Microleague Multimedia Inc – ‘10KSB’ for 12/31/96

As of:  Tuesday, 4/22/97   ·   For:  12/31/96   ·   Accession #:  950116-97-765   ·   File #:  1-11743

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Annual Report — Small Business   —   Form 10-KSB
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10KSB       Annual Report -- Small Business                       53    291K 
 2: EX-3        Exhibit 3.1                                           23     90K 
 3: EX-11       Exhibit 11.1                                           1      5K 
 4: EX-21       Exhibit 21.1                                           1      4K 
 5: EX-27       Financial Data Schedule                                1      6K 

10KSB   —   Annual Report — Small Business
Document Table of Contents

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 U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 Form 10-KSB

(Mark One)                                                                      

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

For the fiscal year ended December 31, 1996                           
----------------- 

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

For the transition period from ___________ to _______________         

Commission file number       1-11743                                  
-------     

MICROLEAGUE MULTIMEDIA, INC.
--------------------------------------------------------------------------------
(Name of Small Business Issuer In Its Charter)

Pennsylvania                                   23-2563090   
-------------------------------             ------------------------------------
(State or Other Jurisdiction of             (I.R.S. Employer Identification No.)
Incorporation or Organization)                                                

1001 Millersville Road, Lancaster, PA                     17604               
----------------------------------------                 ----------             
(Address of Principal Executive Offices)                 (Zip Code)             

(717) 872-6567
--------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)

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

                                                     Name on Each Exchange
 Title of Each Class                                 on Which Registered
 -------------------                                 -------------------

__________________________________                ______________________________

__________________________________                ______________________________

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

Common Stock, $.01 par value
--------------------------------------------------------------------------------
(Title of Class)

--------------------------------------------------------------------------------
(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 preceding 12 months (or for  
such shorter period that the Registrant was required to file such reports), and 
(2) has been subject to such filing requirements for the past 90 days.          

YES __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 [X]                                        

 [Cover page 1 of 2 pages]

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         State the Issuer's revenues for its most recent fiscal year. $4,087,037

State the aggregate market value of the voting stock held by  
non-affiliates computed by reference to the price at which the stock was sold,  
or the average of the bid and asked prices of such stock, as of a specified date
within the past 60 days. (See definition of affiliate in Rule 12b-2 of the      
Exchange Act.) $6,109,748 based on the closing price of such voting stock as    
reported on the National Association of Securities Dealers SmallCap System on   
April 15, 1997.                                                                 

        State the number of shares outstanding of each of the Issuer's classes
of common equity, as of the latest practicable date. 4,526,268 as of April 15,  
1997.                                                                           

 DOCUMENTS INCORPORATED BY REFERENCE

       Portions of the Proxy Statement to be utilized in connection with the
Issuer's 1997 Annual Meeting of Shareholders ("1997 Annual Meeting") currently  
scheduled to be held in July 1997 are incorporated by reference into Part III   
hereof.                                                                         

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MICROLEAGUE MULTIMEDIA, INC.

 Form 10-KSB

 INDEX

                                                        [Enlarge/Download Table]


                                                                                                           Page
                                                                                                           ----
PART I                                                                                                         
------                                                                                                         

                                                                                                               
Item 1.   Description of Business.........................................................................   1 
Item 2.   Description of Property.........................................................................  18 
Item 3.   Legal Proceedings...............................................................................  18 
Item 4.   Submission of Matters to a Vote of Security Holders.............................................  19 

PART II                                                                                                        
-------                                                                                                        

Item 5.   Market for Common Equity and Related Stockholder Matters........................................  19 
Item 6.   Management's Discussion and Analysis of Financial Condition                                          
            and Results of Operations.....................................................................  20 
Item 7.   Financial Statements............................................................................  26 
Item 8.   Changes in and Disagreements with Accountants on Accounting and                                      
            Financial Disclosure..........................................................................  26 

PART III                                                                                                       
--------                                                                                                       

Item 9.   Directors, Executive Officers, Promoters and Control Persons; Compliance with                        
            Section 16(a) of the Exchange Act.............................................................  26 
Item 10.  Executive Compensation..........................................................................  26 
Item 11.  Security Ownership of Certain Beneficial Owners and Management..................................  26 
Item 12.  Certain Relationships and Related Transactions..................................................  27 
Item 13.  Exhibits, List and Reports on Form 8-K..........................................................  27 


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PART I

Item 1. Description of Business                                                 

 Cautionary Statement Regarding Forward-looking Statements

       This Report contains "forward-looking" statements regarding potential
future events and developments affecting the business of MicroLeague Multimedia,
Inc. (the "Company"). Such statements relate to, among other things, (i)        
competition for customers for its products and services; (ii) the uncertainty of
developing or obtaining rights to new products that will be accepted by the     
market and the timing of the introduction of new products into the market; (iii)
the limited market life of the Company's products; (iv) the uncertainty of      
consummating potential acquisitions or entering into joint ventures; and (v) the
availability of financing to fund working capital and expansion needs.          

       The Company's ability to predict results or the effect of any pending
events on the Company's operating results is inherently subject to various risks
and uncertainties, including those discussed under "Description of Business" and
"Management's Discussion and Analysis of Financial Condition and Results of     
Operations."                                                                    

Introduction                                                                    

The Company, a Pennsylvania corporation formed in 1989, is a  
brand-oriented publisher of interactive products in various media, including    
CD-ROM, board games, audio cassettes and compact discs and children's books, as 
well as through the Internet and on public radio. The Company's products are    
designed for the entertainment, lifestyle and education segments of both the    
personal computer software market and the children/family multimedia market, and
are published under five brand names for four different market segments as      
follows:                                                                        

Brand            Market Segment              Medium           
-----            --------------              ------           

MicroLeague Sports(R)     Sports Simulation           Computer                  
APBA(R)                   Sports Simulation           Computer/Board Games      
Ablesoft(TM)              Hobbies/Workplace           Computer                  
Rabbit Ears(R)            Children/Family             Video/Audio/Books/Computer
General Admission(R)      Low Price/High Quality      Computer                  

     The Company currently sells over 50 computer software titles in its
existing product lines (of which approximately 25 are products licensed from    
other software companies), and is currently developing nine new titles. In      
addition, the Company recently acquired 65 children/family titles that are      
available in audio, video and book format.                                      

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The following products are currently under development:       

                                                                [Download Table]


         Product                Licensor                     Format           
         -------                --------                     ------           
                                                                              

Sports Illustrated presents    Major League Baseball                          
Microleague Baseball 1997      Players Association           CD-ROM           

Sports Illustrated presents    National Football League                       
Microleague Football 1998      Players Association, Inc.     CD-ROM           

Comic Collector                Wizard                        CD-ROM           

Car Collector                  Tuff Stuff                    CD-ROM           

Fantasy Card Collector         Inquest                       CD-ROM           

Teachers Toolbox - MacIntosh   N/A                           CD-ROM           

APBA(R) Sports Game -          Various                       Board Game       
Current Season Card Sets                                                      

Rabbit Ears(R)*               Various actors, personalities                   
                              and musicians                  Video/Audio/Books


*    The Company expects to re-release six to eight titles each fiscal quarter. 

        The Company seeks to expand the market for its products by focusing on
brand recognition and focusing on market segments such as sports, hobbies and   
children's story telling that permit the Company to sell its products in a      
variety of media. The Company also seeks to develop new upgrades to existing    
products, such as franchise history disks of teams sold separately from the base
product, and add-ons to existing products, which include updated team statistics
for sports games and updated pricing information for its card and comic         
collector products. The Company has acquired and seeks to acquire companies and 
products that the Company believes will make its existing brands stronger or    
that are in a market segment in which the Company believes it can gain market   
share and build brand name recognition.                                         

         To compliment the Company's existing software product lines and to gain
greater control over the development of new software products, in October 1996  
the Company acquired all of the assets of Micro Sports, Inc. ("Micro Sports"), a
Tennessee-based developer of statistical sports simulation games. The Company   
plans to expand into other market segments through its strategy of acquiring    
other companies with strong brand names, advanced technology and a registered   
customer base in order to leverage the Company's access to retail shelf space   
and utilize its direct mail capabilities. The Company's computer products,      
substantially all of which are offered on CD-ROM format, are available on the   
Microsoft Windows(R) or DOS operating systems. In addition, the Company has     
upgraded its existing products and is designing its new products to take        
advantage of the growth in the use of the Microsoft Windows 95(R) operating     
system. The Company also intends to develop an Internet component for all of its
new software releases and to form strategic relationships with other Web sites  
and commercial on-line services which should enhance the distribution of its    
products and is in the process of licensing these products to an outside        
developer to be published on a MacIntosh platform.                              

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   The Company recently acquired the intellectual property assets of
Rabbit Ears Productions, Inc. ("Rabbit Ears"), a Philadelphia-based             
entertainment company that produces family-oriented literature productions in a 
variety of media. The Rabbit Ears(R) library consists of 65 stories that are    
told by famous actors and personalities with original scores that are written   
and performed by well-known musicians. The audio versions of these titles have  
been aired on Public Radio International's Rabbit Ears Radio. The Rabbit Ears(R)
brand provides the Company with content that can be repackaged and re-released  
to the consumer market. By utilizing the radio program and other media such as  
the Internet, the Company presents to the public an opportunity to experience   
these stories. The Company intends to produce fourteen new titles for airing on 
Rabbit Ears Radio (which is scheduled to begin broadcasts on Public Radio       
International in Autumn 1997). Once such shows are created, the Company will    
have content to create new products in different media (i.e., animation video,  
audio cassettes and book).                                                      

         The Company sells its products to a broad range of retailers, including
computer superstores, wholesale clubs, mall-based chains, consumer electronics  
stores, specialty retailers (children's products stores), office superstores,   
software retailers and sells directly to end users through catalog sales. The   
Company plans to sell its products through additional outlets such as bookstores
and original equipment manufacturers.                                           

   To complement the Company's retail sales, the Company distributes
catalogs quarterly to its 335,000 registered customers. These catalogs focus    
primarily on software add-ons or upgrades. In order to extend the life-cycle of 
its software products, the Company has implemented target sales and marketing   
programs that attempt to maximize sales of older backlist titles under the      
General Admission(R) product line in appropriate sales channels primarily by    
selling such products at reduced prices.                                        

         Development efforts are managed by an internal development staff, which
develops the Company's front line sports products and supervises a network of   
independent development contractors. Until October 1996, the Company relied     
exclusively on outside developers for new products. Due to the failure of one   
such developer to deliver new products to the Company in 1996, however, and the 
consequent inability of the Company to release new front-line products in time  
for the 1996 holiday season, the Company determined that it needed more reliable
development sources and therefore acquired Micro Sports in October 1996. The    
Micro Sports team provides technical expertise in the development of new        
products and in facilitating the development of new products through external   
developers. Although internal product development tends to be more expensive    
than outside development due to higher fixed costs and overhead, the Company has
greater control over the development process and therefore should be able to    
establish and maintain a more reliable flow of new products. The Company will   
continue to rely on outside developers, however, for certain of its products    
when the Company believes that such sources are a dependable and economical     
product source.                                                                 

        After a product is developed, a master CD-ROM is delivered to a CD-ROM
manufacturing company, which replicates the CD-ROMs and delivers them to the    
Company. The Company manufactures packaging material and assembles its products 
at its Newark, Delaware facility. In addition to selling software and publishing
services to the computer software industry, the Company sells some of its excess
printing capacity to companies outside the software industry; however, the      
Company currently is negotiating the possible sale of its printing business. See
"-- Services." Warehousing and shipping functions are performed by the Company  
at its Lancaster, Pennsylvania and Newark, Delaware facilities.                 

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Industry Overview                                                               

 The Company believes that the market for interactive multimedia
software products will continue to grow as the installed base of personal       
computers with CD-ROM drives expands. According to International Data           
Corporation, sales of multimedia personal computers sold for home use nearly    
doubled from 1994 to 1995, from approximately 4.5 million in 1994 to            
approximately 8.5 million in 1995. In addition, according to a study prepared by
the Software Publishers Association, sales of games and home creativity CD-ROM  
titles increased on a unit basis by 189% and on a revenue basis by 175% from the
first half of 1994 to the first half of 1995.                                   

     The Company believes that significant developments in both computer
hardware and software have been driving the rapid growth in the installed base  
of CD-ROM drives and personal computers. First, the cost for the computer       
hardware necessary to utilize interactive multimedia software products has      
continued to decrease. The power, capabilities and functional uses of computers 
has expanded dramatically and are currently offered to consumers at prices      
comparable to those for much less powerful and capable machines a few years ago.
Entry level machines now include 486 or Pentium microprocessors, double or quad 
speed CD-ROM drives, super VGA video, large disk drives, expanded random access 
memory, sound cards, high speed modems, and software for access to computer     
on-line providers. Second, a new generation of computer software has become     
available that takes full advantage of the power of these personal computers.   
Operating system software, such as Microsoft Windows, has made it easier to use 
these powerful new applications. New interactive multimedia software            
applications generally have improved graphics, high quality sound, full motion  
video and near real-time interactivity. For home computer users, applications   
such as games, elementary education, home reference and lifestyle software are  
popular.                                                                        

  The Company believes that certain new industry developments will
contribute to continued strong growth in the markets for home software.         
According to Fairfield Research Inc., a market research firm which covers the   
computer industry, at December 18, 1995, 15% of home computer users had         
integrated Windows 95(R) with another 10% planning on installation by year end. 
These numbers are even higher for CD-ROM users with one-third of these users    
converted to Windows 95(R) at December 18, 1995 and 50% expected to be converted
by year end of 1995. The August 1995 release of Windows 95(R) has also increased
consumers awareness of the benefit of powerful new software titles.             

      As personal computers have become common home and office appliances,
there have been changes in the ways in which computer software is sold.         
Traditional computer software distribution has been through software retailers  
such as Best Buy, CompUSA, Computer City, Electronics Boutique, Micro Center,   
Egghead Software, Wal-Mart and Office Max. However, computer software is        
becoming more of a consumer product sold through standard consumer channels such
as bookstore chains, supermarkets, department stores and discount retailers. As 
a result of this product evolution, the Company believes that the importance of 
brand names associated with a particular software title or line of titles will  
become significant.                                                             

    In addition, the popularity of the Internet and the World Wide Web
network has spurred demand for information (whether books, video, sound or other
data) that can be shared and transmitted. The Internet is currently a popular   
medium for providing marketing and sales information about products. When the   
Internet develops mechanisms for efficiently and securely charging customers for
this information, the Company anticipates that it will become feasible for      
companies to distribute their information over the Internet, thereby developing 
new forms of product distribution. During 1996, the Company established an      
Internet site, MMI Online, which is used to market the Company's products and to
create a forum for users of the Company's products to meet.                     

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Company Strategy                                                                

        Based on the Company's view of the development of its industry and the
Company's capabilities, the Company has developed a five-part strategy to expand
its business:                                                                   

         1. Promote the Company's brand names. The Company aggressively promotes
its MicroLeague(R) Sports, APBA(R), Ablesoft(TM), General Admission(R) and      
Rabbit Ears(R) brand names in order to encourage customer loyalty and repeat    
purchases. The Company believes that its brand name software and multimedia     
products are recognized by consumers as high quality products. The Company      
promotes its brand names through advertising and the use of a public relations  
firm. The Company also believes that by marketing through recognizable brand    
names, satisfied customers are more likely to purchase additional brand-name    
products published by the Company when faced with multiple purchase options. As 
the consumer software industry becomes more of a mass market, the Company       
believes that brand name recognition will become an increasingly important means
of product differentiation among retailers and consumers.                       

        2. Create products that generate separate add-on and upgrade products.
The Company has adopted a product line strategy for its sports game products in 
which a series of titles is developed that can be updated every season with the 
most recently completed season's statistics. Further, the Company intends to    
continue to develop new updates and add-ons to existing products, such as       
additional sports teams sold separately from the base product. This strategy    
enables the Company to capitalize on its asset base by updating existing        
products rather than developing new product lines and by utilizing its existing 
customer base for sales of the particular update or add-on. In addition,        
marketing expenditures that create value for each product line can impact a     
longer product cycle in contrast to a single product launch.                    

