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

                      H SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                F O R M 10-KSB/A
                                (Amendment No. 1)

              {X} ANNUAL REPORT PURSUANT TO SECTION l3 OR l5(d) OF
                       THE SECURITIES EXCHANGE ACT OF l934

                   For the fiscal year ended December 31, 2001

                                       OR

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

              For the transition period from ________ to _________

                         Commission file number 1-12635

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

                      PARADISE MUSIC & ENTERTAINMENT, INC.
           (Name of Small Business Issuer as specified in its charter)

               Delaware                                13-3906452
    State or other jurisdiction of          (I.R.S. Employer Identification No.)
    incorporation or organization)

122 East 42nd Street, New York, New York                10017
(Address of principal executive offices)              (Zip Code)

         Issuer's telephone number, including area code: (888) 565-3259

       Securities registered under Section 12(b) of the Exchange Act: None


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

                     Common Stock, par value $0.01 per share
                                (Title of Class)

     Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or 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 |_| No |X|

     Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained herein and will not be contained, to the best of
issuer'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. |X|

     The issuer's revenues for the fiscal year ended December 31, 2001, were
$90,000.

     The aggregate market value of voting and non-voting common equity held by
non-affiliates of the issuer on March 16, 2002, was approximately $1,193,500. On
such date, the last sale price of issuer's common stock was $0.049. Solely for
the purposes of this calculation, shares beneficially owned by directors,
officers and beneficial owners of in excess of 10% of the registrant's common
stock have been excluded, except shares with respect to which such persons
disclaim beneficial ownership. Such exclusion should not be deemed a
determination or admission by registrant that such persons are, in fact,
affiliates of registrant.

     As of March 16, 2002, there were 35,853,822 shares of common stock
outstanding.

     DOCUMENTS INCORPORATED BY REFERENCE: None

Transitional Small Business Disclosure Format (check one)
     Yes |_| No |X|


<PAGE>


                                EXPLANATORY NOTE

This Amendment No. 1 to the Annual Report on Form 10-KSB for Paradise Music &
Entertainment, Inc. for the fiscal year ended December 31, 2001, as filed with
the Securities and Exchange Commission on May 20, 2002, is being filed solely
for the purpose of amending Part I, Item 2 and Part II, Items 6 and 7 thereof,
adding Part II, Item 8A and Exhibits 31 and 32 thereto and amending the exhibit
index accordingly.

This amendment does not reflect events occurring after the filing of the
original Form 10-KSB, or modify or update the disclosures therein in any way
other than as required to reflect the amendment set forth above. The filing of
this Form 10-KSB/A shall not be deemed an admission that the original filing,
when made, included any untrue statement of a material fact or omitted to state
a material fact necessary to make a statement not misleading.

                                     PART I

     The statements contained in this Annual Report that are not historical
facts are forward-looking statements. Such forward-looking statements may be
identified by, among other things, the use of forward-looking terminology such
as "believes," "expects," "may," "should" or "anticipates" or the negative
thereof or other variations thereon or comparable terminology, or by discussions
of strategy that involve risks and uncertainties. These forward-looking
statements involve predictions. Our actual results, performance or achievements
could differ materially from the results expressed in, or implied by, these
forward-looking statements. Potential risks and uncertainties that could affect
our future operating results include, but are not limited to, our need to raise
additional capital, our history of losses, the high-risk nature of the music and
entertainment business and our dependence on some large customers, as well as
economic conditions. We disclaim any intention or obligation to revise any
forward-looking statements whether as a result of new information, future
developments or otherwise.

ITEM 2. DESCRIPTION OF PROPERTY

     We surrendered our former office space at 53 W. 23rd Street in New York
City to the landlord as of December 15, 2001. Our rent expense for the fiscal
year ended December 31, 2001, was approximately $487,000. We were released of
all ongoing obligations, including the approximately seven year balance of the
rent obligation. The lease was for approximately 20,000 square feet and was due
to expire in July 2007. We currently share space in New York City at 122 East
42nd Street. We are in negotiation for an extended arrangement, but those
negotiations are not complete. We are also attempting to secure office space in
Denver, Colorado.

                                     PART II

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

Introduction

     We market sponsor-targeted entertainment projects, including the
development and production of proprietary festivals, events and branding
campaigns for corporate clients.

     During the past year we discontinued all our other operating areas to focus
on our core business, as described above. Consequently, we have a limited
history with respect to our current business operations. In 2001 we discontinued
the operations of our principal subsidiaries, Straw Dogs, Inc. and Shelter
Films, Inc., and we sold our subsidiaries, Picture Vision, Inc. and John Leffler
Music, Inc. (d/b/a/ Rave Music & Entertainment), to their founders. These
subsidiaries had focused on artist management, and television, commercial and
movie production.

<PAGE>

     Picture Vision was sold on October 5, 2001, due to the exercise of the
voluntary termination section of the employment agreement of the principal of
the business.

     Shelter Films was shut down in August 2001 due to a combination of the
effect of the severe decline in the advertising market and the impact on Shelter
of the shutdown of Straw Dogs, exacerbated by the lack of working capital.

     Straw Dogs was shut down in August 2001 due to a combination of the severe
decline in advertising and its negative working capital position.

     Rave Music was sold in December 2001 due to the exercise of the voluntary
termination section of the employment agreement of the principal of the
business.

     Paradise Digital was shut down in 2001 due to the severe downturn of
web-based businesses.

     On February 10, 2001, our Board of Directors approved the execution of a
Memorandum of Understanding with iball Media, Inc. ("iball") stipulating the
intent of Paradise and iball to combine their respective businesses into a
merged entity. That merger was accomplished July 3, 2001. In connection with
this transaction, iball shareholders were issued 9,390,000 shares of Paradise
common stock.

Results of Operations:

     Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 (As
reclassified for discontinued operations)

     In the aggregate, revenues from continuing operations for the year ended
December 31, 2001, were $90,000, as compared to $660,554 for the year ended
December 31, 2000. The Statement of Operations for the year ending December 31,
2000, was reclassified to reflect the discontinued operations. This decrease of
$570,554, or 87%, was due primarily to a slower market for music videos, the
ceasing of new releases for Label M, ending of the joint ventures in the Music
Group, the sale of the Rave operations and royalties and the sale of Picture
Vision. The loss before discontinued operations and extraordinary items in 2001
was $6,151,000 compared to a loss before discontinued operations and
extraordinary items of $6,733,000 in 2000. The discontinued operations generated
a loss of $13,159,000 in 2001 and income of $1,579,000 in 2000. We also had an
extraordinary gain on early extinguishment of debt that totaled $337,000 in
2000. The net loss that includes both continuing and discontinued operations was
$19,309,000 for the year ended December 31, 2001, as compared to a net loss of
$4,817,000 for the year ended December 31, 2000. A significant portion of the
net loss for the year ended December 31, 2001, relates to a charge of $2,516,000
for the impairment of fixed assets and goodwill for the continuing operations
based on revised cash flow projections reflecting our new strategy and limited
resources to maximize cash flow from the non-strategic subsidiaries. There were
also significant losses and impairments recorded for the discontinued
operations.

     PDSE Film & TV Group revenues declined to $4,620,000 for the year ended
December 31, 2001, from $7,174,000 for the twelve months ended December 31,
2000, a decrease of $2,554,000, or 36%. The decrease in revenues is primarily
due to the sale of Picture Vision and both Rave's operations and royalties.

     PDSE Film & TV Group cost of sales decreased to $3,163,000 for the year
ended December 31, 2001, from $4,758,000 for the year ended December 31, 2000, a
decrease of $1,595,000, or 34%. Gross profit as a percentage of PDSE Film & TV
Group revenues decreased to 32% for the year ended December 31, 2001, compared
to 34% for the year ended December 31, 2000. The change in cost of sales and
gross profit margin is primarily due to increased competition in the remaining
business.

