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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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


                                 FORM 10-KSB/A


|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

| | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                                    OF 1934

                         COMMISSION FILE NUMBER 0-21534

                             iNTELEFILM CORPORATION
                 (Name of Small Business Issuer in Its Charter)

                       Children's Broadcasting Corporation
                                  (former name)
           MINNESOTA                                     41-1663712
(State or Other Jurisdiction of                       (I.R.S. Employer
Incorporation or Organization)                       Identification No.)




             5501 EXCELSIOR BOULEVARD, MINNEAPOLIS, MINNESOTA 55416
          (Address of Principal Executive Offices, including Zip Code)

                                 (612) 925-8840
                (Issuer's Telephone Number, including Area Code)

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                          COMMON STOCK ($.02 PAR VALUE)
                          COMMON STOCK PURCHASE RIGHTS
                                (Title of Class)

         Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes |X| No
| |

         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of 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. | |


         The issuer's revenues for its most recent fiscal year were $67,242,374.


         The aggregate market value of the voting stock held by non-affiliates
of the issuer as of March 1, 2000 was approximately $20,409,920.

         The number of shares of the common stock of the issuer outstanding as
of March 1, 2000 was 6,388,966.

                       DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the document listed below have been incorporated by
reference to the indicated part of this Form 10-KSB.

DOCUMENT INCORPORATED BY REFERENCE                      PART OF THE FORM 10-KSB

Definitive Proxy Statement for the Company's 2000       Item 10 of Part III
Annual Meeting of Shareholders

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<TABLE>
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                                                 TABLE OF CONTENTS

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<S>                                                                                                             <C>
PART I   .........................................................................................................2

         ITEM 1     DESCRIPTION OF BUSINESS.......................................................................2
         ITEM 2     DESCRIPTION OF PROPERTY.......................................................................8
         ITEM 3     LEGAL PROCEEDINGS.............................................................................8
         ITEM 4     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........................................9

PART II  ....................................................................................................... 10

         ITEM 5     MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.....................................10
         ITEM 6     MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION....................................10
         ITEM 7     FINANCIAL STATEMENTS......................................................................18-51
         ITEM 8     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                    FINANCIAL DISCLOSURE.........................................................................52

PART III ........................................................................................................52

         ITEM 9     DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
                    COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT............................................52
         ITEM 10    EXECUTIVE COMPENSATION.......................................................................54
         ITEM 11    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............................55
         ITEM 12    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................................56
         ITEM 13    EXHIBITS, LIST AND REPORTS ON FORM 8-K.......................................................58

SIGNATURES.......................................................................................................61

EXHIBIT INDEX....................................................................................................62

</TABLE>

SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

         Certain statements under the captions "Description of Business," "Legal
Proceedings," "Market for Common Equity and Related Shareholder Matters,"
"Management's Discussion and Analysis or Plan of Operation," and elsewhere in
this Form 10-KSB constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements may be identified by the use of terminology such as "may," "will,"
"expect," "anticipate," "estimate," "should," or "continue" or the negative
thereof or other variations thereon or comparable terminology. Such
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical results or from
those results presently anticipated or projected. Such factors are set forth
under the caption "Management's Discussion and Analysis or Plan of Operation -
Cautionary Statements."


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                                     PART I

ITEM     1        DESCRIPTION OF BUSINESS

GENERAL OVERVIEW


         Over the past year, iNTELEFILM(sm) Corporation (the "Company") has
transformed itself into a leading source of services for the television
commercial production and related media business industry through acquisitions
and the establishment of relationships in the industry, and now offers the most
extensive production capability for television commercials, music videos and
related media available in the United States and the exclusive services of
established talent (See General Overview of 1999 Events and Transactions). In
January 1999, the Company completed its exit from the children's entertainment
and radio business when it sold the last of its radio stations to Radio Unica
Corp.


          The Company believes that the expanded number of television channels,
advances in digital technology and the demand for effective advertising concepts
and efficient delivery of production services create significant opportunities
for the Company in traditional broadcast media and on the Internet.

         During 1999, the Company increased its ownership interest in Harmony
Holdings, Inc. ("Harmony"), a company which produces television commercials,
music videos and related media, from 49.1% to 55.2%. For reporting purposes, the
Company now consolidates Harmony's financial statements under the purchase
method of accounting for the acquisition of a majority interest in a subsidiary.
On March 23, 2000, the Company announced its proposal to commence an exchange
tender offer to the shareholders of Harmony to acquire all of the outstanding
shares of Harmony not currently owned by the Company. The Company proposes to
offer one share of its common stock for every 13.75 shares of Harmony's common
stock.

         In January 2000, the Company, through its relationships with AT&T,
Excalibur Technologies, The Source Maythenyi and Spot Rocket, announced the
formation of webADTV.com, Inc. ("webADTV"). webADTV, a wholly-owned subsidiary
of the Company, was organized to provide a complete web based source of
communications, commerce, solutions and services to advertising agencies and
other companies in the advertising campaign production industry.

         The Company's services are usually directed towards advertising
agencies located in the major markets of New York, Los Angeles, Chicago,
Minneapolis, Detroit, Dallas and San Francisco as well as regional markets. The
Company provides commercial production services to such major advertisers as
Acura, Anheuser Busch, AT&T, Audi, Bank of America, Blue Cross, Coca Cola,
Canon, Disney, Kellogg's, Kodak, McDonald's, Motorola, Nike, Nintendo, Reebok,
Sears, Sony, State Farm and Visa. The Company also works with such major
advertising agencies as Leo Burnett, Bozell Worldwide, Foote, J. Walter
Thompson, DDB Needham, Young & Rubicam and Fallon McElligot.

         The Company was incorporated under the Minnesota Business Corporation
Act on February 7, 1990. All references to the Company herein include its
subsidiaries, unless otherwise noted. The Company's executive office is located
at 5501 Excelsior Boulevard, Minneapolis, Minnesota 55416, and its telephone
number is (612) 925-8840. The Company's website is http://www.intelefilm.com.

BUSINESS AND ACQUISITION STRATEGY

         COMMERCIAL PRODUCTION STRATEGY

         It is the Company's objective to provide an end-to-end commercial
production solution for advertising agencies enabling the Company to provide the
highest level of service to its clients. To do so, the Company intends to
further expand its television commercial production service business and
holdings through acquisitions


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and/or opportunities within its present divisions. The Company intends to seek
to acquire production service companies, such as rental, editing,
designing/marketing, post-production or music companies. The Company believes
that it can increase revenues and profits through the acquisition of production
companies and related service companies.

         By creating this infrastructure, the Company believes it can also
create a community for creative talent including a highly effective and
cost-efficient professional support organization, experienced executive
producers and integrated production services. The Company believes key talent
will recognize that the Company will provide an environment conducive to
creativity by relieving them and production management of the responsibility of
business and financing operations while providing a measure of financial
stability. Key talent will also recognize the possibility of the Company taking
a long-term interest in their career that traditional, independent production
houses typically do not provide.

         The Company believes the primary benefits of its strategy include:

         - offering more extensive services than its competitors;
         - attracting key talent;
         - higher overall profit margins;
         - economies of scale;
         - centralization of accounting, legal and marketing functions; and
         - the ability to receive support services at lower costs.

         The Company believes it should have adequate capital to continue its
acquisition strategy and business plan over the next 12 months. However, should
a potential acquisition be greater than the Company's current cash sources, the
Company may need to obtain additional financing. If the Company is not able to
obtain adequate financing or financing on acceptable terms, it could possibly
cause a delay in the implementation of its full business plan. There can be no
assurance that the Company will consummate any additional acquisition or that
any acquisition, if consummated, will ultimately be advantageous or profitable
for the Company.

INTERNET STRATEGY

         As the leader in television commercial production, the Company has
developed a high level of expertise in the development of short form video and
advertising. The Company has assessed its strengths in these areas and has
identified several Internet initiatives:

         -  utilization of the Internet for productivity gains;
         -  development of a global presence;
         -  creation of short form content via the Company's directorial talent
            pool for use on the Internet;
         -  development of new advertising solutions for the Internet through
            integration of character-based content; and
         -  creation of the leading business to business portal to serve the
            advertising agency industry.

         The Company believes the Internet can be used for greater communication
within each of its divisions, sales network and as a solution to provide lower
costs and improve productivity and information availability. Additionally, the
Company currently spends approximately $750,000 per year to dub and send
directorial reels to advertising agencies and their clients. The Company is
exploring the elimination of this process through Internet video systems
including a beta version of the inteleSource.org ("inteleSource") system
described below.

         DEVELOPMENT OF SHORT FORM CONTENT AND ADVERTISING

         The Company is also exploring the use and development of short form
video together with the development of new Internet advertising models. Recent
studies have shown that banner ads create only a 0.2%


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click through rate. It is the Company's belief that rich media advertising is a
key to developing greater advertising revenue models for the Internet. Although
the Company recognizes that current broadband parameters still limit the
development of rich media advertising for the mass market, the Company believes
that there will be solutions to these barriers. Additionally, the Company
believes that rich media advertising to individuals while they are at work is a
viable opportunity due to high speed access at most business locations. As such,
the Company has begun to establish relationships with broadband providers to
maintain an awareness and participate in seeking the solution to the advertising
revenue models. In February 2000, the Company announced a relationship with
Hitplay, an entertainment video delivery network, pursuant to which the Company
will develop, produce and deliver original and archival entertainment video to
Hitplay and Hitplay will deliver the video over the Internet.

         The Company currently retains the exclusive services of approximately
60 commercial directors. The Company believes that this director pool has the
video expertise necessary to meet the growing demand for short form video on the
Internet. The Company intends to leverage its talent base to explore the
convergence of content and technology over the Internet.

         DEVELOPMENT OF A BUSINESS TO BUSINESS PORTAL

         In January 2000, the Company formed webADTV. webADTV will provide a
complete web based source of communications, commerce, solutions and services to
the advertising agencies and other companies in the advertising campaign
production industry including news and information from affiliate content
providers, an e- commerce business generated from a wide range of affiliated
design and production sources and its subscription based archiving and retrieval
service, inteleSource. Initially, the portal will focus on the workflow needs
critical to advertising agencies in the $60 billion television commercial
production arena. webADTV will later expand to meet the service needs of
advertising agencies in all areas including print, media, newspaper, magazines
and outdoor. The Company believes the portal will differentiate itself from
future competitors due to the uniqueness of its service oriented subscriber
based inteleSource archiving system. The Company also anticipates that the
portal will generate revenues through advertising and pay per view content
specifically created for advertising agencies.


         In connection with the development of the business to business portal,
the Company, in development with AT&T and Excalibur Technologies Corporation
("Excalibur"), announced the creation of inteleSource, a digital video archiving
and retrieval service designed specifically for global advertising agencies, the
Company's core customer. AT&T and Excalibur will provide web-based hosting,
connectivity and video content management technologies for the data-based
service and the Company will provide its relationships with advertising agencies
and its expertise in commercial production. The Company believes that there is a
great need for on-demand digital archiving and retrieval of video assets by
global advertising agencies and that the Company will be able to couple its
agency relationships with the AT&T infrastructure and the new Excalibur
architecture in order to manage video content over networks to take additional
steps in web-enabling its services. inteleSource is a web based digitized video
storage and retrieval service designed exclusively for use by global advertising
agencies and their clients. Utilizing Excalibur Screening Room technologies
powered by AT&T Labs technology, inteleSource encodes television commercials
with specific searchable criteria such as clients, products, directors,
producers, and creatives, empowering agencies and their clients to more
efficiently manage and retrieve assets from their extensive video libraries.


         inteleSource provides an Internet solution to advertising agencies who
do not have a reliable or efficient manner to search their commercial video
library. Currently, advertising agencies collect and store the commercials
produced for their clients on 3/4 inch video tape. Because commercials are
stored on individual reels, the creative personnel do not have a system to
quickly review all the reels in their library by selected categories. Instead,
each reel would have to be viewed separately. inteleSource minimizes this
process to better serve the creative personnel's need to review past advertising
campaigns, specific director work or, for example, all the car commercials
produced by the agency. Additionally, inteleSource encodes and digitizes each
new commercial produced by the advertising agency and stores the commercial on
the agency's archive system. In addition to the


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need to archive commercials, webADTV intends to further develop the archiving
capabilities of the service to include agency specific programming. As an
example, the portal could utilize the system to archive various seminars, spots
of the week or interviews with various industry lumaries.

         There can be no assurance that webADTV's business plan will be
completed or if completed, that the business plan will be successful.

         BUSINESS DESCRIPTION

         The Company's primary business is the production of television
commercials, music videos and related media. The expertise, reputation and
creative vision of the commercial director roster and the ability of the Company
to deliver the commercial in an efficient manner defines the production
company's role. The Company's customers are typically advertising agencies
acting on behalf of a television advertiser.

         The Company's marketing efforts have focused on national and
multi-national advertisers, national network commercials and higher budget
commercials. Nationally, the advertising and commercial production industry has
experienced an increase in the number of markets for television commercials.
Generally, the Company's budgeted price for a commercial ranges from $200,000 to
$400,000 and occasionally exceeds $1,000,000.

         The Company's services are marketed by a staff of sales representatives
who seek out available commercial projects suitable for the Company's commercial
directors. These efforts are usually directed towards advertising agencies
located in New York, Los Angeles, Chicago, Detroit, Dallas, San Francisco,
Minneapolis and other regional markets.

         Sales personnel hired by the Company work exclusively for the Company
out of offices located in Los Angeles and New York. The Company also employs
independent sales representatives on a select basis. The Company is seeking to
coordinate its sales efforts in a more efficient manner to enhance revenues.

         To sell a commercial director's work, the sales staff uses the
commercial director's reel as its primary tool which contains samples of the
director's work demonstrating the director's creativity and experience. The
reels are continuously updated and provided to the advertising agencies who
generally act as the decision maker.

         The Company also advertises in trade publications and has sponsored
agency events on an occasional basis to maintain visibility among advertisers
and advertising agencies and to publicize specific information such as additions
to the directorial roster, completion of a significant commercial, or the
recognition of awards and achievements.

         The Company attracts and retains commercial directors by offering such
directors the opportunity to work in an organization with a highly effective
sales force and a high-quality staff of executive producers and support staff.
The Company offers directors the ability to work in an environment that fosters
creativity by relieving directors of the worry and burden of running a business
or financing the projects on which they work.

         Ad agencies award jobs to commercial production companies with an
accompanying bid. The award bid contains all of the costs associated with that
particular commercial and is broken down into direct costs of production,
director's fees, insurance and the production company's fee. The production
company and producer of the commercial carefully monitor costs throughout the
filming process. The pre-approved bid is often altered during filming due to
agreed upon new creative options or unexpected occurrences such as inclement
weather. When this occurs, and the project costs exceed the original budget, the
increased cost is paid for by the agency and its client.



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         In most circumstances, the Company bills the advertising agency for
33%-70% of the entire budget as stated in the bid, to be paid in advance or on
the first day of principal photography. The remainder of the contract price is
generally paid in one or more installments by the agency within 30 to 120 days
after completion of the principal photography. The accounts receivable write
offs have traditionally been less than 2% of all business.

         A small percentage of the Company's business is derived from the
production of music videos. The production cycles for music videos is similar to
that of television commercials, but the budgets are generally smaller. The
client for the music videos is usually the record company or the performer
directly.

         The television commercial production industry is a highly fragmented
multi-billion dollar industry, with most of the Company's competitors being
relatively small operations. The Company believes that its large director roster
with its range of creative ability, expertise and wide experience coupled with
the Company's reputation and advertising agency relationships, provide the
Company with a competitive edge in its current markets.

         GENERAL OVERVIEW OF 1999 EVENTS AND TRANSACTIONS

         During 1999, the Company utilized its resources to purchase an
aggregate of 456,600 additional shares of common stock of Harmony at prices
ranging from $0.94 to $1.03 per share. Such purchases increased the Company's
ownership interest in Harmony, a company which produces television commercials,
music videos and related media, from 49.1% to 55.2%. For reporting purposes, the
Company consolidates Harmony's financial statements under the purchase method of
accounting for the acquisition of a majority interest in a subsidiary.

         In January 1999, the Company completed the sale of the radio broadcast
licenses and certain other assets of its remaining three radio stations
KAHZ(AM), Dallas, KIDR(AM), Phoenix and WJDM(AM), New York to Radio Unica Corp.
The Company used a portion of the proceeds of that transaction to redeem all of
its 606,061 shares of Series B Convertible Preferred Stock which were issued in
June 1998. The preferred stock was redeemed at $4.04 per share, or $2.45
million. Upon the sale to Radio Unica Corp. the Company completed the exit from
its former business plan.

         In February 1999, the Company incorporated a new subsidiary, Buffalo
Rome Films, Inc. ("Buffalo Rome") which will seek out independent film
opportunities. During 1999, the Company entered into an agreement regarding the
production of a picture entitled "True Rights" which was based on a screenplay
written by Meg Thayer. In exchange for providing certain financing of the
production, the Company acquired a one-third equity interest in the screenplay,
production of "True Rights" and any other material relating thereto. In
addition, the Company will receive a percentage of the net proceeds from the
distribution and exploitation of "True Rights" in all media and all sources
worldwide after the Company receives, the sum equal to 125% of its respective
contribution to the production of "True Rights." The Company's financing
obligation totaled $126,000 and was paid in full during the filming of the
project. The Company has no assurance as to the amount of return, if any, that
the investment will produce. Investment in independent films involves a high
degree of risk. As a result, the Company has limited its involvement in this
area.

         In March 1999, the Company acquired Chelsea Pictures, Inc. ("Chelsea")
by merging it with Chelsea Acquisition, Inc., a newly formed subsidiary of the
Company with Chelsea as the surviving corporation. Chelsea engages in the
production of television commercials, independent films and related media. In
1999, Chelsea had revenues of approximately $16.7 million. In exchange for the
stock of Chelsea, the Company issued to Steve Wax, Chelsea's sole shareholder,
125,000 shares of the Company's Common Stock with an additional 75,000 shares to
be issued to Mr. Wax contingent upon Chelsea obtaining certain earnings before
interest, taxes, depreciation, and amortization ("EBITDA") levels. Subsequent to
the merger transaction, the Company repaid approximately $887,000 of Chelsea's
liabilities in existence at the time of the merger. Also, in connection with
this transaction, Chelsea entered into certain employment and commercial
production director agreements.



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         In April 1999, the Company's Board of Directors authorized the
repurchase of up to 500,000 shares of its common stock. The repurchases have
been made in accordance with Exchange Act Rule 10b-18, and are subject to the
availability of stock, trading price, market conditions and the Company's
financial performance. The repurchased shares are canceled and returned to the
Company's authorized capital stock. As of March 1, 2000, the Company had
repurchased an aggregate of 488,900 shares at prices ranging from $1.53 to $2.06
per share.

         In June 1999, as part of its repositioning into the television
commercial production industry, the Company began doing business as
iNTELEFILM(sm) and changed its Nasdaq symbol from "AAHS" to "FILM." On September
30, 1999, the Company and Children's Radio of Kansas City, Inc., a subsidiary of
the Company, merged and in the process of the merger the Company changed its
name from Children's Broadcasting Corporation to iNTELEFILM Corporation.

         Effective as of August 1, 1999, the Company purchased the Option and
Share Transfer Agreement ("Option Agreement") entered into by Harmony and the
four principal executives (collectively, "Curious Management") of Curious
Pictures Corporation ("Curious Pictures") dated December 15, 1996, from Curious
Management. Under the Option Agreement, Curious Management could earn the right
to purchase 50% of the outstanding stock of Curious Pictures from Harmony upon
the achievement of certain specified financial goals. Pursuant to the Company's
purchase agreement and based on the results of operations of Curious Pictures,
it was agreed by all parties that Curious Management's right to purchase the 50%
equity interest had fully vested and was exercisable for consideration totaling
$50. Following its purchase of the Option Agreement, the Company acquired 50% of
Curious Pictures through the exercise of stock options granted under the Option
Agreement. The Company also acquired a 1% equity interest in Curious Pictures
owned by Curious Management that was initially conveyed to Curious Management
upon signing the Option Agreement. The consideration paid to Curious Management
by the Company for the aforementioned acquisitions aggregated $3.0 million
consisting of $1.5 million in cash and $1.5 million note payable bearing an
interest rate of 8%, due May 31, 2000. The Company believes it has adequate
resources to satisfy the note payable. As a result of this transaction, the
Company currently owns 51% of the outstanding stock of Curious Pictures and
Harmony owns 49% of the outstanding stock of Curious Pictures.

         In October 1999, the Company received payment in full on its $15.0
million note receivable from Catholic Radio Network ("CRN"). The Company
believes that with the sums received on this note, it should have adequate
capital to continue its acquisition strategy and business plan over the next 12
months.

         SALE OF RADIO STATIONS ACQUIRED PURSUANT TO FORMER BUSINESS STRATEGY.


         In January 1998, the shareholders initially approved a sale agreement
for all of the assets related to the Company's radio stations; however, this
sale was ultimately not closed by the seller. Management continued to pursue the
sale strategy, and in August 1998, the shareholders of the Company approved new
sales agreements for substantially all of the assets related to the Company's
radio stations. During the fall of 1998 and early 1999, the Company completed
the sale of all of its radio stations and exited its former business strategy.


         TRADEMARKS, SERVICE MARKS AND COPYRIGHTS

         The Company has pending service mark applications and claims trademark
and service mark rights to and ownership in a number of marks including, but not
limited to, iNTELEFILM(sm) Corporation, iNTELEFILM.com(sm), Chelsea
Pictures(sm), Wraparoni(sm), Populuxe Pictures(sm), inteleSource.org(sm),
webADTV.com(sm), Curious Pictures Corporation(sm), Harmony Holdings, Inc.(sm),
The End, Inc.(sm), Beginning Entertainment, Inc.(sm), The Moment Films,
Inc.(sm), Unscented, Inc.(sm) and Gigantic Entertainment, Inc.(sm). In addition,
the Company has trademark and service mark rights to a number of marks in
connection with its former business strategy.



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         EMPLOYEES

         The Company had 76 employees, including one part-time employee, at the
end of its last fiscal year. No employee is represented by a union. Some of the
Company's subsidiaries are signatory to several talent and collective bargaining
agreements related to the physical production of commercials. Personnel covered
by such agreements are hired on a freelance basis solely for a specific
production and do not have an employment relationship with the Company. The
Company believes its relations with employees are satisfactory. Also, see
"Certain Relationships and Related Transactions."

         ITEM  2        DESCRIPTION OF PROPERTY

         The Company's executive offices are located at 5501 Excelsior
Boulevard, Minneapolis, Minnesota. The Company pays for its executive office
space through its management fee with Media Management, LLC (" MMLLC"), an
entity owned by Messrs. Christopher T. Dahl and Richard W. Perkins, each a
director of the Company. See "Certain Relationships and Related Transactions."

         Chelsea leases an office facility in New York City which consists of
approximately 5,000 square feet. This lease requires an annual rent of $132,000
and expires on September 30, 2002. Chelsea also leases an office facility in
Hollywood, California, at an annual rent of $59,760 and expires on March 31,
2000.

         Curious Pictures leases two office spaces in New York City and one
office space in San Francisco, California. One New York office lease consists of
approximately 20,708 square feet which requires an annual rent of $290,731 and
expires on January 31, 2008. The other New York office lease requires an annual
rent of $151,500 and expires on November 30, 2004. The San Francisco office
lease consists of approximately 3,741 square feet, requires an annual rent of
$41,040 and expires on August 31, 2003.

         The End, Inc.'s California facility is located at 433 South Beverly
Hills Drive in Beverly Hills, California. The lease is for ten years ending in
October 2008 at a monthly rate for $21,909. The End, Inc.'s current New York
facility is located at 75 Varick Street, New York, New York and is shared with
Populuxe Pictures, Inc. The lease is for ten years ending in August 2009 at a
monthly rate of $9,282.