         3. Acquisitions. The Company has acquired, and will continue to seek to
acquire, products and companies that make the Company's existing brands stronger
or that allow the Company to enter into new market segments and attempt to gain 
greater market share. The Company will seek to expand into other market segments
by acquiring companies with strong brand names, advanced technology or a        
registered customer base. The Company will seek opportunities to utilize its    
access to retail shelf space and its direct mail capabilities to expand the     
market for products of any companies it may acquire. Consistent with this       
strategy, in October 1996, the Company acquired Micro Sports, a developer of    
statistical sports simulation software games, and in February 1997, the Company 
acquired Rabbit Ears(R), an entertainment company that sells children's         
literature-based productions in various media, such as audio cassette, animation
video and book. Also, in March 1997, the Company signed a letter of intent to   
acquire KidSoft, LLC ("KidSoft"), a leading distributor of children's multimedia
education and entertainment software based in Cupertino, California. See        
"--Recent and Proposed Acquisitions."                                           

         4. Expand distribution into new outlets and media. The Company seeks to
achieve widespread distribution for all of its titles through existing retail   
outlets, which include traditional software retailers, mass merchants, consumer 
electronic stores and warehouse clubs. The Company plans to gain entry into     
bookstores, supermarkets, department stores and other outlets for its products  
as marketing opportunities arise. The Company also plans to expand new and      
existing distribution channels through the use of discount bundles and racks and
through the development of relationships with original equipment manufacturers. 
As the technology evolves, the Company may expand distribution into new media   
such as the Internet. The Company's direct-mail business enables it to make     
repeat sales to customers. The Company intends to promote add-ons and updates to
existing products through direct-mail sales to existing customers across all of 
its product lines.                                                              

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       5. Product life-cycle extensions. The life-cycle of computer software
products in the segments in which the Company competes generally ranges from    
approximately six to twenty-four months. The Company seeks to extend the        
life-cycle of many of its products through the General Admission(R) line by     
implementing targeted marketing and sales programs that attempt to maximize the 
value of older backlist titles in the appropriate sales channels primarily by   
selling such products at reduced prices. This strategy allows the Company to    
extend the life (and the amortization of development expenses) of a successful  
computer game such as Blood Bowl by selling such a product under the General    
Admission(R) line after its sales cycle as a front-line full retail product     
ends.                                                                           

Recent and Proposed Acquisitions                                                

     In October 1996, the Company acquired all of the assets and assumed
certain liabilities of Micro Sports, a Tennessee-based developer of statistical 
sports simulation games, and certain of the assets of M.S. Investments Holdings,
Ltd. ("MSIH"), the parent corporation of Micro Sports, consisting of various    
intellectual property rights. In consideration for the purchase of such assets  
and assumption of such liabilities, the Company issued to MSIH 308,882 shares of
Common Stock. Following the acquisition, the Company released Sports Illustrated
presents Pro Football 1997, Sports Illustrated presents College Football 1997   
and Pro League Baseball, all of which were developed by Micro Sports.           

     In February 1997, the Company acquired the assets of Rabbit Ears, a
Philadelphia-based entertainment company known for its line of children's       
literate-related productions. Rabbit Ears produces stories such as Grammy Award 
winners The Elephant's Child and Pecos Bill in many forms, including books,     
audio, video and CD-ROM. These stories are narrated, scored and illustrated by  
well-known personalities such as Meg Ryan, Mel Gibson, Meryl Streep, Whoopi     
Goldberg and Jack Nicholson. In consideration for the purchase of such assets   
and assumption of certain liabilities, the Company issued 268,097 shares of     
Common Stock and redeemable options to purchase up to 250,000 shares of Common  
Stock to Millennium Media Group Holdings, Inc. ("MMG").                         

 In March 1997, the Company signed a letter of intent to acquire
KidSoft, a leading distributor of children's multimedia education and           
entertainment software based in Cupertino, California. According to information 
supplied by KidSoft, KidSoft had revenues in 1996 of approximately $9.5 million.
Consummation of the KidSoft acquisition is subject to completion of a           
satisfactory due diligence review by each party, negotiation and execution of   
definitive documentation and other customary closing documents, approval of the 
respective boards of directors of each party and satisfaction of other closing  
conditions. Accordingly, there can be no assurance that the transaction will be 
consummated.                                                                    

Products and Services                                                           

  In 1996, the Company's revenues consisted of approximately 64.1%
product sales and approximately 35.9% service sales. The product sales consisted
of software sold in both CD-ROM and 3.5" disk format, as well as board games.   
The Company's service sales were derived from its printing division and from    
Affiliate Venture Publishing, which provides publishing services to other       
software developers. The Company's service sales in 1996 consisted of           
approximately 98.8% commercial printing services to non-computer software       
companies and 1.2% printing and/or publishing services to computer software     
companies.                                                                      

Products                                                      

         The Company currently has five brand name product lines: MicroLeague(R)
Sports, APBA(R), Ablesoft(TM), General Admission(R) and Rabbit Ears(R). The     
Company's product lines are targeted towards                                    

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customers for use in the entertainment, lifestyle and education segments of the 
multimedia market. Within these categories, the Company has created product     
lines in market niches in which it believes it has opportunities to increase its
market share. The Company believes that its product line approach contributes to
brand awareness of other titles sold within a particular brand.                 

         Consumer preferences for software and multimedia products are difficult
to predict, and few consumer software products achieve sustained market         
acceptance. The Company's success is dependent on the market acceptance of its  
existing products and the continued development and introduction of new products
that achieve market acceptance. In this regard, the Company has attempted to    
focus its new product development efforts on products that the Company believes 
may have a more extended product life-cycle, such as Sports Illustrated presents
MicroLeague Baseball(R) 6.0, which the Company expects to be able to continue to
sell for longer periods than other products due to periodic updates, as well as 
the popular stories of Rabbit Ears(R).                                          

     The Company seeks to expand its product market by focusing on brand
recognition and by publishing products in different media that appeal to        
different groups of consumers. The Company also seeks to develop new upgrades to
existing products, such as franchise history disks of teams sold separately from
the base product and add-ons to existing products, which include updated team   
statistics for sports games and updated pricing information for the Card        
Collector and Comic Book collector products. The Company has also implemented   
targeted sales and marketing programs that attempt to maximize sales of older   
backlist titles in appropriate sales channels primarily by selling such products
at reduced prices.                                                              

Most of the Company's computer products work on the popular PC
operating system, Microsoft Windows, and all products currently in development  
are intended to be compatible with Windows 95(R).                               

MicroLeague(R) Sports Brand                                   

     The Company's products originated with electronic sports simulation
games pioneered by its predecessor, MicroLeague Sports, in the mid-1980's. The  
primary focus of the Company's product development continues to be sports game  
software products. Emphasis is placed on games featuring periodic statistical   
updating because these products provide opportunities for add-on products after 
the initial base product offering. The titles under development include the     
Major League Baseball Players Association licensed product, Sports Illustrated  
presents MicroLeague Baseball(R) 6.0, a football game with content licensed from
National Football League Players Association, Inc., a college football game and 
a hockey game with content licensed from the National Hockey League Players     
Association. The Company's licenses with the Major League Baseball Players      
Association, National Football League Players Association, Inc., Time and the   
National Hockey League Players Association expire on May 31, 1997, February 28, 
1999, August 1, 1997 and June 30, 1999, respectively. See "-- Licenses and      
Proprietary Rights." The license agreements with the Major League Baseball      
Players Association, National Football League Players Association, Inc. and the 
National Hockey League Players Association are important to the Company because 
they permit the Company to use the names, descriptions and biographical data    
relating to various professional baseball, football and hockey players in its   
games. These licenses also grant to the Company the right to use the players    
association names. Therefore, the Company's ability to manufacture and sell     
baseball, football and hockey games using the names and biographical data of    
these players is dependent on the continuation of licensing rights. If these    
licenses were not renewed, the Company would no longer be able to market these  
particular products. The Company's license agreements with the Major League     
Baseball Players Association and National Football League Players Association,  
Inc. require prior approval for the specific manner in which licensed rights are
used. Products developed in connection with the license agreement with the Major
League Baseball Players Association, National Football League Players           
Association, Inc. and National                                                  

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Hockey League Players Association were approved by the respective players       
associations when they were first developed. The Company submits for approval   
any new product releases and packaging changes. The Company is currently engaged
in negotiations with the National Basketball Players Association to obtain      
licenses for its basketball game under development.                             

The Company is currently selling or developing the following  
MicroLeague Sports titles:                                                      

                                                                [Download Table]

Name                           Platform       Format  Status                        
----                           --------       ------  ------                        
                                                                                    
MicroLeague Hooves of Thunder  Windows 95(R)  CD-ROM  Released                      

Sports Illustrated presents                                                         
MicroLeague Football 1997      Windows 95(R)  CD-ROM  Released                      

Sports Illustrated presents                                                         
MicroLeague Baseball(R)6.0     Windows 95(R)  CD-ROM  Under development; release    
                                                      expected during second quarter
                                                      of 1997                       
Sports Illustrated presents                                                         
MicroLeague Football 1998      Windows 95(R)  CD-ROM  Under development; release    
                                                      expected during second quarter
                                                      of 1997                       

APBA(R) Brand                                                 

   On January 1, 1995, the Company acquired substantially all of the
assets of APBA, established in 1951 as a publisher and direct-mail marketer of  
statistics-based sports board and computer games. In 1996, APBA's sales mix was 
comprised of approximately 53.3% board game products and 46.7% computer game    
products. Although APBA and MicroLeague Sports both include computer-based      
sports games, the two brand products appeal to different customers. APBA        
products appeal to die-hard statistical fans who have little interest in        
graphics or playability. MicroLeague products have a strong statistical base,   
but have a broader appeal to a more diverse customer base than APBA games       
because they have technologically state-of-the-art graphics, sound and          
playability features.                                                           

       Some of the most popular APBA titles the Company is currently selling
or in the process of developing are:                                            

                                                                [Download Table]


Name                               Platform       Format      Status           
----                               --------       ------      ------           
                                                                               
APBA Sideline Sports CD-ROM        Windows(R)     CD-ROM      Released         
APBA Baseball for Windows CD       Windows(R)     CD-ROM      Released         
APBA Baseball                      N/A            Board Game  Released         
APBA Football for Windows          Windows(R)     Disk        Released         
APBA Football                      N/A            Board Game  Released         
APBA Hockey for DOS                DOS            Disk        Released         
APBA Hockey                        N/A            Board Game  Released         
APBA Basketball                    N/A            Board Game  Released         
APBA Football X's and O's for the                                              
 Internet                          Windows 95(R)  CD-ROM      Under Development

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Able Soft(TM) Brand                                           

      The Company's Able Soft brand is marketed to customers with specific
interests or hobbies. For example, The Card Collector 1997 and Wizard presents  
The Comic Collector enable collectors of sports cards or comic books to track   
and monitor the value of their inventories. Add-ons for Wizard presents The Card
Collector products are published periodically to update the pricing information 
of the products. Family for Windows enables the user to diagram and research the
origins of their family tree and heritage.                                      

      The Company is currently selling or in the process of developing the
following Able Soft titles:                                                     

                                                        [Enlarge/Download Table]

Name                                 Platform       Format    Status                               
----                                 --------       ------    ------                               
                                                                                                   
The Comic Collector CD-ROM           Windows 95(R)    CD-ROM    Released                           
The Card Collector 96 CD-ROM         Windows 95(R)    CD-ROM    Released                           
Family for Windows 3.5               Windows(R)       Disk      Released                           
Teachers Toolbox 3.5                 Windows(R)       Disk      Released                           
Wizard presents The Comic Collector  Windows 95(R)    CD-ROM    Released                           
The Card Collector 1997              Windows 95(R)    CD-ROM    Under development, release expected
                                                                 during second quarter of 1997.    
Teachers Toolbox - MacIntosh         MacIntosh(R)     CD-ROM    Under development, release expected
                                                                 during second quarter of 1997.    
Fantasy Card                         Windows 95(R)    CD-ROM    Under development, release expected
                                                                 during second quarter of 1997.    


  Although included in the lifestyle category, Teachers Toolbox is
productivity software that enables teachers to track and maintain records such  
as grade histories, attendance and lesson plans as well as to lay out seating   
charts and organize class schedules.                                            

General Admission(R) Software Brand                           

      The General Admission(R) product line is targeted at the lower price
point segment of the entertainment market. General Admission(R) software is     
designed to provide entertaining, high-quality software at lower prices. The    
product line is comprised of five different sub sets: interactive simulations,  
role playing adventure, interactive sports, action and adventure and family     
treasures.                                                                      

Rabbit Ears(R) Brand                                          

 Rabbit Ears(R) is the most recent brand of content added to the
Company's product base. Rabbit Ears(R) is an entertainment brand committed to   
the creation, development and marketing of family programming and products.     
Rabbit Ears(R) products include a series of video, audio, books and related     
products using popular actors, as well as talented illustrators and musicians.  

     The Rabbit Ears(R) products are offered in various forms, including
book, audio, video and CD- ROM. Such products include more than 60 titles and   
relationships with major entertainment personalities including Meg Ryan, Mel    
Gibson, Meryl Streep, Whoopi Goldberg, George Winston, Jack Nicholson, Garrison 
Keillor and many others, as well as relationships with companies such as Simon &
Schuster, Visa and Macmillan/McGraw-Hill. In January 1997, in a cooperative     
effort, CBS aired Rabbit Ears'(R) first live action movie-of-the-week called    
Keeping the Promise, a special which was sponsored by Clorox.                   

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      Rabbit Ears(R) products have received numerous awards, including the
following:                                                                      

o        2 Grammy Awards                    
o        18 Grammy Award nominations        
o        21 Parents' Choice Awards          
      o        7 Action for Children's Television awards
                o        A National Education Association Golden Apple Award
o        The Humanitas Prize                

        To stimulate the demand for Rabbit Ears(R) products, the Company plans
to re-package and re- release approximately six to eight titles in each of the  
second, third and fourth quarters of 1997, including approximately five stories 
that have never been available for purchase. At present, there are sixty-five   
titles available for release. The stories scheduled for release during the      
second and third quarters of 1997 are:                                          

                                                        [Enlarge/Download Table]

                                                                                                    
Annie Oakley                                         Creation                                       
Narration:        Keith Carradine                    Narration:        Amy Grant                    
Music:            Los Lobos                          Music:            Bela Fleck and the Flecktones
Illustrations:    Fred Warter                        Illustrations:    Stefano Vitale               

David & Goliath                                      Davy Crockett                                  
Narration:        Mel Gibson                         Narration:        Mel Gibson                   
Music:            Branford Marsalis                  Music:            Branford Marsalis            
Illustrations:    Douglas Fraser                     Illustrations:    Douglas Fraser               

Finn McCoul                                          Fool and the Flying Ship                       
Narration:        Catherine O'Hara                   Narration:        Robin Williams               
Music:            Boys of the Lough                  Music:            The Klezmer Conservatory Band
Illustrations:    Peter de Seve                      Illustrations:    Henrik Drescher              

Jack & the Beanstalk                                 John Henry                                     
Narration:        Michael Palin                      Narration:        Denzel Washington            
Music:            David A. Stewart                   Music:            B.B. King                    
Illustrations:    Edward Sorel                       Illustrations:    Barry Jackson                

Johnny Appleseed                                     Jonah and the Whale                            
Narration:        Garrison Keillor                   Narration:        Jason Robards                
Music:            Mark O'Connor                      Music:            George Mgrdician             
Illustrations:    Stan Olson                         Illustrations:    Jeffrey Smith                

Joseph and His Brothers                              King Midas and the Golden Touch                
Narration:        Ruben Blades                       Narration:        Michael Caine                
Music:            Strunz & Farah                     Music:            Ellis Marsalis featuring     
Illustrations:    Garnet Henderson                                       Yo-Yo Ma                   
                                                     Illustrations:    Rodica Prato                 

Moses in Egypt                                       Noah and the Ark                               
Narration:        Danny Glover                       Narration:        Kelly McGillis               
Music:            The Sounds of Blackness            Music:            The Paul Winter Consort      
Illustrations:    Phil Huling                        Illustrations:    Lori Lohstoeter              
                              White Cat                                                             
                              Narration:      Emma Thompson                                         
                              Music:          Joe Jackson                                           
                              Illustrations:  Barbara McClintock                                    


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     In addition, the Company may enter into a joint venture with Random
House which will produce the audio for The Ugly Duckling (narrated by Cher with 
music by Patrick Ball), The Elephant's Child (narrated by Jack Nicholson with   
music by Bobby McFerrin) and The Steadfast Tin Soldier (narrated by Jeremy Irons
with music by Mark Isham).                                                      

         The content of the Rabbit Ears(R) products may be produced in a variety
of media, including, but not limited to, CD-ROM, the Internet and television.   
The Company is currently discussing such types of expansion of the Rabbit       
Ears(R) brand name into additional media. Likewise, the Company is producing a  
new season of Rabbit Ears Radio, which is expected to begin in Autumn 1997.     

Services                                                                        

 The services business is operated as a separate division of the
Company. Revenues from the services division comprised approximately 36% of the 
Company's total revenue in 1996. Approximately 98.8% of the service revenue in  
1996 was derived from providing printing services to non-software companies.    

        The Company provides commercial printing services for corporations and
organizations ranging from large manufacturing corporations to local retail     
businesses in the Company's trading area. Printing services provided to         
non-computer software companies generated approximately $1.4 million in sales in
1996. The Company's largest customer, Yale Materials Handling Corporation, an   
equipment manufacturing company, accounted for approximately 18.4% of the       
Company's net revenues in 1996 and accounted for approximately 10% of the       
Company's net accounts receivables at December 31, 1996. The Company also       
provides manufacturing and printing services to other computer software         
companies, which generated revenues of approximately $17,000 in 1996.           

