation believes the beneficial
holders listed above have sole voting and investment  power regarding the shares
shown as being beneficially owned by them.

ITEM 12.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Gene Feldman Exit Option  Agreement.  In  connection  with the Business
Combination, Gene Feldman entered into an exit option agreement with CineMasters
pursuant  to which,  among  other  things,  he was given an option,  exercisable
during  the  six-month  period  commencing  on the  date of  termination  of his
employment, to purchase the production assets of CineMasters for a cash purchase
price equal to the book value of such  assets.  This option does not include the
CineMasters film library. In addition, CineMasters retained the right to acquire
any future production of Mr. Feldman for nominal  consideration,  subject to (i)
the rights of Mr. Feldman to receive commercially reasonable producer fees, (ii)
the rights,  if any, of A&E, as licensee,  consistent  with past  practice,  and
(iii) the distribution rights pursuant to the Distribution Agreement, dated July
1, 1995, as amended,  between Janson and the Wombat Division.  Upon the exercise
of such option,  Gene Feldman will no longer be employed by CineMasters but will
be entitled to receive  annual  payments for the  remainder of his life equal to
the  lesser of (i) 25% of the  annual  net  income  (which  shall be  determined
without   deduction  for  general  and   administrative   expenses)  derived  by
CineMasters from the original CineMasters library and (ii) $100,000 annually. If
Gene  Feldman  shall die prior to the exercise of such  option,  Gene  Feldman's
wife,  Suzette St. John Feldman,  shall  following Gene Feldman's death have the
right to exercise  such option and to receive such annual  payments for a period
of five years  following  the date of such  exercise.  If Gene Feldman shall die
after the exercise of such option but prior to the fifth anniversary of the date
of such exercise,  Suzette St. John Feldman shall following Gene Feldman's death
be entitled to receive such annual payments for a period of five years following
the date of Gene Feldman's death;  provided,  however, that such annual payments
shall be reduced from $100,000 to $75,000 following the fifth anniversary of the
date of Gene  Feldman's  exercise of such option.  In addition,  if  CineMasters
shall  determine to sell its library  during the first five years  following the
exercise of such option by Gene Feldman,  CineMasters  shall first offer to sell
its library to Gene Feldman based upon a specific price and upon specific terms.
If Gene Feldman  does not accept such offer within a reasonable  period of time,
CineMasters will then have a limited period of time in which to sell its library
to a third  party for a price and upon terms no less  favorable  to  CineMasters
than those offered to Gene Feldman. In connection with the Reincorporation,  the
Gene  Feldman  Exit Option  Agreement  was amended to replace  CineMasters  with
Wombat.

         Stockholders  Agreement.  In connection with the Business  Combination,
Mr. Brokaw entered into a stockholders agreement (the "Stockholders Agreement"),
amended in connection  with the  Reincorporation,  with  CineMasters and each of
National Patent,  Gene Feldman,  Jerome Feldman,  Suzette St. John Feldman,  and
Michael Feldman  (collectively,  the "Feldman Group"),  pursuant to which, among
other things,  the Board of Directors of CineMasters was reconstituted such that
Mr. Brokaw and the Feldman Group each have three designees on a six-person Board
of Directors and, except as may be mutually agreed upon, equal representation on
any committee of the Board of Directors.  The  Stockholders  Agreement  provides
that all extraordinary transactions (i.e., any merger or consolidation involving
CineMasters  or  any  subsidiary,   any  public  offering,  any  sale  or  other
disposition  of a  material  portion  of the  assets of  CineMasters  and/or its
subsidiaries,  any acquisition or investment in excess of $250,000,  etc.) shall
require  the  prior  approval  of the  Board of  Directors  of  CineMasters.  In
addition,  the Stockholders  Agreement provides that, except for ordinary course
(i) expenditures for office rent, (ii)  expenditures for selling,  general,  and
administrative expenses, and (iii) out-of-pocket development expenditures not in
excess  of  $500,000  during  each  of the  first  two  fiscal  years  following
consummation of the Business  Combination,  aggregate  expenditures in excess of
$250,000  in any fiscal  year will  require  the prior  approval of the Board of
Directors of CineMasters.  The Stockholders  Agreement also provides each of Mr.
Brokaw and the  members of the  Feldman  Group with  reciprocal  rights of first
negotiation  and refusal  and  tag-along  rights in the event that either  party
wishes to dispose of some or all of his, her, or its shares of Common Stock in a
privately-negotiated  transaction. Mr. Brokaw has agreed until December 31, 1997
to  maintain a balance of cash or cash  equivalents  (including  the  registered
shares of National  Patent common stock held by the Company as described  below)
for CineMasters of at least $500,000 and shall at all times thereafter  maintain
a balance of cash or cash  equivalents  for  CineMasters  of at least  $300,000.
Pursuant to the Stockholders Agreement, $500,000 in cash or cash equivalents was
placed in a separate account with any withdrawal from such account requiring the
signatures of each of Mr. Brokaw and a  representative  from the Feldman  Group.
The balance of such account will be reduced to $300,000 on December 31, 1997. In
connection with the Reincorporation,  the Stockholders  Agreement was amended to
replace CineMasters with the Company.