         Harmony Holdings, Inc. also leases office space located at 420 South
Beverly Hills Drive in Beverly Hills, California, on a month to month basis at a
monthly rate of $1,950.

         The Company carries general commercial liability insurance coverage on
its leased property. The Company believes that such insurance is adequate to
cover any losses that may occur on such property.

         ITEM  3        LEGAL PROCEEDINGS

               On September 30, 1998, a jury in the United States District
Court for the District of Minnesota (the "Court") ruled in favor of the Company
in connection with litigation for breach of contract and misappropriation of
trade secrets that the Company had commenced against ABC/Disney and awarded the
Company $20 million for breach of contract against ABC Radio, $10 million for
misappropriation of trade secret by ABC Radio and $10 million for
misappropriation of trade secret against Disney. On January 15, 1999, the Court
upheld the jury's findings that ABC Radio had breached its contract with the
Company and that ABC/Disney both misappropriated the Company's trade secret
information, the Court disagreed with the jury's conclusion that the evidence
showed that those actions caused the Company's damages or that the amount of
damages awarded by the jury was supported by the evidence, and set aside the
jury's verdict. The Court further ruled that in the event that the decision is
reversed or remanded on appeal, that the defendants be granted a new trial on
the issues of causation and damages. The Company filed a Notice of Appeal in
February 1999. On February 16, 2000, the Company presented its oral argument to
the 8th Circuit Court of Appeals in St. Paul, Minnesota. As of March 28,


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2000, the 8th Circuit Court of Appeals had not yet ruled on the appeal. The
Company intends to pursue its appeal of the judgment and, to this end, certain
personnel and financial resources will be used.

                  Except as described above, the Company is not a party to any
material legal proceedings.

         ITEM  4        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

               No matter was submitted to a vote of security holders through
the solicitation of proxies or otherwise during the fourth quarter of the
Company's most recently completed fiscal year.

         EXECUTIVE OFFICERS OF THE REGISTRANT

               The following table provides information with respect to the
Company's executive officers as of March 1, 2000. Each executive officer has
been appointed to serve until his or her successor is duly appointed by the
Board of Directors or his or her earlier removal or resignation from office.
<TABLE>

         NAME                       AGE              POSITION
         ----                       ---              --------
<S>                                 <C>              <C>
         Christopher T. Dahl        56               Chairman of the Board, President and Chief Executive Officer
         James G. Gilbertson        38               Chief Operating Officer
         Steven C. Smith            44               Chief Financial Officer
         Jill J. Theis              29               Secretary and General Counsel
         Michael N. Delgado         40               Executive Vice President of Marketing
</TABLE>

         Christopher T. Dahl has been President, Chief Executive Officer and
Chairman of the Company since its inception in February 1990. Mr. Dahl also
serves as Chairman of the Board, President and Chief Executive Officer of
Harmony, a company which produces television commercials, music videos and
related media, of which the Company is the largest shareholder and is the
Chairman of the Board of webADTV. Messrs. Dahl and Perkins own MMLLC. Employees
of MMLLC provide certain administrative, legal and accounting services to the
Company and Harmony. From 1969 to 1979, Mr. Dahl was the founder and President
of a group of companies involved in photo finishing, retail photo sales, home
sewing notions, toy distribution and retail craft stores. He was employed by
Campbell-Mithun and Knox Reeves Advertising from 1965 through 1969.

         James G. Gilbertson has served as the Company's Chief Operating Officer
since April 1996 and its Chief Financial Officer from July 1992 until December
21, 1999. In January 2000, Mr. Gilbertson was appointed the Chief Executive
Officer, President and director of webADTV. From June 1988 to July 1992, he was
the Chief Financial Officer of Parker Communications, which operated a group of
radio stations. From 1985 to June 1988, he was Controller of the radio division
of Palmer Communications located in Des Moines, Iowa. Prior to joining Palmer
Communications, Mr. Gilbertson was a practicing certified public accountant with
the firm of Ernst & Young LLP. Mr. Gilbertson is also the Chief Operating
Officer of Harmony. Mr. Gilbertson is also a director of Founders Food &
Firkins, Ltd., a company which owns and operates Granite City Brewery, a
microbrewery restaurant in St. Cloud, Minnesota.

         Steven C. Smith became the Chief Financial Officer of the Company on
December 21, 1999. Mr. Smith has been with the Company since October 1998.
Formerly the Chief Financial Officer of DIC Entertainment Animation Television
and the Vice President of Finance of Orion Television, Mr. Smith brings more
than 20 years experience with companies such as the Walt Disney Company. Mr.
Smith has also performed as a financial consultant to special effects houses, TV
and Satellite Broadcasters and technology companies. On December 21, 1999, Mr.
Smith also became the Chief Financial Officer of Harmony.

         Jill J. Theis joined the Company in March 1997 and has served as the
General Counsel and Secretary since February 1999. From January 1996 to March
1997, Ms. Theis worked for the law firm of Holper, Welsh, Mitchell


                                        9

<PAGE>   11



& Joanis, P.A. in Minneapolis, Minnesota. From 1993 to 1997, Ms. Theis attended
law school at William Mitchell School of Law in St. Paul, Minnesota. Ms. Theis
is also the General Counsel and Secretary of Harmony.

         Michael N. Delgado oversees the marketing and sales efforts of the
Company and has been with the Company since March 1997. A graduate of the
University of Southern California School of Fine Arts, Mr. Delgado has
orchestrated national marketing campaigns and has been involved in worldwide
branding efforts for a variety of corporations including Patagonia and Lucky
Brand Clothing Companies. Mr. Delgado gained significant operations experience
in his capacity as President of SenDel Automotive Corporation, a manufacturer of
aluminum automotive wheels whose customers included Toyota Motor Company.



                                     PART II

         ITEM 5 MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

         The Common Stock of the Company, which currently trades under the
symbol "FILM", has been included in the Nasdaq National Market since February
1996, on the Nasdaq SmallCap Market between May 1993 and February 1996, and on
the over-the-counter Bulletin Board from the completion of the Company's public
offering in 1992 until May 1993. The following table sets forth the approximate
high and low closing prices for the Common Stock for the periods indicated as
reported by the Nasdaq National Market. Such quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.
<TABLE>
<CAPTION>

                      PERIOD                                                        HIGH          LOW
                      ------                                                        ----          ---

<S>                                                                              <C>           <C>
                      1998
                         First Quarter......................................     $ 4.3125      $  2.8125
                         Second Quarter.....................................       4.0625         3.0000
                         Third Quarter......................................       3.3125         2.8750
                         Fourth Quarter.....................................       3.6875         2.8125

                      1999
                         First Quarter......................................    $  3.0630      $  1.7190
                         Second Quarter.....................................       2.1880         1.5000
                         Third Quarter......................................       2.5630         1.5000
                         Fourth Quarter.....................................       5.2500         1.6250
</TABLE>

         As of March 1, 2000, the Company had approximately 307 shareholders of
record and approximately 2,500 beneficial owners.

         The Company has never declared or paid any cash dividends on its Common
Stock and does not intend to declare or pay cash dividends on its Common Stock
in the foreseeable future. The Company currently expects to retain any earnings
to finance its business. The declaration or payment by the Company of dividends,
if any, on its Common Stock in the future is subject to the discretion of the
Board of Directors and will depend on the Company's earnings, financial
condition, capital requirements and other relevant factors.

         ITEM     6        MANAGEMENT'S DISCUSSION AND ANALYSIS

         This discussion and analysis contains certain forward-looking
terminology such as "believes," "anticipates," "expects," and "intends," or
comparable terminology. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. Potential purchasers


                                       10

<PAGE>   12



of the Company's securities are cautioned not to place undue reliance on such
forward-looking statements which are qualified in their entirety by the cautions
and risks described herein.

         RESULTS OF OPERATIONS FOR YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR
ENDED DECEMBER 31, 1998


         On January 6, 1998, the Company's shareholders approved the initial
sale agreements of all of the Company's owned and operated radio stations which
represents the measurement date for the Company's exit from the children's
entertainment and radio broadcasting industries. Accordingly, the operation and
disposition of the radio stations has been classified as discontinued operations
in the accompanying financial statements. The transition from the radio
broadcasting industry and effectively completed with the closing of the sale of
the Company's radio stations in January 1999.


         The transition into the commercial production service industry occurred
with the Company's acquisition of a majority interest in Harmony, and Curious
Pictures, and a 100% interest in Chelsea. As a result of acquiring a majority
interest in Harmony and Curious Pictures, the Company began consolidating these
companies under the purchase method of accounting for the acquisition of
majority-owned subsidiaries. Harmony's results from operations are consolidated
for the period beginning April 1, 1999 (the "Consolidated Reporting Period").
Previous periods are accounted for under the equity method. Chelsea's operations
are consolidated for the period beginning March 1, 1999. Because of this
transition, a traditional "Management's Discussion and Analysis" comparison of
the changes in the revenue and expense categories from 1998 to 1999 would not be
meaningful. Accordingly, information detailing the origin of the production
revenues and expenses has been provided.


         The Company had revenues of $67,242,000 in 1999 compared to no such
revenues in 1998. The Harmony production companies produced revenues of
$49,393,000 during the Consolidated Reporting Period while the Company's two
production companies added in the current year, Chelsea and Populuxe, provided
$17,849,000 of the 1999 revenues. Populuxe is a start-up production company. The
Company purchased and began operating Chelsea in March 1999. Chelsea currently
has a base of talent and directors from which to draw, but intends to continue
to build that base.


         Cost of production is directly related to revenues and includes all
direct costs incurred in connection with the production of television
commercials including film, crews, location fees and commercial directors' fees.
Cost of production as a percentage of production contract revenues was 84%
during 1999. The Company believes the cost of production as a percentage of
revenues will decrease as its production companies retain more directors and
these directors become more established. Additionally, the Company believes it
will continue to realize greater cost benefits such as vendor discounts which
may lower the overall cost of production.


         Selling expenses consist of sales commissions, advertising and
promotional expenses, travel and other expenses incurred in the securing of
television commercial contracts. Harmony's selling expenses were $1,987,000
during the Consolidated Reporting Period, while selling expenses at Chelsea and
Populuxe were $668,000 in 1999.



         General and administrative expenses consist of overhead costs such as
office rent and expenses, executive, general and administrative payroll, and
related items. Harmony's general and administrative expenses were $4,881,000
during the Consolidated Reporting Period, while general and administrative
expenses at Chelsea and Populuxe were $2,186,000 in 1999.





         Stock option compensation was $2,121,000 in 1999 and includes the
following: (i) $50,000 of expense related to options granted to members of the
Company's Board of Directors, (ii) $1,908,000 of expenses related to previously
existing options granted to Curious Management, and (iii) $163,000 of expense
related to current options granted to Curious Management.


                                       11

<PAGE>   13




         Corporate charges decreased $1,941,000 during 1999 from $5,614,000 in
1998 to $3,673,000 in 1999. During 1999 there was a decrease in litigation
expenses of $2,737,000 as the trial against ABC/Disney was concluded in the last
quarter of 1998. A less costly appeals process continues at this time. Corporate
charges, exclusive of the litigation expense, increased as general office
operation expense increased as well as the increase in acquisition activity.



         Depreciation and amortization for the production and corporate
operations was $1,542,000 in 1999 compared to $8,000 in 1998. The Company
reported $675,000 of amortization expense during the Consolidated Reporting
Period related to the excess of the investment cost over the value of the
underlying net assets (goodwill) of Harmony. Prior to the Company obtaining a
majority interest in Harmony, this expense was reported as a portion of the
equity loss in Harmony.

         In the third quarter of 1999, a gain of $120,000 was realized related
to the sale of 90% of the common stock of The End (London), a previously
consolidated subsidiary of Harmony.


         Interest income for 1999 was $1,555,000 compared to $300,000 in 1998.
This increase of $1,255,000 was due primarily to interest earned through October
1999 from the $15,000,000 note receivable due from CRN and the interest earned
from the advances made to Harmony prior to the Consolidated Reporting Period.
Interest expense decreased $4,336,000 from $5,485,000 in 1998 to $1,149,000 in
1999. This decrease in interest expense resulted from the payoff of the majority
of the Company's debt in existence at the time of the radio station sales in
October 1998 and January 1999.


         Income tax benefits of $700,000 and $4,000,000 were realized from
continuing operations in 1999 and 1998, respectively. These income tax benefits
were derived from the ability to offset the taxable loss from operations against
the sale of discontinued operations.



         Net loss from continuing operations of $7,010,000 was realized in 1999
compared to a net loss from continuing operations in 1998 of $10,948,000.



         During the years ended December 31, 1999 and 1998, the Company
recognized gains on the disposal of discontinued operations of $14,349,000 and
$18,518,000, respectively. These overall gains include losses from discontinued
operations of $113,000 and $3,527,000 on revenues of $100,000 and $2,567,000,
respectively, and a tax provision of $1,802,000 and $4,330,000, respectively.
This represents taxes estimated to be due as a result of the sale of the radio
stations.



         Net income of $7,340,000 and $6,890,000 was realized in 1999 and 1998,
respectively.


 LIQUIDITY AND CAPITAL RESOURCES

         The Company's liquidity, as measured by its working capital, was
$9,863,000 at December 31, 1999, compared to a deficit of $5,507,000 at December
31, 1998. This increase in working capital was due to the sale of three radio
stations to Radio Unica, the payoff of related debt, and the receipt of
$15,000,000 upon payment of the note receivable from CRN.

         In January 1999, the Company closed on the sale of the radio broadcast
licenses and certain other assets of its radio stations KAHZ(AM), Dallas,
KIDR(AM), Phoenix, and WJDM(AM), New York to Radio Unica. The Company received
gross proceeds of $29,250,000 for the stations' assets which had a net book
value of approximately $11,304,000 at the time of the sale. The Company
recognized approximately $1,682,000 in transaction costs, including bonuses paid
to management, employees and Media Management, LLC, recorded a tax provision of
$1,102,000, and paid off all but $981,000 of its debt outstanding at the time of
closing. The following is a description of the non-operational use of the
proceeds, net of debt repayments, from the Radio Unica transaction:

         -        The Company redeemed 606,061 shares of Series B Convertible
                  Preferred Stock which were issued in June 1998 for an
                  aggregate of $2,450,000.



                                       12

<PAGE>   14



         -        The Company advanced Harmony $3,290,000 in cash payments to
                  unsecured note receivable agreements which are due on demand
                  and bear an interest rate of 14%. As of December 31, 1999,
                  approximately $3,326,000 (including interest) was outstanding.
                  These notes as well as the related interest are eliminated in
                  the Company's consolidation of Harmony for periods after April
                  1, 1999.

         -        The Company acquired all of the issued and outstanding common
                  stock of Chelsea for $1,135,000, representing 125,000 shares
                  of common stock with a value of $250,000 and the assumption of
                  approximately $885,000 of liabilities net of assets.

         -        The Company's Board of Directors authorized the repurchase of
                  up to 500,000 additional shares of its common stock. As of
                  December 31, 1999, the Company had repurchased an aggregate of
                  488,900 shares for an aggregate of approximately $918,000 at
                  prices ranging from $1.53 to $2.06.

         -        The Company purchased 51% of Curious Pictures, a commercial
                  production company, from Curious Management for $1,500,000 in
                  cash and $1,500,000 pursuant to a promissory note bearing 8%
                  interest, due May 31, 2000. Curious Pictures was a
                  majority-owned subsidiary of Harmony, which now owns 49% of
                  Curious Pictures.

         In October 1999, the Company received payment in full on its
$15,000,000 note receivable due from CRN. Management believes that with this
replenishment of working capital (of which $9,863,000 remained available at
December 31, 1999) as the foundation of its acquisition capital, the Company
should have adequate capital to meet its ongoing working capital needs and
continue its new business plan and acquisition strategy in the near term.
Anticipated uses of cash in the near term include payment of the accrued radio
station income tax liability of $1,033,000 and payment of the short-term note
payable of $1,500,000 due to Curious Management in March and May 2000,
respectively. Additionally, the Company intends to further replenish its
acquisition capital by replacing the operating line of credit in existence at
December 31, 1999. This line of credit had outstanding borrowings of $3,549,000
at December 31, 1999, which have subsequently been repaid in full pursuant to
the lender's call of the debt. Such a line will provide working capital for the
Company's existing divisions which it currently finances internally. However,
should a potential acquisition require greater capital than the Company's cash
sources, the Company may need to obtain additional financing. If the Company is
not able to obtain adequate financing, or financing on acceptable terms, it
could possibly cause a delay in the implementation of its full business plan.

         The Company began executing its business plan to acquire production
companies with the acquisition of Chelsea in March 1999, a majority interest in
Harmony in April 1999, and the acquisition of 51% of Curious Pictures in August
1999. The Company intends to further expand its television commercial production
business and holdings through acquisitions and opportunities within its present
divisions. The Company seeks to explore the consolidation of commercial
production companies in an effort to increase its commercial production director
pool. In addition, the Company intends to acquire production service companies,
such as rental, editing, design/marketing, post-production and music companies.
The Company believes that gross revenues and profits can be increased through
the acquisition of private production companies and related service companies.

         In January 2000, the Company continued the implementation of its
business plan through the incorporation of webADTV, a subsidiary of the Company
which will combine the digital archiving and retrieval service, inteleSource
with additional web enabled services, news, and information under development to
the global advertising industries and their clientele. webADTV currently seeks
to expand and brand its infrastructure to include numerous in-demand vertical
services such as research, media planning and buying, competitive monitoring,
video and print delivery and the services of agency business partners. In
addition, webADTV intends to create useful e-commerce based affiliates and
establish carriage relationships with recognized advertising industry news and
information content providers. There can be no assurance that webADTV's business
plan will


                                       13

<PAGE>   15



be completed, or if completed, that the business plan will be successful. In
February 2000, webADTV granted the right to purchase approximately 3,330,500
shares of webADTV common stock to various individuals. If all options were
exercised, the Company's ownership in webADTV would be diluted to 84%.

         In November 1999, two of the principal officers of The End, a wholly
owned subsidiary of Harmony, resigned. Under their agreements with The End,
certain of the commercial directors of The End now have the right to terminate
their agreement with The End. To date, one of The End's commercial directors has
exercised his right to terminate his agreement and ended his exclusive
representation by The End. The departure of the two principal executives and of
the one commercial director, have not, to date, had any material impact on The
End's revenues. During the Consolidated Reporting Period, The End produced
revenues of $18,487,000 and an operating loss of $601,000. No assurance can be
given that these departures will not cause further negative impact on operations
or financial performance of The End. The impact of the departure of the
foregoing individuals of The End on the Company's liquidity and profits/losses
is not currently ascertainable; however, it has reduced The End's overhead.

         Consolidated cash was $15,986,000 at December 31, 1999 and $254,000 at
December 31, 1998, an increase of $15,732,000.


         Cash used in operating activities from continuing operations during
1999 was $4,344,000 and the operating cash flows reflected are net of account
increases occurring as a result of acquisitions. Accounts receivable at December
31, 1999 increased $2,760,000 from December 31, 1998, other receivables at
December 31, 1999, decreased $307,000 and prepaid expenses at December 31, 1999
increased $326,000 during that same time period. Accounts payable at December
31, 1999, decreased $1,785,000 from December 31, 1998, accrued expenses at
December 31, 1999 increased $571,000 from December 31, 1998, and deferred income
increased $950,000 during the same period.


         During 1999, net cash obtained through investing activities was
$23,289,000 and was provided primarily by the sale of the radio stations to
Radio Unica net of proceeds utilized for the direct payment of outstanding debt.
Prior to the April 1, 1999, consolidation of Harmony's financial statements,
advances to Harmony under note receivable agreements were $2,986,000 net of
Harmony's repayments. Proceeds from the sale of radio stations totaled
$29,045,000, net of advance payments received prior to December 31, 1998.

         Cash used in financing activities amounted to $1,884,000 during 1999.
This represents the redemption of the convertible preferred stock for
$2,448,000, the repurchase of the Company's common stock of $931,000, less the
increased borrowings under Harmony's line of credit.


         Cash used in discontinued operations was $1,329,000.


         SEASONALITY AND INFLATION

         The Company does not believe that seasonality or inflation has affected
the results of its operations, and does not anticipate that inflation will have
an impact on its future operations.

         YEAR 2000 READINESS DISCLOSURE

         Before the rollover of the year from 1999 to 2000, many installed
computer systems and software products were coded to accept only two digit date
entries and were unable to accept four digit date entries to distinguish 21st
century dates from the 20th century dates. As a result, computer systems and
software used by many companies prior to the rollover date required upgrading or
replacement to comply with such "Year 2000" requirements. The failure of the
Company, its vendors, suppliers or other critical third parties with whom the
Company conducts business to achieve Year 2000 compliance on a timely basis
could materially adversely affect the Company's business, operating results, and
financial condition.

         As of March 1, 2000, the Company has not experienced and does not
anticipate any material adverse effects on its production equipment, systems or
operations as a result of Year 2000 issues. Business is continuing as usual, and
internal equipment and systems will continue to be monitored for any likely
disruptions. Further, as


                                       14

<PAGE>   16



of March 1, 2000, the Company has not experienced any operational difficulties
as a result of Year 2000 issues with its vendors, suppliers or other critical
third parties with whom the Company conducts business. However, Year 2000
compliance has many elements and potential consequences, some of which may not
be foreseeable or may be realized in future periods. Consequently, there can be
no assurance that unforeseen circumstances may not arise, or that the Company
will not in the future identify equipment or systems which are not Year 2000
compliant.

         Although the transition to the Year 2000 did not have any significant
impact on the Company or its equipment, systems and operations, the Company will
continue to monitor the impact of the Year 2000 on its equipment and systems and
those of its vendors, suppliers and other critical third parties. The
contingency plans that were developed for use in the event of Year 2000-related
failures will be maintained and generalized for ongoing business use.

         In the aggregate, the Company has spent approximately $8,000 to address
Year 2000 issues and does not anticipate spending any additional material
amounts relating to Year 2000 issues.

         NEW ACCOUNTING PRONOUNCEMENTS

         Statement of Financial Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133) issued by the FASB is
effective for financial statements with fiscal quarters of fiscal years
beginning after June 15, 2000. SFAS 133 requires companies to recognize all
derivative contracts as either assets or liabilities in the balance sheet and to
measure them at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge, the objective of which is to match the
timing of gain or loss recognition on the hedging derivative with the
recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the period of
change.

         Historically, the Company has not entered into derivative contracts
either to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard to affect its financial
statements.

         CAUTIONARY STATEMENTS

         OUR VENTURE INTO TELEVISION COMMERCIAL PRODUCTION MAY NOT PROVE
ADVANTAGEOUS OR PROFITABLE. We have changed our business focus from the
programming of children's radio to the production of television commercials and
related media. Although we believe favorable opportunities exist in the
television commercial production industry, the industry is highly fragmented and
we cannot assure you that we will be successful in completing our revised
business plan, or if completed, that the revised business plan will be
advantageous or profitable. We cannot assure you that our competitors will not
try to consolidate commercial production companies and production service
companies. We cannot assure you that consolidation, if it occurs, will be
advantageous or profitable. We do not have any understandings, commitments or
agreements with respect to any future acquisitions or that any acquisitions, if
consummated, will be advantageous or profitable.