  Through its Affiliate Venture Publishing activities, the Company
provides publishing, manufacturing and marketing services to other software     
development companies. The Company provides packaging, graphic design,          
manufacturing, distribution, advertising and administration of the product while
capitalizing on the developer's brand name and the reputation of the product.   
Through Affiliate Venture Publishing, other software developers may obtain      
access to retail shelf space that they could not obtain on their own.           

        The Company began offering manufacturing and printing services when it
acquired Ferraul Corp., doing business as Foxfire Printing ("Foxfire") in 1994. 
John Ferretti, the sole shareholder of Foxfire, became President, Chief         
Operating Officer and Secretary, and a director of the Company in connection    
with the acquisition. Mr. Ferretti recently resigned his positions as President,
Chief Operating Officer and Secretary, and as a director, although he continues 
to manage the Company's manufacturing and printing operations. The Company has  
determined that its services business is ancillary to its core business of      
developing and selling interactive multimedia products and therefore is         
currently negotiating with Mr. Ferretti the possible repurchase by Mr. Ferretti 
of the printing operations. Consummation of any such transaction would be       
subject to the negotiation and execution of a definitive purchase agreement and 
the satisfaction of customary closing conditions. The revenues and expenses of  
the printing business in 1996 were approximately $1.5 million and $2.7 million, 
respectively, or approximately 36% and 30%, respectively, of the Company's total
net revenues and operating expenses. Therefore, a sale of this business would   
significantly reduce the Company's overhead expenses and, based on 1996 results 
of operation, would improve profitability.                                      

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Licenses and Proprietary Rights                                                 

Intellectual Property Rights                                  

     The Company regards the software that it publishes, the statistical
models that drive the outcomes of its statistical-based sports games, and its   
brand names as proprietary, and relies primarily on a combination of copyrights,
trade secret laws, trademark laws, and third party nondisclosure agreements to  
protect its products and proprietary rights. The Company has federal            
registrations for the trademarks Micro League(R), Micro League Baseball(R),     
APBA(R), General Admission(R), Affiliate Venture Publishing(R), Fantasy         
Manager(R), Ultitainment(R) and Ultimate Cards(R). In addition, the Company has 
pending applications for federal trademark registration for Able Soft,          
MicroLeague Multimedia(TM), Microleague, Microleague Stylized, MMI, MMI and     
Design and MMI Online. The Company's Rabbit Ears(R) subsidiary has thirteen     
registrations for its products and three pending applications. There are        
numerous copyrights created by the production of Rabbit Ears(R) stories. Under  
its agreements with the persons that contribute the creative elements to each   
Rabbit Ears(R) story (narrator, musician, illustrator and, in certain cases,    
writer), Rabbit Ears(R) owns the copyright in all such elements, with the       
following exceptions: (i) Rabbit Ears(R) and Random House, Inc. are co-copyright
owners in the elements that have been contributed to four of the Rabbit Ears(R) 
stories; (ii) the copyright in a musical score that contributes to a Rabbit     
Ears(R) story is either co-owned by Rabbit Ears(R) and the musician or owned    
solely by the musician, but the Company has a perpetual license for broad uses  
of the score; and (iii) the copyright in the illustrations used in a small      
number of the Rabbit Ears(R) stories are owned by the illustrator, but the      
Company has a perpetual license for broad uses of such illustrations.           

        Except as noted above with respect to the Rabbit Ears(R) products, the
Company owns the copyright in all of the principal proprietary software used in 
its products. The Company licenses the right to use a portion of the executable 
code with respect to two of its products from an affiliated partnership. With   
respect to certain of its secondary products, the Company jointly owns the      
copyright in some of the software used in those products with the developers    
that initially created the software. In addition, the Company licenses the right
to publish software owned by other software developers. The license agreements  
with such developers typically require the Company to pay to the developers     
royalties based upon a specified percentage of the net cash receipts from the   
sale of the developers' respective products. The Company also occasionally      
assists other software vendors in publishing, packaging and/or distributing     
their products. Under these arrangements, the Company typically is entitled to a
fee based upon a specified percentage of the net cash receipts from the sale of 
the products. The Company makes no claim of ownership in the copyright of any   
such software of others, nor is such software proprietary to the Company. The   
Company is not aware that it is infringing the trademark rights of any other    
entity, although certain of its trademarks may be similar in some respect to    
trademarks used by others. The Company is aware of at least one party that may  
be using one of the Company's marks (General Admission(R)) to identify possibly 
related goods. The Company believes that its own use of the pertinent mark      
predates the third party's use of its mark. The Company is not aware of the     
existence of any other confusingly similar prior mark, although there can be no 
assurance that a claim of infringement will not be asserted against the Company 
or that any such assertion will not result in costly litigation, and/or require 
the Company to obtain a license to use the trademark to identify particular     
products, or require the Company to change one or more of its trademarks. If the
Company were compelled to change one or more of its significant trademarks, it  
could lose goodwill and revenues and incur increased expenses from advertising  
under a new name and producing new products and packaging materials. Although   
the Company has not been the subject of any intellectual property litigation,   
there has been substantial litigation regarding copyright, trademark and other  
intellectual property rights involving other computer software companies.       

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        The Company has a copyright in all of its proprietary software used in
its products, but has a registered copyright in only one of the several versions
of such proprietary software. The Company does not have any mechanism to        
copy-protect its software, and relies on copyright laws to prevent unauthorized 
copying. Unauthorized copying of software frequently occurs in the software     
industry, and the Company's business, operating results and financial condition 
could be adversely affected if copying of the Company's products becomes        
significant. Due to the large amount of data associated with the Company's      
CD-ROM software, it is currently more difficult (although not impossible) for   
individual customers to copy the Company's software than to copy historical     
diskette software.                                                              

Content Licenses                                              

 The Company licenses content for its products from a variety of
sources, including the Major League Baseball Players Association, National      
Football League Players Association, Inc., the National Hockey League Players   
Association, publishing companies, including Time (Sports Illustrated(R)), and  
individual authors. The Company's licenses with the Major League Baseball       
Players Association, National Football League Players Association, Inc., Time   
and the National Hockey League Players Association expire on May 31, 1997,      
February 28, 1999, April 15, 1998 (baseball) and June 30, 1999, respectively.   
The Company also has acquired computer publishing rights to two existing board  
games, which resulted in the release of Blood Bowl and Hooves of Thunder. In    
license agreements, the Company seeks (i) a license term of at least two years; 
(ii) customary advance guarantees paid by the Company, such as $20,000, and     
royalty rates typically approximating 15%; (iii) artistic and editorial         
cooperation of the licensor; and (iv) to the extent available on a              
cost-effective basis, exclusive rights to publish in various or all electronic  
formats, in each case including CD-ROM.                                         

     In 1993, the Company acquired the computer publishing rights to the
board game Blood Bowl from Games Workshop, Ltd. in Great Britain. The Company   
released Blood Bowl on CD-ROM in 1995. In 1993, the Company acquired the        
computer publishing rights to the board game Quarterpole and released the       
computer version in 1993. In 1995, the Company released an updated version of   
Quarterpole under the name Hooves of Thunder. The Company has some form of      
exclusive CD-ROM publishing rights to the primary content used in several of its
existing products and new products currently under development. Due to the      
multimedia nature of the Company's products, licenses for Company production of 
content is usually required for audio, video and written materials to supplement
original content provided by the primary licensor. Licensing costs are expected 
to rise with increased competition in the CD-ROM and electronic publishing      
industry.                                                                       

         The Company's license agreements with the Major League Baseball Players
Association and National Football League Players Association, Inc. grant to the 
Company computer software and board game publishing rights, on a non-exclusive  
basis. The Company derived $203,881 and $553,587 in revenue from the Major      
League Baseball Players Association license in 1995 and 1996, respectively. The 
Company derived $216,260 and $342,662 in revenue from National Football League  
Players Association, Inc. license in 1995 and 1996, respectively. The Company's 
license agreement with Time for the use of the Sports Illustrated(R) trademark  
grants to the Company the exclusive right to use such trademark in connection   
with certain products only on certain operating platforms. The Company derived  
revenue of $200,150 in 1996 pursuant to the Time license. In the event Time     
desires to produce such products on other platforms, the Company has a right of 
first negotiation regarding the production and distribution of such product. If 
Time and the Company have not been able to reach an agreement after a certain   
period of time, Time is entitled to produce or distribute competing products on 
those other operating platforms. There can be no assurance that the Major League
Baseball Players Association, National Football League Players Association,     
Inc., the National Hockey League Players Association, Time or any other         
strategic partner of the Company regards its relationship with the Company as   
strategic to its own business, that such strategic partner will not re-assess   
its commitment to the                                                           

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Company at some time in the future or that it will not develop (or enter into   
strategic relationships with other companies to develop) products that directly 
compete with the Company's products.                                            

International Licenses                                        

      Through the Company's extensive contacts with international software
developers, the Company is constantly reviewing successful international        
products that it can license, repackage, redesign and sell in the United States.
The Company also licenses the international rights to its internally developed  
products to foreign companies and has licensed its games to software publishers 
in Australia, Europe and the Far East. The Company expects this trend to        
continue and that licensing revenues will increase as the Company develops more 
new products.                                                                   

Product Development                                                             

       The Company currently is seeking to expand all its product lines with
new brand name content in the entertainment and lifestyle market niches.        
Historically, the Company has attempted to shift certain of the risks associated
with product development by relying on independent software developers, which   
share in the initial cost of developing new products. The Company acquired Micro
Sports in October 1996 in order to decrease its reliance on outside developers  
after experiencing problems with one such developer, which adversely affected   
the Company's results of operations for 1996. See "-- Introduction" and         
"Management's Discussion and Analysis of Financial Condition and Results of     
Operations." The Company believes that by adding the Micro Sports development   
team of 13 members, it should be able to develop front-line sports software     
products on a more consistent and timely basis.                                 

         Once a product is approved for development, a project leader, who is an
employee of the Company, is assigned to develop a detailed set of               
specifications, time frame and budget. These criteria are reviewed by the       
Company's executive management, and are modified on an as-needed basis to       
reflect market demand, product release schedules and budgetary considerations.  
The project leader creates the new product with a team that may include         
electronic editors, programmers, graphic artists, animators, video editors,     
sound editors, writers, designers and quality assurance testers. Generally,     
product design, software programming and editing functions are performed by     
independent contractors. The Company performs quality assurance reviews of its  
products and then tests for "bugs", functionality, ease-of-use and compatibility
with a variety of popular PC configurations that are available to consumers. The
Company anticipates that as it increases its development of sports simulation   
products, its product development costs with respect to these products may be   
higher than its historical product development costs. Product development       
agreements entered into with outside developers typically require the Company to
pay advance royalties when certain milestones are reached. In 1996, the Company 
paid approximately $311,000 to outside developers.                              

 The Company's senior marketing and sales staff incorporates new
products into marketing and sales plans and attempts to make preliminary sales  
substantially concurrent with product releases. The Company's development,      
marketing and sales staffs evaluate the Company's products and compare them to  
customer needs and potentially competitive products. These comparisons form part
of the basis for product upgrades, product revisions and new product ideas. In  
addition, the Company looks to acquisitions, such as the recent acquisitions of 
Micro Sports and Rabbit Ears, and the possible acquisition of KidSoft, as a     
source for new products and new product ideas.                                  

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Sales and Marketing                                                             

        The Company relies primarily on two basic sales channels: retail sales
and direct mail. The Company sells its products through distributors for sale to
retailers and on a direct basis to individual consumers and retailers such as   
software specialty stores, computer superstores, office supply stores, warehouse
clubs, mall-based chains, consumer electronics stores, mass merchants and       
bookstores. Retailers purchasing the Company's products directly from the       
Company or through distributors include Best Buy, CompUSA, Computer City,       
Electronics Boutique, Micro Center, Egghead Software, Wal-Mart and Office Max.  
Distributors of the Company's products include Ingram Micro, Navarre and Tech   
Data. The Company maintains a list of its approximately 335,000 registered      
customers and sends periodic mailings primarily to sell upgrade versions,       
add-ons and new products.                                                       

         The Company utilizes an internal sales staff and four independent sales
representatives to sell to retail accounts. These regional sales representatives
sell the Company's products to major retailers in the United States and Canada, 
and a national book sales representative firm sells the Company's products to   
regional and independent bookstores. The Company's Vice President of Sales      
manages these sales representative firms and also sells directly to certain     
national accounts. The Company's sales representatives and in-house sales staff 
work with buyers in an effort to ensure that retailers are carrying the         
appropriate Company products for their outlet, that stocking levels are         
adequate, that promotions and advertising are coordinated with product releases 
and that in-store merchandising plans are properly implemented. The Company     
anticipates that in the event sales increase, the Company will rely more on its 
internal sales force and less on independent sales representatives to generate  
and manage sales of the Company's products.                                     

   To complement the Company's retail sales, the Company distributes
catalogs quarterly to its registered customers to generate direct-mail sales.   
The Company conducts targeted mailings on a regular basis to over 335,000       
registered customers. The Company's sales staff sells add-ons and upgrades and  
attempts to sell customers other Company products. The Company also has the     
right to use Sports Illustrated(R) customer lists for marketing its existing    
products and will, from time to time, rent other lists of potential customers in
an effort to increase sales of existing products. The Company also takes        
advantage of its direct-mail operation to sell products not suited for the      
retail distribution channel such as add-ons and upgrades and products at lower  
price points at the end of their life-cycle. The Company includes marketing and 
promotional literature in all of its software products to introduce its software
customers to the Company's direct mail operation. The Company's graphic design  
department provides the artwork and layouts of the catalogs, and the Company's  
manufacturing division produces the actual catalogs. In the event the           
manufacturing division does not have the capacity to produce the catalogs, the  
Company contracts with an outside source.                                       

    The Company's marketing department is responsible for creating and
executing marketing programs to generate product sales to retailers and         
consumers. These programs are generally based on established consumer product   
marketing techniques which the Company believes are becoming more important as  
CD-ROM products become more of a consumer product. These techniques include     
co-operative advertising programs and promotional allowances coordinated with   
the retail distributors. The marketing department also utilizes the Company's   
graphic design department to attempt to create effective package designs,       
catalogs, brochures, advertisements and related materials. The Company's        
marketing and sales departments work together to coordinate retail and publicity
programs generally in place when products are initially shipped to retailers and
consumers. Public relation campaigns, in-store advertising, catalog mailings and
advertisements are generally designed in advance of product availability.       

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         In 1995 and 1996, direct mail sales provided approximately 33% and 17%,
respectively, of the Company's total revenues and more consistent cash flow than
the mass market distribution, since direct mail sales generate cash upon        
shipment. In addition, because APBA's existing product base is sports related,  
it provides an opportunity to cross-sell MicroLeague Sports(R) products to      
APBA(R) customers. The Company also sells Able Soft's products to APBA(R)       
customers.                                                                      

Funds expended for sales and marketing typically aggregate    
approximately 20% of gross revenues, which the Company attempts to spread across
multiple titles in a series as it produces upgrades and new titles. The Company 
generally sets suggested list prices for its products; however, the Company's   
actual wholesale selling prices to most retail outlets typically approximate 45%
less than the Company's suggested list prices. In connection with certain       
seasonal or other promotional programs, the Company may also offer discounts on 
its products sold directly to end-users.                                        

         The Company provides telephone technical support to its customers at no
additional charge from the Company and plans to expand its technical support to 
the Internet in the future. To date, the call volume to the Company's support   
staff has been modest. The Company believes that customer requests for technical
support have been limited due to the Company's efforts to create high quality,  
easy-to-install products. The Company further believes that its in-house support
facilities currently are sufficient to meet anticipated customer technical      
support needs in the foreseeable future. Unexpectedly high technical support    
needs or service volume could require the Company to increase its expenditures  
on technical support services. Feedback from the support service group is       
provided to the Company's product development staff to facilitate product       
upgrades and modifications of products in the development stage.                

  The Company is exposed to returns by distributors, retailers and
consumers. The Company has established reserves for these returns, which were   
increased substantially in 1996 and which it believes are adequate based on     
product sell-through, inventory levels and historic return rates. The Company   
currently has a reserve equal to approximately 35% of outstanding accounts      
receivable, as customers typically will partially offset new purchases by       
returning products. The Company generally accepts returns from customers, even  
when not legally required to do so, in order to maintain good continuing        
relationships with these customers and to sell its latest products to these     
customers. The Company periodically adjusts its reserves for these returns.     
Significant product returns could have a materially adverse effect on the       
Company's financial condition, operating results and overall business. For      
example, in the third and fourth quarters of 1996, the Company experienced a    
significant increase in returns and price protection credits, and therefore     
increased reserves, which adversely affected 1996 results of operations. See    
"Management's Discussion and Analysis of Financial Condition and Results of     
Operations."                                                                    

        The Company sells to major accounts on credit, with varying discounts,
return privileges and credit terms that are based on the Company's analysis of  
the creditworthiness of the particular customer as well as the sales volume with
the particular customer. These sales are not collateralized. Significant        
problems in accounts receivable collections could have an adverse effect on the 
Company's financial condition, operating results and overall business. Due to a 
decrease in accounts receivable collections in the latter part of 1996, the     
Company increased its reserves. See "Management's Discussion and Analysis of    
Financial Condition and Results of Operations."                                 