     PDSE Music revenues decreased to $1,606,000 for the year ended December 31,
2001, from $5,099,000 for the year ended December 31, 2000, a decrease of
$3,493,000, or 69%. The decrease in revenues is primarily due to the ending of
the music joint ventures and the cessation of new releases by Label M.


<PAGE>

     PDSE Music cost of sales decreased to $1,435,000 for the year ended
December 31, 2001, from $4,557,000 for the year ended December 31, 2000, a
decrease of $3,122,000, or 69%. The decrease is principally due to the ending of
the music joint ventures and the cessation of new releases by Label M. Gross
profit, as a percentage of recorded music and artist management revenues
decreased to 4% for the year ended December 31, 2001, compared to 11% for the
year ended December 31, 2000. The decreased margin is due to the loss of the
joint ventures.

     PDSE Festival & Events revenue was $35,000 for the year ended December 31,
2001. This was the first quarter of operation for this business, so there are no
comparable results for the same period last year. Revenues were primarily the
result of one small project. The net loss for this division was $290,000.

     Paradise's marketing, selling, general and administrative expenses
decreased to $4,007,000 for the year ended December 31, 2001, from $8,048,000
for the year ended December 31, 2000, a decrease of $4,041,000, or 51%. The
decrease was due primarily to the termination of employees.

     Net interest expense was $28,000 for the year ended December 31, 2001,
compared to $535,000 for the year ended December 31, 2000, a decrease of
$488,000, or 92%. The decrease is the result of the settlement payoff of the
NorthBay debt in 2000.

Liquidity and Capital Resources:

     Net cash used in operating activities for the year ended December 31, 2001,
was $1,540,000. The operating loss for the year was partially offset by non-cash
expenses such as depreciation and amortization, impairment of fixed assets,
goodwill and other intangibles and impairments and losses associated with
discontinued operations.

     Net cash used in investing activities for the year ended December 31, 2001,
was zero.

     Net cash provided by financing activities for the year ended December 31,
2001, was $395,000, which is substantially represented by proceeds from notes
payable, net proceeds from a factoring arrangement and cash received with the
collection of a note receivable from an officer.

     We had negative working capital of $1,145,000 and a stockholders' deficit
of $6,101,000 at December 31, 2001. We reduced expenses in 2001 by eliminating
most of our business operations. We are currently negotiating with various
lenders, strategic partners and equity investors to assist in meeting our
short-term cash flow needs.

     We believe we do not have available funds sufficient to sustain our
operations through the third quarter of 2002. Our available funds generally
consist of cash and the funding derived from our revenue sources: residual
income relating to musical compositions used in television series and record
label revenues. As of December 31, 2001, we had $7,000 in available cash. In
2001, we decreased our business operations substantially and we presently have
minimal revenue from our remaining operating business operations. The costs
associated with our merger with iball Media, Inc. in July 2001 and the loss of
our traditional revenue sources due to discontinued operations have also
contributed to the strain on our liquidity. Reducing operating expenses and
capital expenditures alone will not be sufficient to solve our liquidity
problems. Unless we are able to obtain sufficient funding through equity or debt
offerings we will not be able to continue as a going concern. We need to raise
funds through equity or debt offerings in order to survive. Such financing may
not be available on terms favorable to us, or at all. Even if we are able obtain
additional financing it may not be sufficient to maintain our current
operations.

Recently Issued Accounting Pronouncements

     In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141 "Business Combinations"
("SFAS 141") and No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142").


<PAGE>

SFAS 141 requires all business combinations initiated after June 30, 2001 to be
accounted for under the purchase method. For all business combinations for which
the date of acquisition is after June 30, 2001, SFAS 141 also establishes
specific criteria for the recognition of intangible assets separately from
goodwill and requires unallocated negative goodwill to be written off
immediately as an extraordinary gain, rather than deferred and amortized. SFAS
142 changes the accounting for goodwill and other intangible assets after an
acquisition. The most significant changes made by SFAS 142 are: 1) goodwill and
intangible assets with indefinite lives will no longer be amortized; 2) goodwill
and intangible assets with indefinite lives must be tested for impairment at
least annually; and 3) the amortization period for intangible assets with finite
lives will no longer be limited to forty years. We do not believe that the
adoption of these statements will have a material effect on our financial
position, results of operations, or cash flows.

     In June 2001, the FASB also approved for issuance SFAS 143 "Asset
Retirement Obligations." SFAS 143 establishes accounting requirements for
retirement obligations associated with tangible long-lived assets, including (1)
the timing of the liability recognition, (2) initial measurement of the
liability, (3) allocation of asset retirement cost to expense, (4) subsequent
measurement of the liability and (5) financial statement disclosures. SFAS 143
requires that an asset retirement cost should be capitalized as part of the cost
of the related long-lived asset and subsequently allocated to expense using a
systematic and rational method. We will adopt the statement effective no later
than January 1, 2003, as required. The transition adjustment resulting from the
adoption of SFAS 143 will be reported as a cumulative effect of a change in
accounting principle. We do not believe that the adoption of this statements
will have a material effect on our financial position, results of operations, or
cash flows.

     In August 2001, the FASB also approved SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 replaces SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. The new accounting model for long-lived assets to be disposed of
by sale applies to all long-lived assets, including discontinued operations, and
replaces the provisions of APB Opinion No. 30, Reporting Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, for the
disposal of segments of a business. Statement 144 requires that those long-lived
assets be measured at the lower of carrying amount or fair value less cost to
sell, whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred.
Statement 144 also broadens the reporting of discontinued operations to include
all components of an entity with operations that can be distinguished from the
rest of the entity and that will be eliminated from the ongoing operations of
the entity in a disposal transaction. The provisions of Statement 144 are
effective for financial statements issued for fiscal years beginning after
December 15, 2001 and, generally, are to be applied prospectively. We do not
believe that the adoption of this statements will have a material effect on our
financial position, results of operations, or cash flows.

     In April 2002, the FASB approved SFAS 145, Rescission of FASB statements
No. 4, 44 and 64, Amendment of SFAS 13, and technical corrections. While the
adoption of this SFAS will not have any effect on the statements of financial
position, stockholder deficit, or on the net income (loss), the adoption may
change the classification of any future gains from debt extinguishments on the
statements of operations.

ITEM 8A. DISCLOSURE CONTROLS AND PROCEDURES

[Note: The information in this Item 8A is effective as of the date of this
Amendment No. 1 to the Annual Report on Form 10-KSB/A and is being added to the
disclosure in compliance with the certification requirement of Rule 13a-14(a)
under the Securities Exchange Act of 1934, as amended. ]

In mid-2001, shortly after becoming our Chairman of the Board, Kelly T. Hickel
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures. Our disclosure controls and procedures are the controls
and other procedures that are designed to ensure that we record,


<PAGE>

process, summarize and report in a timely manner the information we must
disclose in reports that we file with or submit to the Securities and Exchange
Commission.

As a result of his evaluation of such disclosure controls and procedures, Mr.
Hickel recommended and implemented the following changes that have materially
affected, or are reasonably likely to materially affect our internal controls
over financial reporting:

     1.   Control of the cash balances, checking accounts and cash receipts were
          consolidated under the responsibility of one individual;

     2.   The CFO function had been performed by the President of the company
          and he had no accounting background. A CFO was hired with the
          appropriate credentials;

     3.   Review and reconciliation of all financial data as well as preparation
          of all financial statements was put under the direct responsibility of
          the newly hired CFO;

     4.   A complete review was held of financial data, procedures and policies
          and revised as appropriate;

     5.   The new CFO was given reporting responsibility to the Vice-Chairman of
          the Board in order to provide an independent path of responsibility to
          an independent Director.