         WE MAY LOSE MONEY ON OUR INVESTMENT IN HARMONY AND HAVE LITTLE ABILITY
TO CUT POTENTIAL LOSSES DUE TO THE ILLIQUID NATURE OF HARMONY'S STOCK. As of
March 1, 2000, we had invested approximately $9.7 million in purchasing Harmony
common stock and had advances receivable from Harmony and Curious Pictures of
approximately $3.7 million in cash. The excess of our investment in Harmony's
common stock over Harmony's net book value is primarily reflected as goodwill on
our consolidated balance sheet. Our advances to Harmony are eliminated through
financial statement consolidation for reporting purposes. Over the last year,
Harmony shut down Harmony Pictures, Inc. and sold 90% of The End (London). Ltd.,
each a former subsidiary, due to continued losses. In February 1999, Harmony's
common stock was removed from listing on the Nasdaq SmallCap Market and
currently trades on the OTC Bulletin Board. Until such time as Harmony receives
a new working line of


                                       15

<PAGE>   17



credit, we have agreed to act as Harmony's lender and fund Harmony's operations
as necessary. At this time, we receive no additional compensation for providing
such lending services to Harmony. There can be no assurance that the notes
receivable will be repaid or that our investment in Harmony will not lose value
or that we will be able to dispose of our Harmony common stock should we decide
to do so.

         WEBADTV.COM, INC. MAY BE UNABLE TO IMPLEMENT ITS BUSINESS PLAN. In
January 2000, we announced the formation of webADTV, a subsidiary which will
combine the digital archiving and retrieval service, inteleSource with
additional web enabled services, news, and information under development to the
global advertising industries and their clientele. webADTV seeks private
placement financing in order to expand and brand its infrastructure to include
numerous in-demand vertical services such as research, media planning and
buying, competitive monitoring, video and print delivery and the services of
agency business partners. As a result of such financing, our equity ownership in
webADTV may decrease. In addition, there can be no assurance that webADTV will
be successful in obtaining such financing or if obtained, such financing will be
sufficient to implement its business plan. Further, there can be no assurance
that webADTV's business plan will be completed or if completed, that the
business plan will be successful.

         WE MAY BE UNABLE TO ACQUIRE ADDITIONAL TELEVISION COMMERCIAL PRODUCTION
COMPANIES OR PRODUCTION SERVICE COMPANIES WITHOUT ADDITIONAL FINANCING. The
availability of capital may impact our ability to consummate future acquisitions
as we try to consolidate commercial production companies and production service
companies. There can be no assurance that we will obtain such financing when
required, or if available, that the amount or terms of such financing would be
acceptable or favorable to us. Additional financing could require the sale of
equity securities, which could result in significant dilution to our
shareholders.

         TELEVISION COMMERCIAL DIRECTORS AND OTHER KEY PERSONNEL COULD LEAVE US,
IMPAIRING OUR DEVELOPMENT AND PROFITABILITY. The television commercial
production business is driven by its personnel and creative talent. We recognize
that a major part of our success in this industry will depend upon the hiring
and continued engagement or employment of our directors and other key personnel.
To this end, we have entered into various director and employment agreements
which range from two to five years in length. However, there can be no assurance
that we will be able to retain such talent, nor that such directors and
employees will fulfill their obligations to us nor that they will seek renewal
at the end of their current agreements. In general, with one exception, we do
not maintain life insurance on any of our television commercial directors or
other key personnel.

         WE MAY LOSE OUR APPEAL AGAINST ABC/DISNEY. On September 30, 1998, a
jury in the Court ruled in our favor in connection with litigation for breach of
contract and misappropriation of trade secrets that we had commenced against
ABC/Disney and awarded us $20 million for breach of contract against ABC Radio,
$10 million for misappropriation of trade secret by ABC Radio and $10 million
for misappropriation of trade secret against Disney. On January 15, 1999, the
Court upheld the jury's findings that ABC Radio had breached its contract with
us and that ABC/Disney both misappropriated our trade secret information,
however, the Court disagreed with the jury's conclusion that the evidence showed
that those actions caused damages to us or that the amount of damages awarded by
the jury was supported by the evidence, and set aside the jury's verdict. The
Court further ruled that in the event that the decision is reversed or remanded
on appeal, that the defendants be granted a new trial on the issues of causation
and damages. We filed a Notice of Appeal in February 1999. On February 16, 2000,
we presented our oral argument to the 8th Circuit Court of Appeals. As of March
28 2000, the 8th Circuit Court of Appeals had not ruled on the appeal. We intend
to pursue our appeal of the judgment and to this end, certain personnel and
financial resources will be used. We cannot assure you that we will be
successful on our appeal.

         OUR STOCK IS THINLY TRADED, CREATING POSSIBLE LIQUIDITY PROBLEMS FOR
SHAREHOLDERS WHO SEEK TO SELL. Our common stock is currently listed on the
Nasdaq National Market. We cannot assure you our common stock will ever be
actively traded on such market or that, if active trading does develop, it will
be sustained.



                                       16

<PAGE>   18



         OUR STOCK PRICE MAY BE VOLATILE. The market price of our Common Stock
has been subject to significant fluctuations in response to numerous factors,
including variations in the annual or quarterly financial results, changes by
financial research analysts in their estimates of our earnings, conditions in
the economy in general or in the television commercial production industry in
particular, unfavorable publicity or changes in applicable laws and regulations
(or judicial or administrative interpretations thereof) affecting us or the
television commercial production industry. During 1999, the market price of our
Common Stock ranged from a high of $5.25 on December 8, 1999, to a low of $1.50
on May 28, 1999. We cannot assure you that purchasers of our common stock will
be able to sell such stock at or above the prices at which it was purchased.

         THE SALE OF OUR STOCK MAY CAUSE THE MARKET PRICE OF OUR STOCK TO FALL.
We had 6,388,966 shares of Common Stock outstanding as of March 1, 2000, and we
also had warrants and options outstanding to purchase additional Common Stock
totaling 3,450,616 common shares exercisable at prices ranging from $1.63 to
$13.00 per share. The sale of such shares and the sale of additional Common
Stock which may become eligible for sale in the public market from time to time
upon exercise of warrants and stock options could have the effect of depressing
the market price for our Common Stock.

         WE DEPEND ON MANAGEMENT SERVICES RENDERED BY AN ENTITY WHICH MAY FAVOR
ITS OWN INTERESTS OVER OURS. We share with Harmony certain management services
provided by MMLLC which is owned by Messrs. Dahl and Perkins, each our director
and a director of Harmony. The management services consist of administrative,
legal and accounting services. Such arrangements may present conflicts of
interest in connection with the pricing of services provided.

         OUR MANAGEMENT HAS THE ABILITY TO SIGNIFICANTLY AFFECT THE OUTCOME OF
SHAREHOLDER VOTING, INCLUDING THE POSSIBILITY OF TAKING ACTIONS CONTRARY TO THE
PREFERENCES OF SHAREHOLDERS AT LARGE. As of March 1, 2000, approximately 24.8%
of our outstanding Common Stock was beneficially owned by our current executive
officers and directors. Accordingly, such persons may be able to significantly
influence our business and affairs. This concentration of ownership may have the
effect of delaying, deferring or preventing a change in control of the Company.

         THE EXISTENCE OF OUR SEVERANCE PLAN MAY PREVENT A CHANGE IN CONTROL OR
A LIQUIDATION OF OUR ASSETS. We adopted a severance plan which provides
significant benefits to two executive officers and one non-employee director
following a change in control. Christopher T. Dahl, our Chief Executive Officer,
President and Chairman of the Board, James G. Gilbertson, our Chief Operating
Officer, and Richard W. Perkins, one of our directors, are eligible to receive
lump sum severance payments under the plan. Based upon 1999 annual gross base
salaries, the plan participants would receive an aggregate of approximately $2.0
million following a change in control The plan also provides for accelerated
vesting of outstanding options and other benefits following a change in control.
The existence of our severance plan could deter or delay a takeover or other
change in control.

         OUR ABILITY TO ISSUE PREFERRED STOCK MAY PREVENT A CHANGE OF CONTROL.
The Board of Directors, without any action by our shareholders, has the
authority to issue the remaining undesignated and unissued authorized shares and
to fix the powers, preferences, rights and limitations of such shares or any
class or series thereof, without shareholder approval. Persons acquiring such
shares could have preferential rights with respect to voting, liquidation,
dissolution or dividends over existing shareholders. We are subject to certain
provisions of the Minnesota Business Corporation Act which limit the voting
rights of shares acquired in "control share acquisitions" and restrict certain
"business combinations." Such provisions, as well as the ability to issue
undesignated shares, could have the effect of deterring or delaying a takeover
or other change in control, deny shareholders the receipt of a premium on their
Common Stock and depress the market price of our Common Stock.

         OUR ABILITY TO DILUTE UNFRIENDLY POTENTIAL ACQUIRORS MAY PREVENT A
CHANGE IN CONTROL. On February 14, 1998, the Board of Directors declared a
dividend of one common share purchase right (a "Right") for each share of our
Common Stock outstanding as of the close of business on February 27, 1998. Each
Right will entitle the registered holder to purchase from us, after the
Distribution Date (as defined in the Rights Agreement),


                                       17

<PAGE>   19



common shares at an initial price of $18.00. The Rights have certain
anti-takeover effects. The Rights will cause substantial dilution to a person or
group that attempts to acquire us without conditioning the offer on a
substantial number of Rights being acquired or redeemed. The Rights should not
interfere with any merger or other business combination approved by the Board of
Directors since the Board of Directors may, at its option and in its sole and
absolute discretion, redeem the Rights as provided in the Rights Agreement.

         YEAR 2000 ISSUES MAY HAVE AN ADVERSE IMPACT ON OUR BUSINESS. As of
March 1, 2000, we have not experienced and do not anticipate any material
adverse effects on our equipment, systems and operations as a result of Year
2000 issues. However, our failure, or the failure of our vendors, suppliers or
other critical third parties with whom we conduct business to achieve Year 2000
compliance on a timely basis could materially adversely affect our business,
operating results and financial condition.



         ITEM     7        FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                           INDEX TO FINANCIAL STATEMENTS

                                                                                                               PAGE
<S>                                                                                                          <C>
         iNTELEFILM CORPORATION
         Independent Auditors' Report............................................................................19
         Consolidated Financial Statements
                  Balance Sheets.................................................................................20
                  Statements of Operations.......................................................................21
                  Statement of Shareholders' Equity..............................................................22
                  Statements of Cash Flows....................................................................23-24
         Notes to Consolidated Financial Statements...........................................................25-51

</TABLE>









                                       18





<PAGE>   20















                          INDEPENDENT AUDITORS' REPORT




Board of Directors
iNTELEFILM Corporation

We have audited the accompanying consolidated balance sheets of iNTELEFILM
Corporation as of December 31, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of iNTELEFILM
Corporation at December 31, 1999 and 1998, and the consolidated results of its
operations and cash flows for the years then ended, in conformity with generally
accepted accounting principles.





BDO SEIDMAN, LLP

Milwaukee, Wisconsin
February 8, 2000, except Note 8 and 10 dated March 17, 2000



                                      -19-
<PAGE>   21

                             INTELEFILM CORPORATION

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                DECEMBER 31,
                                                                                    -----------------------------------
               ASSETS                                                                     1999                1998
                                                                                    ---------------     ---------------
<S>                                                                             <C>                    <C>
Current assets:
    Cash and cash equivalents                                                       $    15,986,385     $       253,905
    Accounts receivable, net of allowance for doubtful
       accounts of  $339,216 and $39,000, respectively                                    8,626,251             -
    Accounts receivable - affiliates (Note 13)                                              373,239             280,438
    Radio station assets available for sale (Note 2)                                        -                11,391,402
    Other accounts receivable                                                               642,076             331,527
    Prepaid expenses                                                                      1,563,122             279,816
                                                                                    ---------------     ---------------
               Total current assets                                                      27,191,073          12,537,088

Note receivable (Note 2)                                                                    -                15,000,000
Investment in and notes receivable from Harmony (Note 4)                                    -                 5,421,322
Property and equipment, net (Note 5)                                                      2,957,455             120,385
Goodwill, net (Note 3 and 6)                                                              6,730,446             -
Other assets                                                                                738,878             -
Deferred debt issue costs (Note 9)                                                          -                   742,737
                                                                                    ---------------     ---------------
               Total assets                                                         $    37,617,852     $    33,821,532
                                                                                    ===============     ===============

               LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Accounts payable                                                                $     3,835,891     $     2,205,212
    Accounts payable - affiliates (Note 13)                                                 175,000             363,727
    Accrued income taxes                                                                  1,032,520             328,000
    Deferred revenue (Note 2)                                                             2,392,785           2,675,556
    Other accrued expenses                                                                4,650,835           1,371,142
    Line of credit (Note 8)                                                               3,548,911             434,974
    Short-term debt (Note 3 and 7)                                                        1,500,000             -
    Long-term debt - current portion (Note 9)                                               191,933          10,665,792
                                                                                    ---------------     ---------------
               Total current liabilities                                                 17,327,875          18,044,403

Long-term debt, less current maturities (Note 9)                                            679,885             848,111
                                                                                    ---------------     ---------------
               Total liabilities                                                         18,007,760          18,892,514
                                                                                    ---------------     ---------------

Commitments and Contingencies (Note 10)                                                     -                   -

Redeemable convertible preferred stock (Note 11)                                            -                 2,448,486

Minority interest (Note 3)                                                                  139,447             -

Shareholders' equity (Note 12):
    Common stock                                                                            125,772             129,015
    Additional paid-in capital                                                           45,625,300          45,773,584
    Accumulated deficit                                                               (  25,952,927)      (  33,292,504)
    Stock subscriptions receivable (Note 13)                                          (     327,500)      (     129,563)
                                                                                    ---------------     ---------------
               Total shareholders' equity                                                19,470,645          12,480,532
                                                                                    ---------------     ---------------

               Total liabilities and shareholders' equity                           $    37,617,852     $    33,821,532
                                                                                    ===============     ===============
</TABLE>




        See accompanying notes to the consolidated financial statements.



                                      -20-
<PAGE>   22


                             INTELEFILM CORPORATION

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                                 DECEMBER 31,
                                                                                    -----------------------------------
                                                                                          1999                1998
                                                                                    ---------------     ---------------
<S>                                                                             <C>                    <C>
Production contract revenues                                                        $    67,242,374     $       -
Costs and expenses:
    Cost of production                                                                   56,488,737             -
    Selling, general and administrative
       (exclusive of all items shown below)                                               9,722,084             -
    Corporate                                                                             2,123,734           4,714,011
    Corporate expenses paid to affiliated
       management company (Note 13)                                                       1,549,372             900,000
    Stock option compensation                                                             2,121,024             -
    Depreciation and amortization                                                         1,541,727               7,655
                                                                                    ---------------     ---------------

Loss from continuing operations                                                          (6,304,304)         (5,621,666)

Gain on sale of subsidiary stock (Note 2)                                                   119,508             -
Equity loss in Harmony (Note 4)                                                          (1,930,942)         (4,058,361)
Interest expense                                                                         (1,096,660)         (5,364,117)
Interest expense - related parties (Note 3 and 13)                                          (51,945)           (120,713)
Interest income                                                                           1,554,687             299,571
Other income (expense) - net                                                                  -                 (82,883)
                                                                                    ---------------     ---------------
Loss from continuing operations before taxes                                             (7,709,656)        (14,948,169)

Income tax benefit                                                                          700,000           4,000,000
                                                                                    ---------------     ---------------
Net loss from continuing operations                                                      (7,009,656)        (10,948,169)

Gain on the disposal of discontinued operations,
    net of income taxes of $1,801,892 (1999) and
    $4,330,237 (1998) (Note 2)                                                           14,349,233          18,517,964
                                                                                    ----------------    ---------------

Net income                                                                                7,339,577           7,569,795

Accretion of preferred stock                                                                -                  (680,236)
                                                                                    ---------------     ---------------
Net income available to common shareholders                                         $     7,339,577     $     6,889,559
                                                                                    ===============     ===============
Basic and diluted net loss per share from continuing operations                     $         (1.11)    $         (1.64)
                                                                                    ===============     ===============
Basic and diluted net income per share                                              $          1.16     $          1.03
                                                                                    ===============     ===============
Weighted average number of shares outstanding                                             6,343,000           6,676,000
                                                                                    ===============     ===============
</TABLE>




        See accompanying notes to the consolidated financial statements.


                                      -21-
<PAGE>   23


                             INTELEFILM CORPORATION

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                     YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>

                                                                       COMMON STOCK             ADDITIONAL           STOCK
                                                                 ------------------------        PAID-IN          SUBSCRIPTIONS
                                                                  SHARES          AMOUNT         CAPITAL           RECEIVABLE
                                                                 ----------     ---------      -----------       --------------
<S>                                                         <C>                 <C>           <C>                <C>
         Balance at December 31, 1997                            6,649,865        132,997       46,387,536          (529,563)

Issuance of common stock in connection with note payable            69,277          1,386          225,144              -
Issuance of common stock upon exercise of options                    2,600             52            5,269              -
Repurchase of common stock                                        (271,000)        (5,420)        (882,754)             -
Accretion of redeemable convertible preferred stock                   -              -            (680,236)             -
Issuance of warrants in connection with debt financing                -              -             622,625              -
Issuance of warrants in connection with preferred stock               -              -              96,000              -
Write-off of stock subscription receivable                            -              -                -              400,000

Net income                                                            -              -                -                 -
                                                                 ---------      ---------     ------------        ----------
         Balance at December 31, 1998                            6,450,742      $ 129,015     $ 45,773,584        $ (129,563)

Issuance of common stock regarding purchase of Chelsea             125,000          2,500          247,500              -
Repurchase of common stock                                        (488,900)        (9,778)        (907,836)             -
Issuance of common stock upon exercise of options                  205,316          4,106          474,602          (222,500)
Director options compensation                                         -              -              50,400              -
Receipt of stock subscription                                         -              -                -               24,563
Other                                                               (3,540)           (71)         (12,950)             -

Net income                                                            -              -                -                 -
                                                                 ---------      ---------     ------------        ----------
         Balance at December  31, 1999                           6,288,618      $ 125,772     $ 45,625,300        $ (327,500)
                                                                 =========      =========     ============        ==========





<CAPTION>
                                                                                               TOTAL
                                                                        ACCUMULATED         SHAREHOLDERS'
                                                                          DEFICIT              EQUITY
                                                                       -------------       ---------------
<S>                                                           <C>                     <C>
         Balance at December 31, 1997                                (40,862,299)             5,128,671

Issuance of common stock in connection with note payable                    -                   226,530
Issuance of common stock upon exercise of options                           -                     5,321
Repurchase of common stock                                                  -                  (888,174)
Accretion of redeemable convertible preferred stock                         -                  (680,236)
Issuance of warrants in connection with debt financing                      -                   622,625
Issuance of warrants in connection with preferred stock                     -                    96,000
Write-off of stock subscription receivable                                  -                   400,000

Net income                                                             7,569,795              7,569,795
                                                                  --------------         --------------
         Balance at December 31, 1998                             $  (33,292,504)        $   12,480,532

Issuance of common stock regarding purchase of Chelsea                      -                   250,000
Repurchase of common stock                                                  -                  (917,614)
Issuance of common stock upon exercise of options                           -                   256,208
Director options compensation                                               -                    50,400
Receipt of stock subscription                                               -                    24,563
Other                                                                       -                   (13,021)

Net income                                                             7,339,577              7,339,577
                                                                  --------------         --------------
         Balance at December  31, 1999                            $  (25,952,927)        $   19,470,645
                                                                  ==============         ==============

</TABLE>


         See accompanying notes to the consolidated financial statements.


                                      -22-

<PAGE>   24


                             INTELEFILM CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                             DECEMBER 31,
                                                                                    -------------------------------
                                                                                         1999               1998
                                                                                    -------------      ------------
<S>                                                                               <C>              <C>
OPERATING ACTIVITIES:
    Net income                                                                      $ 7,339,577       $   7,569,795
    Adjustments to reconcile net income to net
       cash used in operating activities net of disposition and
       discontinued operations:
              Gain on disposal of discontinued operations, net of taxes             (14,349,233)        (18,517,964)
              Provision for doubtful accounts                                           191,010            (433,000)
              Depreciation and amortization                                           1,541,727               7,655
              Gain on sale of subsidiary stock                                         (119,508)               -
              Net barter activity                                                          -                  2,767
              Amortization and write-off of deferred debt issue costs                   742,737           1,859,389
              Write-off of stock subscription receivable                                   -                400,000
              Equity loss in Harmony                                                  1,930,942           4,058,361
              Stock option compensation expense                                       2,121,024                -
              Non cash income tax benefit                                              (700,000)         (4,000,000)
              Issuance of common stock and use of sale proceeds
                 for payment of interest                                                   -                392,093
              Decrease (increase) in (excluding subsidiary
                 acquisitions and sales):
                 Accounts receivable                                                 (2,759,791)            309,688
                 Other receivables                                                      306,817            (674,518)
                 Prepaid expenses                                                      (325,545)           (183,954)
              Increase (decrease) in (excluding subsidiary acquisitions and
                 sales):
                 Accounts payable                                                    (1,785,306)            643,109
                 Deferred income                                                        950,000                -
                 Other accrued expenses                                                 571,468             430,187
                                                                                     ----------        ------------
                     Net cash used in operating activities                           (4,344,081)         (8,136,392)
                                                                                     ----------        ------------

INVESTING ACTIVITIES:
    Purchase of property and equipment                                               (1,236,515)           (246,097)
    Investment in Curious Pictures and Chelsea                                       (1,750,382)               -
    Investment in and notes receivable from Harmony                                  (2,986,152)         (3,201,250)
    Cash acquired net of cash relinquished in acquisitions
       and sales                                                                        411,983                -
    Proceeds from sale of radio stations                                             14,045,180           8,656,990
    Proceeds from note receivable                                                    15,000,000                -
    Other capital expenses                                                             (195,309)               -
                                                                                    -----------       -------------
                     Net cash provided by investing activities                       23,288,805           5,209,643
                                                                                    -----------       -------------

FINANCING ACTIVITIES:
    Increase (decrease) in line of credit                                             1,356,776             (18,864)
    Repayment of debt                                                                  (142,085)         (1,454,390)
    Proceeds from issuance of debt                                                         -              3,627,345
    Proceeds from issuance of common stock                                              280,771               5,321
    Payment of deferred debt issue costs                                                   -                (32,792)
    Issuance (redemption) of redeemable convertible
       preferred stock                                                               (2,448,486)          1,768,250
    Repurchase of common stock                                                         (930,635)           (524,447)
                                                                                    -----------       -------------
                     Net cash provided (used in) by
                        financing activities                                         (1,883,659)          3,370,423
                                                                                    -----------       -------------

Cash used in discontinued operations                                                 (1,328,585)           (735,027)
Increase (decrease) in cash and cash equivalents                                     15,732,480            (291,353)
Cash and cash equivalents at beginning of year                                          253,905             545,258
                                                                                    -----------       -------------

Cash and cash equivalents at end of year                                            $15,986,385       $     253,905
                                                                                    ===========       =============
</TABLE>

         See accompanying notes to the consolidated financial statements.



                                      -23-
<PAGE>   25


                             INTELEFILM CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (CONTINUED)

<TABLE>
<CAPTION>

                                                                                             DECEMBER 31,
                                                                                -----------------------------------
                                                                                      1999               1998
                                                                                ---------------    ----------------
<S>                                                                        <C>                    <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    Cash paid during the year for income taxes                                  $       421,104    $        -
                                                                                ===============    ================

    Cash paid during the year for interest                                      $       386,274    $      3,414,837
                                                                                ===============    ================
</TABLE>

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
    During the year ended December 31, 1999:

        The Company utilized radio station sale proceeds totaling $10,934,974 to
        pay debt collateralized by the related assets.

        The Company acquired all the issued and outstanding common stock of
        Chelsea (Note 3) through the assumption of $885,441 in non-cash
        liabilities net of non-cash assets. Additional consideration included
        the issuance of 125,000 shares of the Company's common stock valued at
        $250,000.

        Consideration the Company paid to Curious Management for the acquisition
        of 51% of the stock of Curious Pictures (Note 3), included a $1,500,000
        note receivable due May 31, 2000.

        The Company issued 125,000 shares of common stock and received a stock
        subscription note receivable for $222,500.