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Operations                                                                      

    The Company coordinates accounting, purchasing, inventory control,
scheduling, mass market order processing, warehousing and shipping at its       
Newark, Delaware facility. The Company is in the process of moving all such     
functions except warehousing to its facilities in Lancaster, Pennsylvania. The  
Company's main computer system handles mass market order entry, order           
processing, picking, billing, accounts receivable, accounts payable, general    
ledger and inventory control. Subject to credit terms and product availability, 
orders are typically shipped from the Company's facilities within 48 hours after
receiving an order. Although third party contractors duplicate the CD-ROM discs,
all manuals, catalog inserts and boxes in which the Company's products are      
shipped are produced by the Company's employees. The Company has multiple       
sources for all components of its products, and has not experienced any material
delays in production or assembly.                                               

    Sales and marketing and order processing, warehousing and shipping
activities related to the Company's direct mail operation are based at its      
Lancaster, Pennsylvania facility. The Company's direct-mail computer system     
handles order entry, order processing, picking, billing, and inventory control. 

Competition                                                                     

    The market for the Company's interactive software is intensely and
increasingly competitive. The Company's competitors range from small companies  
with limited resources to large companies with substantially greater financial, 
technical and marketing resources than the Company. Existing consumer software  
companies may broaden their product lines to compete with the Company's         
products, and potential new competitors, including computer hardware and        
software manufacturers, diversified media companies and book publishing         
companies, may enter or increase their focus on the consumer software market,   
resulting in greater competition for the Company. Although the Company competes 
with a number of different companies across its product lines, the Company      
regards Expert Software and The Learning Company (formerly "Softkey") as its    
closest competitors based upon product offerings and price points. The Company's
competitors also include established software companies such as Electronic Arts,
Maxis, Sierra Online, Broderbund, Mindscape, Acclaim and Microsoft, among       
others, all of which have developed interactive multimedia software titles on   
CD-ROM.                                                                         

         Only a small percentage of products introduced in the consumer software
market achieve any degree of sustained market acceptance. The Company believes  
the principal competitive factors in marketing computer software include product
features, quality, reliability, brand recognition, ease of use, merchandising,  
access to distribution channels and retail shelf space, and price. The Company  
vies with many of its competitors for shelf space in the retail distribution    
market. As the number of competitors grows, the demand for existing shelf space 
increases and the Company may experience difficulty in gaining additional shelf 
space for new products and maintaining the shelf space for its current products.
Based on its current and anticipated future product offerings, the Company      
believes that it competes or will compete effectively in these areas,           
particularly with respect to brand name recognition, quality, ease of use, and  
access to distribution channels and retail shelf space.                         

       The Company believes that as competition increases, significant price
competition and reduced profit margins may result. In addition, competition from
new technologies that the Company has not yet implemented may reduce demand for 
the Company's products. Extensive price competition, coupled with reduced demand
or distribution channel changes may have a material adverse effect on the       

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Company's business, financial condition or operating results. There can be no   
assurance that the Company will be able to compete successfully against current 
or future competitors or that competitive pressures will not materially and     
adversely affect its business, operating results and financial condition.       

Employees                                                                       

         As of March 31, 1997, the Company and its subsidiaries had 70 full-time
employees. The Company also has between 10 and 30 part-time employees depending 
on the level of sales activity in various seasons. The Company's employees are  
not represented by a labor union and are not subject to any collective          
bargaining arrangement. The Company has never experienced a work stoppage and   
believes that it has good relations with its employees.                         

Item 2. Description of Properties                                               

  In February 1995, the Company entered into a five-year lease for
approximately 17,800 square feet of office and warehouse space in Newark,       
Delaware, which the Company utilizes for its principal offices and production   
facilities for approximately $5,900 per month. The Company entered into another 
lease in Newark, Delaware, for approximately 6,200 square feet of satellite     
warehouse space for approximately $1,950 per month.                             

   As part of the Company's acquisition of APBA in January 1995, the
Company entered into a ten-year lease for approximately 21,800 square feet of   
office and warehouse space in Lancaster, Pennsylvania, which the Company        
utilizes for its direct mail operation, for approximately $3,272 per month plus 
taxes and insurance. The Company plans to consolidate its entire publishing     
group, including marketing, development and sales at this location in the       
future.                                                                         

       As part of the Company's acquisition of Micro Sports in October 1996,
the Company entered into a five-year lease for approximately 5,300 square feet  
of office space in Chattanooga, Tennessee for approximately $3,333 per month.   
The Company utilizes such space for its Tennessee development team.             

     In the opinion of the Company's management, all such properties are
adequately covered by insurance.                                                

Item 3. Legal Proceedings                                                       

Micro League Multimedia, Inc. v. Borta, Inc.                  

       In December 1996, the Company filed a Demand for Arbitration with the
American Arbitration Association against Borta, Inc., with which MicroLeague had
contracted for the development of four sports software games (MicroLeague       
Baseball, MicroLeague Football, MicroLeague Basketball and MicroLeague Hockey), 
but which were never developed by Borta, Inc. The Company has alleged breach of 
contract against Borta, Inc. and is seeking lost profits and expenses in excess 
of $1,000,000. Borta, Inc. has filed a response to the Demand for Arbitration   
stating that MicroLeague abandoned the contract and alleging a counterclaim     
against MicroLeague for an unspecified amount of royalties. The Company has     
denied the allegations of the counterclaim and believes it has valid defenses to
such counterclaim.                                                              

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       Edward Ringler v. Micro League Multimedia, Inc., Neil Swartz and John
Ferretti                                                                        

       In December 1996, the Company, its Chief Executive Officer and former
President were sued in the District Court of Delaware by Edward Ringler, a      
former employee, for compensation allegedly owed to the employee under an       
employment contract. The Company had terminated the employee for "Cause" as     
defined in his employment contract. The Company is defending the action on the  
ground that the employee committed offenses that entitled MicroLeague to        
terminate his employment and therefore no further compensation is owed. The     
Company has filed an answer in which it denies liability to Mr. Ringler and a   
counterclaim for failure to return office furniture and a computer system and   
related equipment owned by the Company. Under the Company's Bylaws, the Company 
is obligated to indemnify the officers and directors of the Company for         
liabilities and expenses incurred in connection with actions taken in such      
capacities, subject to certain exceptions. Accordingly, the Company will        
indemnify Messrs. Swartz and Ferretti for any liabilities and expenses they may 
incur arising out of this action.                                               

        The Company from time to time is involved in various legal proceedings
with third parties. Management, after review and consultation with counsel,     
believes that the disposition of any such litigation would not, individually or 
in the aggregate, have a material adverse effect on the Company's financial     
position.                                                                       

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

        No matters were submitted to shareholders during the fourth quarter of
1996.                                                                           

 PART II

Item 5. Market for Common Equity and Related Stockholder Matters                

  The Company's Common Stock is listed for trading on the National
Association of Securities Dealers Automated Quotation System SmallCap Market    
under the symbol "MLMI." As of March 31, 1997, there were approximately 76      
holders of record of the Company's Common Stock. The high and low closing bid   
prices for the Company's Common Stock during each fiscal quarter since its      
initial public offering in May 1996 (the "Initial Public Offering") were as     
follows:                                                                        

      The following table sets forth, for the quarters indicated, the high
and low sales price for the Company's Common Stock as reported on the NASDAQ    
SmallCap Market:                                                                

                                                          High           Low
                                                          ----           ---
Year Ended December 31, 1996                                    
        Second Quarter (May 23(1)-June 30)..........         $6.75        $6.375
        Third Quarter...............................         $6.75        $6.375
        Fourth Quarter..............................         $7.50        $6.375
----------------------                                                          

(1) Date of Initial Public Offering.                                            

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                 Market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual       
transactions. On April 15, 1997, the closing price of the Company's Common Stock
as reported on the NASDAQ SmallCap Market was $4.375 per share.                 

               Since its inception, the Company has never paid any cash or
stock dividends.                                                                

                 During the fourth quarter of 1996, the Company issued 308,882
shares of unregistered Common Stock to MSIH, the parent corporation of Micro    
Sports, in connection with the acquisition of Micro Sports.                     

     Item 6. Management's Discussion and Analysis or Plan of Operations.

 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 The following discussion should be read in conjunction with the
historical financial statements, including the notes thereto, of the Company    
included elsewhere herein.                                                      

General                                                                         

     The Company is a brand-oriented publisher of interactive multimedia
software products for the entertainment, lifestyle and educational segments of  
the personal computer software markets and also provides publishing services.   
The Company is a Pennsylvania corporation, which was incorporated and commenced 
operations in 1989. As of December 31, 1996, the Company had an accumulated     
deficit of approximately $7.5 million. The losses in 1989 through 1994 were due 
to the Company being financed primarily by debt with significant annual interest
expense as well as selling, general and administrative expenses associated with 
establishing its infrastructure, including, but not limited to, hiring          
personnel, purchasing information systems and equipment, and establishing market
channels. These efforts have been substantially completed. The losses in 1996,  
which totaled $5.6 million, resulted primarily from a decrease in net revenues  
due to the absence of new front line product releases and significant           
investments in products and acquisitions, and increases in cost of goods sold   
and operating expenses, which are discussed below. These investments should     
contribute to the Company's revenues in future periods.                         

        During 1995, the Company acquired two companies, APBA, a publisher and
developer of software and board sports games, which was purchased on January 1, 
and Able Soft, a lifestyle and productivity software publisher and developer,   
which was purchased on September 30. Both acquisitions were accounted for in    
accordance with the purchase method of accounting. APBA was acquired through an 
asset purchase financed primarily through seller notes, while Able Soft was a   
tax-free exchange of stock. These acquisitions resulted in the Company recording
goodwill of approximately $790,000, of which approximately $750,000 relates to  
Able Soft and approximately $40,000 relates to APBA, which amounts are being    
amortized over 10 years. These acquisitions also contributed approximately      
$350,000 in additional inventory. As a result of the acquisitions, the Company  
consolidated facilities in 1996 at an estimated cost of approximately $45,000.  

         In October 1996, the Company acquired all of the assets of Micro Sports
and certain assets of MSIH, the parent corporation of Micro Sports, consisting  
of various intellectual property rights. The acquisition was accounted for by   
the purchase method of accounting and resulted in this Company recording        
goodwill of approximately $933,000. In consideration of the purchase of such    
assets and the                                                                  

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assumption of certain liabilities of Micro Sports, the Company issued to MSIH   
308,882 shares of Common Stock.                                                 

     In February 1997, the Company acquired the intellectual property of
Rabbit Ears(R), an entertainment company that sells children's                  
literature-related productions. The acquisition was accounted for by the        
purchase method of accounting and is expected to result in the Company reporting
substantial goodwill. In consideration of the purchase of such assets and       
assumption of certain liabilities of Rabbit Ears(R), the Company issued to the  
seller an aggregate of 268,097 shares of Common Stock and redeemable options to 
purchase up to 250,000 shares of Common Stock.                                  

       The Company's interactive multimedia publishing business involves the
development of proprietary content that is published in a variety of media and  
the licensing of such products and, in certain instances, other electronic      
publishing rights to content. The Company expects to require continued increases
in the number of employees, expenditures for new product development, the       
acquisition of licensing or product rights, sales and marketing expenses and    
general and administrative expenses relating to the continued development of a  
management infrastructure and facilities necessary to support the Company's     
growth. The Company expects to fund these expenses with a combination of funds  
from operations and, to the extent available, borrowings from institutional     
lenders and proceeds from the sale of debt and equity securities. See           
"--Liquidity and Capital Resources."                                            

       Net revenues consist of gross revenues, net of allowances for returns
and price protection credits given to distributors and retailers. The Company   
records an allowance for returns and price protection credits based on          
historical experience at the time revenue is recognized. The Company adjusts the
allowance for returns as it deems appropriate. The Company may accept           
substantial product returns or make other concessions, even though it is not    
legally obligated to do so, to maintain its relationships with retailers and    
distributors and its access to distribution channels. Concessions predominantly 
consist of price protection credits from the Company to effectively reduce the  
distributor's unit cost and prices to retailers. For 1996, the Company reduced  
sales and increased the allowance for returns and doubtful accounts by $16,000. 
Allowances and other reductions to accounts receivable realized in 1995 of      
approximately $260,000 resulted from transactions arising in 1994 and prior     
years. Of the $784,000 recorded in 1995, $390,000 related to 1995 transactions  
with the balance used for future reductions of related transactions. The Company
records an allowance for returns and price protection credits based on          
historical experience at the time revenue is recognized. If the Company chooses 
to accept product returns, some of those products may be defective, shelf-worn  
or damaged and therefore may not be salable in the ordinary course. The Company 
currently anticipates that its actual returns plus provisions for returns as a  
percentage of revenues will not change materially in 1997. Prior to 1996, the   
Company's bad debts and uncollected receivables were not material.              

 Cost of goods sold consists primarily of product costs, freight
charges, royalties and an inventory allowance for defective, damaged and        
obsolete products. Product costs consist of the costs to purchase the underlying
materials and print both boxes and manuals, media costs (CD-ROMs), and assembly 
and shipping. Royalties consist of the amortization of license fees in          
connection with the Company's rights to use players associations' statistical   
information and content license fees for publishing other developers' products. 
All of the Company's current license arrangements call for the Company to pay   
royalties based on a percentage of the Company's net cash received relating to  
the respective products. Amounts prepaid upon signing of licenses are generally 
not substantial, and are treated as prepayments against the aforementioned      
royalties. Cash paid for licenses in the form of royalties was approximately    
$98,000 in 1995 and $100,000 in 1996. The Company's provision for inventory     
obsolescence was $59,271 in 1995 and $62,000 in 1996.                           

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    Despite the possibility of increased competition in the future for
these licenses, the Company believes new content licenses will become available 
as the market and the demand for CD-ROM entertainment products grow.            
Accordingly, the Company is unable to predict whether the costs of its licenses 
will increase or decrease in future periods.                                    