         Transactions  with GP Strategies  Corporation.  In connection  with the
Business  Combination,  GP  Strategies  made a  capital  contribution  valued at
$815,000 to the Company in the form of registered shares of GP Strategies common
stock in exchange for 407,500  shares of the Company's  Common Stock.  In August
1996, certain directors,  affiliates and employees of GP Strategies  contributed
an  aggregate  of $185,000 in cash to the capital of the Company in exchange for
an aggregate of 123,338  shares of  restricted  Common Stock of the Company in a
private  placement  transaction.  The  Chairman  of the  Company  and  Jerome I.
Feldman,  the  President  and  Chief  Executive  Officer  of GP  Strategies  are
brothers. Michael Feldman is the son of Jerome Feldman.

         Distribution  Agreement.  On March 1, July 1, 1995 and April 28,  1996,
the  Company   entered  into  an  agreement  with  Janson  whereby  Janson  (the
distributor)  was granted sole and exclusive  rights to license  essentially all
the  programs  of the  Wombat  Division  for all forms of  television  and video
worldwide.  The  distributor  also  gained the  exclusive  right to execute  all
contracts for the exploitation of these rights. The President of Janson, Stephen
Janson, is related to the Company's Chairman, Gene Feldman, through marriage.

         Transactions with Pryor, Cashman, Sherman & Flynn. As consideration for
legal  services  rendered in connection  with the Business  Combination,  Pryor,
Cashman,  Sherman & Flynn was paid  approximately  $75,000 in legal fees in 1996
and approximately $55,000 in legal fees in 1997. As additional consideration for
such legal  services,  the Company issued 25,000 shares of the Company's  Common
Stock to the firm. Mr. Janowitz,  a director of the Company, is a senior partner
at Pryor, Cashman, Sherman & Flynn.

Other Transactions

         Cary Brokaw,  the President and Chief Executive  Officer and a director
of the Company,  had loans outstanding to the Company aggregating  approximately
$110,000  (including  accrued  interest  thereon)  for the period April 15, 1997
through March 31, 1998. As of March 31, 1998, $81,204 of the loan was repaid and
$28,840 is currently outstanding.

<PAGE>


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

(a) The Exhibits listed on the accompanying  Index to Exhibits are filed as part
of this Annual Report.

(a)               INDEX TO EXHIBITS

3.       Restated Certificate of Incorporation. Incorporated herein by reference
         to Exhibit 3 (I) of the Company's Registration Statement on Form 10-SB,
         as amended, filed on April 9, 1997.

3.1      By-Laws.  Incorporated  herein by  reference  to  Exhibit  3(ii) of the
         Company's  Registration  Statement on Form 10-SB, as amended,  filed on
         April 9, 1997.

10.      Share Exchange  Agreement,  dated as of September 30, 1996,  among Cary
         Brokaw,   Avenue  Pictures,   Inc.  and  The  CineMasters  Group,  Inc.
         Incorporated  herein by reference to Exhibit  10(a)(i) of the Company's
         Registration  Statement  on Form 10-SB,  as amended,  filed on April 9,
         1997.

10.1     Stockholders  Agreement,  dated as of September  30,  1996,  among Cary
         Brokaw,  The  CineMasters  Group,  Inc.,  National  Patent  Development
         Corporation, Gene Feldman, Jerome Feldman, Suzette St. John Feldman and
         Michael Feldman. Incorporated herein by reference to Exhibit 10(a) (ii)
         of the  Company's  Registration  Statement  on Form 10-SB,  as amended,
         filed on April 9, 1997.

10.2     Exit Option  Agreement,  dated as of September  30,  1996,  between The
         CineMasters  Group,  Inc.  and Gene  Feldman.  Incorporated  herein  by
         reference to Exhibit 10(a)(iii) of the Company's Registration Statement
         on Form 10-SB, as amended, filed on April 9, 1997.

10.3     Distribution   Agreement,   dated  April  28,  1996,   between   Janson
         Associates,  Inc. and The CineMasters,  Group, Inc. Incorporated herein
         by  reference to Exhibit  10(b)(ii)(1)  of the  Company's  Registration
         Statement on Form 10-SB, as amended, filed on April 9, 1997.

10.4     Agreement,  dated as of December  5, 1994,  amended as of June 27, 1995
         and as of October 1, 1996,  between The CineMasters Group, Inc. and A&E
         Television  Networks.  Incorporated  herein  by  reference  to  Exhibit
         10(b)(ii)(2) of the Company's  Registration Statement on Form 10-SB, as
         amended, filed on April 9, 1997.