    During the year ended December 31, 1998:

        The Company recognized revenues of $115,983 and expenses of $118,750
        through barter activity.

        The Company utilized radio station sale proceeds totaling $18,116,023 to
        pay principal and interest due to lenders aggregating $17,916,023 and to
        pay debt issue costs of $200,000. Additionally, a note receivable of
        $15,000,000 was received in connection with the sale transactions.

        The Company paid debt issuance costs totaling $400,000 by issuing
        additional long-term debt.

        The Company issued 69,277 shares of common stock valued at $226,530 for
        the payment of installments due for the note payable outstanding to the
        seller of WAUR-AM.

        The Company issued warrants to purchase 662,500 shares of common stock
        and cancelled warrants to purchase 150,000 shares of common stock with a
        net value totaling $718,625 in connection with obtaining short and
        long-term debt, and preferred stock.

        At December 31, 1998, an account payable-affiliate of $363,727 remained
        due related to the Company's purchase of 271,000 shares of its common
        stock for consideration totaling $888,174.

          See accompanying notes to the consolidated financial statements.


                                      -24-
<PAGE>   26


                             INTELEFILM CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1:           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                  Description of Business:

                    iNTELEFILM Corporation (f/k/a Children's Broadcasting
                    Corporation) (the "Company") was incorporated under the
                    Minnesota Business Corporation Act on February 7, 1990.
                    Through a series of transactions, the Company believes it
                    has become the largest producer of television commercials in
                    the world. During the period from July 1997 through December
                    1999, the Company has utilized its resources to purchase a
                    55.2% ownership interest in Harmony Holdings, Inc.
                    ("Harmony"), a corporation which produces television
                    commercials, music videos and related media. Further, in
                    April 1999, the Company became Harmony's majority
                    shareholder and began consolidating Harmony rather than
                    accounting for Harmony under the equity method.
                    Additionally, in August 1999, the Company acquired a
                    majority ownership interest in Curious Pictures Corporation
                    ("Curious Pictures") by buying an existing option and share
                    transfer agreement from four principle executives ("Curious
                    Management") of Curious Pictures. As a result, Curious
                    Pictures, a former majority-owned subsidiary of Harmony,
                    became a direct subsidiary of the Company. The Company
                    typically directs its services towards large advertisers and
                    advertising agencies located in the major markets of New
                    York, Los Angeles, Chicago, Detroit, Dallas, San Francisco
                    and Minneapolis. In March 1999 the Company acquired Chelsea
                    Pictures, Inc. ("Chelsea"), which has offices in New York
                    and Hollywood. Chelsea produces television commercials,
                    independent films and related media.

                    The Company intends to further expand its television
                    commercial production business and holdings through
                    acquisitions and opportunities within its present divisions.
                    The Company seeks to explore the consolidation of commercial
                    production companies in an effort to increase its commercial
                    production director pool. In addition, the Company intends
                    to acquire production service companies, such as rental,
                    editing, design/marketing, post-production and music
                    companies. The Company believes that gross revenues and
                    profits can be increased through the acquisition of private
                    production companies and related service companies.

                    In 1999 and 1998, the Company also incorporated the
                    following new subsidiaries: Buffalo Rome Films, Inc. and
                    Populuxe Pictures, Inc. ("Populuxe"). Buffalo Rome Films,
                    Inc. seeks out independent film opportunities and Populuxe
                    produces television commercials with two directors and an
                    executive staff in New York.

                    In December 1999, the Company, in development with AT&T and
                    Excalibur Technologies Corporation ("Excalibur"), announced
                    the creation of inteleSource, a digital video archiving and
                    retrieval service designed specifically for global
                    advertising agencies, the Company's core customer. AT&T and
                    Excalibur will provide dynamic hosting, connectivity and
                    video content management technologies for the data-based
                    service and the Company will provide its relationships with
                    advertising agencies and its expertise in commercial
                    production. inteleSource is an Internet based digitized
                    video storage and retrieval service designed exclusively for
                    use by global advertising agencies and their clients.



                                      -25-
<PAGE>   27


                             INTELEFILM CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1:           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

                  Description of Business (Continued):

                      In January 2000, the Company incorporated webADTV.com,
                      Inc. ("webADTV"). webADTV will provide a complete web
                      based source of communications, commerce, solutions and
                      services to the advertising agencies and other companies
                      in the advertising campaign production industry.
                      Initially, the Company's inteleSource will be the core of
                      webADTV. With inteleSource, webADTV will build a full
                      business to business portal for the advertising agency
                      industry which will include news and information from
                      affiliate content providers, e-commerce business generated
                      from a wide range of affiliated design and production
                      sources and the subscription based inteleSource archiving
                      and retrieval service. The Company also anticipates that
                      the portal will generate revenues through advertising and
                      pay per view content, specifically created for advertising
                      agencies.

                      In addition, webADTV intends to create useful, e-commerce
                      based affiliates and establish carriage relationships with
                      recognized advertising industry news and information
                      content providers.

                      As Children's Broadcasting Corporation, the Company
                      broadcast 24-hour children's radio programming, known as
                      Aahs World RadioSM*, via satellite to markets representing
                      approximately 40% of the U.S. population. Pursuant to its
                      former growth strategy, the Company acquired AM radio
                      broadcast licenses ("Radio Stations") in 14 U.S. markets.
                      On November 3, 1997, the Company announced that it would
                      terminate its network affiliation agreements and cease
                      distributing its full-time Aahs World Radio programming
                      format effective January 30, 1998. In 1998, the Company
                      focused on the process of selling its previously acquired
                      radio stations. The last of its radio stations were sold
                      on January 14, 1999.

                  Consolidated Financial Statements:

                      The financial statements include the accounts of the
                      Company and all majority-owned subsidiaries. All
                      references to the Company in these financial statements
                      relate to the consolidated entity. All significant
                      intercompany accounts and transactions are eliminated in
                      consolidation.

                  Cash and Cash Equivalents:

                      The Company considers all highly liquid investments with a
                      maturity of three months or less when purchased to be cash
                      equivalents.

                  Property, Equipment and Intangible Assets:

                      Property, equipment and intangible assets are stated at
                      cost. Depreciation and amortization are computed using the
                      straight-line method and are charged to expense based upon
                      the estimated useful lives of the assets. Expenditures for
                      additions and improvements are capitalized, while repairs
                      and maintenance are expensed as incurred.

                                      -26-
<PAGE>   28


                             INTELEFILM CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1:           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

                  Long Lived Assets:

                      The Company accounts for long-lived assets in accordance
                      with SFAS No. 121, "Accounting for the Impairment of
                      Long-lived Assets and for Long-lived Assets to be Disposed
                      of". The standard establishes guidelines regarding when
                      impairment losses on long-lived assets, which include
                      property and equipment, certain identifiable intangible
                      assets and goodwill, should be recognized and how
                      impairment losses should be measured. The Company
                      evaluates the existence of long-lived asset impairment on
                      the basis of whether the asset net book value is fully
                      recoverable from projected, undiscounted net cash flows of
                      the related business unit. This standard did not have an
                      impact on the Company's financial position or results of
                      operations.

                  Investment in Harmony:

                      Prior to the Company becoming the majority shareholder of
                      Harmony, the investment in Harmony (Note 4) was accounted
                      for under the equity method of accounting. The equity
                      method of accounting is used to account for investments
                      made when the Company has the ability to exercise
                      significant influence over the operating and financial
                      policies of an investee, generally involving a 20% to 50%
                      interest in those investees.

                      Under the equity method, original investments are recorded
                      at cost, increased for subsequent investments in and
                      advances to the investee, and adjusted for the Company's
                      share of undistributed earnings and losses of the
                      investee. Additionally, the excess of the Company's
                      prorata share of the investee's net assets is amortized
                      over the estimated useful life of the underlying assets.

                  Goodwill:

                      Goodwill primarily represents the excess of the Company's
                      purchase price, including additional payments over the
                      fair market value of Harmony, Chelsea and Curious Pictures
                      net assets at the date of acquisition. Goodwill has been
                      amortized on a straight-line basis over seven years for
                      all periods.

                  Revenues:

                      The Company produces television commercials and music
                      videos under firm bid, cost plus or cost plus fixed fee
                      contracts, which are typically less than one month in
                      duration. At December 31, 1999 and 1998, the Company had
                      no long-term contracts. Contract revenues are recognized
                      using the percentage of completion method. The percentage
                      of contract revenues recognized is computed at that
                      percentage of estimated total revenues that incurred costs
                      to date bears to total estimated costs, after giving
                      effect to the most recent estimate of costs to complete.
                      Revisions in costs and revenue estimates are reflected in
                      the period in which the facts which require the revision
                      become known. Deferred income represents amounts billed in
                      excess of revenues earned.





                                      -27-
<PAGE>   29


                             INTELEFILM CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1:           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

                  Net Income (Loss) Per Share:


                      In February 1997, The Financial Accounting Standards Board
                      ("FASB") issued SFAS No. 128, Earnings Per Share ("EPS").
                      SFAS No. 128 requires dual presentation of basic EPS and
                      diluted EPS on the face of all income statements issued
                      after December 15, 1997 for all entities with complex
                      capital structures. Basic EPS is computed as net income
                      available to common shareholders divided by the weighted
                      average number of common shares outstanding for the
                      period. Diluted EPS reflects the potential dilution that
                      could occur from common shares issuable through stock
                      options and warrants. Outstanding options and warrants to
                      purchase 3,577,718 and 3,197,317 shares of the Company's
                      common stock at December 31, 1999 and 1998, respectively,
                      were not included in the diluted EPS calculation as they
                      were antidilutive. For 1999 and 1998 the Company's basic
                      and diluted EPS were the same as the effect of all
                      outstanding options and warrants were antidilutive.
                      Additionally, the Company's preferred stock outstanding at
                      December 31, 1998 was not included in the computation of
                      diluted EPS as its effect would be antidilutive.


                  Income Taxes:

                      The Company accounts for income taxes using the liability
                      method. Deferred income taxes are provided for temporary
                      differences between financial reporting and tax basis.

                  Stock Based Compensation:

                      Statement of Financial Accounting Standards No. 123,
                      "Accounting for Stock-Based Compensation" (SFAS 123),
                      establishes a fair value method of accounting for
                      stock-based compensation plans and for transactions in
                      which a company acquires goods or services from
                      non-employees in exchange for equity instruments. SFAS 123
                      also gives the option to account for stock-based employee
                      compensation in accordance with Accounting Principles
                      Board Opinion No. 25 (APB 25), "Accounting for Stock
                      issued to Employees," or SFAS 123. The Company has chosen
                      to account for stock-based compensation utilizing the
                      intrinsic value method prescribed in APB 25. Accordingly,
                      compensation cost for stock options is measured as the
                      excess, if any, of the fair market price of the Company's
                      stock at the measurement date over the amount an employee
                      must pay to acquire stock.

                      If SFAS 123 is not adopted related to stock-based employee
                      compensation, SFAS 123 for footnote purposes requires that
                      companies measure the cost of stock-based employee
                      compensation at the grant date based on the value of the
                      award and recognize this cost over the service period. The
                      value of the stock-based award is determined using a
                      pricing model whereby compensation cost is the excess of
                      the fair value of the stock as determined by the model at
                      grant date or other measurement date over the amount an
                      employee must pay to acquire the stock.


                                      -28-
<PAGE>   30


                             INTELEFILM CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1:           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

                  Concentration of Credit Risk:

                     Financial instruments which potentially subject the Company
                     to a concentration of credit risk principally consist of
                     cash, cash equivalents and trade receivables. The Company
                     invests available cash in money market securities of high
                     credit quality financial institutions. The Company's
                     accounts receivable were from customers primarily in the
                     advertising industry. To reduce credit risk, the Company
                     performs periodic credit evaluations of its customers, but
                     does not generally require advance payments or collateral.
                     Credit losses to customers operating in the advertising
                     industry have not been material.

                  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 amounts reported in the financial statements and
                     accompanying notes. Actual results could differ from those
                     estimates.

                  Comprehensive Income:

                     The Company adopted Statement of Financial Accounting
                     Standards No. 130, "Reporting Comprehensive Income" as of
                     January 1, 1998. The Company does not have any components
                     of comprehensive income.

                  Segment Information:

                     The Company adopted Statement of Financial Accounting
                     Standards No. 131, "Disclosure About Segments of an
                     Enterprise and Related Information" as of January 1, 1998.
                     Following the provisions of this Statement, the Company is
                     reporting segment assets, liabilities, sales and operating
                     income in the same format reviewed by the Company's
                     management. In 1999 and 1998, the Company transitioned into
                     the commercial production and related media business.

                  New Accounting Pronouncements:

                      Statement of Financial Standards No. 133, "Accounting for
                      Derivative Instruments and Hedging Activities" (SFAS No.
                      133) issued by the FASB is effective for financial
                      statements with fiscal quarters of fiscal years beginning
                      after June 15, 2000. SFAS 133 requires companies to
                      recognize all derivative contracts as either assets or
                      liabilities in the balance sheet and to measure them at
                      fair value. If certain conditions are met, a derivative
                      may be specifically designated as a hedge, the objective
                      of which is to match the timing of gain or loss
                      recognition on the hedging derivative with the recognition
                      of (i) the changes in the fair value of the hedged asset
                      or liability that are attributable to the hedged risk or
                      (ii) the earnings effect of the hedged forecasted
                      transaction. For a derivative not designated as a hedging
                      instrument, the gain or loss is recognized in income in
                      the period of change.


                                      -29-
<PAGE>   31


                             INTELEFILM CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1:           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

                  New Accounting Pronouncements:

                      Historically, the Company has not entered into derivative
                      contracts either to hedge existing risks or for
                      speculative purposes. Accordingly, the Company does not
                      expect adoption of the new standard to affect its
                      financial statements.

                  Reclassifications:

                      Certain amounts in the 1998 financial statements have been
                      reclassified to conform with the 1999 presentation. These
                      reclassifications have no effect on the accumulated
                      deficit or net loss previously reported.


                      In accordance with Accounting Principles Board Opinion 30,
                      "Reporting the Results of Operations - Discontinued Events
                      and Extraordinary Items" (ABP 30), certain
                      reclassifications have been made to the previously
                      reported 1999 financial statements to reflect the
                      disposition of the radio stations as a discontinued
                      operations.


NOTE 2:           ASSET AND SUBSIDIARY STOCK SALE TRANSACTIONS

                  Radio Station Sale Transaction:


                     On January 6, 1998, the Company's shareholders approved the
                     sale of all of the Company's owned and operated radio
                     stations which represents the measurement date for the
                     Company's exit from the children's entertainment and radio
                     broadcasting industries. Accordingly, the operations and
                     disposition of the radio stations has been classified as
                     discontinued operations in the accompanying financial
                     statements. During the years ended December 31, 1999 and
                     1998, the Company recognized gains on the disposal of
                     discontinued operations of $14,349,233 and $18,517,964,
                     respectively. These overall gains include losses from
                     discontinued operations of $113,183 and $3,526,703 on
                     revenues of $100,279 and $2,566,647, respectively, and a
                     tax provision of $1,802,000 and $4,330,000, respectively.
                     The basic and diluted income per share related to the gain
                     from the disposal of discontinued operations was $2.26 and
                     $2.77 in 1999 and 1998, respectively:

                     The following table summarized the balance sheets of such
                     radio stations to be sold as of December 31:

<TABLE>
<CAPTION>
                                                                     1999                 1998
                                                                 ------------         ------------
                           <S>                                   <C>                  <C>
                           Current assets                        $       -            $   386,211
                           Assets held for sale                          -             11,391,402

                           Accounts payable                              -                462,800
                           Accrued income taxes                          -                328,000
                           Other accrued liabilities                     -                 40,971
                           Deferred revenue                              -              2,675,556
                           Notes payable                                 -                979,613
</TABLE>

                     As of January 14, 1999, all of the stations have been sold
                     pursuant to the following transactions:


                           1090 Radio Station Sale Transaction:

                              On September 8, 1998, the Company closed on the
                              sale of the radio broadcast license and certain
                              other assets of its radio station WCAR(AM),
                              Livonia, MI to 1090 Investments, LLC. ("1090").
                              The Company received gross proceeds of $2,000,000
                              in cash and incurred transaction expenses totaling
                              $138,051. The station assets had a net book value
                              totaling $1,431,609 and the Company realized a
                              gain on sale of $430,340.

                           Salem Radio Station Sale Transaction:

                              On October 30, 1998, the Company closed on the
                              sale of the radio broadcast licenses and certain
                              other assets of its radio stations KTEK(AM),
                              Alvin,TX and KYCR(AM), Golden Valley, MN to Salem
                              Communications Corporation ("Salem"). The Company
                              received gross proceeds of $2,700,000 in cash and
                              incurred transaction expenses totaling $229,135.
                              The station assets had a net book value totaling
                              $863,006 and the Company realized a gain on sale
                              of $1,607,859.

                           CRN Radio Station Sale Transaction:

                              On October 30, 1998, the Company closed on the
                              sale of the radio broadcast licenses and certain
                              other assets of its radio stations KCNW(AM),
                              Fairway, KS, KKYD(AM), Denver, CO, KPLS(AM)
                              Orange, CA, WAUR(AM), Sandwich, IL, WPWA(AM),
                              Chester, PA, WWTC(AM) Minneapolis, MN, and
                              WZER(AM), Jackson, WI, to Catholic Radio Network
                              LLC ("CRN"). The Company received gross proceeds
                              of $37,000,000 ($22,000,000 in cash and
                              $15,000,000 pursuant to a note receivable
                              agreement) and incurred transaction expenses
                              totaling $2,235,357. The station assets had a net
                              book value totaling $10,427,936 and the Company
                              realized a gain on sale of $24,336,707.


                                      -30-
<PAGE>   32


                             INTELEFILM CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2:           ASSET AND SUBSIDIARY STOCK SALE TRANSACTIONS (CONTINUED)

                  Radio Station Sale Transaction (Continued):

                           CRN Radio Station Sale Transaction:

                              The note receivable bore interest at 10% payable
                              monthly, was secured by the sold station assets
                              and virtually all of CRN's other property, whether
                              owned prior to or subsequent to the sale
                              transaction. The note was due in full on April 30,
                              2000. In October 1999, the Company received
                              payment in full on this note.

                           Unica Radio Station Sale Transaction:

                              On October 26, 1998, the Company entered into an
                              agreement to sell the radio broadcast licenses and
                              certain other assets of its radio stations
                              KAHZ(AM), Fort Worth, TX, KIDR(AM), Phoenix, AZ,
                              and WJDM(AM), Elizabeth, NJ, to Radio Unica Corp.
                              ("Unica"). The stations assets had a net book
                              value totaling $11,391,402 at December 31, 1998
                              and are included on the accompanying 1998 balance
                              sheet as radio station assets held for sale. Under
                              the agreement, the Company received gross proceeds
                              of $29,250,000 in cash and incurred transaction
                              expenses totaling $1,682,180. At the time of the
                              sale, the asset net book value totaled $11,303,512
                              and the Company realized a gain on the sale of
                              $16,264,308.

                              The agreement provided for the stations to be
                              operated by Unica to the closing date under a
                              Local Programming and Marketing Agreement ("LMA").
                              Unica prepaid a total of $2,500,000 of the LMA
                              fees which were earned by the Company based on a
                              monthly LMA fee of $200,000. Unica also prepaid
                              $500,000 of the purchase price. The prepaid
                              purchase price and any unused portion of the
                              prepaid LMA fee was credited to the sales price at
                              closing. At December 31, 1998, deferred revenue
                              aggregating $2,675,556 was included on the
                              accompanying balance sheet related to these
                              prepayments. On January 14, 1999, the transaction
                              closed.


                  The gain on the sale of the Company's radio stations
                  aggregated $14,462,416 and $22,044,667 net of income taxes in
                  1999 and 1998, respectively.


                  Included in the transaction costs for the transactions closed
                  in 1998 are bonuses paid to Company management, employees and
                  the Management Company (Note 13) totaling $1,930,000. An
                  additional bonus of approximately $825,000 was paid in 1999 on
                  the close of the Unica radio station sale transaction. This
                  additional bonus was reflected as a transaction expense for
                  the Unica radio station sale in 1999. The bonuses were
                  approved by the Company's board of directors and were
                  contingent upon completion of the sale transactions.

                  The End (London) Sale Transaction:

                     Effective July 1, 1999, Harmony sold 90% of the issued and
                     outstanding shares of capital stock of one of its
                     consolidated subsidiaries, The End (London), LTD ("The End
                     (London)"), to a principal executive (the "Purchaser") of
                     The End (London) for nominal consideration. The End
                     (London) is a commercial production company based in
                     London, England, and, prior to this sale, was a wholly
                     owned subsidiary of Harmony. In connection with the sale,
                     the Company and the Purchaser entered


                                      -31-
<PAGE>   33


                             INTELEFILM CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2:           ASSET AND SUBSIDIARY STOCK SALE TRANSACTIONS (CONTINUED)

                  The End (London) Sale Transaction:

                     into an agreement granting the Purchaser the right, under
                     certain circumstances, to purchase the remaining 10% equity
                     interest in The End (London) from Harmony for approximately
                     $803,000. As a result of the sale, Harmony was relieved of
                     liabilities in excess of assets forfeited, resulting in a
                     non-cash gain to the Company of $119,508.

NOTE 3:           ACQUISITIONS

                  Chelsea Pictures:

                     On March 4, 1999, the Company acquired all of the issued
                     and outstanding common stock of Chelsea Pictures, Inc.
                     ("Chelsea") for 125,000 shares of common stock with a value
                     of $250,000 and the assumption of approximately $885,441 of
                     liabilities net of assets. Chelsea is a television
                     commercial production company with principal operations in
                     New York, New York. The acquisition has been accounted for
                     as a purchase, whereby, the purchase price and related
                     acquisition expenses incurred of $250,382 were allocated
                     based upon the fair market value of the assets purchased
                     and liabilities assumed, consisting of goodwill of
                     $1,385,823, current accrued liabilities of $1,163,584 and
                     current assets of $278,143. Additionally, consideration for
                     the transaction may consist of up to an aggregate of
                     200,000 shares of the Company's common stock, 125,000 of
                     these shares were issued on the acquisition date. Issuance
                     of the remaining shares is contingent upon the level of
                     Chelsea's earnings before interest, taxes, depreciation and
                     amortization (EBITDA) in the first year following the
                     acquisition. If Chelsea achieves EBITDA within a range of
                     $0 - $410,000, the previous owner will receive a
                     proportionate number of shares up to a maximum of 50,000
                     shares. If Chelsea achieves EBITDA in excess of $500,000,
                     an additional 25,000 shares will be issued. The value of
                     the remaining shares will be treated as an adjustment to
                     the purchase price upon issuance.

                  Curious Pictures:

                     Effective as of August 1, 1999, the Company purchased the
                     Option and Share Transfer Agreement ("Option Agreement")
                     entered into by Harmony and the four principal executives
                     (collectively, "Curious Management") of Curious Pictures
                     Corporation ("Curious Pictures") dated December 15, 1996.
                     Under the Option Agreement, Curious Management could earn
                     the right to purchase 50% of the outstanding stock of
                     Curious Pictures from Harmony upon the achievement of
                     certain specified financial goals. Pursuant to the
                     Company's purchase agreement and based on the results of
                     operations of Curious Pictures, it was agreed by all
                     parties that Curious Management's rights to purchase the
                     50% equity interest in Curious Pictures had fully vested
                     and were exercisable for consideration totaling $50. As a
                     result of the intrinsic value established by interim
                     valuations of Curious Pictures and the Company's purchase
                     of the Option Agreement, compensation expense totaling
                     $1,907,850 has been recognized in the accompanying
                     statement of operations resulting from the consolidation
                     with Harmony.