 The printing capabilities of the Company reduce the cost of its
products, and the Company attempts to utilize its excess capacity by providing  
printing services to outside customers. Historically, however, the printing     
group has operated at a loss. In 1996, the printing group had a loss of         
approximately $1.3 million based on revenues of $1,468,738 and expenses of      
$2,735,855. Accordingly, the Company currently is negotiating for the sale of   
this business to the Company's former President and Chief Operating Officer. See
"Description of Business -- Services."                                          

Results of Operations in 1996 compared to 1995                                  

  Net revenues decreased $900,000, or 18%, from approximately $5.0
million in 1995 to approximately $4.1 million in 1996. The decrease was         
attributable to lower multimedia product sales, which declined approximately    
$1,000,000, or 27%, and was partially offset by an increase of approximately    
$100,000, or 4%, in commercial printing sales. Multimedia product sales declined
primarily due to the absence of any new front line product releases until late  
December 1996. The Company had planned to release in 1996 Sports Illustrated    
presents Microleague Baseball 6.0 as well as new basketball, football and hockey
games as new front line products. The Company was unable to release any of these
games on a timely basis, however, due to the failure of an outside developer to 
deliver the games to the Company in accordance with the terms of their          
development contract. Management believes that the absence of new front line    
products contributed significantly to lower sales during the year-end holiday   
season, which historically has been the Company's strongest sales period.       
See "Description of Business - Litigation."                                     

     In an effort to improve the timeliness and consistency of new front
line sports product development, in October 1996, the Company acquired Micro    
Sports, a well-established competing developer of statistical sports simulation 
computer games. As a result of the acquisition, the Company released in late    
December 1996 Sports Illustrated presents MicroLeague Pro Football 1997, Sports 
Illustrated presents MicroLeague College Football and Pro League Baseball, all  
of which were developed by Micro Sports.                                        

   The absence of new front line products in 1996 resulted in higher
product returns and credits for price support on an aggregate basis and as a    
percentage of gross sales, increasing from $884,105, or 15%, in 1995 to         
$1,080,732, or 20%, in 1996. Front line products typically constitute the       
Company's highest quality products and therefore generally represent a lower    
percentage of total product returns than its other products. Accordingly, the   
Company believes that the development and timely release of new front line      
products is essential to limiting product returns as a percentage of gross      
sales. The Company has instituted formal distribution policies and restricted   
sales of its products to distributors in order to limit the Company's exposure  
to product returns.                                                             

     Cost of goods sold increased $1,100,000, or 47%, from approximately
$2.4 million in 1995 to approximately $3.5 million in 1996. As a percentage of  
net revenues, cost of goods sold increased from 47% in 1995 to 85% in 1996. The 
increase in cost of goods sold as a percentage of net sales resulted primarily  
from a substantial increase in lower priced software sales and commercial       
printing sales relative to total net revenues in 1996 versus 1995. Lower priced 
software and commercial printing services have a lower gross profit margin than 
the Company's front line software products. In addition,                        

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the higher product returns and price supports described above reduced net       
revenues in 1996 and also contributed to the sharp increase in cost of goods    
sold as a percentage of net revenues.                                           

      Product development expenses increased $1,100,000 from approximately
$200,000 in 1995 to approximately $1,400,000 in 1996, net of the portion        
capitalized for software development. Approximately $1,020,000 of this increase 
was due to writing off prepaid development expenses and capitalized software    
costs related to the front line sports products planned for 1996, which were not
delivered by an outside developer as discussed above. The balance of the        
increase in 1996 development expenses was due to the hiring of additional       
development personnel in that year, including David Holt, the Company's Vice    
President of Software Development, and the Micro Sports development staff       
consisting of approximately 13 persons.                                         

       Selling expenses increased from approximately $500,000, or 10% of net
revenues, in 1995 to approximately $1.8 million, or 43% of net revenues, in     
1996. The significant increase was primarily due to the Company's efforts to    
gain more control over its software distribution channels, including advertising
campaigns and cooperative advertising programs with the Company's retailers to  
preserve shelf space for future periods in which the Company will have new front
line products. The increase was also attributable to the Company's efforts to   
gain new distribution outlets through the establishment of a private label      
program with GTE Interactive, an original equipment manufacturer, and the       
Company's establishment of MMI Online, its Internet web site. Approximately     
$450,000, or 32%, of the increase in 1996 selling expenses compared to 1995     
resulted from higher bad debt expense due to write-offs of certain accounts     
receivable and increased reserves relating to the weakened financial positions  
of two major customers. Further, selling expenses increased due to the hiring of
additional sales personnel in 1996. The Company believes that its increased     
marketing efforts in 1996 should contribute to revenues in 1997 and intends to  
continue to launch new marketing promotions. The Company expects that selling   
expenses as a percentage of net revenues will decrease as the Company releases  
new products, including four new front line products scheduled for release in   
the second quarter of 1997. See "Description of Business - Products and         
Services."                                                                      

      General and administrative expenses increased $500,000, or 30%, from
approximately $1.8 million in 1995 to approximately $2.3 million in 1996. This  
increase was primarily due to the amortization of goodwill and other intangible 
assets related to the Able Soft and Micro Sports acquisitions, which were       
completed on September 30, 1995 and October 24, 1996, respectively, as well as  
hiring personnel in finance and administration to facilitate the Company's      
expansion and assist with financial reporting.                                  

Interest expense increased approximately $34,000, or 15%, from
approximately $224,000 in 1995 to approximately $258,000 in 1996. The increase  
resulted from increased borrowings in 1996, partially offset by the repayment of
a portion of the Company's outstanding indebtedness using proceeds from the     
Initial Public Offering.                                                        

    As a result of the Company's acquisition of Able Soft, the Company
converted to a C corporation from an S corporation for income tax purposes on   
October 1, 1995. Thus, for the nine months ended September 30, 1995, the Company
was not subject to federal and state corporate income taxes. No income tax      
benefit has been recognized for financial statement purposes for the year ended 
December 31, 1996 due to the Company's inability historically to generate       
substantial net income, which is necessary to justify utilization of its        
substantial net operating loss credits for tax purposes.                        

        In connection with the Company's sale of bridge notes in February 1996
for $800,000, the Company incurred approximately $250,000 in deemed interest and
deferred financing costs upon completion of the Initial Public Offering in May  
1996. In addition, the Company incurred expenses in                             

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May 1996 of approximately $90,000 for premiums in excess of principal related to
the early retirement of certain partnership debt interests.                     

Liquidity and Capital Resources                                                 

        The Company historically has not been able to generate sufficient cash
flow to fund its operations. Prior to 1996, working capital deficiencies were   
funded principally through private placements of securities. Prior to the       
completion of these private placements, the Company relied primarily on cash    
flow from operations and borrowings under its bank line of credit to finance its
operations and expansion.                                                       

In May 1996, the Company raised net proceeds of approximately 
$5,000,000 in the Initial Public Offering, which consisted of 1,173,000 units,  
each comprised of one share of Common Stock and one Common Stock purchase       
warrant. The Company applied approximately $2.8 million of such net proceeds to 
repay bank debt, bridge notes issued in February 1996 and notes to a            
partnership. The Company applied the remaining net proceeds to fund product     
development and to provide working capital for general corporate purposes.      

 As of December 31, 1996, the Company had payment commitments of
approximately $304,000 under various product development agreements, $1.3       
million under its property and vehicle leases, and $1.9 million under existing  
employment agreements with certain officers of the Company.                     

 As a result of the costs incurred in connection with the recent
acquisitions of Micro Sports and Rabbit Ears, the Company believes that cash    
flow from operations will not be sufficient to meet its needs for working       
capital and the expansion of its business. The Company's cash flow from         
operations was substantially lower in 1996 than previously anticipated due to   
the decrease in net revenues and the increases in cost of goods sold and        
operating expenses described above. Cash flow from operations in the first      
quarter of 1997 has continued to be less than the Company's working capital     
needs.                                                                          

 The Company's working capital needs may increase depending upon
numerous factors, including financing of increased inventory and accounts       
receivable arising from the sale and shipment of new products, as well as       
additional acquisitions. Accordingly, the Company has continued to borrow under 
its bank line of credit and approximately $1.35 million was outstanding as of   
March 31, 1997. The Company estimates that in order to fund its working capital 
needs for the balance of 1997, it will require approximately $2.0 million of    
financing in addition to cash flow from operations. Accordingly, the Company is 
seeking additional debt and equity financing.                                   

        In late March 1997, the bank providing the Company's $1.5 million line
of credit, which is collateralized by substantially all of the Company's assets,
informed the Company that it would not renew the line of credit, and that the   
Company was in violation of a covenant relating to the maintenance of a minimum 
level of tangible net worth. The Company immediately began discussions with the 
bank to obtain a limited extension of the line of credit and simultaneously     
began discussions with other banks to obtain a replacement credit facility. The 
line of credit expired on March 31, 1997 and all amounts outstanding thereunder 
became immediately due and payable on that date. In April 1997, the bank        
agreed in principle not to exercise its remedies under the line of credit until 
July 15, 1997 in order to allow the Company an opportunity to arrange for a     
new line of credit. Under such agreement in principle, the Company will be      
required to make principal payments of $50,000 on the date the parties execute a
definitive agreement, $50,000 on each of May 15, 1997 and June 15, 1997, and all
remaining amounts outstanding under the line of credit on July 15, 1997.        

    Also, in April 1997, the Company accepted a commitment letter from
another bank that has agreed to provide a $1.5 million line of credit to replace
the Company's expired line of credit. Receipt of funds under the new line of    
credit, however, is subject to negotiation and execution of definitive          
documentation. While the Company expects to finalize such documentation and     
receive such funds shortly, in the event it is unable to do so and cannot obtain
alternative financing by July 15, 1997, the bank that provided the expired line 
of credit could declare an event of default and exercise its rights as a secured
lender, including taking control of the Company's assets.                       

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  Even if the Company obtains a new credit facility, it must raise
additional debt or equity financing in order to fund its working capital needs. 
The Company has negotiated the issuance and sale to an institutional investor of
$1,000,000 principal amount of convertible subordinated pay-in-kind secured     
debentures and warrants to purchase 85,000 shares of Common Stock for aggregate 
consideration of $1,000,000. Completion of the transaction, however, is         
conditioned on the Company obtaining a new credit facility on terms acceptable  
to the investor. Accordingly, there is no assurance that this transaction will  
be completed.                                                                   

     The Company has received a proposal from an investment banking firm
under which such firm would act as placement agent to offer on a best efforts   
basis up to $2,000,000 of convertible preferred stock of the Company. The       
Company intends to proceed with such offering; however, as a practical matter,  
completion of the offering is contingent upon the Company obtaining a new credit
facility on terms that the placement agent believes would be acceptable to      
investors. The offering would be made on a best efforts basis, and therefore,   
even assuming the Company obtains a new credit facility, there can be no        
assurance that the offering will be successful.                                 

       On March 24, 1997, the Company announced it had entered into a letter
of intent to acquire KidSoft, a California-based distributor and publisher of   
children's multimedia software products. See "Business-Recent and Proposed      
Acquisitions." In connection with the acquisition, certain shareholders of      
KidSoft have agreed, subject to certain conditions, to purchase in a private    
placement up to $2,000,000 of Common Stock. The Company anticipates that, while 
a significant portion of the proceeds from this issuance of stock will be used  
to integrate KidSoft's California-based operations with the Company's           
operations, a substantial amount of the net proceeds will be available for      
working capital and general corporate purposes. The Company anticipates that    
KidSoft's direct mail and original equipment manufacturer business, which       
represent a substantial portion of KidSoft's total revenues, will enable the    
Company to substantially improve its cash flow from operations. In addition, the
Company anticipates that all costs incurred in consolidating the companies'     
operations will be fully funded by the proceeds of such issuance of stock.      
Consummation of the KidSoft acquisition is subject to completion of a           
satisfactory due diligence review by each party, negotiation and execution of   
definitive documentation and other customary closing documents, approval of the 
respective boards of directors of each party and satisfaction of other closing  
conditions. Accordingly, there can be no assurance that this transaction will be
completed.                                                                      

   In the normal course of business, the Company evaluates potential
acquisitions and joint ventures that may complement the Company's business. The 
Company is currently evaluating a number of opportunities in this regard;       
however no commitments or agreements have been reached except for a letter of   
intent with respect to KidSoft, which is subject to due diligence and other     
conditions described above. Any such acquisitions or joint ventures may require 
the Company to make additional capital expenditures, and such expenditures could
be significant.                                                                 

Seasonality                                                                     

         The interactive multimedia consumer products market is characterized by
significant seasonal swings in demand, which typically peak in the fourth       
quarter of each year. The seasonal pattern is due primarily to the increased    
demand for software during the year-end holiday buying season. The Company      
expects its net sales and operating results to continue to reflect this         
seasonality. There can be no assurance that the Company will achieve consistent 
profitability on a quarterly or annual basis or that any profitability, if      
achieved, will be maintained.                                                   

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Inflation                                                                       

       The Company does not believe that inflation has had a material effect
on its results of operations to date. There can be no assurance, however, that  
the Company's business will not be affected by inflation in the future.         

Item 7. Financial Statements.                                                   

 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF
MICROLEAGUE MULTIMEDIA, INC.

                                                        [Enlarge/Download Table]

                                                                                                     Page
                                                                                                     ----

                                                                                                         
Report of Independent Accountants...................................................................  F-1
Consolidated Balance Sheets as of December 31, 1995 and December 31, 1996...........................  F-2
Consolidated Statements of Income for the years ended December 31, 1995                                  
  and December 31, 1996.............................................................................  F-3
Consolidated Statements of Shareholders' Equity for the years ended                                      
  December 31, 1995 and December 31, 1996...........................................................  F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1995                              
  and December 31, 1996.............................................................................  F-5
Notes to Consolidated Financial Statements..........................................................  F-6

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

Not Applicable.                                               

PART III

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

            The information required by this Item is incorporated by
reference from the definitive proxy materials of the Company to be filed with   
the Commission in connection with the Company's 1997 Annual Meeting.            

Item 10. Executive Compensation                                                 

            The information required by this Item is incorporated by
reference from the definitive proxy materials of the Company to be filed with   
the Commission in connection with the Company's 1997 Annual Meeting.            

Item 11. Security Ownership of Certain Beneficial Owners and Management         

            The information required by this Item is incorporated by
reference from the definitive proxy materials of the Company to be filed with   
the Commission in connection with the Company's 1997 Annual Meeting.            

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Item 12. Certain Relationships and Related Transactions                         

            The information required by this Item is incorporated by
reference from the definitive proxy materials of the Company to be filed with   
the Commission in connection with the Company's 1997 Annual Meeting.            

Item 13. Exhibits, List and Reports on Form 8-K                                 

(a) Financial Statements:                   

                The financial statements filed as part of this annual report
on Form 10-KSB are included in Part II, Item 7.                                 

Report of Independent Accountants           

           Consolidated Balance Sheets as of December 31, 1995 and
December 31, 1996                           

                  Consolidated Statements of Income for the years ended December
31, 1995 and December 31, 1996              

                 Consolidated Statements of Shareholders' Equity for the years
 ended December 31, 1995 and December 31, 1996

             Consolidated Statements of Cash Flows for the years ended
December 31, 1995 and December 31, 1996     

Notes to Consolidated Financial Statements. 

(b) Reports on Form 8-K                     

                     The following Current Report on Form 8-K was filed by the
Company during the fourth quarter of 1996:                                      

               Current Report on Form 8-K, dated October 24, 1996,
                   reporting the acquisition of all of the assets of Micro
                      Sports and certain of the assets of MSIH and assumption of
       certain of the liabilities of Micro Sports.

(c) Exhibits                                

                (3.1)    Amended and Restated Bylaws of the Company.

           (11.1)   Statement re: Computation of Earnings.

(21.1)   List of Subsidiaries.      

(27.1)   Financial Data Schedule.   

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MICROLEAGUE MULTIMEDIA, INC.

 INDEX TO FINANCIAL STATEMENTS

                                                        [Enlarge/Download Table]


                                                                                                           Page 
                                                                                                           ---- 
                                                                                                                
MICROLEAGUE MULTIMEDIA, INC.                                                                                    

Report of Independent Accountants.........................................................................   F-1
Consolidated Balance Sheets as of December 31, 1995 and December 31, 1996.................................   F-2
Consolidated Statements of Income for the years ended December 31, 1995 and 1996..........................   F-3
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995 and 1996............   F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1995 and 1996......................   F-5
Notes to Consolidated Financial Statements ...............................................................   F-6


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To the Board of Directors and Stockholders of Microleague Multimedia, Inc.:     

 We have audited the accompanying consolidated balance sheets of
Microleague Multimedia, Inc. as of December 31, 1995 and 1996 and the related   
consolidated statements of income, stockholders' equity, and cash flows for the 
years ended December 31, 1995 and 1996. These consolidated financial statements 
are the responsibility of the Company's management. Our responsibility is to    
express an opinion on these consolidated financial statements based on our      
audits.                                                                         

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Microleague 
Multimedia, Inc. as of December 31, 1995 and 1996 and the results of their      
income and their cash flows for the years ended December 31, 1995 and 1996, in  
conformity with generally accepted accounting principles.                       