     6.   The same Vice-Chairman serves as the Chair of the Audit Committee.

     7.   Based on this evaluation and following the implementation of the
          foregoing changes, Mr. Hickel concluded that, as of August, 2001, our
          disclosure controls and procedures were effective. We are now in the
          process of bringing Paradise Music into full compliance with its
          reporting obligations.

Based on this evaluation and following the implementation of the foregoing
changes, Mr. Hickel concluded that, as of December 31, 2001, our disclosure
controls and procedures were effective. We are now in the process of bringing
Paradise Music into full compliance with its reporting obligations.

ITEM 7. FINANCIAL STATEMENTS

     The financial statements required by Item 7 are included in this report
beginning on page F-1.

PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

     (a)  Exhibits

Exhibit
Number                            Description
-------- ------------------------------------------------------------------

3.1      Certificate of Incorporation of the Registrant (1)
3.2      Amended and Restated By-Laws of the Registrant (1)
4.1      Specimen of Registrant's Common Stock Certificate (1)
4.2      Specimen of Registrant's Warrant Certificate (1)
4.3      Form of Representative's Warrant Agreement including form of
           Warrant (1)
4.4      Form of Warrant Agreement between Registrant and Continental Stock
          Transfer and Trust Company (1)
10.7     Form of The Registrant's 1996 Stock Option Plan (corrected version) (1)
21.1     Subsidiaries of Registrant (2)
31       Certification of Kelly Hickel under Rule 13a-14(a)
32       Certification of Kelly Hickel
99.1     Risk Factors (3)

          (1)  Incorporated by reference to the Company's Registration Statement
               on Form SB-2 (Reg. No. 333-13941) which was declared effective by
               the Securities and Exchange Commission on January 22, 1997. nge
               Commission on March 29, 2000.

          (2)  Incorporated by reference to the Company's Current Report on Form
               8-K filed on February 15, 2001.

          (3)  Incorporated by reference to the Company's Annual Report on Form
               10-KSB as filed on May 20, 2002.


<PAGE>

     (b)  Reports on Form 8-K

     o    Report on Form 8-K filed with the SEC on May 17, 2001, announcing a
          change in accountants.

                                   SIGNATURES

     In accordance with the requirements of the Securities Exchange Act of 1934,
as amended, the registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of New York, State of New
York on April 19, 2004.

                                        PARADISE MUSIC & ENTERTAINMENT, INC.

                                        By /s/ Kelly Hickel
                                        -----------------------------------
                                        Kelly Hickel, Chairman

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

       Signature                      Title                            Date

 /s/ KELLY HICKEL           Chairman of the Board                 April 19, 2004
 ----------------           (Principal Executive Officer,
 Kelly Hickel               Principal Financial Officer,
                            Principal Accounting Officer)


/s/ RICHARD P. RIFENBURGH       Vice Chairman                     April 20, 2004
-------------------------
Richard P. Rifenburgh


<PAGE>





              PARADISE MUSIC & ENTERTAINMENT, INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



                                                                            PAGE
                                                                            ----

 Consolidated Balance Sheet - December 31, 2001 ............................ F-2

 Consolidated Statements of Operations - For the Years Ended
   December 31, 2001 and 2000 .............................................. F-3

 Consolidated Statements of Stockholders' Equity (Deficit) -
   For the Period January 1, 2000 through December 31, 2001 ..... .......... F-4

 Consolidated Statements of Cash Flows - For the Years Ended
   December 31, 2001 and 2000 .............................................. F-5

 Notes to Consolidated Financial Statements - .............................. F-6





<PAGE>




                      Paradise Music & Entertainment, Inc.

                           Consolidated Balance Sheet

                                December 31, 2001

                ASSETS

Current assets:

  Cash                                                             $      7,010
                                                                   ------------
    Total current assets                                                  7,010

Deposits                                                                 10,285
                                                                   ------------
                                                                   $     17,295
                                                                   ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

  Notes payable - bank                                             $    165,564
  Accounts payable                                                      711,214
  Notes payable - iball                                                 305,250
  Accrued Interest                                                       24,964
  Accrued wages                                                         199,815
  Accrued taxes                                                          92,883
 Net liabilities of discontinued operations                           4,618,285
                                                                   ------------
    Total current liabilities                                         6,117,975

Stockholders' equity:

 Preferred stock, $.01 par value,
  5,000,000 shares authorized                                              --
 Common stock, $.01 par value,
  75,000,000 shares authorized,
  25,464,339 shares issued and outstanding                              254,643
 Additional paid-in capital                                          26,716,248
Accumulated (deficit)                                               (33,071,571)
                                                                   ------------
                                                                     (6,100,680)
                                                                   ------------
                                                                   $     17,295
                                                                   ============

       See accompanying notes to these consolidated financial statements.


                                      F-2
<PAGE>



                      Paradise Music & Entertainment, Inc.

                            Statements of Operations

                     Years Ended December 31, 2001 and 2000

<TABLE>
<CAPTION>
                                                                          December 31,

                                                                   2001                 2000
                                                               ------------         -----------
<S>                                                            <C>                  <C>
Revenue                                                        $     90,000         $   660,544

Operating expenses
  Cost of sales                                                        --             1,406,762
  Marketing, selling, general and
    administrative                                                4,006,389           5,399,971
  Impairment of fixed assets, goodwill and
  other intangibles                                               2,086,164                --
                                                               ------------         -----------
Total operating expenses                                          6,092,553           6,806,733

(Loss) from continuing operations                                (6,002,553)         (6,146,189)
                                                               ------------         -----------

Other (income) and expense
  Interest expense                                                   46,298             634,918
  Interest (income)                                                 (18,965)            (79,127)
  Other expenses                                                      9,127               8,351
                                                               ------------         -----------
                                                                     36,460             564,142

(Loss) before income taxes, discontinued operations and
  extraordinary item                                             (6,039,012)         (6,710,331)
Provision for income taxes                                          111,504              21,719
                                                               ------------         -----------
(Loss) before discontinued operations and
  extraordinary item                                             (6,150,516)         (6,732,050)
                                                               ------------         -----------
Income (loss) from discontinued operations                      (13,158,149)          1,578,585
                                                               ------------         -----------
(Loss) before extraordinary item                                (19,308,665)         (5,153,465)
                                                               ------------         -----------
Gain on early extinguishment of debt                                   --               336,815
                                                               ------------         -----------
Net (loss)                                                     $(19,308,665)        $(4,816,650)
                                                               ============         ===========
 Basic and diluted (loss) per share
  Before discontinued operations and
   extraordinary item                                          $      (0.37)        $     (0.75)
  Discontinued operations                                             (0.79)              (0.58)
  Extraordinary item                                                   --                  0.04
                                                               ------------         -----------
                                                               $      (1.16)        $     (1.29)
                                                               ============         ===========
Weighted average shares outstanding                              16,625,354           8,958,396
                                                               ============         ===========
</TABLE>




       See accompanying notes to these consolidated financial statements.


                                      F-3
<PAGE>



                      Paradise Music & Entertainment, Inc.