                                      -32-
<PAGE>   34


                             INTELEFILM CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3:           ACQUISITIONS (CONTINUED)

                  Curious Pictures (Continued):

                     Following its purchase of the Option Agreement, the Company
                     acquired 50% of Curious Pictures through the exercise of
                     stock options granted under the Option Agreement. The
                     Company also acquired a 1% equity interest in Curious
                     Pictures owned by Curious Management that was initially
                     conveyed to Curious Management upon signing the Option
                     Agreement. The consideration paid to Curious Management by
                     the Company for the aforementioned acquisitions aggregated
                     $3,000,000 consisting of $1,500,000 in cash and a
                     $1,500,000 note payable bearing an interest rate of 8%, due
                     May 31, 2000. As a result of the aforementioned
                     transaction, the Company owns 51% of the outstanding stock
                     of Curious Pictures and Harmony owns 49% of the outstanding
                     stock of Curious Pictures.


                     In addition, as of January 1, 1999, Curious Pictures
                     entered into new five-year employment agreements with each
                     of the four members of Curious Management. As part of the
                     compensation to be paid to Curious Management, at the end
                     of each employment year, each member of Curious Management
                     was granted the right to purchase from Harmony, one share
                     of Curious Pictures at a price of $1.00 per share,
                     representing 1% of the capital stock of Curious Pictures.
                     As a result, if all of the members of Curious Management
                     exercise all of their new options over the five-year term
                     of their employment agreements, the Company will own 51% of
                     the Curious Pictures stock, Curious Management will
                     collectively own 20%, and Harmony will own the remaining
                     29%. Additionally, the Company granted Curious Management
                     warrants to purchase an aggregate 300,000 shares of the
                     Company's common stock for approximately $1.92 per share.


                     The Company, Harmony, and Curious Management also entered
                     into a Stock Agreement effective as of August 1, 1999.
                     Under this agreement, the members of Curious Management
                     were granted the right to sell to the Company the shares of
                     Curious Pictures that they earn from Harmony (the put
                     right), and the Company obtained the right to purchase such
                     shares from Curious Management (the call right). The price
                     to be paid by the Company to Curious Management under the
                     put or call is $96,774 per share. These options have been
                     valued at their intrinsic value as of August 1, 1999
                     ($54,000 per option). The related compensation expense will
                     be recognized ratably over the employment agreement service
                     period and reflected as a minority interest on the
                     Company's balance sheet. Further, the minority interest
                     will be ratably accreted to the value of management's put
                     right ($96,774 per share) over the time period from the
                     option vesting date to the date that the put right may be
                     exercised. During the six month period ended December 31,
                     1999, the Company recognized compensation expense of
                     $162,774. The minority interest valuation aggregated
                     $139,447 at December 31, 1999.

NOTE 4:           INVESTMENT IN AND NOTES RECEIVABLE FROM HARMONY

                  The Company's investment represents 55.2% and 49.1% of the
                  outstanding common stock of Harmony at December 31, 1999 and
                  1998, respectively. The aggregate purchase price paid of
                  $9,730,872 and transaction costs totaling $93,201 were
                  allocated based on the estimated fair market value of the
                  assets acquired consisting of common stock of $9,140,872 and
                  stock options valued at $590,000. With this increase of
                  ownership, the Company began to consolidate Harmony results
                  from

                                      -33-
<PAGE>   35


                             INTELEFILM CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4:           INVESTMENT IN AND NOTES RECEIVABLE FROM HARMONY (CONTINUED)

                  operations on April 1, 1999. All periods prior to this date
                  were accounted for under the equity method. Accordingly, the
                  excess of the purchase price over the Company's pro-rata share
                  of Harmony's net tangible assets discussed below was recast
                  from the investment in Harmony to Goodwill based on the
                  estimated fair market value of Harmony's assets.

                  The excess of the purchase price over the Company's prorata
                  share of Harmony's net tangible assets totaled $6,810,877 and
                  $6,245,996 at December 31, 1999 and 1998, respectively. This
                  excess purchase price relates to Harmony's intangible asset
                  value, principally technical know-how, industry reputation and
                  customer lists, and is being amortized on a straight line
                  basis over a seven-year estimated useful life. At December 31,
                  1999 and 1998, accumulated amortization of the excess purchase
                  price totaled $1,752,998 and $871,552, respectively.

                  The following schedule represents the Company's equity
                  investments in Harmony since January 1, 1998:

<TABLE>
<CAPTION>
                                                                 Common Stock                       Stock Options
                                                        ------------------------------------------------------------------
                                                         Number of                          Number of
                                Date                      Shares        Consideration        Shares        Consideration
                --------------------------------------  -----------    ---------------     -----------    ----------------
<S>                                                  <C>                <C>             <C>                <C>
                Balance at December 31, 1997             2,188,731          6,149,150        750,000             590,000
                June 30, 1998 (exercise of
                 stock options)                            750,000          1,715,000       (750,000)           (590,000)
                July 2, 1998                               250,000            432,500           -                   -
                November 4, 1998                           494,231            968,750           -                   -
                                                        -----------    ---------------     -----------        ----------

                Balance at December 31, 1998             3,682,962        $ 9,265,400           -              $    -

                April 15, 1999                             225,000            229,754           -                   -
                May 21, 1999                                40,000             39,304           -                   -
                May 25, 1999                               180,000            184,575           -                   -
                June 25, 1999                                1,600              1,622           -                   -
                June 28, 1999                               10,000             10,217           -                   -
                                                        ----------     --------------     ------------       ----------

                Balance at December 31, 1999             4,139,562       $  9,730,872           -              $    -
                                                        ==========     ==============     ============       ==========
</TABLE>

                  The June 1998 stock option exercise at $1.50 per share and the
                  July 1998 purchase of outstanding common stock required
                  consideration totaling $1,557,500 in cash obtained through the
                  Company's issuance of redeemable convertible preferred stock
                  (Note 11). Consideration for the November 1998 stock
                  acquisitions of 269,231 newly issued shares and of 225,000
                  outstanding shares of common stock totaled $968,750 in cash
                  obtained in through the Company's sale of its radio stations
                  (Note 2).

                  The November 1998 purchases of 225,000 outstanding shares
                  occurred pursuant to an outstanding put option exercised by
                  the seller in February 1998. The put option required that the
                  Company purchase the shares for $2.50 per share by March 31,
                  1998. As the Company did not have the current financial
                  resources to meet this obligation by March 31, 1998, the
                  Company assigned the put option to two entities controlled by
                  a director, and another director individually (the "assigned
                  parties"). The assigned parties consummated the purchase of
                  shares required by the initial put and were granted a similar
                  option to put the shares to the Company at a price of $2.75
                  per share. The new put option was exercisable upon the
                  completion of the CRN sale transaction which occurred in
                  October 1998 (Note 2).


                                      -34-
<PAGE>   36


                             INTELEFILM CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4:           INVESTMENT IN AND NOTES RECEIVABLE FROM HARMONY (CONTINUED)

                  Consideration for the April through June 1999 purchases of
                  456,600 outstanding shares totaled $465,472 in cash obtained
                  through the Company's sale of its radio stations (Note 2).
                  These purchases increase the Company's ownership in Harmony to
                  approximately 55.2%, and this additional ownership allows the
                  Company to consolidate Harmony, for financial statement
                  purposes, as of April 1, 1999, rather than accounting for the
                  investment under the equity method as it has for all previous
                  periods presented. No minority interest is currently shown
                  related to Harmony, as the minority shareholders no longer
                  have any equity basis in their investment. As of December 31,
                  1999, the Company has recognized losses in excess of its
                  prorata share totaling $2,214,013.

                  Unsecured demand notes payable due from Harmony totaling
                  $3,326,369 and $680,041 (including interest) are outstanding
                  at December 31, 1999 and 1998, respectively. At December 31,
                  1999, these notes as well as the related interest are
                  eliminated in Harmony's consolidation with the Company.

                  The following amounts represent Harmony's results from
                  operations for the periods presented that Harmony was
                  accounted for under the equity method. Such amounts have been
                  derived from Harmony's financial statements for the fiscal
                  years ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
                                                                          Quarter Ended              Year Ended
                                                                          March 31, 1999          December 31, 1998
                                                                         -----------------       ------------------
<S>                                                                  <C>                      <C>
                  Contract revenues                                      $      16,274,699       $       62,019,148
                  Cost of production                                            14,300,552               51,779,753
                                                                         -----------------       ------------------

                  Gross profit                                                   1,974,147               10,239,395
                  Operating expenses                                             3,620,554               18,089,550
                                                                         -----------------       ------------------

                  Loss from operations                                          (1,646,407)              (7,850,155)
                  Interest income (expense), net                                   (79,089)                (179,221)
                                                                         -----------------       ------------------

                  Loss before income taxes                                      (1,725,496)              (8,029,376)
                  Income taxes                                                     -                         (8,122)
                                                                         -----------------       ------------------

                  Net loss                                               $      (1,725,496)      $       (8,037,498)
                                                                         =================       ==================

                  Company's share of Harmony's
                     net loss                                            $      (1,725,496)      $       (3,398,841)

                  Amortization expense for the excess of the
                     investment cost over the underlying net
                     assets of Harmony                                            (205,446)                (659,520)
                                                                         -----------------       ------------------

                  Company's equity loss in Harmony                       $      (1,930,942)      $       (4,058,361)
                                                                         =================       ==================
</TABLE>


                                      -35-
<PAGE>   37


                             INTELEFILM CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4:           INVESTMENT IN AND NOTES RECEIVABLE FROM HARMONY (CONTINUED)

        The consolidated balance sheet of Harmony is summarized as follows:
<TABLE>
<CAPTION>

                                                                           March 31, 1999         December 31, 1998
                                                                         -----------------       ------------------
<S>                                                                  <C>                        <C>
                  Current assets                                         $       8,416,156       $        7,117,732
                  Non-current assets                                             3,159,354                3,001,164
                                                                         -----------------       ------------------

                  Total assets                                           $      11,575,510       $       10,118,896
                                                                         =================       ==================

                  Current liabilities                                           13,223,368               10,150,060
                  Minority interest                                                792,150                  -
                  Stockholders' deficit                                         (2,440,008)                 (31,164)
                                                                         ------------------      ------------------

                  Total liabilities and stockholders' deficit            $      11,575,510       $       10,118,896
                                                                         =================       ==================
</TABLE>

                  Harmony is a public company traded over-the-counter under the
                  symbol "HAHO". At December 31, 1999, the aggregate value of
                  the Harmony common stock held by the Company totaled $558,841.

NOTE 5:           PROPERTY AND EQUIPMENT

                  Property and equipment consisted of the following at December
                  31:
<TABLE>
<CAPTION>
                                                                                                                Estimated
                                                                                                               Useful Life
                                                                    1999                  1998                   In Years
                                                              ---------------       ---------------            -----------
<S>                                                       <C>                      <C>                         <C>
                  Office equipment                                    840,476               198,352                5
                  Vehicles                                             39,014                50,514                5
                  Leasehold improvements                            1,584,670               -                      5
                  Computer & production equipment                   2,828,543               -                      3
                                                              ---------------       ---------------
                                                                    5,292,703               248,866
                  Less accumulated depreciation                     2,335,248               128,481
                                                              ---------------       ---------------

                  Property and equipment, net                 $     2,957,455       $       120,385
                                                              ===============       ===============
</TABLE>

                  Depreciation  expense was $687,514  and  $670,748 for the
                  years ended  December 31, 1999 and 1998, respectively.

NOTE 6:           GOODWILL

                  Goodwill consisted of the following at December 31:
<TABLE>
<CAPTION>
                                                                                                              Estimated
                                                                                                              Useful Life
                                                                    1999                  1998                 In Years
                                                              ---------------       ---------------          ------------
<S>                                                       <C>                    <C>                         <C>
                  Goodwill                                    $     8,746,640       $       -                     7
                  Less accumulated amortization                     2,016,194               -
                                                              ---------------       ---------------

                  Goodwill, net                               $     6,730,446       $       -
                                                              ===============       ===============
</TABLE>


                  Amortization expense related to goodwill and other intangible
                  assets totaled $976,899 and $1,278,592 for the years ended
                  December 31, 1999 and 1998, respectively. The 1998
                  amortization expense relates primarily to the amortization of
                  radio broadcast licenses.

                                      -36-
<PAGE>   38




                             INTELEFILM CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 7:           SHORT-TERM DEBT - AFFILIATES

                  Directors and Shareholders:

                     In July 1998, the notes payable aggregating $1,250,000
                     which were issued in July 1997, were extended four months
                     to October 22, 1998. As consideration for the extension,
                     the holders, a partnership controlled by a Company
                     director, a Company director individually and a less than
                     five-percent shareholder, were offered additional warrants
                     to purchase the Company's common stock or an increase in
                     the note payable interest rate from 10% to 20%. Two of the
                     holders representing $750,000 of the outstanding debt opted
                     to receive additional warrants to purchase an aggregate of
                     37,500 shares of the Company's common stock. The remaining
                     holder of outstanding debt totaling $500,000 opted for the
                     increased interest rate of 20%. The warrants vested
                     immediately and are exercisable at $3.06 per share for a
                     term of 5 years. The value of the warrants was determined
                     to be $62,625. The debt was repaid in full in October 1998
                     upon closing of the CRN radio station sales transaction
                     (Note 2).

                  Curious Picture's Management:

                     Effective August 1, 1999, the Company purchased the Option
                     and Share Transfer Agreement for the sum of $3,000,000
                     including cash consideration of $1,500,000 and this
                     issuance of a promissory note for a aggregate of $1,500,000
                     to the four members of Curious Management ($375,000 to each
                     member) payable on May 31, 2000 at an interest rate equal
                     to eight percent (8%) per annum (Note 3). The promissory
                     note requires the Company to pay interest quarterly through
                     May 31, 2000, at which time the principal balance will be
                     payable in full. In the event any member of Curious
                     Management's employment with Curious is terminated or any
                     member of Curious Management terminates his/her employment
                     agreement prior to the payment of the promissory note, the
                     principal amount of this promissory note will be reduced by
                     $375,000 for such member.

NOTE 8:           LINE OF CREDIT

                  At December 31, 1998, the Company had outstanding short-term
                  borrowings totaling $434,974 under a discretionary line of
                  credit pursuant to the finance company credit agreement (Note
                  9). The line of credit was terminated upon its full repayment
                  in January 1999 (Note 9).

                  In July 1998, Harmony entered into an asset based loan and
                  security agreement due to a finance company, which is secured
                  by virtually all its assets, is guaranteed by iNTELEFILM, and
                  provides for the following borrowings: a revolving line of
                  credit with maximum availability of $4,500,000 or a specified
                  percentage of acceptable accounts receivable with interest at
                  a variable rate (10.0% at December 31, 1999). At December 31,
                  1999, $3,548,911 was outstanding on the line of credit.
                  Subsequent to December 31, 1999, the line of credit was repaid
                  in full pursuant to the lender's call.







                                      -37-
<PAGE>   39


                             INTELEFILM CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 9:           LONG-TERM DEBT

                  Long-term debt consisted of the following at December 31:


<TABLE>
<CAPTION>

                                                                                          1999              1998
                                                                                     ---------------  ---------------
                 <S>                                                                 <C>              <C>
                 Term note payable bearing interest at a variable rate (13.5% at
                 December 31, 1998). Due to the recurring requirement to meet
                 certain restrictive financial covenants, which had not been
                 met, this entire indebtedness was classified as current at
                 December 31, 1998. This note was paid in full in January 1999.
                                                                                     $       -        $    10,500,000
                 Covenant not-to-compete, non-interest bearing, payable in
                 quarterly installments of $37,500 through June 2006, less
                 unamortized discount at 9.25% ($197,035 and $255,531, at
                 December 31, 1999 and 1998, respectively).
                                                                                             777,965          869,469
                 Note payable bearing interest at 9%,  subsequently paid in full in
                 February 2000.                                                               57,069           80,433
                 Various other installment notes payable.                                     36,784           64,001
                                                                                     ---------------  ---------------
                                                                                             871,818       11,513,903
                 Less current portion                                                        191,933       10,665,792
                                                                                     ---------------  ---------------
                 Long-term debt, less current portion                                $       679,885  $       848,111
                                                                                     ===============  ===============
</TABLE>


                 In November 1996, the Company entered into an agreement with a
                 finance company (the "Credit Agreement") under which three
                 credit facilities (the "Facilities") were established. The
                 Facilities included a $11,500,000 term note payable, a
                 $1,000,000 line of credit (Note 8), and a $4,000,000
                 acquisition facility which was not utilized.

                 From July 1997 through October 1998, the Credit Agreement was
                 amended and restated pursuant to additional term note payable
                 advances received by the Company aggregating $15,000,000 in
                 1998. The provisions of the Credit Agreement remained
                 substantially unchanged as a result of these amendments and
                 restatements except that the $4,000,000 acquisition facility
                 was cancelled and the available line of credit (Note 8) was
                 reduced from $1,000,000 to $500,000 in favor of the increased
                 term note payable. In September and October 1998, the Company
                 repaid $1,300,000 and $14,700,000 in connection with the 1090
                 and CRN radio station sales transactions (Note 2),
                 respectively. Finally, the Credit Agreement was amended again
                 in October 1998, primarily to reschedule installment payments
                 due and to provide the lender a security interest in the note
                 receivable received by the Company in the CRN radio station
                 sale transaction (Note 2). In January 1999, the Facilities
                 were repaid in full upon completion of the Unica radio station
                 sale transaction (Note 2).

                 In connection with the original Credit Agreement and the
                 amendments, the Company incurred debt issuance costs
                 aggregating $1,310,000 in 1998. These costs included finance
                 company fees which reduced the proceeds of the term note
                 payable advances of $400,000 in 1998, the value of warrants
                 granted to the finance company net of the value of cancelled
                 previously granted warrants of $560,000 in 1998, and other
                 transaction costs of $350,000 in 1998. The debt issuance costs
                 have been deferred on

                                      -38-


<PAGE>   40


                             INTELEFILM CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 9:           LONG-TERM DEBT (CONTINUED)

                  the accompanying balance sheet and, prior to the complete
                  facility repayment in January 1999, were being amortized
                  utilizing the interest method over the remaining life of the
                  Credit Agreement. Additionally, with each of the
                  aforementioned facility repayments, the Company wrote-off
                  deferred debt issue costs based on the proportionate share of
                  principal repaid. At December 31, 1998 the unamortized value
                  of these costs totaled $742,737, and was written off in
                  January 1999.

                  The facilities were subject to certain restrictive covenants.
                  As of December 31, 1998, the Company had not met certain of
                  the covenant requirements; however, the violation was cured
                  with the Company's repayment of the Facilities in full in
                  January 1999.

                  Future maturities of long-term debt are as follows:

<TABLE>
<CAPTION>
                           Year ending December 31:
                           <S>                                                   <C>
                                    2000                                         $       191,933
                                    2001                                                 105,128
                                    2002                                                 112,682
                                    2003                                                 120,799
                                    2004                                                 129,458
                                    Thereafter                                           211,818
                                                                                 ---------------

                                                                                 $       871,818
                                                                                 ===============
</TABLE>


                  The Company believes that the carrying value of the debt
                  approximates its fair market value at December 31, 1999 and
                  1998.

NOTE 10:          COMMITMENTS AND CONTINGENCIES

                  Operating Leases and Other Commitments:

                      The Company leases various office and production studio
                      space. Future minimum lease and other commitment payments
                      are as follows for the years ending December 31:

<TABLE>

                                   <S>                                          <C>
                                    2000                                         $     1,054,672
                                    2001                                               1,053,317
                                    2002                                               1,028,896
                                    2003                                                 938,092
                                    2004                                                 925,840
                                    Thereafter                                         2,693,664
                                                                                 ---------------

                                                                                 $     7,694,481
                                                                                 ===============
</TABLE>


                      Total rent expense was $916,077 and $771,728 for the years
                      ended December 31, 1999 and 1998, respectively, and rent
                      expense to related parties totaled $0 and $234,984,
                      respectively.




                                      -39-
<PAGE>   41


                             INTELEFILM CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 10:          COMMITMENTS AND CONTINGENCIES (CONTINUED)

                  Employment Contracts:

                      The Company has entered into various employment agreements
                      with its officers and commercial directors, which obligate
                      it to make minimum payments of approximately $9,914,047.
                      The payments due are $3,443,901, $2,219,696, $1,747,878,
                      $1,722,487, $499,046 and $281,039, for the years ended
                      December 31, 2000, 2001, 2002, 2003, 2004 and thereafter,
                      respectively. Of these amounts $6,344,220 are for
                      administrative personnel and $3,569,827 are for commercial
                      television directors and salespeople. Certain of these
                      agreements provide for additional compensation based on
                      subsidiary revenues, defined subsidiary operating profits
                      or other incentives. This additional compensation is
                      payable whether or not the Company achieves an operating
                      profit as a whole. Some of the television directors who
                      are associated with the Company receive monthly draws
                      against the directors' compensation for production of
                      commercials. The monthly draws equal the minimum
                      guaranteed compensation payable to such directors.
                      Although the draws are recoupable by the Company out of
                      compensation otherwise payable to such directors, such
                      directors are not obligated to repay such draws, if their
                      fees for commercials produced do not exceed the monthly
                      draws that have been paid. Consequently, the Company is
                      obligated to provide compensation to these directors
                      whether or not they are directing commercials. Most of the
                      Company's sales personnel receive monthly draws offset by
                      their earned commissions.

                  Officers and Director Severance Plan:

                      In April 1999, a severance plan which covers two of the
                      Company's executive officers and one of the Company's
                      non-employee directors was adopted. As to the officers,
                      the plan provides for severance benefits in the event of
                      termination of employment under certain circumstances
                      following a change in control of the Company (as defined).
                      The applicable circumstances are (a) termination by the
                      Company without cause (as defined) other than because of
                      death, retirement or disability, (b) termination for good
                      reason (as defined), or (c) termination without good
                      reason if the date of termination is within 180 days after
                      a change in control. Following any such termination, in
                      addition to compensation and benefits already earned, such
                      individual will be entitled to receive a lump sum
                      severance payment equal to a multiple of such individual's
                      annual gross base salary as then in effect, including
                      amounts accrued but not paid. Based upon 1999 annual gross
                      base salaries, lump sum severance payments aggregating
                      $2,055,000 would be payable under the plan. The plan also
                      provides for the accelerated vesting of outstanding stock
                      options and certain other benefits following a change in
                      control.

                      The plan is in effect from April 1, 1999 through March 31,
                      2002. Thereafter, the plan automatically renews annually
                      unless the Company gives notice that it does not wish to
                      extend it. In addition, the plan will continue in effect
                      for three years after a change in control.


                                      -40-


<PAGE>   42


                             INTELEFILM CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 10:          COMMITMENTS AND CONTINGENCIES (CONTINUED)

                  Pending Litigation:

                     On September 30, 1998, a jury in the United States District
                     Court for the District of Minnesota (the "Court") ruled in
                     favor of the Company in connection with litigation for
                     breach of contract and misappropriation of trade secrets
                     that the Company had commenced against ABC/Disney and
                     awarded the Company $20,000,000 for breach of contract
                     against ABC Radio, $10,000,000 for misappropriations of
                     trade secret by ABC Radio and $10,000,000 for
                     misappropriation of trade secret against Disney. On January
                     15, 1999, the Court upheld the jury's findings that ABC
                     Radio had breached its contract with the Company and that
                     ABC/Disney both misappropriated the Company's trade secret
                     information, the Court disagreed with the jury's conclusion
                     that the evidence showed that those actions caused the
                     Company's damages or that the amount of damages awarded by
                     the jury was supported by the evidence, and set aside the
                     jury's verdict. The Court further ruled that in the event
                     that the decision is reversed or remanded on appeal, that
                     the defendants be granted a new trial on the issues of
                     causation and damages. The Company filed a Notice of Appeal
                     in February 1999. On February 16, 2000, the Company
                     presented its oral argument to the 8th Circuit Court of
                     Appeals in St. Paul, Minnesota. The Company intends to
                     pursue its appeal of the judgement and, to this end,
                     certain personnel and financial resources will be used.