        The accompanying financial statements have been prepared assuming that
Microleague Multimedia, Inc. will continue as a going concern. As discussed in  
Note 1 to the financial statements, Microleague Multimedia, Inc. has a working  
capital deficiency, loan covenant violations and a loss from operations, all    
which raise substantial doubt about its ability to continue as a going concern. 
Management's plans in regard to these matters are also described in Note 1. The 
financial statements do not include any adjustments that might result from the  
outcome of this uncertainty.                                                    

COOPERS & LYBRAND L.L.P.                                                        

2400 Eleven Penn Center                                                         
Philadelphia, Pennsylvania                                                      

March 21, 1997,                                                                 
except for the third and fourth paragraphs of Note 5                            
and the second through the sixth paragraphs of                                  
Note 12 for which the date is April 21, 1997                                    

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MICROLEAGUE MULTIMEDIA, INC.
 CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1995 AND 1996

                                                        [Enlarge/Download Table]


                                                                       1995          1996    
                                                                   -----------   ----------- 
                                                                                             
ASSETS                                                                                       
Current Assets:                                                                              
    Cash and cash equivalents ...................................  $     6,754   $    22,080 
    Accounts receivable, net of allowance for returns and                                    
    doubtful accounts of $444,000 and $460,000 ..................    1,763,124       867,915 
    Inventory ...................................................      916,715     1,302,728 
    Royalty advances ............................................      295,702       102,100 
    Prepaid and other current assets ............................      247,500        83,539 
    Deferred tax asset ..........................................      208,300        83,300 
                                                                   -----------   ----------- 
       Total current assets .....................................    3,438,095     2,461,662 
Fixed assets, net ...............................................      425,162       858,290 
Goodwill, net ...................................................      771,210     1,592,301 
Capitalized software costs, net .................................      370,021        73,251 
Intangible assets, net ..........................................      262,638     2,307,710 
Other assets ....................................................      107,413        57,129 
                                                                   -----------   ----------- 
Total assets ....................................................  $ 5,374,539   $ 7,350,343 
                                                                   ===========   =========== 
LIABILITIES AND STOCKHOLDERS' EQUITY                                                         
Current liabilities:                                                                         
    Current portion of long-term debt and capital leases ........  $   391,530   $   338,626 
    Notes payable ...............................................    2,281,372     1,800,200 
    Accounts payable ............................................    1,109,625     1,488,647 
    Accrued expenses ............................................      238,813       723,232 
    Cash overdraft ..............................................         --          73,068 
                                                                   -----------   ----------- 
       Total current liabilities ................................    4,021,340     4,423,773 
Deferred tax liability ..........................................      192,000        83,300 
Long-term debt and capital leases, net ..........................    1,019,602       673,085 
                                                                   -----------   ----------- 
    Total liabilities ...........................................    5,232,942     5,180,158 
                                                                   -----------   ----------- 

Commitments and contingencies                                                                
Stockholders' equity:                                                                        
    Preferred stock, $.01 par value, 1,000,000 shares authorized;                            
       None issued and outstanding ..............................         --            --   
    Common stock $.01 par value, 10,000,000 shares authorized;                               
    2,674,870 and 4,243,171 shares issued and outstanding .......       26,749        42,432 
    Additional paid-in capital ..................................    2,057,158     9,618,747 
    Warrants ....................................................         --            --   
    Accumulated deficit .........................................   (1,872,380)   (7,454,994)
    Receivables from stockholders ...............................      (69,930)      (36,000)
                                                                   -----------   ----------- 

       Total stockholders' equity ...............................      141,597     2,170,185 
                                                                   -----------   ----------- 

       Total liabilities and stockholders' equity ...............  $ 5,374,539   $ 7,350,343 
                                                                   ===========   =========== 


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

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MICROLEAGUE MULTIMEDIA, INC.
 CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996

                                                                [Download Table]


                                                       1995           1996   
                                                    -----------  ----------- 
                                                                             
Net revenues .....................................  $ 5,010,156  $ 4,087,037 
Cost of goods sold ...............................    2,374,975    3,488,509 
                                                    -----------  ----------- 
    Gross profit .................................    2,635,181      598,528 
                                                    -----------  ----------- 
Operating expenses:                                                          
    Product development ..........................      215,167    1,487,523 
    Selling and marketing ........................      515,882    1,771,645 
    General and administrative ...................    1,555,838    2,307,556 
                                                    -----------  ----------- 
       Total operating expenses ..................    2,286,887    5,566,724 
                                                    -----------  ----------- 
       Income (loss) from operations .............      348,294   (4,968,196)
Interest expense .................................      224,451      257,815 
Other expense ....................................       41,054         --   
                                                    -----------  ----------- 
Income (loss) before benefit for income taxes and        82,789   (5,226,011)
extraordinary items                                                          
Benefit (provision) for income taxes before                                  
  extraordinary items ............................       16,300      (16,300)
                                                    -----------  ----------- 
    Income (loss) before extraordinary items .....       99,089   (5,242,311)
                                                    -----------  ----------- 
Extraordinary loss on early extinguishment of debt         --        340,303 
                                                    -----------  ----------- 
Net income (loss) ................................  $    99,089  $(5,582,614)
                                                    ===========  =========== 
Per share of Common Stock:                                                   
    Loss before extraordinary items ..............         --    $     (1.46)
    Extraordinary items ..........................         --           (.10)
                                                                 ----------- 
    Net loss .....................................         --    $     (1.56)
                                                                 =========== 
Weighted average common shares outstanding .......                 3,584,722 
                                                                 =========== 
Pro forma income data (unaudited):                                           
    Income before taxes ..........................  $    82,789              
    Income tax provision at 40% ..................       33,116              
                                                    -----------              
    Net income ...................................  $    49,673              
                                                    ===========              
Proforma earnings per share ......................  $       .02              
                                                    ===========              
Weighted average common shares outstanding .......    2,937,978              
                                                    ===========              


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

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MICROLEAGUE MULTIMEDIA, INC.

 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996

                                                        [Enlarge/Download Table]


                                                                Additional                  Receivables                 
                                                     Common       Paid-in      Accumulated      from                    
                                         Shares      Stock        Capital        Deficit    Stockholders     Total      
                                         ------      -----        -------        -------    ------------     -----      
                                                                                                                        
Balance, December 31, 1994...........     2,188,899    $21,889      $849,510   $(1,971,469)      $(46,331)  $(1,146,401)
Issuance of Common Stock.............       230,733      2,307       572,701                                    575,008 
Stock issued for acquisition.........       132,252      1,323       373,677                                    375,000 
Stock issued for services............        38,874        389        87,111                                     87,500 
Conversion of notes payable..........        84,112        841       174,159                                    175,000 
Borrowings by stockholders...........                                                             (23,599)      (23,599)
Net income...........................                                               99,089                       99,089 
                                          ---------  ---------   -----------  -------------   -----------      -------- 
Balance, December 31, 1995...........     2,674,870     26,749     2,057,158    (1,872,380)       (69,930)      141,597 
                                          ---------  ---------   -----------  -------------   -----------      -------- 

Initial public offering of Common Stock   1,173,000     11,730     4,987,557                                  4,999,287 
Issuance of Common Stock                                                                                                
  for acquisitions...................       324,682      3,247     2,096,753                                  2,100,000 
Issuance of Common Stock.............        53,581        536       441,921                                    442,457 
Conversion of notes payable..........        17,038        170        35,358                                     35,528 
Payments by stockholders.............                                                              33,930        33,930 
Net loss.............................                                           (5,582,614)                  (5,582,614)
                                          ---------  ---------   -----------  -------------   -----------      -------- 
Balance, December 31, 1996                4,243,171    $42,432    $9,618,747   $(7,454,994)      $(36,000)   $2,170,185 
                                          =========    =======    ==========   ===========       ========    ========== 

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

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MICROLEAGUE MULTIMEDIA, INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996

                                                        [Enlarge/Download Table]


                                                                         1995           1996    
                                                                      -----------   ----------- 
                                                                                                
Cash Flows from operating activities:                                                           
  Net income .......................................................  $    99,089   $(5,582,614)
  Adjustments to reconcile net income to net cash                                               
    used for operating activities:                                                              
    Depreciation and amortization ..................................      201,124     1,504,606 
    Deferred income taxes ..........................................      (16,300)       16,300 
    Provision for inventory obsolescence ...........................       59,271        62,000 
    Provision for returns and uncollectible accounts ...............      134,000        16,000 
    Changes in operating assets and liabilities net of acquisitions:                            
      Accounts receivable ..........................................   (1,127,991)      879,190 
      Inventory ....................................................     (208,989)     (448,013)
      Royalty advances .............................................     (150,164)     (430,125)
      Prepaid expenses and other current assets ....................      (31,231)      163,961 
      Other assets .................................................     (145,122)       32,703 
      Accounts payable .............................................      454,605       379,022 
      Accrued expenses .............................................        1,110       145,849 
                                                                      -----------   ----------- 
        Net cash used in operating activities ......................     (730,598)   (3,261,121)
                                                                      -----------   ----------- 
Cash flows from investing activities:                                                           
  Purchases of equipment ...........................................     (137,433)     (380,414)
  Capitalized software costs .......................................     (360,672)     (238,220)
                                                                      -----------   ----------- 
        Net cash used for investing activities .....................     (498,105)     (618,634)
                                                                      -----------   ----------- 
Cash flows from financing activities:                                                           
  Net borrowings under lines of credit .............................      381,872    (1,181,172)
  Payments (borrowings) of receivables from stockholders ...........      (23,599)       33,930 
  Borrowings of long-term debt .....................................      787,500        89,013 
  Principal payments of long-term debt and capital leases ..........     (558,669)     (488,434)
  Proceeds from initial public offering ............................         --       5,928,958 
  Initial public offering costs ....................................         --        (929,671)
  Issuance of Common Stock .........................................      575,008       442,457 
                                                                      -----------   ----------- 
        Net cash provided by financing activities ..................    1,162,112     3,895,081 
                                                                      -----------   ----------- 
        Net increase (decrease) in cash and cash equivalent ........      (66,591)       15,326 
Cash and cash equivalents at beginning of year .....................       73,345         6,754 
                                                                      -----------   ----------- 
Cash and cash equivalents at end of year ...........................  $     6,754   $    22,080 
                                                                      ===========   =========== 
Supplemental disclosure of cash flow information:                                               
                                                                      ===========   =========== 
  Cash paid for interest ...........................................  $   226,066   $   365,694 
                                                                      ===========   =========== 
  Noncash financing and investing activities:                                                   
                                                                      ===========   =========== 
    Acquisition notes ..............................................  $   312,783   $   700,000 
                                                                      ===========   =========== 
    Non-compete agreement ..........................................  $   200,023   $      --   
                                                                      ===========   =========== 
    Capital lease obligations ......................................  $    18,020   $   228,507 
                                                                      ===========   =========== 
    Conversion of notes payable to Common Stock ....................  $   175,000   $    35,528 
                                                                      ===========   =========== 
    Issuance of Common Stock for acquisitions ......................  $   375,000   $ 2,100,000 
                                                                      ===========   =========== 
    Issuance of Common Stock for services ..........................  $    87,500   $      --   
                                                                      ===========   =========== 
    Original issue discount ........................................  $      --     $   249,866 
                                                                      ===========   =========== 

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:                                  

DESCRIPTION OF BUSINESS:                                                        

     The 1996 consolidated financial statements for Microleague Multimedia, Inc.
(the "Company" or "Microleague"), include the operations of APBA Game Company   
("APBA") and Ablesoft, Inc. ("Ablesoft") (see Note 2), two interactive          
multimedia product companies which were acquired by the Company in 1995, as well
as those of Microleague, Micro Sports, Inc. ("Micro Sports"), a sports          
simulation software developer acquired in 1996, and Ferraul Corp., doing        
business as FoxFire Printing ("FoxFire"). Microleague sells its products        
primarily through software retailers, mail order, wholesale clubs and mass      
market merchandisers throughout the United States. FoxFire provides commercial  
printing, graphic design and manufacturing services. All significant            
intercompany accounts and transactions have been eliminated.                    

GOING CONCERN:                                                                  

As shown in the accompanying financial statements, the Company has a  
working capital deficiency at December 31, 1996, loan covenant violations, and a
loss from operations. These factors raise substantial doubt about the Company's 
ability to continue as a going concern. The financial statements do not include 
any adjustments that might be necessary if the Company is unable to continue as 
a going concern.                                                                

     Management has undertaken a plan to obtain sufficient capital and execute a
development and marketing plan that will enable the Company to achieve a level  
of profitable sales sufficient to support current operations as well as growth  
initiatives. For a discussion of certain steps management of the Company has    
undertaken to obtain sufficient capital, see Note 12.                           

ACCOUNTING ESTIMATES:                                                           

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

CASH AND CASH EQUIVALENTS:                                                      

For purposes of the statement of cash flows, the Company considers all
highly liquid debt investments purchased with an initial maturity of three      
months or less to be cash equivalents.                                          

CONCENTRATION OF CREDIT RISKS:                                                  

     The Company sells products primarily to software retailers and distributors
and extends credit based on an evaluation of the customer's financial condition,
generally without requiring collateral. Exposure to losses on receivables is    
principally dependent on each customer's financial condition. The Company       
monitors its exposure for credit losses and maintains allowances for anticipated
losses.                                                                         

   In 1995 and 1996, the Company had one customer that accounted for 15% and
18% of revenues, respectively. In 1995 and 1996, the Company's three largest    
customers accounted for approximately 29% and 33% of revenues, respectively, and
in the aggregate accounted for approximately 30% and 44% of the Company's       
accounts receivable at December 31, 1995 and December 31, 1996, respectively.   

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)                     

INVENTORY:                                                                      

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

  The Company periodically reviews inventory for obsolete, slow moving and
nonsalable inventory and records a reduction of such items to their net         
realizable value as a component of Cost of Goods Sold.                          

   During 1995 and 1996, the Company recognized writedowns to net realizable
value of its inventory of approximately $60,000 and $62,000, respectively.      

FIXED ASSETS:                                                                   

     Fixed assets are stated at cost and depreciated over their estimated useful
lives (three to five years for computers and related equipment and 20 years for 
printing equipment) using the straight-line method. Equipment with capital      
leases are also amortized over the estimated useful life of the asset. Normal   
repairs and maintenance are expensed as incurred. Upon sale or retirement of    
depreciable assets, the cost and related accumulated depreciation are removed   
from the accounts. Any gain or loss on the sale or retirement is recognized in  
current operations.                                                             

COMPUTER SOFTWARE:                                                              

The Company capitalizes computer software costs and costs of product  
enhancements subsequent to the determination of technological feasibility, which
occurs when all planning, designing, coding and testing activities necessary for
that product to be produced, have been completed; such capitalization continues 
until the product becomes available for general release. Unamortized capitalized
costs of a computer software product are compared to the net realizable value of
that product and reduced as necessary to its net realizable value. Maintenance  
and general upgrades are expensed as incurred. Capitalized software costs are   
written down to net realizable value when the carrying amount is in excess      
thereof.                                                                        

Computer software development and enhancement costs are amortized on a
product-by-product basis over a period of up to two years. Amortization, which  
is included in the cost of goods sold, is the greater of the amount computed    
using (1) the ratio of the current year's gross revenues to the total current   
and anticipated future gross revenues for that product or (2) the straight-line 
method over the estimated life of the product. The Company capitalized          
approximately $360,700 and $225,482 of these costs in the years ended December  
31, 1995 and 1996. Total amortization expense related to computer software was  
$14,593 and $522,252 (including $399,855 of a write-off to realizable value) in 
the years ended December 31, 1995 and 1996.                                     

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)                     

INTANGIBLE ASSETS:                                                              

    The Company has intangible assets resulting from acquisitions as set forth
in the table below. The Company amortizes these intangible assets on the        
straight line basis over their estimated useful lives, which do not exceed any  
applicable contractual lives.                                                   

                                                        [Enlarge/Download Table]


                                                      1995              1996          Estimated useful lives  
                                                ----------------  -----------------  -------------------------
                                                                                                              
Goodwill.......................................      $  792,039         $1,725,519            5 - 10          
Accumulated amortization ......................          20,829            133,218                            
                                                ----------------  -----------------                           
                                                        771,210          1,592,301                            
                                                ================  =================  -------------------------

Licensing Rights ..............................              -           2,148,203            5 - 10          
                                                ----------------  -----------------                           
Noncompete agreements .........................         235,023            235,023               7            
Trademarks.....................................          31,428             31,428              20            
Customer lists and other.......................          30,000             45,000              10            
                                                ----------------  -----------------                           
                                                        296,451          2,459,654                            
                                                ----------------  -----------------                           

Accumulated amortization.......................          33,813            151,944                            
                                                ----------------  -----------------                           
                                                     $  262,638         $2,307,710                            
                                                ================  =================                           

Amortization expense was $54,642 in 1995 and $230,520 in 1996.        

IMPAIRMENT OF LONG LIVED ASSETS:                                                

 Statement of Financial Accounting Standard No. 121, "Impairment of Long
Lived Assets", was adopted on January 1, 1996 with no material impact upon      
adoption. The carrying values of long lived assets, which include fixed assets, 
computer software and intangibles, are evaluated periodically in relation to the
operating performance and future undiscounted cash flows of the underlying      
assets. Adjustments are made if the sum of expected future cash flows is less   
than book value.                                                                

DEFERRED OFFERING COSTS:                                                        

     Deferred offering costs, which are included in other assets at December 31,
1995, consist of legal, accounting, consulting and other costs related to the   
initial public offering of the Company's Common Stock, which was completed in   
May 1996.                                                                       

ROYALTIES:                                                                      

The Company routinely enters into various agreements for licensing and
product development of software games, whereby the Company pays periodic royalty
payments. Royalty expense is included in the cost of goods sold. Royalty        
advances represent advance payments made to independent developers and licensors
of intellectual properties and are expensed against future royalty obligations. 
The royalty advances made for specific products are compared to the Company's   
estimates of future royalty obligations, which are based on estimated revenues, 
and reduced to their net realizable value when the carrying value of the royalty
advance exceeds future obligations.                                             

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)                     

NOTES PAYABLE AND LONG-TERM DEBT:                                               

FASB Statement No. 107, "Disclosures About Fair Value of Financial    
Instrument," requires disclosure of fair value information about financial      
instruments, when it is practicable to estimate that value. The carrying amounts
reported in the balance sheet for notes payable and long-term debt approximates 
fair value, as a majority of the debt carries variable interest rates and other 
terms which approximate fair value.                                             

REVENUE RECOGNITION:                                                            

Revenues are recognized when a product is shipped or a service is     
performed, and when no significant obligations remain and collection is         
probable. Net revenues are comprised of the total sales billed during the period
less the sales value of goods estimated to be returned, trade discounts and     
customer allowances anticipated at the time of shipment.                        