            Consolidated Statement of Changes in Stockholders' Equity

                     Years Ended December 31, 2001 and 2000


<TABLE>
<CAPTION>

                                                                                                                         Additional
                                                                           Common                  Stock                  Paid-in
                  ACTIVITY                                                 Shares                  Amount                  Capital
<S>                                                                      <C>                       <C>                   <C>
Balance, January 1, 2000                                                 7,863,330                 78,633                21,356,812

Issuance of stock for cash, net of expenses                              1,605,400                 16,054                 1,550,968
Issuance of stock for services                                             120,107                  1,201                   123,150
Issuance of stock for debt cancellation                                  1,000,000                 10,000                   715,500
Issuance of stock and warrants for acquisition                             150,000                  1,500                   176,700
Compensation value of warrants issued for
  services and long-term financing                                                                                          897,252
Common stock grants authorized
Net (loss) for the year                                                       --                     --                        --
                                                                       -----------               --------               -----------
Balance, December 31, 2000                                              10,738,837                107,388                24,820,382

Repayment of stockholder note:
  In cash
  In connection with sale of subsidiary
Issuance of stock and warrants for acquisition                           8,565,691                 85,657                 1,798,795
Issuance of stock for consideration for
  restructure of debt                                                      250,000                  2,500                    32,500
Issuance of stock for debt cancellation                                     50,000                    500                     7,500
Issuance of stock to Employees                                           3,307,046                 33,070                   305,733
Issuance of stock for services                                           3,486,261                 34,863                   135,811
Issuance of previously authorized common stock grants
Stock reacquired and cancelled                                            (933,496)                (9,335)                  (75,955)
Compensation value of warrants issued for
  services and long-term financing                                                                                           26,150
Compensation value of options issued for board members                                                                       16,155
Reduction of PIC due to Sale of Subsidiaries                                                                               (350,824)
Net (loss) for the year                                                       --                     --                        --
                                                                       -----------               --------               -----------
Balance, December 31, 2001                                              25,464,339                254,643                26,716,248
                                                                       ===========               ========               ===========
</TABLE>


                                      F-4
<PAGE>


                      Paradise Music & Entertainment, Inc.

            Consolidated Statement of Changes in Stockholders' Equity

                     Years Ended December 31, 2001 and 2000

<TABLE>
<CAPTION>
                                                                       Common        Stockholder
                                                                        Stock           Note          Accumulated
                               ACTIVITY                            Subscriptions      Receivable        Deficit           Total

<S>                                                                <C>                 <C>             <C>              <C>
Balance, January 1, 2000                                                 --            (64,082)        (8,946,254)      12,425,109

Issuance of stock for cash, net of expenses                                                                              1,567,022
Issuance of stock for services                                                                                             124,351
Issuance of stock for debt cancellation                                                                                    725,500
Issuance of stock and warrants for acquisition                                                                             178,200
Compensation value of warrants issued
  for services and long-term financing                                                                                     897,252
Common stock grants authorized                                        93,750                                                93,750
Net (loss) for the year                                                  --                --          (4,816,651)      (4,816,651)
                                                                 -----------       -----------        -----------       ----------
Balance, December 31, 2000                                            93,750           (64,082)       (13,762,905)      11,194,533

Repayment of stockholder note:
  In cash                                                                               20,000                              20,000
  In connection with sale of subsidiary                                                 44,082                              44,082
Issuance of stock and warrants for acquisition                                                                           1,884,452
Issuance of stock for consideration for                                                                                     35,000
  restructure of debt
Issuance of stock for debt cancellation                                                                                      8,000
Issuance of stock to Employees                                                                                             338,804
Issuance of stock for services                                                                                             170,674
Issuance of previously authorized
  common stock grants                                                (93,750)                                              (93,750)
Stock reacquired and cancelled                                                                                             (85,289)
Compensation value of warrants issued
  for services and long-term financing                                                                                      26,150
Compensation value of options issued                                                                                        16,155
  for board members
Reduction of PIC due to Sale of Subsidiaries                                                                              (350,824)
Net (loss) for the year                                                 --                --          (19,308,665)     (19,308,665)
                                                                 -----------       -----------         ----------       ----------
Balance, December 31, 2001                                              --                --          (33,071,570)      (6,100,679)
                                                                 ===========       ===========       ============      ===========
</TABLE>


       See accompanying notes to these consolidated financial statements.


                                      F-5
<PAGE>


                      Paradise Music & Entertainment, Inc.

                            Statements of Cash Flows

                     Years Ended December 31, 2001 and 2000

<TABLE>
<CAPTION>

                                                                                       December 31,
                                                                                 2001                2000
                                                                                 ----                ----
<S>                                                                         <C>                  <C>
Net (loss)                                                                  $(19,308,665)        $(4,816,650)
  Adjustments to reconcile net income (loss) to net cash provided by
    operating activities
  Depreciation and amortization                                                  255,768           1,117,920
  Non-cash consulting expense in connection with warrants                                            183,733
  Provision for returns                                                             --               233,725
  Common stock issued for services                                             2,043,121             218,101
  Non-cash interest expense                                                                          587,938
  Gain on debt extinguishment                                                       --              (336,816)
  Impairments and losses arising from discontinued operations                 14,793,539
Changes in assets and liabilities:
  (Increase) decrease in accounts receivable                                      89,582          (1,397,300)
  (Increase) decrease in inventory                                                  --              (330,991)
  (Increase) decrease in prepaid expenses                                           --              (302,109)
  (Increase) decrease in other assets                                               --               (85,326)
  Increase (decrease) in accounts payable                                        269,478             805,200
  Increase (decrease) in accrued expenses                                        317,662            (228,494)
                                                                            ------------         -----------
    Total adjustments                                                         17,769,150             465,581
                                                                            ------------         -----------
Net Cash (used in) operating activities                                       (1,539,515)         (4,351,069)
                                                                            ------------         -----------
Cash flows from investing activities:
  Acquisition of plant and equipment                                                --              (309,550)
  Acquisition costs net of cash acquired                                            --              (338,709)
                                                                            ------------         -----------
Net cash (used in) investing activities                                             --              (648,259)
                                                                            ------------         -----------
Cash flows from financing activities:
  Common stock sold for cash                                                        --             1,567,022
  Proceeds from bank borrowings                                                  374,564                --
  Proceeds from convertible debt                                                    --             1,732,017
  Proceeds from warrants issued with long-term debt                                 --             1,220,943
  Repayment of shareholder loans                                                  20,000                --
                                                                            ------------         -----------
  Net Cash provided by financing activities                                      394,564           4,519,982
                                                                            ------------         -----------
Increase (decrease) in cash                                                   (1,144,915)           (479,346)
Cash and cash equivalents, beginning of period                                 1,151,961           1,631,307
                                                                            ------------         -----------
Cash and cash equivalents, end of period                                    $      7,010         $ 1,151,961
                                                                            ============         ===========
Supplemental cash flow information:
  Cash paid for interest                                                    $       --           $    81,000
  Cash paid for income taxes                                                $       --           $    29,000
Non-cash financing activities:
Conversion of Liabilities into common stock                                 $       --           $    65,000
Options, warrants and stock granted for services                            $       --           $   726,000
Net assets acquired for stock and warrants                                  $       --           $   178,000

</TABLE>

                 See accompanying notes to financial statements.


                                      F-6
<PAGE>

              PARADISE MUSIC & ENTERTAINMENT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND NATURE OF OPERATIONS:
   -------------------------------------

Paradise Music & Entertainment, Inc. ("Paradise") was formed in July 1996.
Effective July 3, 2001, Paradise and iball Media Inc. ("iball") completed their
plan of merger and effectively combined their business interests (See Note 5 for
further details).

Paradise Music & Entertainment, Inc. ("Paradise" or the "Company") is a music
and entertainment company focused on partnering with other companies to build
their brands by utilizing music and events to marry marketing, technology and
entertainment to connect customers with consumers. The Company's strategy is to
deliver the branding message targeted to global and Fortune 1000 companies
through unique music and music events geared to targeted demographics.

The Company markets sponsor-targeted entertainment projects, including the
development and production of proprietary festivals, events and branding
campaigns for corporate clients. The Company has agreed to produce two events
for not-for-profit organizations. The Company is currently in negotiations for a
number of festivals and music events for the 2002 season, with contracts with a
number of global brand companies currently being negotiated. The Company expects
a series of tours, concerts and festivals for the second half of 2002.