                     Additionally, the Company has entered an agreement with its
                     primary counsel for this litigation. Under the agreement
                     the counsel has agreed to make twenty-five percent of their
                     fees contingent upon the successful outcome of this lawsuit
                     in exchange for seven and one half percent of any
                     settlement or judgement in favor of the Company. At
                     December 31, 1999 and 1998, the fees contingent under this
                     agreement totaled approximately $800,000 and $727,000,
                     respectively.

                     Except as described above, the Company is not a party to
                     any material proceedings. From time to time the Company is
                     a party to litigation which is incidental to its business,
                     including administrative proceedings.

                  401(k) Savings/Profit-Sharing Plan:

                     The Company has a 401(k) plan available to all employees
                     meeting certain service requirements. Eligible employees
                     may contribute a portion of their annual salary to the
                     plan, subject to certain limitations. The Company may make
                     matching contributions and also may provide profit-sharing
                     contributions at the discretion of its board of directors.
                     Employees become fully vested in the Company contributions
                     after five years of service. There were no Company
                     contributions in 1999 or 1998.






                                      -41-
<PAGE>   43


                             INTELEFILM CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 11:          REDEEMABLE CONVERTIBLE PREFERRED STOCK

                  The Company has authorized 606,061 shares of $0.02 par value
                  Series B redeemable convertible preferred stock ("the
                  Series"). In June 1998, the Company issued 606,061 shares of
                  the Series with a $3.30 per share stated value and warrants to
                  purchase 100,000 shares of the Company's common stock. The
                  Series was initially recorded on the Company's financial
                  statements at $1,768,250 which represents the net proceeds
                  received totaling $1,864,250 ($2,000,000 aggregate stated
                  value less transaction costs totaling $135,750) discounted by
                  $96,000 for the value of the warrants granted. The preferred
                  stock carried the right of redemption or conversion into a
                  variable number of shares of the Company's common stock upon
                  expiration of the Company's right to redeem the series. Prior
                  to an amendment to the related securities agreement, the
                  Company had the right to redeem the Series for $4.04 per share
                  until October 22, 1998. Subject to the amendment, the Company
                  issued additional warrants to purchase 125,000 shares of the
                  Company's common stock. The warrant issuance allowed the
                  Company to extend its redemption right until January 1999. At
                  that time, the preferred stock was redeemed at $4.04 per
                  share, or $2,450,000, utilizing proceeds of the Unica radio
                  station sale transaction (Note 2). During 1998, the Company
                  recorded accretion of the preferred stock totaling $680,236.

NOTE 12:          SHAREHOLDERS' EQUITY

                  Common Stock:

                     The Company has authorized 50,000,000 shares of common
                     stock at $.02 par value. The Company has voting shares of
                     6,099,577 and 6,261,701 issued and outstanding at December
                     31, 1999 and 1998, respectively, and nonvoting shares of
                     189,041 which are issued and outstanding at December 31,
                     1999 and 1998.

                  Repurchase of Common Stock:

                     In April 1999, the Company's Board of Directors authorized
                     the repurchase of up to 500,000 shares of its common stock,
                     representing approximately 7.6% of the outstanding common
                     stock at that time, over a period of 12 months. Repurchases
                     have been and will be made in accordance with Exchange Act
                     Rule 10b-18, and will be subject to the availability of
                     stock, trading price, market conditions and the Company's
                     financial performance. The repurchased shares are canceled
                     and returned to the Company's authorized capital stock. As
                     of December 31, 1999, the Company had repurchased an
                     aggregate of 488,900 shares for an aggregate of $917,614 at
                     prices ranging from $1.53 to $2.06 per share.

                  Incentive and Non-Qualified Stock Options Plans:

                     In August 1998, the Company amended the 1994 Stock Option
                     Plan to allow the board of directors to amend the terms of
                     options issued under the plan at its discretion subject to
                     certain restrictions. Additionally, options issued under
                     the 1991 and 1994 Stock Option Plans were revised to
                     provide that the options would not automatically terminate
                     as a result of a sale of substantially all the Company's
                     assets. In October 1998 upon the closing of the CRN radio
                     station transaction (Note 2), all options outstanding under
                     the plans became fully vested to the holders.





                                      -42-
<PAGE>   44



                             INTELEFILM CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 12:          SHAREHOLDERS' EQUITY (CONTINUED)

                  Incentive and Non-Qualified Stock Options Plans (Continued):

                     In 1991, the Company established the 1991 Stock Option Plan
                     to provide incentives to employees whereby 200,000 shares
                     of the Company's common stock have been granted. The
                     options are exercisable on the date of grant and are
                     generally valued at the fair market value of the stock on
                     the date of grant. The options expire on various dates
                     through January 2005.

                     In March 1994, the board adopted the 1994 Stock Option Plan
                     whereby 1,000,000 shares of the Company's common stock have
                     been reserved. The options can be either incentive stock
                     options or nonstatutory options and are generally valued at
                     the fair market value of the stock on the date of grant.
                     The options generally vest over a five-year period and
                     expire through January 2005.

                     In May 1994, the board adopted the 1994 Director Stock
                     Option Plan whereby 125,000 shares of the Company's common
                     stock have been reserved. The plan provided for automatic
                     grants of non-qualified options to purchase 3,750 shares to
                     outside directors upon first becoming a director and an
                     additional 3,750 shares upon each anniversary of the
                     original grant. In April 1999, the Plan was amended to
                     reserve 500,000 shares of the Company's common stock. At
                     that time 45,000 options, vesting equally over three years,
                     were granted to each of the three outside directors. All
                     options under this plan were valued under the Black-Scholes
                     option-pricing model resulting in $50,400 of compensation
                     expenses recorded in 1999. The options are generally valued
                     at the fair market value of the stock on the date of grant
                     and expire five years thereafter.

                     In December 1999, the board adopted the 1999 Broad-Based
                     Stock Incentive Plan whereby 400,000 shares of the
                     Company's common stock have been reserved. The options may
                     be granted to only non-officer employees and may be priced
                     at not less than 100% of the fair market value on the date
                     of grant. The options have varying vesting schedules and
                     generally expire within five years of the date of grant.

                     A summary of the status of the Company's stock option plans
                     as of December 31, 1999 and 1998 and changes during the
                     years ending on those dates is presented below:



<TABLE>
<CAPTION>

                                                                       1999                             1998
                                                        ------------------------------    -------------------------------
                                                                         Weighted-                          Weighted-
                                                                          Average                            Average
                               Fixed Options               Shares       Exercise Price        Shares      Exercise Price
                    ---------------------------------   ------------   ---------------    ------------    ---------------
                    <S>                                 <C>               <C>           <C>                <C>
                    Outstanding at beginning of year         984,276           3.19          1,372,401          5.76
                    Granted                                1,003,749           2.08          1,063,552          3.20
                    Exercised                             (  205,316)          2.33         (    2,600)         2.05
                    Forfeited                             (  181,032)          3.17         (1,449,077)         5.62
                                                        -------------                     ------------
                    Outstanding at end of year             1,601,677           2.61            984,276          3.19
                                                        ============                      ============

                    Options exercisable at year end         930,555            2.95           984,276           3.19
                    Weighted-average fair value of
                       options granted during the year                      $  1.42                          $  1.16
</TABLE>



                                      -43-


<PAGE>   45


                             INTELEFILM CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 12:          SHAREHOLDERS' EQUITY (CONTINUED)

                  Incentive and Non-Qualified Stock Options Plans (Continued):

                     On April 3, 1998, option holders were offered the
                     opportunity to receive a reduced number of options at an
                     exercise price of $3.19, the fair market value of the
                     Company's stock on that date. The number of new options
                     received by the option holders was determined ratably based
                     on the ratio of the existing option exercise price and the
                     new exercise price of $3.19. The forfeited and granted
                     option amounts in the table above include options
                     aggregating 1,289,972 and 817,302, respectively, that were
                     canceled and issued under this offer.

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


<TABLE>
<CAPTION>

                                                    Options Outstanding                         Options Exercisable
                                      ------------------------------------------------   ---------------------------------

                                            Number     Weighted-Average   Weighted-            Number         Weighted-
                       Range of           Outstanding     Remaining        Average           Exercisable       Average
                    Exercise Prices      At 12/31/99   Contractual Life  Exercise Price      at 12/31/99    Exercise Price
                    ------------------------------------------------------------------------------------------------------
                    <S>                 <C>            <C>               <C>                 <C>            <C>
                    $1.50 to 2.99          744,249       4.3 years         $ 1.87              156,667         $ 1.79
                    $3.00 to 4.00          857,428       2.7 years         $ 3.25              773,888         $ 3.19
                                         ---------                                             -------
                                         1,601,677       3.4 years         $ 2.61              930,555         $ 2.95
                                         =========                                             =======
</TABLE>



                     Included in the table above are certain options outstanding
                     which are performance based which become exercisable on the
                     achievement of certain goals reached, but no later than
                     2005. A summary of these performance-based options is
                     presented below:
<TABLE>
<CAPTION>

                                                                    1999                             1998
                                                        ----------------------------     ---------------------------
                                                                        Weighted-                        Weighted-
                                                                         Average                          Average
                           Performance Options             Shares     Exercise Price         Shares   Exercise Price
                   ---------------------------------    -----------  -------------       ------------   ------------
                   <S>                                    <C>           <C>                <C>            <C>
                   Outstanding at beginning of year          66,835        $  3.19            158,750        $  7.59
                   Granted                                   61,500           2.20             66,835           3.19
                   Forfeited                              (  31,714)          3.19           (158,750)          7.59
                                                        -----------   ------------       ------------   ------------
                   Outstanding at end of year                96,621           2.56             66,835           3.19
                                                        ===========   ============       ============   ============

                   Options exercisable at year end           35,121           3.19             66,835           3.19
                   Weighted-average fair value of
                      options granted during the year                      $  1.59                           $  1.16
</TABLE>


                     As of December 31, 1999 the performance options outstanding
                     under the Plans have exercise prices ranging from $1.88 to
                     $3.19 and a weighted-average remaining contractual life of
                     3.6 years.



                                      -44-

<PAGE>   46


                             INTELEFILM CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 12:          SHAREHOLDERS' EQUITY (CONTINUED)

                  Incentive and Non-Qualified Stock Options Plans (Continued):

                     FASB Statement 123, Accounting for Stock-Based
                     Compensation, requires the Company to provide pro forma
                     information regarding net income and earnings per share as
                     if compensation cost for the Company's stock option plans
                     and employment contract warrants had been determined in
                     accordance with the fair value based method prescribed in
                     FASB Statement 123. The Company estimates the fair value of
                     each stock option at the grant date by using the
                     Black-Scholes option-pricing model with the following
                     weighted-average assumptions used for grants in 1999 and
                     1998, respectively: no dividend yield for each year;
                     weighted average estimated option life 5.0; expected
                     volatility of 82.6 and 41.3 percent; and risk-free interest
                     rates of 5.3 and 5.4 percent.


                     Under the accounting provisions of FASB Statement 123, the
                     Company's net income and income per share would have been
                     reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
                                                                                      1999                 1998
                                                                                ---------------      ----------------
                      <S>                                                       <C>                  <C>
                      Net income:
                           As reported                                          $     7,339,577      $      7,569,795
                           Pro forma                                                  6,400,308             5,513,782
                      Basic and diluted net income per share:
                           As reported                                                  1.16                 1.03
                           Pro forma                                                    1.01                 0.72
</TABLE>


                  Employee Stock Purchase Plan:

                      In May 1996, the Board adopted the 1996 employee stock
                      purchase plan whereby 400,000 shares of the Company's
                      common stock have been reserved. The reserved shares may
                      be purchased at their fair market value during specified
                      offering periods. No shares were issued under the plan
                      during 1999 and 1998. In 1999, they amended this plan to
                      update for various regulation compliance. The underlying
                      plan terms have not changed.

                  Shareholder Rights Plan:

                     In February 1998, the Company adopted a Shareholder Rights
                     Plan designed to enable the Company and its board to
                     develop and preserve long-term values for shareholders and
                     to protect shareholders in the event an attempt is made to
                     acquire control of Company through certain coercive or
                     unfair tactics or without an offer of fair value to all
                     shareholders. The Plan provides for distribution of a
                     common share purchase right to each shareholder of record
                     of the Company's Common Stock on February 27, 1998. Under
                     the Plan, these rights to purchase common shares will
                     generally be exercisable a certain number of days after a
                     person or group acquires or announces an intention to
                     acquire 20% or more of the Company's Common Stock. Each
                     right entitles the holder, after the rights become
                     exercisable, to receive shares of Company common stock
                     having a market value of two times the exercise price of
                     the right or securities of the acquiring entity at one-half
                     their market value at that time.




                                      -45-
<PAGE>   47


                             INTELEFILM CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 12:          SHAREHOLDERS' EQUITY (CONTINUED)

                  Finance Company Credit Agreement:

                     In connection with the original completion and subsequent
                     amendments of the Credit Agreement (Note 9), the Company
                     granted the finance company warrants to purchase an
                     aggregate of 600,000 shares of the Company's common stock
                     at exercise prices ranging from $3.68 to $3.76. The
                     warrants became immediately exercisable and expire through
                     May 2003. The warrants also are convertible into a variable
                     number of shares of common stock which, upon conversion,
                     allows the finance company to receive a benefit of an
                     amount equal to the amount obtainable if the options were
                     exercised without payment of the related exercise price.

                  Redeemable Convertible Preferred Stock:

                     In connection with the issuance and subsequent amendment of
                     the Redeemable Convertible Preferred Stock (Note 11), the
                     Company granted the investors warrants to purchase 225,000
                     shares of the Company's common stock at exercise prices
                     ranging from $2.68 to $3.77. The warrants became
                     immediately exercisable and expire through January 2004.

                     The following table summarizes the warrants to purchase
                     shares of the Company's common stock:



<TABLE>
<CAPTION>
                                                                                                             Exercise
                                                                          Warrants                             Price
                                                                         Outstanding      Exercisable        Per Share
                                                                        ------------      -----------   -----------------
                    <S>                                                 <C>               <C>           <C>
                    Balance at December 31, 1997                           1,700,541       1,686,540    $    2.40 - 13.80

                    Granted:
                      Credit agreement                                       200,000         200,000                 3.68
                      Credit agreement                                       200,000         200,000                 3.76
                      Short-term debt                                         37,500          37,500                 3.06
                      Preferred stock                                        100,000         100,000                 3.77
                      Preferred stock                                        125,000         125,000                 2.68

                    Canceled:
                      Credit agreement                                  (     50,000)    (     50,000)               4.40
                      Credit agreement                                  (    100,000)    (    100,000)               5.29
                                                                      --------------   --------------   -----------------

                    Balance at December 31, 1998                           2,213,041       2,199,040    $    2.40 - 13.80
                    Granted:
                      Employment agreement                                   300,000               -    $            1.92
                    Canceled:
                      Bridge loans and others                           (    537,000)    (   522,999)   $   4.00 - $13.80
                                                                      ---------------  --------------   -----------------

                    Balance at December 31, 1999                           1,976,041       1,676,041    $   1.92 - $13.00
                                                                      ==============   =============    =================
</TABLE>




                                      -46-



<PAGE>   48


                             INTELEFILM CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 12:          SHAREHOLDERS' EQUITY (CONTINUED)

                  Redeemable Convertible Preferred Stock (Continued):

                     Included in the table above are warrants issued in
                     connection with the finance company Credit Agreement,
                     bridge loans and other short-term notes payable. The value
                     of these warrants is charged to interest expense over the
                     term of the related debt agreement and during the years
                     ended December 31, 1999 and 1998, the Company incurred
                     interest expense aggregating approximately $302,747 and
                     $725,378, respectively. The value of the warrants related
                     to the issuance of new debt was determined based on the
                     difference between the stated interest rate and the
                     Company's estimated effective borrowing rate.

                  Harmony Stock Options:

                     As of December 31, 1999, 1,120,500 Harmony stock options at
                     a weighted average exercise price of $1.47 per share were
                     outstanding. If all these options were exercised, the
                     Company's ownership in Harmony would be diluted to 48%.

NOTE 13:          RELATED PARTY TRANSACTIONS

                  Management Agreement:

                     The Company has management services contracts with a
                     privately held affiliate (the "Management Company") related
                     to the Company through common control. The contracts, which
                     expire in December 2000 and are renewable annually
                     thereafter, require that the Company pay the Management
                     Company a fee aggregating of $180,000 per month for
                     services received. The management fees totaled $1,549,372
                     and $900,000 in 1999 and 1998, respectively. At December
                     31, 1999, $175,000 of these fees remained due and payable
                     to the Management Company.

                     The Management Company also provides services to another
                     privately held affiliate related to the Company through
                     common control. The management fee is based on estimated
                     usage of the Management Company's services by each company.
                     Management reviews the allocation periodically and believes
                     that the allocation method is reasonable.

                  Accounts Receivable/Payable - Affiliates:

                     At December 31, 1999 and 1998, accounts receivable
                     aggregating $373,239 and $280,438, respectively, were
                     outstanding from several affiliates related to Company
                     through common control or equity investment. These accounts
                     result primarily from the allocation of shared expenses.

                     At December 31, 1998, an account payable totaling $363,727
                     remained due to an officer and director of the Company
                     associated with their assistance in financing the Company's
                     repurchases of 271,000 shares of its common stock.




                                      -47-
<PAGE>   49


                             INTELEFILM CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 13:          RELATED PARTY TRANSACTIONS (CONTINUED)

                  Stock Subscriptions Receivable - Officers:

                     The Company's board of directors has, from time to time,
                     approved the non-cash exercise of options for employees,
                     officers and directors. At December 31, 1999 and 1998 stock
                     subscriptions receivable of $327,500 and $129,563,
                     respectively, remained outstanding from officers of the
                     Company as a result of such exercises.

                  Interest Expense - Related Parties:

                     At December 31, 1999, interest expense paid to Curious
                     Management related to the note payable resulting from the
                     purchase of 51% of Curious Pictures (Note 3) was $51,945.

                  Note Receivable - Director:

                     In April 1999, the Company advanced a director $12,000 as
                     evidenced by a promissory note signed by said director. The
                     note bears an interest rate of 8% per annum and is due in
                     full on or before April 13, 2001. As of December 31, 1999,
                     $12,000 of principal remained due to the Company, as well
                     as approximately $690 of related interest.

                  Payment to Officer

                     In connection with the sale of radio station KYCR(AM) (Note
                     2), Salem became the lessee for the KYCR tower site which
                     is leased from the president and chief executive officer of
                     the Company. The transaction was structured so that the
                     monthly tower lease payments decreased from $4,000 per
                     month to $2,000 per month. The Company reimburses its
                     president for the money he would have received had the
                     Company continued to be the lessee of the KYCR tower site.

NOTE 14: INCOME TAXES

                     At December 31, 1999, the Company has net operating loss
                     carryforwards for income tax purposes of $3,000,000 which
                     expire in 2012. Additionally, the federal net operating
                     loss carryforwards for subsidiaries not consolidated for
                     tax purposes are as follows:


<TABLE>
<CAPTION>
                                    Carryforward               Curious
                                       Expires                 Pictures              Harmony
                                    ------------          ------------------    ----------------
                                 <S>                      <C>                   <C>

                                        2005              $         -           $        251,730
                                        2006                        -                  1,721,893
                                        2007                        -                      6,430
                                        2008                        -                  2,709,559
                                        2009                        -                    348,090
                                        2011                        -                  1,366,208
                                        2013                        -                  3,108,872
                                        2019                        -                  2,428,813
                                 2020 (approximate)               2,150,000            1,300,000
                                                          -----------------     ----------------
                                                          $       2,150,000     $     13,241,595
                                                          =================     ================
</TABLE>



                                      -48-

<PAGE>   50


                             INTELEFILM CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 14: INCOME TAXES (CONTINUED)

                  The Company's ability to utilize the net operating loss
                  carryforwards is dependent upon the ability to generate
                  taxable income in future periods. Additionally, federal net
                  operating losses of Harmony of approximately $7,400,000 are
                  limited to usage of $792,000 per year, due to ownership
                  changes as defined under Section 382 of the Standard Revenue
                  Code of 1986.

                  The income tax provisions (benefits) for the years ended
                  December 31 are as follows:


<TABLE>
<CAPTION>

                                                                                      1999                 1998
                                                                                ---------------      ---------------
                      <S>                                                       <C>                  <C>
                      Current:
                           Federal                                              $      (615,000)      $    (3,500,000)
                           State                                                        (85,000)             (500,000)
                                                                                ---------------      ----------------
                                                                                       (700,000)           (4,000,000)
                                                                                ===============      ================
</TABLE>

                  During 1999 and 1998, the Company allocated a benefit of
                  $700,000 and $4,000,000, respectively, to continuing
                  operations for the current tax benefit realized from the
                  ability to offset the taxable loss from operations against the
                  sale of discontinued operations. The benefit from net
                  operating losses from periods prior to 1999 that were realized
                  as a result of the radio station sale transactions was
                  allocated to discontinued operations

                  A reconciliation of the statutory federal income tax rate
                  (benefit) and the effective tax rate as a percentage of income
                  (loss) before taxes on income is as follows:
<TABLE>
<CAPTION>

                                                                                        1999                 1998
                                                                                     ----------          -----------
                  <S>                                                               <C>                 <C>
                  Statutory rate (benefit)                                            (34.0%)              (34.0%)
                  Current state tax benefit                                            (0.4%)               (1.1%)
                  Loss carry forwards with no current benefit                          25.4%                 8.3%
                                                                                     -------             -------
                  Effective tax rate (benefit)                                         (9.0%)              (26.8%)
                                                                                     =======             =======
</TABLE>



                  Deferred income taxes reflect the net tax effects of temporary
                  differences between the carrying amounts of assets and
                  liabilities for financial reporting purposes and the amounts
                  used for income tax purposes. Significant components of the
                  Company's deferred tax assets and liabilities as of December
                  31 are as follows:


<TABLE>
                  <S>                                                           <C>                <C>
                  Deferred tax assets:
                    Net operating loss carryforwards                            $     1,111,000     $     11,877,000
                    Net operating loss carryforward of
                       subsidiaries not consolidated for
                       tax purposes                                                   6,288,000                    -
                    Excess of subsidiary and equity-basis
                       investee stock tax basis over the
                       amount for financial reporting                                         -            5,515,000
                    Other items not yet deductible for tax
                       purposes                                                         220,000               20,000
                                                                                ---------------     ----------------

                  Total long-term deferred tax asset                                  7,619,000           17,412,000

                  Deferred tax liability:
                    Deferred installment gain                                                 -            3,650,000
                    Amortization and the excess of broadcasting
                       license financial reporting basis over the
                       amounts for taxes                                                      -            3,237,000
                    Depreciation                                                        190,000                    -
                                                                                ---------------     ----------------

                  Total net long-term deferred tax asset                              7,429,000           10,525,000

                  Valuation allowance for net deferred tax assets                 (   7,429,000)      (   10,525,000)
                                                                                ---------------     ----------------

                  Net deferred tax assets                                       $             -     $              -
                                                                                ===============     ================
</TABLE>


                                      -49-

<PAGE>   51


                             INTELEFILM CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 14: INCOME TAXES (CONTINUED)

         As the Company has posted consistent operating losses since inception
         exclusive of the radio station sale transactions, realization of the
         tax benefit related to the net deferred tax asset is uncertain.
         Accordingly, a valuation allowance has been recorded for the full value
         of the net deferred tax asset. The net change in the deferred tax
         valuation allowance was a decrease of $3,096,000 and $3,342,000 in 1999
         and 1998, respectively.


                                     -50-



<PAGE>   52

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

                  None.