ADVERTISING COSTS:                                                              

    The catalog costs that are capitalized primarily consist of graphic design
and package costs for quarterly catalogs which supersede previously issued      
catalogs. Capitalized catalog costs are amortized over the three-month life of  
the catalog. Prepaid advertising costs are reduced to their net realizable value
when the carrying value of the prepaid advertising costs exceeds the anticipated
future benefits. Total prepaid advertising included in prepaid and other current
assets was $28,487 and $18,455 as of December 31, 1995 and 1996, respectively.  
Total advertising expense included in selling and marketing expense was $191,501
and $233,710 for the years ended December 31, 1995 and 1996, respectively.      

RESEARCH AND DEVELOPMENT:                                                       

   Research and development costs are included in general and administrative
expenses in the accompanying statements of operations. These costs were $69,795 
and $174,523 in 1995 and 1996, respectively.                                    

INCOME TAXES:                                                                   

Prior to October 1995, the Company elected to be treated as an S      
Corporation (as defined in the Internal Revenue Code (the "Code")). As a result 
of this election, federal and state income taxes, if any, on taxable income of  
the Company were the responsibility of stockholders. On October 1, 1995, the    
Company elected to be recognized as a C Corporation as defined in the Code.     
Accordingly, a pro forma provision for income taxes is presented as if the      
Company were taxed as a C Corporation during the periods prior to the change in 
status.                                                                         

   Upon termination of the Company's election, the Company became subject to
the provisions of Statement of Financial Accounting Standard No. 109,           
"Accounting for Income Taxes." As a result, the Company records deferred taxes  
for the effect of cumulative temporary differences between the tax and book     
basis of its assets and liabilities.                                            

NET INCOME PER SHARE:                                                           

   Net income per share and pro forma net income per share is based upon the
weighted average number of common shares and equivalents outstanding during each
period. Common stock equivalents are attributable primarily to outstanding stock
options and warrants. All stock issued, stock options and warrants granted by   
the Company during the twelve months immediately preceding the date of the      
initial filing by the Company of its initial public offering have been included 
in the calculation of the shares outstanding as if they were outstanding for all
periods presented prior to the Initial Public Offering. Historical earnings per 
share is not presented in 1995 as it is not meaningful due to the Company's tax 
status.                                                                         

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)                     

     In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 128 "Earnings Per Share." This Statement      
establishes standards for computing and presenting earnings per share (EPS) and 
applies to entities with publicly held common stock or potential common stock.  
This Statement is effective for financial statements issued for periods ending  
after December 15, 1997. Earlier application is not permitted. This Statement   
requires restatement of all prior-ended EPS data. The Company is currently      
evaluating the impact, if any, adoption of SFAS No. 128 will have on its        
financial statements.                                                           

2. ACQUISITIONS:                                                                

On January 1, 1995, the Company acquired the net assets of APBA, a    
developer of software and board sports games. The total purchase price for the  
APBA acquisition was $513,000, of which $313,000 was paid by the issuance of    
notes and $200,000 in the form of a noncompetition agreement. Notes payable of  
$175,000 were immediately converted into 84,112 shares of Common Stock. The     
remaining notes were converted into 24,070 shares of Common Stock in March 1997.
The $513,000 purchase price pertained to the acquisition of $557,000 of assets  
and the assumption of $85,000 of liabilities. The Company recorded approximately
$41,000 of goodwill associated with the APBA acquisition.                       

On October 1, 1995, the Company acquired the stock of Ablesoft, a     
developer/publisher of lifestyle/entertainment software. The total purchase     
price was $375,000, which was paid entirely with 132,252 shares of Common Stock 
of the Company. The purchase price reflected the acquisition of assets in the   
amount of $243,000 and the assumption of liabilities totaling $619,000. The     
Company recorded approximately $751,000 of goodwill associated with the Ablesoft
acquisition.                                                                    

     On August 30, 1996, the Company acquired certain assets of Ringler Studios,
a software developer, for 15,835 shares of Common Stock. The purchase price     
reflects the issuance of $100,000 in Common Stock.                              

     On October 24, 1996, the Company acquired all of the assets of Micro Sports
and certain of the assets of MSIH and agreed to assume certain of the           
liabilities of Micro Sports. Micro Sports is a Tennessee-based developer of     
statistical sports simulation software games. In consideration for the purchase 
of such assets and assumption of such liabilities, the Company issued an        
aggregate of 308,882 shares of the Company's Common Stock. The purchase price   
reflected the issuance of $2,000,000 in Common Stock, the assumption of $700,000
in notes payable and the assumption of $472,265 in liabilities which resulted in
the Company recording $2,148,203 in intangibles and $933,480 in goodwill.       

These acquisitions have been accounted for as business combinations in
accordance with the purchase method. The results of operations for these        
acquisitions are included in the Company results of operations from their       
respective dates of acquisition.                                                

     The following unaudited proforma consolidated net sales, net income and net
income per share have been presented as if the acquisitions had occurred on     
January 1, 1995:                                                                

                                        1995                1996
                                         (Unaudited)         (Unaudited)
                                         ------------         ------------
Net Sales ................................  $ 5,742,799          $ 4,178,531    
Net loss .................................  $(1,494,512)         $(6,625,705)   
Net loss per share .......................  $      (.46)         $     (1.73)   
Weighted average shares outstanding ......  $ 3,246,860          $ 3,836,001    

   Pro forma loss per share presented above have been modified to assume the
Company was a taxable entity in each year.                                      

The pro forma results are not necessarily indicative of the results of
operations that would have occurred had the acquisitions taken place at the     
beginning of the periods presented nor are they indicative of the results that  
may occur in the future.                                                        

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3. INVENTORY:                                                                   

    Inventory, net of valuation allowances of $59,271 and $121,271 in 1995 and
1996, respectively, consisted of the following:                                 

                                December 31,
                             -------------------------
                             1995           1996
                             ---------      ----------
Raw materials .......................     $  24,695       $  52,334             
Work-in-process .....................        86,082          63,303             
Finished goods ......................       805,938       1,187,091             
                             ---------      ----------
Total ..........................      $916,715      $1,302,728        
                             =========      ==========

4. FIXED ASSETS:                                                                

 Fixed assets (including equipment acquired under capitalized leases) at
December 31, 1995 and 1996 consisted of the following:                          

                                                    1995            1996
                                                      ---------     ----------
Printing equipment ..............................      $428,504       $464,678  
Computers........................................       273,374        516,798  
Furniture and fixtures ..........................        60,843        289,584  
Automobile.......................................        15,469         53,126  
                                                      ---------     ----------
                                                      778,190      1,324,186
Less accumulated depreciation and amortization ..       353,028        465,896  
                                                      ---------     ----------
                                                     $425,162       $858,290
                                                      =========     ==========

 Computers and equipment under capital leases were $104,474 and $28,919,
respectively, at December 31, 1995 and $104,474 and $394,093, respectively, at  
December 31, 1996. Amortization expense on capital leases totaled $27,510 and   
$33,890, respectively, for the years ended December 31, 1995 and 1996.          

     Depreciation expense amounted to $65,573 and $92,938, respectively, for the
years ended December 31, 1995 and 1996, respectively.                           

5. DEBT AND LINES OF CREDIT:                                                    

    The Company has a line of credit with a bank that permits borrowings of up
to $1,500,000. Borrowings bear interest at the prime lending rate plus 1.5%, or 
9.75%, at December 31, 1996. The line of credit is collateralized by all assets 
of the Company. At December 31, 1995 and 1996, $681,372 and $1,100,200,         
respectively, was outstanding under the line of credit. In addition, at December
31, 1995, the Company had an additional line of credit collateralized by a      
guarantee of one of the Company's directors. At December 31, 1995, approximately
$1,600,000 was outstanding under this facility. This facility was repaid in full
with proceeds from the Initial Public Offering.                                 

    In connection with the Company's October 1996 acquisition of Micro Sports,
the Company assumed a $700,000 non-interest bearing note payable, of which      
$200,000 was due in December 1996 and remains unpaid to date, to International  
Business Machines Corporation. The note is due and payable in full on October 1,
1997.                                                                           

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5. DEBT AND LINES OF CREDIT -- (continued)                                      

   In late March 1997, the bank informed the Company that it would not renew
the $1.5 million line of credit, which is collateralized by substantially all of
the Company's assets and expired on March 31, 1997, and that the Company was in 
violation of a covenant requiring a minimum level of tangible net worth. The    
Company immediately began discussions with the bank to obtain a limited         
extension of the line of credit and simultaneously began discussions with other 
banks to obtain a replacement line of credit. In April 1997, the bank           
agreed in principle not to exercise its remedies under the line of credit until 
July 15, 1997 in order to allow the Company an opportunity to arrange for a     
new line of credit. Under such agreement in principle, the Company will be      
required to make principal payments of $50,000 on the date the parties execute a
definitive agreement, $50,000 on each of May 15, 1997 and June 15, 1997, and all
remaining amounts outstanding under the line of credit on July 15, 1997.        

    Also, in April 1997, the Company accepted a commitment letter from
another bank that has agreed to provide a $1.5 million line of credit to replace
the Company's expired line of credit. Receipt of funds under the new line of    
credit, however, is subject to negotiation and execution of definitive          
documentation. While the Company expects to finalize such documentation and     
receive such funds shortly, in the event it is unable to do so and cannot obtain
alternative financing by July 15, 1997, the bank that provided the expired line 
of credit could declare an event of default and exercise its rights as a secured
lender, including taking control of the Company's assets.                       

    Long-term debt obligations as of December 31, 1995 and 1996 consist of the
following:                                                                      

                                                        [Enlarge/Download Table]


                                                                                            1995             1996     
                                                                                       ---------------  --------------
                                                                                                                      
Third party:                                                                                                          
Bank term loan, interest only until June 30, 1996 at the bank's prime rate plus                                       
     1%. Principal payable thereafter in 24 monthly installments of $10,000 plus                                      
     interest at the bank's prime rate (8 1/4% at December 31, 1996) plus 2%                                          
     through June 30, 1997, and at the bank's prime rate plus 3% thereafter with                                      
     a balloon payment due                                                                                            
     June, 1998.......................................................................        $475,000      $  415,000
Equipment loans payable in monthly installments, including interest at                                                
     10.125%, due 1999 (Notes are collateralized by certain equipment) ...............        $105,530          71,592
Vendor notes payable at various interest rates ranging from 7.5% to 10%                                               
     due March 1996 and 1997 .........................................................         118,379          35,760
Delaware Economic Development Authority Loan, payable monthly,                                                        
     including interest at 4.8%, due September 1996 ..................................          59,231         --     
Capitalized leases for equipment payable in monthly installments                                                      
     through May 2000.................................................................          57,187         285,604
Bank term loans payable in monthly installments plus interest at the bank's                                           
     prime rate (10.25% at December 31, 1996) plus 2%, due February 1999..............          61,621         --     
                                                                                       ---------------  --------------
                                                                                               876,948         807,956
Related party:                                                                                                        
Seller notes payable from acquired businesses at 10% interest, due                                                    
     October 1996 and January 1997 ...................................................         131,783          50,000
Notes payable for covenant not to compete including interest at 8%,                                                   
     due January 2002 ................................................................         177,812         153,755
Interactive Multimedia partnership notes payable, due March 1998 .....................         187,820         --     
Notes payable with certain shareholders and a Director at 7% interest,                                                
     due April 1998 ..................................................................          36,769         --     
                                                                                       ---------------  --------------
                                                                                             1,411,132       1,011,711
Less current portion .................................................................         391,530         338,626
                                                                                       ---------------  --------------
                                                                                            $1,019,602       $ 673,085
                                                                                       ===============  ==============


The bank term loan with a balance of $415,000 at December 31, 1996 is 
guaranteed by three Directors and two stockholders.                             

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5. DEBT AND LINES OF CREDIT -- (Continued)                                      

  In the event of default, resulting from a material adverse change in the
financial condition of the Company or failure to make payment of interest or    
principal, the seller notes, which include both principal and interest, may be  
converted into Common Stock of the Company at a rate of $2.08 per share. In     
March 1997, the shareholder converted this note payable plus accrued interest   
into 24,070 shares of Common Stock.                                             

  In February 1996, the Company raised $800,000 through the sale of bridge
units, consisting of (i) bridge notes due upon the earlier of the consummation  
of a public stock offering by the Company or 12 months from the date of issuance
and (ii) bridge warrants to acquire 160,000 shares of Common Stock. The Bridge  
Notes were repaid upon the closing of the Company's Initial Public Offering in  
May 1996. The Company incurred an extraordinary pre-tax charge to earnings in   
1996 of approximately $250,000 relating to deemed interest and deferred         
financing costs resulting from the early repayment of this debt.                

  In March 1995, the Company borrowed $212,500 from Interactive Multimedia
Partnership whose general partners include an officer of the Company and three  
stockholders. In April 1995, the Company borrowed $50,000 from certain          
stockholders and a Director of the Company. The loans were repaid early at a    
premium of approximately $90,000 during 1996 which has been recorded as an      
extraordinary expense.                                                          

  Aggregate maturities for long-term debt, excluding capital leases, as of
December 31, 1996 for each of the next five years, is as follows:               

Year ended                                                      
December 31                                                     
---------------------------                                                     
1997                                      $   261,402     
1998                                          178,045     
1999                                          162,728     
2000                                           88,093     
2001                                           35,839     
Thereafter                                       --       
                                    ------------
                                       $ 726,107
                                    ============

6. STOCKHOLDERS' EQUITY:                                                        

PREFERRED STOCK:                                                                

  Under the Company's Articles of Incorporation, the Board of Directors is
authorized to issue 1,000,000 shares of preferred stock, $.01 par value. As of  
December 31, 1996, no shares of preferred stock were outstanding.               

COMMON STOCK:                                                                   

On September 15, 1995, the Board of Directors amended the Company's   
articles of incorporation to increase the number of authorized shares of Common 
Stock from 100,000 shares to 3,000,000 shares and authorized a 100-for-1 stock  
split. On March 1, 1996, the Board of Directors amended the Company's articles  
of incorporation to increase the number of authorized common shares from        
3,000,000 to 10,000,000 shares and authorized a stock split of approximately    
1.32 for 1. Stockholders' equity has been restated to give retroactive          
recognition to the stock split in all periods. In addition, all references in   
the financial statements to number of shares, per share amounts and stock option
data have been restated to reflect such stock splits.                           

On May 23, 1996, the Company completed a public offering of 1,173,000 
shares of Common Stock for $5.70 per share. Net proceeds of $4,999,287 from the 
Initial Public Offering were net of offering costs payable by the Company of    
approximately $929,000. Other stock issuances include 48,092 shares of Common   
Stock issued to an investor for $200,000 and 5,489 shares of Common Stock issued
upon the exercise of warrants totalling $10,000.                                

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6. STOCKHOLDERS' EQUITY -- (Continued)                                          

STOCK OPTIONS:                                                                  

   The 1996 Equity Compensation Plan (the "Plan") permits the issuance of up
to 410,000 qualified and nonqualified stock options, stock appreciation rights  
and grants of restricted stock. Options granted under the Plan will expire no   
later than 10 years from their grant dates. During 1996, the Company granted    
options to purchase 103,000 shares of Common Stock pursuant to the Plan to      
employees, which options vest ratably over a period of three years from the date
of grant. As of December 31, 1996, the range of exercise prices for options     
outstanding was 358,931 options at $2.08 to $2.84 and 103,000 options at $6.56  
to $6.81. The weighted average remaining contractual life is approximately 9    
years. Of the outstanding options, 125,639 were issued prior to the adoption of 
the Plan. These options will expire on various dates through 2000.              

  Effective January 1, 1996 the Company adopted the disclosure-only option
under Statement of Financial Accounting Standard No. 123, "Accounting for       
Stock-Based Compensation." The Company continues to use the accounting method   
under APB Opinion No. 25 (APB 25) and related interpretations for its employee  
stock options. Under APB 25, when the exercise price of the Company's employee  
stock options equals the market price of the underlying stock on the date of    
grant, no compensation expense is recognized.                                   

     Pro forma disclosure, as required by SFAS No. 123, regarding net income and
earnings per share has been determined as if the Company had accounted for its  
employee stock options under the fair value method of the statement.            

     The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average          
assumptions for 1995 and 1996, respectively; option forfeiture of 0%; risk free 
interest rates of 7.8% and 6.3%; no dividends; volatility factors of the        
expected market price of the Company's Common Stock of 24.5%; and a weighted    
average expected life of the options of three years.                            