During the past year the Company ceased operations of all other operating areas
to focus on the core business, as described above. Consequently, the Company has
a limited history with respect to our current business operations. In 2001, the
Company discontinued the operations of their principal subsidiaries, Straw Dogs,
Inc. and Shelter Films, Inc., and sold their subsidiaries Picture Vision, Inc.
and John Leffler Music, Inc. (d/b/a/ Rave Music & Entertainment), to their
founders. These subsidiaries had focused on artist management, and television,
commercial and movie production.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
   ------------------------------------------

Principles of Consolidation - The consolidated financial statements include the
accounts of Paradise and its wholly-owned subsidiaries, iball Media, Events, All
Access, PDSE Records, Push Records, PDSE Digital, Rave, Picture Vision, Straw
Dogs and Shelter Films (collectively the "Company"). All significant
intercompany accounts and transactions have been eliminated in consolidation.

Revenue Recognition - Commercial music production revenues and the related
production costs are recognized upon acceptance of the music production by the
client. Royalty and residual income which relates to musical compositions used
in television series are recognized when earned and the amount can be reasonably
estimated and when received, if it cannot be reasonably estimated. For projects
which are short in duration, (primarily less than one month) video production
revenues and related production costs are recorded upon completion of the video.
For projects that have a longer term, video production revenues and related
production costs are recorded using the percentage-of-completion method which
recognizes income as work on the project progresses. No such long-term
production projects existed at December 31, 2001. In accordance with industry
custom, the Company currently operates its music artist management business
based on oral agreements with certain artists and customers. Pursuant to these
arrangements the Company receives up to 20% of the gross revenues received


                                      F-7
<PAGE>


              PARADISE MUSIC & ENTERTAINMENT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

in connection with artist entertainment related earnings less certain standard
industry costs. Record label revenues are recognized in accordance with the
provisions of the various distribution agreements. Certain record costs are
capitalized as recoverable from future revenues and amortized over the expected
life of the records, to the extent there is reasonable assurance that these
costs will be recoverable from future sales. No such cost were capitalized as of
December 31, 2001. The Company is accounting for these costs in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 50 "Financial Reporting
in the Record and Music Industry."

Cash and Cash Equivalents -The Company considers all highly liquid investments
with maturities of three months or less when purchased to be cash equivalents.
The Company maintains its cash in bank deposit accounts that, at times, may
exceed federally insured limits. The Company has not incurred any losses in such
accounts and believes it is not exposed to any significant credit risk on cash.

Inventory - Inventory is stated at the lower of cost or market and consists
primarily of finished compact discs and tape cassettes. The cost of inventory is
determined by the first-in, first-out (FIFO) method. Due to the change in the
business strategy to focus on festivals and events, and the Company's limited
personnel to pursue the sale of the Company's inventory, the inventory was
impaired to zero at December 31, 2001. Any future sale of compact discs or tapes
will be recorded as revenue if and when it occurs.

Impairment of Long Lived Assets - Impairment losses on long-lived assets
(including goodwill) is recognized when events and circumstances indicate that
the undiscounted cash flows estimated to be generated by these assets are less
than the carrying amounts of those assets. As discussed in Note 4, in 2001, the
Company significantly impaired the majority of its assets.

Stock Warrants - Stock warrants issued for goods and services are accounted for
in accordance with Emerging Issues Task Force (EITF) 96-18, Accounting for
Warrants that are Issued to other than Employees for Acquisition, or in
Conjunction with Selling Goods and Services. Accordingly warrants subject to
vesting based on performance, will be valued each reporting period until vested.
The portion of the value related to the completed term of the related agreement
is expensed, and the remaining non-cash deferred consulting expense is amortized
over the remaining term of the agreement. The value of such related warrants was
subject to adjustment until such time that the warrant was nonforfeitable, fully
vested and exercisable. All warrants issued as consideration for goods or
services, either were fully vested or cancelled as of December 31, 2001.

Income Taxes - Deferred income tax assets and liabilities are computed for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future,
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce the deferred income tax assets to the
amount expected to be realized.

Loss Per Common Share - Basic earnings per share excludes dilution and is
computed by dividing loss applicable to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. Diluted loss per common



                                      F-8
<PAGE>

              PARADISE MUSIC & ENTERTAINMENT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

share is the same as basic loss per common share for all periods presented.
Unexercised stock options and warrants to purchase 6,033,890 shares at December
31, 2001 and 5,040,839 shares at December 31, 2000, of the Company's common
stock were not included in the computations of diluted earnings per common share
because their effect would have been antidilutive as a result of the Company's
losses.

Fair Value of Financial Instruments - The fair value of the Company's assets and
liabilities which qualify as financial instruments under SFAS No. 107
"Disclosures about fair value of financial instruments," approximate the
carrying amounts presented in the consolidated balance sheet.

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

The Company's calculation of impairments, discontinued operations, litigation,
lease liabilities and contingencies, and other liabilities and obligations are
significant estimates. It is at least reasonably possible that these estimates
could be revised in the near term and that such a revision could be material.

New Accounting Pronouncements - In June 2001, the Financial Accounting Standards
Board ("FASB") issued Statements of Financial Accounting Standards No. 141
"Business Combinations" ("SFAS 141") and No. 142 "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 141 requires all business combinations initiated
after June 30, 2001 to be accounted for under the purchase method. For all
business combinations for which the date of acquisition is after June 30, 2001,
SFAS 141 also establishes specific criteria for the recognition of intangible
assets separately from goodwill and requires unallocated negative goodwill to be
written off immediately as an extraordinary gain, rather than deferred and
amortized. SFAS 142 changes the accounting for goodwill and other intangible
assets after an acquisition. The most significant changes made by SFAS 142 are:
1) goodwill and intangible assets with indefinite lives will no longer be
amortized; 2) goodwill and intangible assets with indefinite lives must be
tested for impairment at least annually; and 3) the amortization period for
intangible assets with finite lives will no longer be limited to forty years.
The Company does not believe that the adoption of these statements will have a
material effect on its financial position, results of operations, or cash flows.

In June 2001, the FASB also approved for issuance SFAS 143 "Asset Retirement
Obligations." SFAS 143 establishes accounting requirements for retirement
obligations associated with tangible long-lived assets, including (1) the timing
of the liability recognition, (2) initial measurement of the liability, (3)
allocation of asset retirement cost to expense, (4) subsequent measurement of
the liability and (5) financial statement disclosures. SFAS 143 requires that an
asset retirement cost should be capitalized as part of the cost of the related
long-lived asset and subsequently allocated to expense using a systematic and
rational method. The Company will adopt the statement effective no later than
January 1, 2003, as required. The transition adjustment resulting from the
adoption of SFAS 143 will be reported as a cumulative effect of a change in
accounting principle. The Company does not believe that the adoption of this
statements will have a material effect on its financial position, results of
operations, or cash flows.


                                      F-9
<PAGE>


              PARADISE MUSIC & ENTERTAINMENT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In August 2001, the FASB also approved SFAS 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS 144 replaces SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The
new accounting model for long-lived assets to be disposed of by sale applies to
all long-lived assets, including discontinued operations, and replaces the
provisions of APB Opinion No. 30, Reporting Results of Operations-Reporting the
Effects of Disposal of a Segment of a Business, for the disposal of segments of
a business. Statement 144 requires that those long-lived assets be measured at
the lower of carrying amount or fair value less cost to sell, whether reported
in continuing operations or in discontinued operations. Therefore, discontinued
operations will no longer be measured at net realizable value or include amounts
for operating losses that have not yet occurred. Statement 144 also broadens the
reporting of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of the entity in a disposal
transaction. The provisions of Statement 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001 and,
generally, are to be applied prospectively. The Company does not believe that
the adoption of this statements will have a material effect on its financial
position, results of operations, or cash flows.