                                    PART III

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

    Set forth below is certain information concerning the management of the
Company as of March 1, 2000. There are no family relationships among any
directors and any executive officers.
<TABLE>
<CAPTION>

                                   MANAGEMENT

--------------------------------    -----------------------------------------------------
                      Name                                    Position

                                    Age
      <S>                           <C>    <C>
      Christopher T. Dahl           56     Chairman of the Board, President and Chief Executive
                                           Officer
      James G. Gilbertson           38     Chief Operating Officer
      Steven C. Smith               44     Chief Financial Officer
      Jill J. Theis                 29     General Counsel and Secretary
      Michael N. Delgado            40     Vice President of Marketing
      Richard W. Perkins            69     Director
      Michael R. Wigley             46     Director
      William E. Cameron            55     Director
</TABLE>


         Christopher T. Dahl has been President, Chief Executive Officer and
Chairman of the Company since its inception in February 1990. Mr. Dahl also
serves as Chairman of the Board, President and Chief Executive Officer of
Harmony, a company which produces television commercials, music videos and
related media, of which the Company is the largest shareholder and is the
Chairman of the Board of webADTV. Messrs. Dahl and Perkins own MMLLC. Employees
of MMLLC provide certain administrative, legal and accounting services to the
Company and Harmony. From 1969 to 1979, Mr. Dahl was the founder and President
of a group of companies involved in photo finishing, retail photo sales, home
sewing notions, toy distribution and retail craft stores. He was employed by
Campbell-Mithun and Knox Reeves Advertising from 1965 through 1969.

         James G. Gilbertson has served as the Company's Chief Operating Officer
since April 1996 and its Chief Financial Officer from July 1992 to December 21,
1999. In January 2000, Mr. Gilbertson was appointed the Chief Executive Officer,
President and director of webADTV. From June 1988 to July 1992, he was the Chief
Financial Officer of Parker Communications, which operated a group of radio
stations. From 1985 to June 1988, he was Controller of the radio division of
Palmer Communications located in Des Moines, Iowa. Prior to joining Palmer
Communications, Mr. Gilbertson was a practicing certified public accountant with
the firm of Ernst & Young LLP. Mr. Gilbertson is also the Chief Operating
Officer of Harmony. Mr. Gilbertson is also a director of Founders Food &
Firkins, Ltd., a company which owns and operates Granite City Brewery, a
microbrewery restaurant in St. Cloud, Minnesota.

         Steven C. Smith became the Chief Financial Officer of the Company on
December 21, 1999. Mr. Smith has been with the Company since October 1998.
Formerly the Chief Financial Officer of DIC Entertainment Animation Television
and the Vice President of Finance of Orion Television, Mr. Smith brings more
than 20 years experience with companies such as the Walt Disney Company. Mr.
Smith has also performed as a financial consultant to special effects houses, TV
and Satellite Broadcasters and technology companies. On December 21, 1999, Mr.
Smith also became the Chief Financial Officer of Harmony.


                                       51

<PAGE>   53



Jill J. Theis joined the Company in March 1997 and has served as the General
Counsel and Secretary since February 1999. From January 1996 to March 1997, Ms.
Theis worked for the law firm of Holper, Welsh, Mitchell & Joanis, P.A. in
Minneapolis, Minnesota. From 1993 to 1997, Ms. Theis attended law school at
William Mitchell School of Law in St. Paul, Minnesota. Ms. Theis is also the
General Counsel and Secretary of Harmony.

         Michael N. Delgado oversees the marketing and sales efforts of the
Company and has been with the Company since March 1997. A graduate of the
University of Southern California School of Fine Arts, Mr. Delgado has
orchestrated national marketing campaigns and has been involved in worldwide
branding efforts for a variety of corporations including Patagonia and Lucky
Brand Clothing Companies. Mr. Delgado gained significant operations experience
in his capacity as President of SenDel Automotive Corporation, a manufacturer of
aluminum automotive wheels whose customers included Toyota Motor Company.

         Richard W. Perkins has been a director of the Company since its
inception. For more than five years, Mr. Perkins has been President and Chief
Executive Officer of Perkins Capital Management ("PCM"), a registered investment
advisor. Mr. Perkins is also a director of the following publicly held
companies: Bio-Vascular, Inc., a medical products manufacturer; CNS, Inc., a
consumer products manufacturer; Eagle Pacific Industries, Inc., a manufacturer
of plastic pipe; Harmony; LifeCore Biomedical, Inc., a medical device
manufacturer; Nortech Systems, Inc., an electronic sub-systems manufacturer;
Quantech LTD., a developer of immunological tests; and Vital Images, Inc., a
medical visualization software company.

         Michael R. Wigley was elected to the Company's Board of Directors in
February 1998. Mr. Wigley is President and Chief Executive Officer of Great
Plains Companies, Inc. ("Great Plains"), a building material and supply company
based in Roseville, Minnesota. He has served as its President since 1989. Mr.
Wigley is Chairman and Chief Executive Officer of four subsidiaries of Great
Plains, as well as Chairman and Chief Executive Officer of Great Plains
Properties, Inc. and TerraDek Lighting, Inc., two independent privately-held
companies. Mr. Wigley is also a director of Choicetel Communications, Inc., an
internet kiosk provider. He co- founded the Minnesota branch of McKinsey &
Company, where he managed various teams of consultants from 1986 to 1989. Mr.
Wigley holds a M.B.A. from Harvard University and a M.S. in Civil Engineering
from Stanford University.

         William E. Cameron was elected to the Company's Board of Directors in
April 1998. Since 1993, Mr. Cameron has been the head of International Business
Development for Universal Health Communications, London, England, the largest
medical-health-wellness video library in the world. Mr. Cameron also runs
International Telemedicine Marketing for KZT Corporation. Mr. Cameron also
serves as a director of Harmony and RME Entertainment.

         Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers, directors and persons who own more than 10% of
a registered class of the Company's equity securities to file reports of
ownership and changes in ownership with the SEC. Such officers, directors and
shareholders are required by the SEC to furnish the Company with copies of all
such reports. To the Company's knowledge, based solely on a review of copies of
reports filed with the SEC during 1999, all applicable Section 16(a) filing
requirements were satisfied except that one report on Form 5 setting forth the
November 5, 1999 exercise by Christopher T. Dahl, President, Chief Executive
Officer and Chairman of a stock option to purchase 125,000 shares was not filed
on a timely basis.



                                       52

<PAGE>   54



         ITEM 10   EXECUTIVE COMPENSATION

         Information in response to this Item is incorporated herein by
reference from the information set forth under the caption "Executive
Compensation" in the Definitive Proxy Statement for the Company's 2000 Annual
Meeting of Shareholders.

         ITEM 11   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

         The following table contains certain information as of March 1, 2000,
regarding the beneficial ownership of the Company's Common Stock by (i) each
person known by the Company to own beneficially more than 5% of the Company's
Common Stock, (ii) each director, (iii) each executive officer, and (iv) the
executive officers and directors as a group, and as to the percentage of the
outstanding shares held by them on such date. Any shares which are subject to an
option or a warrant exercisable within 60 days are reflected in the following
table and are deemed to be outstanding for the purpose of computing the
percentage of Common Stock owned by the option or warrant holder but are not
deemed to be outstanding for the purpose of computing the percentage of Common
Stock owned by any other person. Unless otherwise noted, each person identified
below possesses sole voting and investment power with respect to such shares.
The business address of Messrs. Dahl, Wigley, Cameron, Gilbertson, Delgado,
Smith and Ms. Theis is 5501 Excelsior Boulevard, Minneapolis, Minnesota 55416.
<TABLE>
<CAPTION>
                                                                        SHARES               PERCENT
                                                                     BENEFICIALLY               OF
                                                                       OWNED (1)              CLASS
                                                           -------------------------    -----------------
         <S>                                               <C>                          <C>
         Christopher T. Dahl.......................                    1,127,668(2)        15.0%
         William Bednarczyk........................                      628,500(3)         9.0%
            6908 Gleason Road
            Edina, Minnesota 58439
         Foothill Capital Corporation..............                      600,000(4)         8.6%
            11111 Santa Monica Boulevard
            Los Angeles, California 90025
         Richard W. Perkins.....................                         518,717(5)         7.3%
            730 East Lake Street
            Wayzata, Minnesota 55391
         Perkins Capital Management, Inc...........                      680,186(6)         9.6%
            730 East Lake Street
            Wayzata, Minnesota 55391
         James G. Gilbertson...................                         235, 976(7)         3.6%
         Michael N. Delgado........................                       73,006(8)         1.1%
         Jill J. Theis.............................                       18,432(8)            *
         Steven C. Smith...........................                       50,000(8)            *
         Michael R. Wigley.........................                       68,750(9)         1.1%
         William E. Cameron........................                       33,750(8)            *
         All Directors and Executive Officers
         as a Group (8 persons)....................                    2,111,299(10)       24.8%
</TABLE>

         ---------------
         *     Less than 1%
         (1)   Securities "beneficially owned" by a person are determined in
               accordance with the definition of "beneficial ownership" set
               forth in the regulations of the SEC and, accordingly, may
               include securities owned by or for, among others, the spouse,
               children or certain other relatives of such person as well as
               other securities as to which the person has or shares voting
               or investment power or has the option or right to acquire
               Common Stock within 60 days.
         (2)   Mr. Dahl has the sole right to sell and has sole voting power
               over such shares.  Includes 434,682 shares purchasable upon
               the exercise of options and warrants.
         (3)   Based upon statements filed on a Schedule 13D with the SEC as
               of July 23, 1999, Mr. Bednarczyk has the sole right to sell
               such shares and has sole voting power over such shares.
         (4)   Represents shares purchasable upon the exercise of warrants.


                                       53

<PAGE>   55



         (5)   Represents shares held by Mr. Perkins as trustee for various
               trusts of which he is sole trustee. Mr. Perkins has the sole
               right to sell such shares and has sole voting power over
               336,460 of such shares. Includes 167,257 shares purchasable
               upon the exercise of options and warrants.
         (6)   Based upon statements filed with the SEC as of February 2,
               2000, PCM is a registered investment adviser of which Richard
               W. Perkins, a director of the Company, is President. As set
               forth in Schedule 13 D filed with the SEC on February 2, 2000,
               PCM has the sole right to sell such shares and has sole voting
               power over 149,051 of such shares. Mr. Perkins and PCM
               disclaim any beneficial interest in such shares. This excludes
               shares beneficially owned by Mr. Perkins.
         (7)   Includes 231,476 shares purchasable upon the exercise of
               options.
         (8)   Represents shares purchasable upon the exercise of options.
         (9)   Includes 33,750 shares purchasable upon exercise of options.
        (10)   Includes 1,042,353 shares purchasable upon exercise of options
               and warrants.

         ITEM  12  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         LEASES

         Until October 30, 1998, the studios and tower site of WWTC(AM) and
KYCR(AM) were located in St. Louis Park, Minnesota. The studio facility
consisted of approximately 12,000 square feet. The tower site included four
200-foot towers, a transmitter building and a storage garage on approximately 16
acres. The tower site was leased from Mr. Dahl at a total annual rent of
approximately $114,000, and the studio site was leased from 5501 Building
Partnership, a partnership consisting of Messrs. Dahl and Perkins at an annual
rent of approximately $132,000. In connection with the sale of radio station
KYCR(AM), Salem became the lessee for the KYCR(AM) tower site lease. The
transaction was structured so that the monthly tower lease payments decreased
from $4,000 a month to $2,000 a month. The Related Party Transaction Committee
has approved the Company's reimbursement to Mr. Dahl for the money he would have
received had the Company continued to be the lessee of the KYCR(AM) tower site
through October 31, 2008.

         Until February 28, 1999, the Company leased certain office space at 724
First Street North, Minneapolis, Minnesota, the Company's former executive
offices, from 724 Associates, a partnership consisting of Messrs. Dahl, Perkins
and Stephen L. Wallack, a shareholder of the Company. These facilities were
leased at annual rental of $54,000. The arrangements were approved by the
Related Party Transaction Committee of the Company's Board of Directors, which
is comprised of disinterested directors, and the Company believes such
arrangements were on terms at least as favorable as could have been obtained
from unaffiliated third parties. On March 1, 1999, the Company assigned all of
its rights and obligations under the lease to 5501 Building Partnership, an
entity owned by Dahl and Perkins.

         MANAGEMENT SERVICES FROM AN AFFILIATE

         From July 1993 through July 1998 the Company received administrative,
legal and accounting services from RMC, an entity owned by Messrs. Dahl,
Perkins, and Russell Cowles II. Mr. Cowles, a former director-elect of the
Company, is a beneficiary and trustee of John Cowles Family Trust, a shareholder
of the Company. Since August 1998, the Company has received such services from
MMLLC, an entity owned by Messrs. Dahl and Perkins. MMLLC provides corporate,
legal, accounting and financial services to the Company, CAC and Harmony. The
Company also subleases its executive offices from MMLLC. The Company pays a set
monthly fee of $125,000 for the services listed above. All outside services
directly attributable to the Company are billed directly to the Company. The
Company paid MMLLC an aggregate of $1,095,000 for such services during the
fiscal year ended December 31, 1999 and an aggregate of $ 375,000 for such
services during the fiscal year ended December 31, 1998. Harmony pays a set
monthly fee of $55,000 for services provided to it. Harmony paid MMLLC an
aggregate of $463,720 for such services during its fiscal year ending June 30,
1999 and $0 for its fiscal year ending June 30, 1998. The Company paid RMC an
aggregate of $525,000 for such services during


                                       54

<PAGE>   56



fiscal year ended December 31, 1998. The salaries of three of the Company's
officers, Messrs. Gilbertson, Smith and Ms. Theis are paid by MMLLC. The
services of the Chief Operating Officer, Chief Financial Officer and the General
Counsel are also rendered by Messrs. Gilbertson, Smith and Ms. Theis,
respectively, on a shared basis with Harmony. Additionally, MMLLC received
additional payments of $550,000 in connection with the closing of the sale of
the radio stations to 1090, Salem, CRN and Radio Unica Corp.

         HARMONY-RELATED TRANSACTIONS

         In connection with the July 1997 acquisition by the Company of shares
of common stock of Harmony, the Company borrowed an aggregate of $1.25 million
from three parties: Rodney P. Burwell, a former director of the Company, Pyramid
Partners, L.P., an entity of which PCM is the managing partner, and William M.
Toles, a shareholder of the Company. Mr. Perkins, a director of the Company, is
President and Chief Executive Officer of PCM. Messrs. Perkins and Toles are
members of the Board of Directors of Harmony. Their loans were evidenced by
notes bearing interest at 10% per year, payable on July 25, 1998. Additionally,
warrants to purchase an aggregate of 125,000 shares of Common Stock at $4.00 per
share were issued to those lenders. In June 1998, the Company received
extensions from Messrs. Toles and Burwell and Pyramid Partners in exchange for
an option for either additional warrants or for an increase in the interest rate
on the outstanding balance of the loan. Mr. Toles and Pyramid Partners elected
to receive additional warrants to purchase 12,500 and 25,000 shares of the
Company's common stock at a price of $3.06 per share for a term of five years,
respectively, and Mr. Burwell elected to receive an increase in the interest
rate to 20%. On November 3, 1998, the Company repaid Messrs.
Toles and Burwell and Pyramid Partners in full.

         Messrs. Dahl and Perkins are directors of Harmony, an entity of which
the Company is the largest shareholder. In January 1998, the Company received
proceeds of $611,000 and paid debt issuance costs of $39,000 through the
issuance of a note payable to Harmony on face amount of $650,000. The Company
repaid the entire note along with accrued interest in June 1998.

         In April 1998, the Company assigned to Pyramid Partners, L.P.; Perkins
& Partners, Inc., Profit Sharing Plan & Trust and Christopher T. Dahl & State
Bank of New Prague Joint Account all of its right to purchase 225,000 shares of
common stock of Harmony at $2.50 per share from Glenn B. Laken, a shareholder of
Harmony. In October 1998, the Company repurchased the 225,000 shares of common
stock of Harmony at $2.75 per share from Pyramid Partners, L.P., Perkins &
Partners, Inc. Profit Sharing Plan & Trust and Christopher T. Dahl & State Bank
of New Prague Joint Account.

         From November 1998 to March 2000, the Company has advanced Harmony
operating funds under notes receivable of which approximately $3.7 million
remain outstanding as of March 1, 2000. The notes receivable bear an interest
rate of 14%. Also, until such time as Harmony receives a new working line of
credit, the Company has agreed to fund Harmony's operations as necessary. At
this time, the Company receives no additional compensation for providing such
services to Harmony.

         OTHER

         In connection with the sale of the assets to CRN, Christopher T. Dahl,
Chairman of the Board of Directors, President and Chief Executive Officer of the
Company entered into a three (3) year Consulting and Non- Circumvention
Agreement with CRN, pursuant to which Mr. Dahl received payment of $750,000.
Also, in connection with the sale of the assets to Radio Unica, Mr. Dahl entered
into a two (2) year Non-Competition Agreement with Radio Unica, pursuant to
which Mr. Dahl received payment of $750,000. The fees provided for under these
agreements are payable whether or not CRN or Radio Unica requests Mr. Dahl to
perform any services thereunder.

         In April 1999, after consulting with an outside consulting firm, the
Board of Directors adopted a severance plan which covers two of the Company's
executive officers, Christopher T. Dahl and James G. Gilbertson, and


                                       55

<PAGE>   57



one of the Company's non-employee directors, Richard W. Perkins. As to the
officers, the plan provides for severance benefits in the event of termination
of employment under certain circumstances following a change in control of the
Company (as defined in the plan). The applicable circumstances are (a)
termination by the Company without cause (as defined in the plan) other than
because of death, retirement or disability (only as it pertains to Messrs. Dahl
and Perkins), (b) termination for good reason (as defined in the plan), or (c)
termination without good reason if the date of termination is within 180 days
after a change in control. Following any such termination, in addition to
compensation and benefits already earned, such individual will be entitled to
receive a lump sum severance payment equal to a multiple of such individual's
annual gross base salary from MMLLC, Harmony and the Company as then in effect,
including amounts accrued but not paid. The applicable multiples for Messrs.
Dahl and Perkins are five and for Mr. Gilbertson two. Based upon 1999 annual
gross base salaries, Messrs. Dahl and Gilbertson would be eligible to receive
lump sum severance payments of $1,455,000 and $350,000, respectively. As to Mr.
Perkins, he would be entitled to receive a lump sum severance payment of
$250,000. Mr. Perkins is participating in the plan in consideration of his
status as a founding director of the Company and his ongoing consulting with
management, for which he has not received separate compensation. The plan also
provides for the accelerated vesting of outstanding stock options and certain
other benefits following a change in control. The plan is in effect from April
1, 1999 through March 31, 2002. Thereafter, the plan automatically renews
annually unless the Company gives notice that it does not wish to extend it. In
addition, the plan will continue in effect for three years after a change in
control.

         In November 1999, Mr. Dahl exercised his right to purchase 125,000
shares of the Company's common stock at a price equal to $1.625 per share by
executing a note receivable to the Company for the principal amount of $203,125
at an interest rate equal to 6% per annum. The Company's Board of Directors
approved the loan and exercise of the options.

         In August 1998, the Board of Directors of the Company authorized the
repurchase of up to 400,000 shares of common stock pursuant to Exchange Act Rule
10b-18 whereby such repurchase was to be made through a broker through purchases
of common stock in the open market in the Company's name and on its behalf. The
Company subsequently determined that the broker did not follow the Company's
instructions with respect to the purchase of such shares and canceled its
authorization for the repurchase of shares. The broker then advised the Company
that it has accumulated 385,000 shares of common stock for its own account and
presented Company with the opportunity to purchase such shares, but the Company
was unable to effect such purchase because of delays in connection with the
closing of the sale of assets to CRN and restrictions placed upon the Company by
its lender. Two of the Company's directors, Christopher T. Dahl and Richard W.
Perkins, with the consent of the Board, initiated negotiations with the broker
to acquire the broker's shares and financed the acquisition of 171,000 shares of
the Company's common stock from the broker for their own account and assumed all
market and other risks associated therewith. Upon the closing of the sale of the
assets to CRN, the Company purchased 171,000 shares of the Company's common
stock from Messrs. Dahl and Perkins at their actual cost, including financing
expenses associated therewith in the amount of approximately $563,000 and
assumed the financing obligations of Messrs. Dahl and Perkins at Key Community
Bank. In January 1999, the Company repaid in full along with interest its
indebtedness with Key Community Bank. The Company canceled the repurchase of
shares pursuant to its 1998 repurchase plan.

         Lance W. Riley, former Secretary and General Counsel of the Company,
had an of counsel relationship with Hessian & McKasy, P.A. ("HMPA"), one of the
law firms which represented the Company in connection with the ABC/Disney
litigation. During 1997, the Company paid HMPA legal fees of $883,749 and
disbursements of $106,480. During 1998, the Company paid HMPA legal fees of
$419,299 and disbursements of 50,735 in connection with the ABC/Disney
litigation.