10.5     Output Agreement,  dated October 1, 1994 between Avenue Pictures,  Inc.
         and RHI Entertainment, Inc. Incorporated herein by reference to Exhibit
         10(b)(ii)(6) of the Company's  Registration Statement on Form 10-SB, as
         amended, filed on April 9, 1997.

10.6     Promissory  Note between  Avenue  Entertainment  Group,  Inc. and Fleet
         Bank, National Association. Incorporated herein by reference to Exhibit
         10(b)(ii)(7) of the Company's  Registration Statement on Form 10-SB, as
         amended, filed on April 9, 1997.

10.7     Avenue  Entertainment  Group, Inc. Stock Option and Long Term Incentive
         Compensation Plan. Incorporated herein by reference to Exhibit 10(c)(i)
         of the  Company's  Registration  Statement  on Form 10-SB,  as amended,
         filed on April 9, 1997.



<PAGE>


10.8     Employment  Agreement,  dated  as of  September  30,  1996,  among  The
         CineMasters  Group,  Inc.,  Avenue  Pictures,  Inc.  and  Cary  Brokaw.
         Incorporated  herein by reference to Exhibit 10(c)(ii) of the Company's
         Registration  Statement  on Form 10-SB,  as amended,  filed on April 9,
         1997.

10.9     Employment  Agreement,  dated  as of  September  30,  1996,  among  The
         CineMasters  Group,  Inc.,  Avenue  Pictures,  Inc.  and Gene  Feldman.
         Incorporated   herein  by  reference  to  Exhibit  10.(c)(iii)  of  the
         Company's  Registration  Statement on Form 10-SB, as amended,  filed on
         April 9, 1997.

10.10    Option  Agreement,   dated  as  of  September  30,  1996,  between  The
         CineMasters  Group,  Inc.  and  Cary  Brokaw.  Incorporated  herein  by
         reference to Exhibit 10(c)(iv) of the Company's  Registration Statement
         on Form 10-SB, as amended, filed on April 9, 1997.

10.11    Form of Option Grant Agreement, dated as of September 30, 1996, between
         Avenue Entertainment Group, Inc. and the Optionee.  Incorporated herein
         by  reference  to  Exhibit  10(c)(v)  of  the  Company's   Registration
         Statement on Form 10-SB, as amended, filed on April 9, 1997.

10.12    Form of Option  Grant  Agreement,  dated as of March 10,  1997  between
         Avenue Entertainment Group, Inc. and the Optionee.  Incorporated herein
         by  reference  to  Exhibit  10(c)(vi)  of  the  Company's  Registration
         Statement on Form 10-SB, as amended, filed on April 9, 1997.

10.13    Termination  Agreement,  With Accounts  Receivable,  dated July 3, 1996
         among The  CineMasters  Group,  Inc.,  Kaufman  Films,  Inc.  and Kevin
         Kaufman.  Incorporated herein by reference to Exhibit 10(c)(vii) of the
         Company's  Registration  Statement on Form 10-SB, as amended,  filed on
         April 9, 1997.

10.14    Letter Agreement,  dated November 27, 1995, between  CineMasters Group,
         Inc. and  Ehrenkrantz,  King,  Nussbaum,  Inc.  Incorporated  herein by
         reference to Exhibit  10(c)(viii)  to Amendment  No. 1 of the Company's
         Registration Statement on Form SB-2/A1 filed on October 30, 1997.

10.15    Warrant,  dated October 1, 1995,  issued by CineMasters  Group, Inc. to
         Ehrenkrantz,  King, Nussbaum,  Inc. Incorporated herein by reference to
         Exhibit  10(c)(ix) to  Amendment  No. 1 of the  Company's  Registration
         Statement on Form SB-2/A1 filed on October 30, 1997.

21       Subsidiaries of the Company *

23       Consent of KPMG Peat Marwick LLP *

23.1     Consent of Israeloff, Trattner & Co., CPAs, P.C. *

27       Financial Data Schedule *

--------------
* Filed herewith.


(b) There were no Reports  on Form 8-K filed by the  Registrant  during the last
quarter of the period covered by this report.




<PAGE>




                                   SIGNATURES

         In accordance  with Section 13 or 15(d) of the Securities  Exchange Act
of 1934,  the  Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

                                    AVENUE ENTERTAINMENT GROUP, INC.


                                    Cary Brokaw
                                    President and Chief Executive Officer

Dated:   April 14, 1998

         In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following  persons on behalf of the  Registrant  and in
the capacities and on the dates indicated.


Signature                                            Title


Cary Brokaw                      President and Chief Executive Officer, Director


Sheri L. Halfon                  Director


Gene Feldman                     Chairman of the Board


Doug Rowan                       Director


James A. Janowitz                Director


Ira J. Sobotko                   Principal Financial and Accounting Officer