In April 2002, the FASB approved SFAS 145, Rescission of FASB statements No. 4,
44 and 64, Amendment of SFAS 13, and technical corrections, while the adoption
of this SFAS will not have any effect on the statements of financial position,
stockholder deficit, or on the net income (loss), the adoption may change the
classification of any future gains from debt extinguishments on the statements
of operations.

3. CONTINUED OPERATIONS:
   --------------------

For the years ended December 31, 2001, and December 31, 2000, the Company had
net losses of $19,309,000 and $4,817,000, respectively. In September 2001, the
Company discontinued operations of its principal subsidiaries, Shelter Films,
Inc. and Straw Dogs, Inc., as well as selling its Picture Vision and Rave
subsidiaries to their founders. As a result, the Company is experiencing
substantially decreased business operations and it has minimal income from the
remaining operating divisions and subsidiaries. The Company's new strategy is to
focus on festivals and events in a global branding strategy, and while there has
been some progress made on the implementation of this new strategy, the strategy
is still in its infancy and the Company has generated limited revenues from it.
The Company presently has limited credit facilities and is in default on several
loan instruments, however as discussed in Note 16, some additional financing has
been obtained subsequent to year-end. These factors raise substantial doubt
about our ability to continue as a going concern.

4. IMPAIRMENTS AND DISCONTINUED OPERATIONS:
   ---------------------------------------

As discussed throughout the notes, the Company discontinued Shelter Films and
Straws Dogs, Paradise Digital (which focused on new digital formants for music
and entertainment), as well as its All Access subsidiary (which was an artist
management company.) The net liabilities and results of operations for the
discontinued operations are presented as a single line item on the balance sheet
and in the statement of operations. The statement of operations for the year
ended December 31, 2000 was reclassified to reflect the discontinued operations
in a manner consistent with the presentation in 2001. The reclassifications had
no effect on the net loss reported.


                                      F-10
<PAGE>

              PARADISE MUSIC & ENTERTAINMENT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company also sold its Picture Vision and Rave subsidiaries to their
founders. In general, the discontinued operations and disposals resulted in
substantial impairments and losses.

The Company also impaired assets in the other division and subsidiaries. The
impairments were required based on revised cash flow projections that took into
consideration the Company's new festival and events global branding strategy and
the Company's current limited resources to maximize cash flow from the
non-strategic subsidiaries.

5. BUSINESS COMBINATIONS:
   ---------------------

Effective July 3, 2001, ib Acquisition Corp., a subsidiary of Paradise Music &
Entertainment, Inc., and iball Media, Inc. ("iball") completed a Plan of Merger
and effectively combined their business interests. iball provided a model for
event promotions, along with a website to distribute music information and
marketing for sponsor partners. In connection with this transaction, iball
shareholders were issued 9,390,000 shares of Paradise common stock at $.22 per
share, which represented approximately 45% of the total Paradise common stock
outstanding as of the completion of the transaction. The total purchase price of
$2,067,000 was originally allocated among capitalized website cost ($472,000),
current liabilities ($484,000) and goodwill ($2,079,000). Further, 2,000,000
shares were placed in escrow for future grants of options to present and future
employees of the Company.

Had the merger with iball taken place on January 1, 2001, the effect on earnings
per share would have been minimal, while revenues would have increased by
$183,000, and the net loss from operations would have increased by $360,000. A
January 1, 2002 merger would have been reflected in the net loss from
discontinued operations on the balance sheet, increasing the loss from
discontinued operations to $4,978,000.

Based on a revised cash flow analysis prepared in the fourth quarter, the
Company impaired all of the capitalized website costs and goodwill related to
the iball acquisition.

The Offshore Pictures, Inc. ("OPI") acquisition was completed on June 15, 2000.
In the acquisition the Company purchased, for 150,000 shares of common stock at
$1.88, substantially all of the business and assets of OPI's business and
assumed substantially all of its liabilities. OPI's name was subsequently
changed to Shelter Films, Inc.

The total purchase price of $178,000 was allocated to the following assets and
liabilities:

       Current assets                             $      27,000
       Other assets                                      78,000
       Goodwill                                         497,000
       Current liabilities                             (424,000)

As discussed in Notes 1 and 4, Shelter Films was discontinued in 2001.

6. DEBT:
   ----

Factoring Agreement - On April 25, 2001, the Company entered into a commercial
factoring agreement with a lender. The agreement provides that the Company sell,
transfer, set over and assign certain invoices and accounts receivable to the
lender, with recourse. The credit facility provides for maximum revolving
borrowings up to $1,500,000. The agreement may be cancelled with 30 days' notice
by the Company or the lender. Borrowings under this facility are based on a
funding formula and, in addition to the factored accounts receivable and
invoices, are collateralized by all of the Company's remaining assets.



                                      F-11
<PAGE>

              PARADISE MUSIC & ENTERTAINMENT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2001 approximately $166,000 was the outstanding advance
balance. Advances from the lender bear interest at the higher of 10.5% per annum
or the prime rate plus 2.50%. A factoring fee of 3.25% per invoice is assessed,
with available rebates up to 2.25% depending on speed of collection of invoices.

See Note 16 for terms of additional borrowings from the lender subsequent to
December 31, 2001.

Notes Payable - Notes payable totaling $335,000 are past due and in default. The
notes currently bear a default interest rate of 15%.

7. NOTE RECEIVABLE, STOCKHOLDER:
   ----------------------------

The Company had a promissory note receivable from a stockholder/officer. The
note had an interest rate at 8.5% per annum. The promissory note was
collateralized by 200,000 shares of the officers' common stock of the Company
and allowed for mandatory repayments as defined in the note. In January 2001,
$20,000 was repaid on this note. The remaining note was forgiven in conjunction
with the sale of the Rave subsidiary to the stockholder.

8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
   -------------------------------------

At December 31, 2001, accounts payable and accrued expenses for continuing
operations consists of the following:

    Accounts payable                                      $       712,000
    Accrued Interest                                               25,000
    Accrued Wages and Taxes                                       293,000
                                                          ---------------
                                                          $     1,030,000

9. INCOME TAXES:
   ------------

The provision for income taxes consists of state and local taxes. At December
31, 2001, the Company recorded deferred federal, state and local income tax
assets aggregating approximately $11,300,000 arising from net operating loss
carryforwards and property basis differences. A valuation allowance of
approximately $11,300,000 has been recorded, since management is uncertain if
the tax benefit will be realized.

At December 31, 2001, the Company has federal net operating loss carryforwards
of approximately $19,000,000, which expire in periods beginning in 2012 through
2021. The net operating loss carryforwards will be subject to significant IRS
Section 382 limitations due to changes in control of the Company.

10. COMMITMENTS AND CONTINGENCIES:
    -----------------------------

Litigation - On August 13, 2001, 8330 W. Third Street, LLC filed a complaint
against Straw Dogs, Inc., a subsidiary of the Company, in the Superior Court of
California, County of Los Angeles, alleging that Straw


                                      F-12
<PAGE>

              PARADISE MUSIC & ENTERTAINMENT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Dogs breached various obligations under its lease dated August 1, 1998. The suit
seeks damages, including but not limited to past due rent, in the amount of
approximately $59,000, attorneys fees, and certain other fees and taxes. These
charges have been provided for in the liabilities for discontinued operations
section on the financial statements for fiscal year ending 2001.