                                       56

<PAGE>   58


<TABLE>
<CAPTION>

         ITEM   13       EXHIBITS, LIST AND REPORTS ON FORM 8-K

                (a)      Exhibits
         <S>                      <C>
                         3.1      Articles of Incorporation, as amended and
                                  restated (incorporated by reference to the
                                  Company's Form 8-K filed October 1, 1999).
                         3.2      Amended and Restated Bylaws (incorporated by
                                  reference to the Company's Registration
                                  Statement on Form S-18 (File No. 33-44412)
                                  filed on December 5, 1991).
                         4.1      Rights Agreement between the Company and
                                  Norwest Bank Minnesota, National
                                  Association, as Rights Agent, dated as of
                                  February 19, 1998 (incorporated by reference
                                  to the Company's Registration Statement on
                                  Form 8-A (File No. 0-21534) filed on
                                  February 20, 1998).
                         10.1     1991 Incentive Stock Option Plan (incorporated
                                  by reference to the Company's Registration
                                  Statement on Form S-18 (File No. 33-44412)
                                  filed on December 5, 1991).
                         10.2     1994 Stock Option Plan (incorporated by
                                  reference to the Company's Annual Report on
                                  Form 10-KSB for the fiscal year ended
                                  December 31, 1996 (File No. 0-21534) filed
                                  on March 31, 1997, as amended by Definitive
                                  Schedule 14A (Proxy Statement) filed on July
                                  9, 1998).
                         10.3     1994 Director Stock Option Plan
                                  (incorporated by reference to the Company's
                                  Annual Report on Form 10-KSB for the fiscal
                                  year ended December 31, 1994 (File No.
                                  0-21534) filed on March 31, 1995, as amended
                                  by Form 10-KSB/A filed on October 4, 1995
                                  and as amended by Definitive Proxy Schedule
                                  14A filed on April 29, 1999).
                         10.4     Common Stock Purchase Warrant issued by the
                                  Company to Foothill Capital Corporation,
                                  dated November 7, 1996 (incorporated by
                                  reference to the Company's Annual Report on
                                  Form 10-KSB for the fiscal year ended
                                  December 31, 1996 (File No. 0-21534) filed
                                  on March 31, 1997).
                         10.5     Management Services Agreement between the
                                  Company and Media Management, L.L.C. (f/k/a
                                  Radio Management, L.L.C.)  dated July 31, 1998
                                  and effective August 1, 1998.
                         10.7     Common Stock Purchase Warrant issued by the
                                  Company to Foothill Capital Corporation,
                                  dated September 25, 1997 (incorporated by
                                  reference to the Company's Current Report on
                                  Form 8-K/A (File No. 0-21534) filed on
                                  October 1, 1997, relating to the Company
                                  acquiring a 40.7% beneficial interest in
                                  Harmony Holdings, Inc.).
                         10.8     Common Stock Purchase Warrant issued by the
                                  Company to Foothill Capital Corporation,
                                  dated as of March 13, 1998 (incorporated by
                                  reference to the Company's Annual Report on
                                  Form 10-KSB for the fiscal year ended
                                  December 31, 1997 (File No. 0-21534 filed on
                                  March 31, 1998).
                         10.9     Amended and Restated Common Stock Purchase
                                  Warrant issued by the Company to Foothill
                                  Capital Corporation, dated March 13, 1998
                                  (incorporated by reference to the Company's
                                  Annual Report on Form 10-KSB for the fiscal
                                  year ended December 31, 1997 (File No.
                                  0-21534 filed on March 31, 1998).
                         10.10    Purchase Agreement with Catholic Radio
                                  Network, LLC dated April 17, 1998
                                  (incorporated by reference to the
                                  Registrant's Definitive Schedule 14A (Proxy
                                  Statement) filed on July 8, 1998).
                         10.11    First Amendment to the Purchase Agreement
                                  with Catholic Radio Network, LLC, dated
                                  September 29, 1998 (incorporated by
                                  reference to the Registrant's Current Report
                                  on Form 8-K filed on October 2, 1998).
</TABLE>


                                       57

<PAGE>   59
<TABLE>

                     <S>      <C>
                     10.12    Second Amendment to Purchase Agreement with
                              Catholic Radio Network, LLC, dated October
                              26, 1998 (incorporated by reference to the
                              Registrant's Form 10QSB for quarter ended
                              September 30, 1998 and filed on November 16,
                              1998).
                     10.13    Asset Purchase Agreement by and between the
                              Company and Radio Unica Corp., dated October
                              27, 1998 (incorporated by reference to the
                              Registrant's Form 10QSB for quarter ended
                              September 30, 1998 and filed on November 16,
                              1998).
                     10.14    First Amendment to the Asset Purchase
                              Agreement by and between the Company and
                              Radio Unica Corp., dated October 27, 1998
                              (incorporated by reference to the
                              Registrant's Form 10QSB for quarter ended
                              September 30, 1998 and filed on November 16,
                              1998).
                     10.15    Amendment No. 1 to Securities Purchase
                              Agreement by and between the Company,
                              Talisman Capital Opportunity Fund Ltd.,
                              Dominion Capital Limited and Sovereign
                              Partners, L.P dated October 22, 1998
                              (incorporated by reference to the
                              Registrant's Form 10QSB for quarter ended
                              September 30, 1998 and filed on November 16, 1998).
                     10.16    Form of Common Stock Purchase Warrant issued
                              by the Company to Talisman Capital
                              Opportunity Fund Ltd. (incorporated by
                              reference to the Registrant's Current Report
                              on Form 8-k filed on July 6, 1998).
                     10.17    Form of Common Stock Purchase Warrant issued
                              by the Company to Dominion Capital Limited
                              (incorporated by reference to the
                              Registrant's Current Report on Form 8-K
                              filed on July 6, 1998).
                     10.18    Form of Common Stock Purchase Warrant issued
                              by the Company to Sovereign Partners LP
                              (incorporated by reference to the
                              Registrant's Current Report on Form 8-k
                              filed on July 6, 1998).
                     10.19    Promissory Note issued by Catholic Radio
                              Network, LLC to the Company, dated October
                              30, 1998 (incorporated by reference to the
                              Registrant's Form 10QSB for quarter ended
                              September 30, 1998 and filed on November 16,
                              1998).
                     10.20    Loan Agreement by and between the Company
                              and CRN Broadcasting, LLC, dated October 30,
                              1998 (incorporated by reference to the
                              Registrant's Form 10QSB for quarter ended
                              September 30, 1998 and filed on November 16,
                              1998).
                     10.21    Amendment No. 4 to the Amended and Restated
                              Loan and Security Agreement by and between
                              the Company and Foothill Capital
                              Corporation, dated as of October 1, 1998
                              (incorporated by reference to the
                              Registrant's Form 10QSB for quarter ended
                              September 30, 1998 and filed on November 16,
                              1998).
                     10.22    Asset Purchase Agreement by and between the
                              Company and 1090 Investments, L.L.C. dated
                              May 1, 1998 (incorporated by reference to
                              the Registrant's Definitive Schedule 14A
                              (Proxy Statement) filed on July 8, 1998).
                     10.23    Amendment No. 3 to the Amended and Restated
                              Loan and Security Agreement by and between
                              the Company and Foothill Capital
                              Corporation, dated as of May 21, 1998, and
                              effective as of April 17, 1998 (incorporated
                              by reference to the Registrant's Form 8-K
                              filed on June 5, 1998).
                     10.24    Securities Purchase Agreement by and between
                              the Company, Talisman Capital Opportunity
                              Fund, Ltd., Dominion Capital Limited and
                              Sovereign Partners, LP dated June 25, 1998
                              (incorporated by reference to the
                              Registrant's Form 8-K filed on July 6,
                              1998).
                     10.25    Registration Rights Agreement by and between
                              the Company, Talisman Capital Opportunity
                              Fund, Ltd., Dominion Capital Limited and
                              Sovereign Partners, LP
</TABLE>


                                       58

<PAGE>   60

<TABLE>

                         <S>      <C>
                                  dated June 25, 1998 (incorporated by
                                  reference to the Registrant's Form 8-K filed
                                  on July 6, 1998).
                         10.26    Common Stock Purchase Warrant issued by the
                                  Company to Talisman Capital dated June 26,
                                  1998 (incorporated by reference to the
                                  Registrant's Form 8-K filed on July 6,
                                  1998).
                         10.27    Common Stock Purchase Warrant issued by the
                                  Company to Dominion Capital Limited dated
                                  June 26, 1998 (incorporated by reference to
                                  the Registrant's Form 8-K filed on July 6,
                                  1998).
                         10.28    Common Stock Purchase Warrant issued by the
                                  Company to Sovereign Partners LP, dated June
                                  26, 1998 (incorporated by reference to the
                                  Registrant's Form 8-K filed on July 6,
                                  1998).
                         10.29    Guaranty by and between the Company and
                                  Heller Financial, Inc., dated July 30, 1998
                                  (incorporated by reference to Registrant's
                                  Form 10QSB for quarter ended June 30, 1998
                                  and filed August 13, 1998).
                         10.30    Asset Purchase Agreement by and between the
                                  Company and Salem Communications Corporation
                                  for the sale of two of the Company's radio
                                  stations (incorporated by reference to the
                                  Registrant's Definitive Schedule 14A (Proxy
                                  Statement) filed on July 8, 1998).
                         10.31    Guaranty by and between the Company and The
                                  Rector, Church-Wardens and Vestrymen of
                                  Trinity Church dated July 8, 1998
                                  (incorporated by reference to the
                                  Registrant's Form 10-KSB for fiscal year
                                  ending December 31, 1998 and filed on March
                                  31, 1999).
                         10.32    Promissory Note issued by Harmony Holdings,
                                  Inc. to the Company dated November 13, 1998
                                  (incorporated by reference to the
                                  Registrant's Form 10- KSB for fiscal year
                                  ending December 31, 1998 and filed on March
                                  31, 1999).
                         10.33    Promissory Note issued by Harmony Holdings,
                                  Inc. to the Company dated November 18, 1998
                                  (incorporated by reference to the
                                  Registrant's Form 10- KSB for fiscal year
                                  ending December 31, 1998 and filed on March
                                  31, 1999).
                         10.34    Promissory Note issued by Harmony Holdings,
                                  Inc. to the Company dated December 17, 1998
                                  (incorporated by reference to the
                                  Registrant's Form 10- KSB for fiscal year
                                  ending December 31, 1998 and filed on March
                                  31, 1999).
                         10.35    Promissory Note issued by Harmony Holdings,
                                  Inc. to the Company dated January 7, 1999
                                  (incorporated by reference to the
                                  Registrant's Form 10-KSB for fiscal year
                                  ending December 31, 1998 and filed on March
                                  31, 1999).
                         10.36    Promissory Note issued by Harmony Holdings,
                                  Inc. to the Company dated January 15, 1999
                                  (incorporated by reference to the
                                  Registrant's Form 10-KSB for fiscal year
                                  ending December 31, 1998 and filed on March
                                  31, 1999).
                         10.37    Promissory Note issued by Harmony Holdings,
                                  Inc. to the Company dated January, 1999
                                  (incorporated by reference to the
                                  Registrant's Form 10-KSB for fiscal year
                                  ending December 31, 1998 and filed on March
                                  31, 1999).
                         10.38    Promissory Note issued by Harmony Holdings,
                                  Inc. to the Company dated January, 1999
                                  (incorporated by reference to the
                                  Registrant's Form 10-KSB for fiscal year
                                  ending December 31, 1998 and filed on March
                                  31, 1999).
                         10.39    Promissory Note issued by Harmony Holdings,
                                  Inc. to the Company dated February 8, 1999
                                  (incorporated by reference to the Registrant's
                                  Form 10- KSB for fiscal year ending December
                                  31, 1998 and filed on March 31, 1999).
                         10.40    Promissory Note issued by Harmony Holdings,
                                  Inc. to the Company dated February 18, 1999
                                  (incorporated by reference to the Registrant's
                                  Form 10-KSB for fiscal year ending December
                                  31, 1998 and filed on March 31, 1999).
                         10.41    Form of Promissory Note issued by Harmony
                                  Holdings, Inc. to the Company.
                         10.42    1999 Broad-Based Stock Incentive Plan.
                         10.43    1996 Employee Stock Purchase Plan as amended
                                  and restated.
</TABLE>


                                       59

<PAGE>   61

<TABLE>

                <S>               <C>
                         10.44    1999 Company's Severance Policy.
                         10.45    Memorandum of Understanding by and among the
                                  Company, AT&T, and Excalibur Technologies.
                         21.1     Subsidiaries of the Company.
                         23.1     Consent of BDO Seidman, LLP.
                         27.1     Financial Data Schedule.

                (b)      Reports on Form 8-K

                         (1)      The Company's Current Report on Form 8-K
                                  filed on October 1, 1999, relating to the
                                  Company's name change from Children's
                                  Broadcasting Corporation to iNTELEFILM
                                  Corporation.
                         (2)      The Company's Current Report on Form 8-K
                                  filed on December 10, 1999, relating to the
                                  Company's announcement of inteleSource.
</TABLE>


                                   SIGNATURES

                  In accordance with Section 13 or 15(d) of the Exchange Act,
the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Minneapolis, State of
Minnesota on October 27, 2000.



                              iNTELEFILM CORPORATION

                              By   /s/ Christopher T. Dahl
                                 ------------------------------------------
                                   Christopher T. Dahl
                                   President and Chief Executive Officer

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


<TABLE>
<CAPTION>

         Signature                          Title                                                Date
         ---------                          -----                                                ----
         <S>                                <C>                                                  <C>
         /s/ Christopher T. Dahl            President, Chief Executive Officer                   October 27, 2000
         -------------------------          and Director
         Christopher T. Dahl                (principal executive officer)


         /s/ Steven C. Smith                Chief Financial Officer and                         October 27, 2000
         -------------------------          Principal Accounting Officer
         Steven C. Smith

         /s/ Richard W. Perkins             Director                                             October 27, 2000
         -------------------------
         Richard W. Perkins


         /s/ Michael R. Wigley              Director                                             October 27, 2000
         -------------------------
         Michael R. Wigley

         /s/ William E. Cameron             Director                                             October 27, 2000
         -------------------------
         William E. Cameron

</TABLE>



                                       60

<PAGE>   62



<TABLE>
<CAPTION>

                                                 EXHIBIT INDEX
                  EXHIBITS
                  <S>               <C>
                           3.1      Articles of Incorporation, as amended and
                                    restated (incorporated by reference to the
                                    Company's Form 8-K filed October 1, 1999).
                           3.2      Amended and Restated Bylaws (incorporated by
                                    reference to the Company's Registration
                                    Statement on Form S-18 (File No. 33-44412)
                                    filed on December 5, 1991).
                           4.1      Rights Agreement between the Company and
                                    Norwest Bank Minnesota, National
                                    Association, as Rights Agent, dated as of
                                    February 19, 1998 (incorporated by reference
                                    to the Company's Registration Statement on
                                    Form 8-A (File No. 0-21534) filed on
                                    February 20, 1998).
                           10.1     1991 Incentive Stock Option Plan
                                    (incorporated by reference to the Company's
                                    Registration Statement on Form S-18 (File
                                    No. 33-44412) filed on December 5, 1991).
                           10.2     1994 Stock Option Plan (incorporated by
                                    reference to the Company's Annual Report on
                                    Form 10-KSB for the fiscal year ended
                                    December 31, 1996 (File No. 0-21534) filed
                                    on March 31, 1997, as amended by Definitive
                                    Schedule 14A (Proxy Statement) filed on July
                                    9, 1998).
                           10.3     1994 Director Stock Option Plan
                                    (incorporated by reference to the Company's
                                    Annual Report on Form 10-KSB for the fiscal
                                    year ended December 31, 1994 (File No.
                                    0-21534) filed on March 31, 1995, as amended
                                    by Form 10-KSB/A filed on October 4, 1995
                                    and as amended by Definitive Proxy Schedule
                                    14A filed on April 29, 1999).
                           10.4     Common Stock Purchase Warrant issued by the
                                    Company to Foothill Capital Corporation,
                                    dated November 7, 1996 (incorporated by
                                    reference to the Company's Annual Report on
                                    Form 10-KSB for the fiscal year ended
                                    December 31, 1996 (File No. 0-21534) filed
                                    on March 31, 1997).
                           10.5     Management Services Agreement between the
                                    Company and Media Management, L.L.C.
                                    (f/k/a Radio Management, L.L.C.)  dated July
                                    31, 1998 and effective August 1, 1998.
                           10.7     Common Stock Purchase Warrant issued by the
                                    Company to Foothill Capital Corporation,
                                    dated September 25, 1997 (incorporated by
                                    reference to the Company's Current Report on
                                    Form 8-K/A (File No. 0-21534) filed on
                                    October 1, 1997, relating to the Company
                                    acquiring a 40.7% beneficial interest in
                                    Harmony Holdings, Inc.).
                           10.8     Common Stock Purchase Warrant issued by the
                                    Company to Foothill Capital Corporation,
                                    dated as of March 13, 1998 (incorporated by
                                    reference to the Company's Annual Report on
                                    Form 10-KSB for the fiscal year ended
                                    December 31, 1997 (File No. 0-21534 filed on
                                    March 31, 1998).
                           10.9     Amended and Restated Common Stock Purchase
                                    Warrant issued by the Company to Foothill
                                    Capital Corporation, dated March 13, 1998
                                    (incorporated by reference to the Company's
                                    Annual Report on Form 10-KSB for the fiscal
                                    year ended December 31, 1997 (File No.
                                    0-21534 filed on March 31, 1998).
                           10.10    Purchase Agreement with Catholic Radio
                                    Network, LLC dated April 17, 1998
                                    (incorporated by reference to the
                                    Registrant's Definitive Schedule 14A (Proxy
                                    Statement) filed on July 8, 1998).
                           10.11    First Amendment to the Purchase Agreement
                                    with Catholic Radio Network, LLC, dated
                                    September 29, 1998 (incorporated by
                                    reference to the Registrant's Current Report
                                    on Form 8-K filed on October 2, 1998).
</TABLE>


                                       61

<PAGE>   63

<TABLE>

                    <S>      <C>
                    10.12    Second Amendment to Purchase Agreement with
                             Catholic Radio Network, LLC, dated October
                             26, 1998 (incorporated by reference to the
                             Registrant's Form 10QSB for quarter ended
                             September 30, 1998 and filed on November 16,
                             1998).
                    10.13    Asset Purchase Agreement by and between the
                             Company and Radio Unica Corp., dated October
                             27, 1998 (incorporated by reference to the
                             Registrant's Form 10QSB for quarter ended
                             September 30, 1998 and filed on November 16,
                             1998).
                    10.14    First Amendment to the Asset Purchase
                             Agreement by and between the Company and
                             Radio Unica Corp., dated October 27, 1998
                             (incorporated by reference to the
                             Registrant's Form 10QSB for quarter ended
                             September 30, 1998 and filed on November 16,
                             1998).
                    10.15    Amendment No. 1 to Securities Purchase
                             Agreement by and between the Company,
                             Talisman Capital Opportunity Fund Ltd.,
                             Dominion Capital Limited and Sovereign
                             Partners, L.P dated October 22, 1998
                             (incorporated by reference to the
                             Registrant's Form 10QSB for quarter ended
                             September 30, 1998 and filed on November 16,
                             1998).
                    10.16    Form of Common Stock Purchase Warrant issued
                             by the Company to Talisman Capital
                             Opportunity Fund Ltd. (incorporated by
                             reference to the Registrant's Current Report
                             on Form 8-k filed on July 6, 1998).
                    10.17    Form of Common Stock Purchase Warrant issued
                             by the Company to Dominion Capital Limited
                             (incorporated by reference to the
                             Registrant's Current Report on Form 8-K
                             filed on July 6, 1998).
                    10.18    Form of Common Stock Purchase Warrant issued
                             by the Company to Sovereign Partners LP
                             (incorporated by reference to the
                             Registrant's Current Report on Form 8-k
                             filed on July 6, 1998).
                    10.19    Promissory Note issued by Catholic Radio
                             Network, LLC to the Company, dated October
                             30, 1998 (incorporated by reference to the
                             Registrant's Form 10QSB for quarter ended
                             September 30, 1998 and filed on November 16,
                             1998).
                    10.20    Loan Agreement by and between the Company
                             and CRN Broadcasting, LLC, dated October 30,
                             1998 (incorporated by reference to the
                             Registrant's Form 10QSB for quarter ended
                             September 30, 1998 and filed on November 16,
                             1998).
                    10.21    Amendment No. 4 to the Amended and Restated
                             Loan and Security Agreement by and between
                             the Company and Foothill Capital
                             Corporation, dated as of October 1, 1998
                             (incorporated by reference to the
                             Registrant's Form 10QSB for quarter ended
                             September 30, 1998 and filed on November 16,
                             1998).
                    10.22    Asset Purchase Agreement by and between the
                             Company and 1090 Investments, L.L.C. dated
                             May 1, 1998 (incorporated by reference to
                             the Registrant's Definitive Schedule 14A
                             (Proxy Statement) filed on July 8, 1998).
                    10.23    Amendment No. 3 to the Amended and Restated
                             Loan and Security Agreement by and between
                             the Company and Foothill Capital
                             Corporation, dated as of May 21, 1998, and
                             effective as of April 17, 1998 (incorporated
                             by reference to the Registrant's Form 8-K
                             filed on June 5, 1998).
                    10.24    Securities Purchase Agreement by and between
                             the Company, Talisman Capital Opportunity
                             Fund, Ltd., Dominion Capital Limited and
                             Sovereign Partners, LP dated June 25, 1998
                             (incorporated by reference to the
                             Registrant's Form 8-K filed on July 6,
                             1998).
                    10.25    Registration Rights Agreement by and between
                             the Company, Talisman Capital Opportunity
                             Fund, Ltd., Dominion Capital Limited and
                             Sovereign Partners, LP
</TABLE>


                                       62

<PAGE>   64
<TABLE>
                           <S>      <C>
                                    dated June 25, 1998 (incorporated by
                                    reference to the Registrant's Form 8-K filed
                                    on July 6, 1998).
                           10.26    Common Stock Purchase Warrant issued by the
                                    Company to Talisman Capital dated June 26,
                                    1998 (incorporated by reference to the
                                    Registrant's Form 8-K filed on July 6,
                                    1998).
                           10.27    Common Stock Purchase Warrant issued by the
                                    Company to Dominion Capital Limited dated
                                    June 26, 1998 (incorporated by reference to
                                    the Registrant's Form 8-K filed on July 6,
                                    1998).
                           10.28    Common Stock Purchase Warrant issued by the
                                    Company to Sovereign Partners LP, dated June
                                    26, 1998 (incorporated by reference to the
                                    Registrant's Form 8-K filed on July 6,
                                    1998).
                           10.29    Guaranty by and between the Company and
                                    Heller Financial, Inc., dated July 30, 1998
                                    (incorporated by reference to Registrant's
                                    Form 10QSB for quarter ended June 30, 1998
                                    and filed August 13, 1998).
                           10.30    Asset Purchase Agreement by and between the
                                    Company and Salem Communications Corporation
                                    for the sale of two of the Company's radio
                                    stations (incorporated by reference to the
                                    Registrant's Definitive Schedule 14A (Proxy
                                    Statement) filed on July 8, 1998).
                           10.31    Guaranty by and between the Company and The
                                    Rector, Church-Wardens and Vestrymen of
                                    Trinity Church dated July 8, 1998
                                    (incorporated by reference to the
                                    Registrant's Form 10-KSB for fiscal year
                                    ending December 31, 1998 and filed on March
                                    31, 1999).
                           10.32    Promissory Note issued by Harmony Holdings,
                                    Inc. to the Company dated November 13, 1998
                                    (incorporated by reference to the
                                    Registrant's Form 10- KSB for fiscal year
                                    ending December 31, 1998 and filed on March
                                    31, 1999).
                           10.33    Promissory Note issued by Harmony Holdings,
                                    Inc. to the Company dated November 18, 1998
                                    (incorporated by reference to the
                                    Registrant's Form 10- KSB for fiscal year
                                    ending December 31, 1998 and filed on March
                                    31, 1999).
                           10.34    Promissory Note issued by Harmony Holdings,
                                    Inc. to the Company dated December 17, 1998
                                    (incorporated by reference to the
                                    Registrant's Form 10- KSB for fiscal year
                                    ending December 31, 1998 and filed on March
                                    31, 1999).
                           10.35    Promissory Note issued by Harmony Holdings,
                                    Inc. to the Company dated January 7, 1999
                                    (incorporated by reference to the
                                    Registrant's Form 10-KSB for fiscal year
                                    ending December 31, 1998 and filed on March
                                    31, 1999).
                           10.36    Promissory Note issued by Harmony Holdings,
                                    Inc. to the Company dated January 15, 1999
                                    (incorporated by reference to the
                                    Registrant's Form 10-KSB for fiscal year
                                    ending December 31, 1998 and filed on March
                                    31, 1999).
                           10.37    Promissory Note issued by Harmony Holdings,
                                    Inc. to the Company dated January, 1999
                                    (incorporated by reference to the
                                    Registrant's Form 10-KSB for fiscal year
                                    ending December 31, 1998 and filed on March
                                    31, 1999).
                           10.38    Promissory Note issued by Harmony Holdings,
                                    Inc. to the Company dated January, 1999
                                    (incorporated by reference to the
                                    Registrant's Form 10-KSB for fiscal year
                                    ending December 31, 1998 and filed on March
                                    31, 1999).
                           10.39    Promissory Note issued by Harmony Holdings,
                                    Inc. to the Company dated February 8, 1999
                                    (incorporated by reference to the
                                    Registrant's Form 10-KSB for fiscal year
                                    ending December 31, 1998 and filed on March
                                    31, 1999).
                           10.40    Promissory Note issued by Harmony Holdings,
                                    Inc. to the Company dated February 18, 1999
                                    (incorporated by reference to the
                                    Registrant's Form 10-KSB for fiscal year
                                    ending December 31, 1998 and filed on
                                    March 31, 1999).
                           10.41    Form of  Promissory Note issued by Harmony
                                    Holdings, Inc. to the Company.
                           10.42    1999 Broad-Based Stock Incentive Plan.
                           10.43    1996 Employee Stock Purchase Plan as amended
                                    and restated.

</TABLE>

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<PAGE>   65


<TABLE>
                           <S>      <C>
                           10.44    1999 Company's Severance Policy.
                           10.45    Memorandum of Understanding by and among the
                                    Company, AT&T, and Excalibur Technologies.
                           21.1     Subsidiaries of the Company.
                           23.1     Consent of BDO Seidman, LLP.
                           27.1     Financial Data Schedule.
</TABLE>



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