On September 17, 2001, Craig Rodgers, the former President of Straw Dogs, made a
demand for arbitration alleging breach of various obligations under his
employment agreement, which was guaranteed by the Company. The dispute was
settled on April 15, 2003. The terms of the settlement are that the Company
would make two payments of $12,500 to Mr. Rodgers, the first such payment to be
made on or before June 10, 2003, and the second payment to be made on or before
August 10, 2003. While these settlement payments have not yet been made, they
have been provided for in the liabilities for discontinued operations section on
the financial statements for the fiscal year ending 2001.

Additional claims have been raised by former management regarding breach of
contract (employment), as well as third parties for damages incurred pertaining
to the shutdown of both the Straw Dogs and Shelter Films businesses by their
respective Boards of Directors. The third party claims made by vendors, former
employees and unions are against the respective former subsidiaries and in some
cases, name the Company as well. In each matter, the Company is currently
investigating potential counterclaims.

Although management believes that the Company will be able to settle these
disputes favorably, there can be no assurance of such outcome. Further,
resolution may be predicated on the Company's ability to secure additional
capital funding. Unfavorable resolution of these claims would have a material
adverse impact on the financial condition of the Company.

Leases - The Company had leased for office facilities that expired in various
years through July 2009. Rent expense for the years ended December 31, 2001 and
December 31, 2000 was approximately $487,000 and $635,000, respectively.

In 2001, the Company entered into a termination agreement with the landlord of
its primary office lease in New York City. The termination agreement required a
cash payment of approximately $50,000 and for the Company to give all leasehold
improvements at the leased premises to the landlord. A loss of $493,000 was
recorded on the transaction representing the cash payment and the book value of
the leasehold improvements.

Although the Company remains contingently liable on the Straw Dogs lease, no
amounts have been accrued. The lease requires payments of $274,000 per year
through July of 2009. The former founders, principals, and manager of Straw Dogs
continue to occupy the leased premises and the owner of the leased building is
affiliated with the same individuals. The Company considers the possibility of
any amounts being due under the lease guarantee to be remote.


                                      F-13
<PAGE>

              PARADISE MUSIC & ENTERTAINMENT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Employment and Termination of Employment - The Company and a former officer and
director entered into a separation agreement and general release whereby the
individual resigned from all positions he held as an officer or director of the
Company as of September 1, 2000. Under the terms of the settlement, this
individual received $50,000 and is entitled to additional contingent payments up
to a maximum of $200,000 in the event that certain earnings targets for each of
the next two years are achieved. In connection with the termination, 400,000
options held by the individual were cancelled, leaving him with 200,000 vested
options exercisable at $5.00 per share.

Paradise and the former Chairman and CEO entered into a Termination Agreement
effective as of January 1, 2001 whereby he resigned his positions as Chairman
and CEO of the Company. In connection with the termination all 750,000 options
to purchase Paradise common stock held by him were cancelled. The individual
agreed that 1,000,000 shares of Paradise common stock received by him in
connection with the Stock Purchase Agreement and Asset Purchase Agreement, both
dated September 23, 1999, will remain locked up for the lesser of two years
following the Effective Date of the Termination Agreement or a period equal to
the lock up period of the new chairman. Subsequently, this individual resigned
from the Board of Directors in 2001.

Straw Dogs, Inc. and the former Chairman and CEO entered into an exclusive
director agreement dated January 1, 2001 whereby the former Chairman and CEO
agreed to provide television and commercial and music video production services
for a two-year term. Each of the parties has the option to terminate the
agreement at any time upon thirty days prior written notice. The former Chairman
and CEO terminated this agreement in 2001.

All other officers and employees either terminated their employment agreements
or those employment agreements were terminated by the Company in 2001. As
discussed above, certain claims have been made by some former employees.
Although the company currently believes no additional amounts are owed, it is
reasonably possible that the resolution of these matters could result in
additional expenses.

The Company has agreed to pay each of its outside directors $18,000 per year,
payable quarterly in the Company's common stock valued on the last day of the
applicable quarter. The Company has also agreed to pay the Vice Chairman
$166,500 per year.

11. CONCENTRATIONS:
    --------------

Although a significant portion of the Company's 2001 and 2000 revenues were
derived from few customers and substantially all the Company's revenues were
from television and film production and from music sales, future concentrations
of risk are expected to be related to the Company's new strategy focusing on
festivals and events.

All remaining receivables were reserved for at December 31, 2001 and minimal
future revenue is currently expected to be generated from television and film
production, and from music sales.

                                      F-14
<PAGE>


              PARADISE MUSIC & ENTERTAINMENT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. STOCKHOLDERS' EQUITY:
    --------------------

The Company entered into consulting agreements with various consultants in 2000
for professional and financial services. The consultants were compensated for
their services (either partially or in full) through the issuance of an
aggregate of 281,500 warrants to purchase the Company's common stock. The
warrants typically vest immediately and have exercise prices ranging form $1.06
to $3.00 per share. The warrants were valued at approximately $184,000 and were
expensed under these agreements in fiscal 2000.

On June 28, 2000, Paradise entered into a Subscription Agreement with Renessence
Ventures bv io ("Renessence") whereby Renessence invested approximately $1.6
million through the purchase of 1,605,400 restricted shares of Paradise common
stock (the "Shares") and warrants to purchase an additional 240,813 Shares (the
"Warrants"). The securities granted under the agreement were subject to a
lock-up period for one year commencing on June 22, 2000, the binding date of the
agreement. The shares issued were not registered under the Securities Act of
1933, as amended. Also, if at any time after the first anniversary of the
binding date Paradise is authorized to file a registration statement the
Renessence securities are subject to piggy-back registration rights. The
Warrants vested on January 1, 2001 and expire June 28, 2002. The Warrants have
an exercise price of $1.75 per share.

For the year ended December 31, 2000, certain executive officers were awarded an
aggregate of 375,000 shares of restricted common stock valued at the current
market price at the date of grant of $.25 as a bonus for services to the
Company. These awards resulted in a charge to operations aggregating
approximately $94,000.

For the year ended December 31, 2001, the Company issued 500,000 shares to
employees valued at approximately $44,000. This amount is recorded in
operations.

On March 7, 2000, the Company and North Bay Opportunities, L.P. (f/k/a BayStar
Capital, L.P.) and Northbay International Opportunities Ltd. (f/k/a BayStar
International Ltd.) (collectively "NorthBay") entered into a $3,000,000 private
convertible subordinated note financing made in the form of Paradise Senior
Subordinated Convertible Notes (the "Notes"), convertible at $2.375 per share,
plus five year warrants to purchase an additional 631,579 shares ("Warrants 1
and 2"). Warrants 1 and 2 had an initial exercise price of $2.61 per share,
vested on March 7, 2001 (the first anniversary of the date of grant) and expire
on March 7, 2005.

On December 15, 2000, the Company completed a transaction with NorthBay the
terms of which were set forth in a Purchase and Sale Agreement. NorthBay
converted and exchanged the Notes and accrued interest for an aggregate of
1,000,000 shares of Paradise common stock, warrants to purchase an aggregate of
500,000 shares of Paradise common stock ("Warrants 3 and 4"), and the Company's
investment in 1,000,000 shares of Series A Preferred Stock of Eruptor
Entertainment, Inc. Warrants 3 and 4 vested immediately, expire on December 15,
2005 and had an initial exercise price of $2.00 per share. The exchange enabled
the Company to eliminate all then-outstanding long-term debt and related annual
interest expense. The Company recorded a one-time non-cash gain related to this
exchange during the fourth quarter of 2000 of $337,000.


                                      F-15
<PAGE>


              PARADISE MUSIC & ENTERTAINMENT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Pursuant to the terms of Warrants 1 and 2 and Warrants 3 and 4 (collectively the
"NorthBay Warrants") NorthBay exercised their option to have the per share
exercise price redetermined on March 7, 2001, to a price equal to the lesser of
$2.61 and $2.00, respectively, or the average daily closing bid price for the
common stock for the 20 trading days immediately preceding March 7, 2001.
Paradise calculated the reset price of the NorthBay Warrants to be $.48 per
share and notified NorthBay of this calculation on March 13, 2001.

The exercise price of the NorthBay Warrants and the number of shares of common
stock issuable upon exercise of the NorthBay Warrants are subject to adjustment
in certain circumstances, including a stock dividend, subdivision or combination
of stock and the issuance of common stock or rights, options or warrants to
acquire common stock at a price per share less than the exercise price of the
warrants in effect immediately before such issuance.

Effective January 21, 2001, Paradise extended and modified the terms of the
1,146,000 public warrants sold under the Initial Public Offering. The exchange
ratio was set such that the warrant holders can buy an aggregate of 229,200
shares of common stock (five warrants exercisable for one share), the expiration
period was extended to December 31, 2002, and the exercise price was changed to
$2.50 per share.

13. STOCK OPTIONS:
    -------------

On October 8, 1996, the Board of Directors adopted and the stockholders approved
the Option Plan. The Option Plan provides for the granting of incentive stock
options ("ISOs") within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), non-qualified stock options ("NQSOs") and/or
Stock Appreciation Rights (SARs) to certain directors, agents and employees of,
and consultants to the Company. The purpose of the Option Plan is to attract and
retain exemplary employees, agents, consultants and directors. Options and SARs
granted under the Option Plan may not be exercisable for terms in excess of 10
years from the date of grant. In addition, no options or SARs may be granted
under the Option Plan later than 10 years after the Option Plan's effective
date. The total number of shares of Common Stock with respect to which options
and SARs will be granted under the Option Plan is 3,000,000. The shares subject
to and available under the Option Plan may consist, in whole or in part, of
authorized but unissued stock or treasury stock not reserved for any other
purpose. Any shares subject to an option or SAR that terminates, expires or
lapses for any reason, and any shares purchased pursuant to an option and
subsequently repurchased by the Company pursuant to the terms of the option,
shall again be available for grant under the Option Plan.

As part of the Option Plan, the Board of Directors set aside for Outside
Directors an aggregate of 100,000 stock options to eligible directors of the
Company. Each eligible director receives 5,000 stock options per annum, subject
to adjustment, for his services on the Board on each July 1. The options are
exercisable at the fair market value of the common stock on the last date
preceding the date of grant. The maximum term of the stock options is 5 years
and the stock options may be exercised at any time for a period of 5 years after
the date of grant.


                                      F-16
<PAGE>


              PARADISE MUSIC & ENTERTAINMENT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The activity in the Option Plan is as follows:

                                                                Exercise Price
                                            Number of Options   Per Share Range
                                           ------------------  ----------------

    Balance outstanding January 1, 2000          2,657,500        2.06 - 6.00
        Granted                                  1,151,500        1.00 - 5.00
        Cancelled                               (1,061,500)       1.50 - 5.00
                                            --------------        -----------

    Balance outstanding Dec. 31, 2000            2,747,500        1.00 - 6.00
        Granted                                    242,222        0.25 - 1.00
        Cancelled                                 (207,030)       1.00 - 5.00
                                            --------------        -----------

    Balances outstanding Dec. 31, 2001           2,782,692        0.25 - 6.00
                                            ==============        ===========



The Company has adopted the disclosure requirements of SFAS No. 123, "Accounting
for Stock-Based Compensation". The Company applies Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for its Option Plan and
Program. Had compensation for the Company's stock options been determined based
on the fair value at the grant dates, consistent with the provisions of SFAS No.
123, the Company's consolidated net loss and loss per common share would have
been adjusted to the pro forma amounts indicated below:

                                                      For the Years
                                                    Ended December 31,
                                         ---------------------------------------
                                               2001                   2000
                                         ------------------    -----------------
        Net Loss:
            As reported                  $   (19,309,000)      $     (4,816,650)
            Pro forma                        (19,488,000)            (5,429,781)


Basic and diluted loss per common share:

                                                       For the Years
                                                    Ended December 31,
                                          --------------------------------------
                                                2001                  2000
                                          -----------------    -----------------

        As reported                       $      (1.17)        $       (.54)
        Pro forma                                (1.17)                (.61)



                                      F-17
<PAGE>


              PARADISE MUSIC & ENTERTAINMENT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The fair value of each option grant is estimated on the grant date using the
Black-Scholes option pricing model with the following assumptions for grants:

                                                       For the Years
                                                     Ended December 31,

                                           -------------------------------------
                                                 2001                  2000
                                           -----------------    ----------------

   Volatility                                         111%                124%
   Interest rate                                      5.0%                5.5%
   Dividends                                            -                   -
   Expected term                                        5                   5



14. STOCK WARRANTS:
    --------------

The following table summarizes common stock warrant activity:

                                                                     Exercise
                                                  Shares             Prices
                                              -------------       --------------

Warrants outstanding as of January 1, 2000       2,869,000         4.00 - 7.20
    Granted                                      2,221,339         1.06 - 8.28
    Cancelled                                   (2,797,000)        4.00 - 10.00
                                              ------------         ------------

Warrants outstanding as of December 31, 2000     2,293,339         1.06 - 8.28
    Granted                                      1,421,000         0.25 - 2.50
    Cancelled                                     (463,141)        1.06 - 10.00
                                              ------------         ------------

Outstanding as of December 31, 2001              3,251,198
                                                ===========



15. RELATED PARTY TRANSACTIONS:
    --------------------------

On February 10, 2001, the Paradise Board of Directors approved the execution of
a Management Services Engagement Letter with iball whereby iball provided the
management services of Kelly Hickel and David Sunshine for the interim period
prior to the closing of the proposed merger between Paradise and iball. Paradise
paid iball approximately $25,000 per month through the merger date (July 3,
2001) and a $25,000 retainer.


                                      F-18
<PAGE>


              PARADISE MUSIC & ENTERTAINMENT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In connection with the acquisition of Straw Dogs in December 1999, the Company
assumed a lease with 8330 West Third Street, LLC, an affiliate of Mr. Dylan and
Mr. Rodgers which expires July 2009. The lease is for 10,147 square feet of
space at the rental rate of $2.25 per square foot per month. This rate is
subject to escalation in accordance with inflation after 5 years. The rental
rate was determined by an independent appraisal. As discussed in Note 10, the
Company believes it has no further obligation under this lease based on the
shutdown of Straw Dogs counter claims against Mr. Rodgers and conversion by the
principals at 8330 West Third Street LLC to their own use.

16. SUBSEQUENT EVENTS:
    -----------------

In January through May 2002 the commercial factory lender advanced $110,000 on a
short term basis and in May 2002 converted $200,000 of the debt to equity by
purchasing 4,000,000 shares at a price of $0.05 per share. Warrants for
1,600,000 and 500,000 shares at an exercise price of $0.05 and $0.03,
respectively, were issued as consideration for these borrowings and conversions.
The lender has the right to default the remaining balance of approximately
$200,000 on July 15, 2002 if the account balance is not paid in full. In that
event, the lender has the right to receive sufficient shares of the company to
accomplish a 51% ownership position

In March 2002, the CEO and a consultant loaned the Company $30,000 on the same
terms as the lender.

In April and May 2002 the Company received $70,500 from four investors in the
form of Bridge financings providing notes for 12 months with 500,025 warrants at
a price of $0.04 or $0.05 per share. Three of the investors have the right to
invest an additional $75,000 on the same terms. Additional investors have
pledged additional sums, but these have not been finalized.

Subsequent to December 31, 2001 and through May 19, 2002, 4,493,807 additional
shares of stock were issued to consultants.


                                      F-19