For purposes of pro forma disclosures the estimated fair value of the 
options ($157,409 for the 1995 grant and $196,772 for the 1996 grant) is        
amortized to expense over the options' vesting period. The initial impact on pro
forma net income may not be representative of compensation expense in future    
years, when the effect of the amortization of multiple awards would be reflected
in the pro forma disclosures. The Company's pro forma information follows:      

                                             For the years ended
                                             December 31,       December 31,
                                             ------------       ------------
                                             1995               1996
                                             ------------       ------------

Net income (loss)............................   $  99,089        $(5,582,614)   
Estimated pro forma compensation expense                                        
from stock options.........................                                 
1995 grant...................................     157,409                --     
1996 grant...................................        --              196,772    
Pro forma net loss...........................    $(58,320)       $(5,779,386)   
                                              =========       ============

Pro forma loss per share.....................  $    (0.02)       $     (1.61)   
                                            ===========       ============

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6. STOCKHOLDERS' EQUITY -- (Continued)                                          

A summary of the Company's stock option activity, and related 
information is as follows:                                                      

                                                        [Enlarge/Download Table]


                                                         1995                         1996              
                                                         ----                         ----              
                                                                Weighted                     Weighted   
                                                                average                      average    
                                                 Shares      exercise price  Shares       exercise price
                                                 ------      --------------  ------       --------------
                                                                                                        
Options outstanding beginning of year.......... 125,639           $1.55      358,931           $2.29    
Options granted................................ 233,292            2.68      103,000            6.62    
Options exercised..............................    --              --           --              --      
Options forfeited..............................    --              --           --              --      
                                                -------                      -------                    
Options outstanding end of year................ 358,931           $2.29      461,931           $3.26    

Exercisable at end of year..................... 358,931           $2.29      383,931           $2.47    
Stock options available for future issuance....     --                       307,000                    

WARRANTS:                                                                       

       As of December 31, 1996, the Company had outstanding warrants (issued
to a stockholder in 1994 concurrent with a stock issuance), to purchase 89,931  
shares of the Company's Common Stock at $1.68 per share which expire in December
1997.                                                                           

       In connection with the Company's Initial Public Offering, the Company
issued 1,173,000 units, each consisting of one share of Common Stock and one    
warrant to purchase Common Stock (the "Warrants") at an initial exercise price  
of $6.27 per share, or 110% of the initial public offering price ($5.70). The   
Warrants are exercisable at any time on or before May 23, 1999. The Warrants are
redeemable at the Company's option, in whole but not in part, at a price of $.10
per Warrant at any time if the last sale price of the Common Stock exceeds 140% 
of the initial public offering price for not fewer than 10 of 15 consecutive    
trading days.                                                                   

         Also in connection with the Initial Public Offering, the Company issued
to the underwriter for the Initial Public Offering warrants (the "Underwriter   
Warrants") to purchase up to 102,000 shares of Common Stock and/or 102,000      
warrants at an initial exercise price of $7.41 per share.                       

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7. LEASES                                                                       

      The Company leases certain of its operating facilities and equipment
under non-cancelable leases expiring at various dates through 2001. At December 
31, 1996, aggregate minimum lease commitments are as follows:                   

                                                                [Download Table]


                                                              Capital   Operating
                                                                                 
1997                                                         $119,996    $227,802
1998                                                          102,279     227,487
1999                                                           79,061     223,321
2000                                                           54,085     181,654
2001                                                           21,609      92,252
                                                           ----------  ----------
Minimum lease payments                                       $377,030    $952,516
                                                             ========    ========

Less amount representing interest                              91,426            

                  Present value of minimum lease payments     285,604            
                  Less current portion                         78,797            
                                                             --------            
                                                             $206,807            
                                                             ========            

        Rent expense as a result of operating leases amounted to approximately
$184,000 and $177,000 for 1995 and 1996, respectively.                          

8. INCOME TAXES:                                                                

The benefit for income taxes consists of the following        

                                                1995                1996
                                                ----                ----
Deferred federal income tax...........           $(14,600)             $14,600  
Deferred state income tax.............             (1,700)               1,700  
                                               ---------             -------
                                               $(16,300)             $16,300
                                               =========             =======

    The reconciliation of income taxes at the U.S. statutory rate to the
benefit for income taxes for 1995 and 1996 is as follows:                       

                                                1995                1996
                                                ----                ----
U.S. Federal statutory rate ................      $ 38,437        $(1,776,844)  
State income taxes net of federal benefit...        11,260           (337,000)  
Nondeductible expenses......................         4,267              39,000  
Impact on deferred for change in tax rate...                            28,319  
Changes in valuation allowance..............            --           2,062,825  
Effect of deferred income taxes due to                                          
change in tax status.......................      (70,264)                 --  
                                               --------       ------------
(Benefit) Provision for income taxes........     $(16,300)       $      16,300  
                                               =========       =============

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8. INCOME TAXES -- (Continued)                                                  

      The tax effects on temporary differences which comprise the deferred
tax assets and liabilities at December 31, 1995 and 1996 are as follows:        

                                              1995                1996
                                              ----                ----
Deferred tax assets:                                                            
Net Operating Losses ....................      $                  $ 1,816,525   
Accounts receivables.....................         182,100             184,000   
Inventory................................          24,300              48,500   
Deferred revenue.........................              --              40,000   
Accrued expense..........................              --              29,700   
Goodwill.................................              --              27,400   
Other....................................           1,900                  --   

Total gross deferred tax assets..........         208,300           2,146,125   
Less: valuation allowance                          --            2,062,825
                                           -----------        ------------
  Net deferred tax assets.............         208,300              83,300
Deferred tax liabilities:                                                       
Capitalized software.....................         146,000              29,300   
Fixed assets.............................          46,000              54,000   
                                               192,000              83,300

Net deferred tax asset...................      $   16,300        $         --   
                                            ==========        ============

   The Company has established a valuation allowance against its net
deferred tax assets due to the uncertainty surrounding the realization of such  
assets pursuant to SFAS No. 109. Management evaluates on a quarterly basis the  
recoverability of the deferred tax assets and the level of this valuation       
allowance. At such time as it is determined that it is more likely than not that
the deferred tax assets are realizable, the valuation allowance will be reduced.

         At December 31, 1996, the Company had net operating loss carry forwards
of approximately $4,299,870 for federal tax purposes expiring in 2011. The net  
operating loss carry forwards for state tax purposes is approximately $477,763  
and expires in 2000. These carry forwards may be applied as a reduction to      
future taxable income of the Company, if any.                                   

9. RELATED PARTY TRANSACTIONS:                                                  

         In connection with a consulting agreement with an employee-director for
obtaining and managing a printing customer, in June 1995, the Company issued    
30,057 shares of stock valued at $62,500 and paid a consulting fee of $64,500.  
As a result, the Company has deferred the expenses of the consulting agreement  
over the three-year life of the contract. The unamortized portion of $88,000 and
$57,000 is included in other assets at December 31, 1995 and 1996, respectively.
The employee-director has agreed that if he terminates his relationship with the
Company during the three-year period of the contract he will remit on a pro-rata
basis any unearned compensation.                                                

    At December 31, 1995 and 1996, respectively, there was $69,930 and
$36,000 due from stockholders for outstanding advances. As there are no         
definitive repayment terms, this amount has been classified as a reduction of   
stockholders' equity.                                                           

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9. RELATED PARTY TRANSACTIONS -- (continued)                                    

    As part of the Company's acquisition of APBA, in January 1995, the
Company entered into a ten-year operating lease with one of the Company's       
officers for the facility housing APBA. In accordance with this lease, the      
Company paid rent of approximately $53,000 and $84,000 in 1995 and 1996,        
respectively.                                                                   

During 1995, the Company entered into certain debt agreements 
aggregating approximately $212,500 with a limited partnership. Total related    
party royalty expense pertaining to the limited partnership was $51,884 for the 
year ended December 31, 1995. An officer of the Company is a shareholder in the 
corporate general partner of the partnership. In addition, certain stockholders 
of the Company are limited partners in said partnership. During 1995, the       
Company also entered into debt agreements aggregating $50,000 with certain      
stockholders and a director. At December 31, 1995, approximately $225,000 was   
outstanding and included in the Company's long-term debt obligations. During    
1996, the Company repaid these loans in full at an additional premium of $90,435
to compensate the noteholders for relinquishing future royalty rights to certain
products in development. This early extinguishment of debt resulted in an       
extraordinary expense of $90,435 (see Note 5).                                  

       The Company's former general counsel is a stockholder of the Company.
Fees incurred by the Company to such person totaled approximately $36,000 in    
1995, of which $25,000 was satisfied by issuing 8,817 shares of Common Stock in 
October 1995.                                                                   

10. COMMITMENTS AND CONTINGENCIES:                                              

     Certain licenses and development agreements require advance royalty
payments by the Company that could aggregate up to $304,000 over a period of    
years as certain milestones are achieved.                                       

     In connection with the APBA acquisition, the Company entered into a
15-year employment contract with one employee with compensation payable at      
$80,000 per year.                                                               

     On March 1, 1996, one officer and one former officer of the Company
entered into employment agreements with aggregate base compensation of          
approximately $690,000 payable over the next three years.                       

     On October 24, 1996, the Company entered into employment agreements
with two employees with aggregate base compensation of approximately $462,000   
payable over the next three years.                                              

       In December 1996, the Company filed a Demand for Arbitration with the
American Arbitration Association against a software developer, with which the   
Company had contracted for the development of four sports software games, but   
which were never delivered by the developer. The Company has alleged breach of  
contract against the developer and is seeking lost profits and expenses in      
excess of $1,000,000. The developer has filed a response to the Demand for      
Arbitration stating that the Company abandoned the contract and alleging a      
counterclaim against the Company for an unspecified amount of royalties. The    
Company has denied the allegations of the counterclaim and believes it has valid
defenses to such counterclaim.                                                  

       In December 1996, the Company, its Chief Executive Officer and former
President were sued in the District Court of Delaware by a former employee, for 
compensation allegedly owed to the employee under an employment contract. The   
Company had terminated the employee for "Cause" as defined in his employment    
contract. The Company is defending the action on the ground that the employee   
committed offenses that entitled the Company to terminate his employment and    
therefore no further compensation is owed. The Company has filed an answer in   
which it denies liability to the employee and a counterclaim for failure to     
return office furniture and a computer system and related equipment owned by the
Company. Under the Company's Bylaws, the Company is obligated to indemnify the  
officers and directors of the Company for liabilities and expenses incurred in  
connection with actions taken in such capacities, subject to certain exceptions.
Accordingly, the Company will indemnify the officers for any expenses they may  
incur arising out of this action.                                               

F-18

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

10. COMMITMENTS AND CONTINGENCIES -- (continued)                                

      Certain claims and litigation have arisen against the Company in the
ordinary course of its business. The Company believes that all claims and       
lawsuits against the Company are without merit, and the Company intends to      
vigorously contest such disputes. In the opinion of management, the likelihood  
of a materially adverse outcome in such disputes is remote and the outcome of   
such disputes will not have a material adverse effect, if any, on its financial 
position, results of operations or liquidity, as reported in these financial    
statements. However, depending on the amount and timing of any unfavorable      
resolution of these matters, it is possible that the Company's future results of
operations or cash flows could be materially affected in a particular period.   

11. BUSINESS SEGMENT INFORMATION:                                               

         The Company and its subsidiaries operate principally in two industries:
multimedia products and printing services. Multimedia products include the      
operations of APBA, Able Soft and Rabbit Ears which are engaged in the          
development and distribution of sports game simulation and other software and   
family/children entertainment products. Printing services include the operations
of FoxFire, which provides commercial printing, graphic design and manufacturing
services to software and non-computer software companies. The following table   
sets forth certain financial information regarding the Company's multimedia     
products and printing services:                                                 

                                                1995              1996
                                                ----              ----
Net sales                                                                       
Multimedia Products...........................      3,602,025        2,618,299  
Printing Services.............................      1,408,131        1,468,738  
Consolidated..................................      5,010,156        4,087,037  
Operating Profits (Losses)                                                      
Multimedia Products...........................        361,160       (3,775,426) 
Printing Services.............................       (12,866)       (1,192,770) 
Consolidated..................................        348,294       (4,968,196) 
Identifiable Assets                                                             
Multimedia Products...........................      4,646,061        6,540,810  
Printing Services.............................        728,478          809,533  
Consolidated..................................      5,374,539        7,350,343  
Depreciation Expense                                                            
Multimedia Products...........................         76,012           53,493  
Printing Services.............................         17,071           39,445  
Consolidated..................................         93,083           92,938  
Capital Expenditures                                                            
Multimedia Products...........................        147,129          117,951  
Printing Services.............................         73,646          261,872  
Consolidated..................................        220,775          379,823  

12. SUBSEQUENT EVENTS                                                           

         On February 18, 1997, the Company acquired all of the assets and agreed
to assume certain of the liabilities of Rabbit Ears Productions, Inc. ("Rabbit  
Ears"). Rabbit Ears is a Philadelphia-based entertainment company known for its 
line of children's literature-related products. In consideration for the        
purchase of such assets and assumption of such liabilities, the Company issued  
268,097 shares of the Company's Common Stock. In addition, the Company issued to
the shareholder of Rabbit Ears(R) options to purchase 125,000 shares of Common  
Stock at an exercise price of $7.46 per share (the "First Options") and options 
to purchase 125,000 shares of Common Stock at an exercise price of $8.95 per    
share (the "Second Options"). The First Options are exercisable through February
16, 1999. The Second Options are exercisable through February 16, 2000. The     
First and Second Options are redeemable by the Company, at $.01 per share, at   
any time after the last sale price of the Common Stock exceeds $10.44 per share 
and $12.53 per share, respectively, for not fewer than 15 consecutive trading   
days.                                                                           

F-19

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

12. SUBSEQUENT EVENTS -- (continued)                                            

  On March 18, 1997, the Company's Board of Directors approved the
disposition of the Company's commercial printing business to the Company's      
former President and Chief Operating Officer. Completion of the transaction is  
subject to the negotiation and execution of definitive documentation and other  
closing documents and satisfaction of certain closing conditions. The Company   
does not anticipate a loss from this disposition.                               

       On March 19, 1997, the Company commenced negotiating the issuance and
sale to an institutional investor of $1,000,000 principal amount of convertible 
subordinated secured debentures and warrants to purchase 85,000 shares of Common
Stock for aggregate consideration of $1,000,000. Completion of the transaction, 
however, is conditioned on the Company obtaining a new line of credit on terms  
acceptable to the investor. Accordingly, there is no assurance that this        
transaction will be completed.                                                  

       On March 24, 1997, the Company announced it had entered into a letter
of intent to acquire KidSoft, a California-based distributor and publisher of   
children's multimedia software products. The letter of intent calls for the     
Company to issue 1,629,630 shares of Common Stock to the shareholders of        
KidSoft. In addition, the Company shall grant warrants to purchase 100,000      
shares of Common Stock. In connection with the acquisition, certain shareholders
of KidSoft have agreed, subject to certain conditions, to purchase in a private 
placement up to $2,000,000 of Common Stock. Consummation of the KidSoft         
acquisition is subject to completion of a satisfactory due diligence review by  
each party, negotiation and execution of definitive documentation and other     
customary closing documents, approval of the respective boards of directors of  
each party and satisfaction of other closing conditions.                        

      On April 6, 1997, the Company received a proposal from an investment
banking firm under which such firm would act as placement agent to offer on a   
best efforts basis up to $2,000,000 of convertible preferred stock of the       
Company. The Company intends to proceed with such an offering; however, as a    
practical matter, completion of the offering is contingent upon the Company     
obtaining a new credit facility on terms that the placement agent believes would
be acceptable to investors. The offering would be made on a best efforts basis, 
and therefore, even assuming the Company obtains a new credit facility, there   
can be no assurance that the offering will be successful.                       

         On April 15, 1997, the Company accepted a commitment letter from a bank
that has agreed to provide a line of credit sufficient to repay all amounts     
outstanding under the Company's existing line of credit. Receipt of funds under 
the new line of credit, however, is subject to the negotiation and execution of 
definitive documentation. See Note 5.                                           

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SIGNATURES

       In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this Report to be signed on its behalf  
by the undersigned, thereunto duly authorized, in the City of Lancaster,        
Commonwealth of Pennsylvania on April 18, 1997.                                 

          MICROLEAGUE MULTIMEDIA, INC.

    By: /s/ Neil B. Swartz
                                   ---------------------------------------------
                               Neil B. Swartz, Chairman, Chief Executive
          Officer and Director

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

         In accordance with the Securities Exchange Act of 1934, this Report has
been duly signed on April 18, 1997 by the following persons in the capacities   
indicated.                                                                      

Name                         Title                      
----                         -----                      

/s/ Neil B. Swartz                Chairman, Chief Executive Officer and Director
---------------------------                                                     
Neil B. Swartz                                                                  

/s/ Ruly R. Carpenter, III        Director                                      
---------------------------                                                     
Ruly R. Carpenter, III                                                          

/s/ Donald Gleklen                Director                                      
---------------------------                                                     
Donald Gleklen                                                                  

/s/ W. Thacher Longstreth         Director                                      
---------------------------                                                     
W. Thacher Longstreth                                                           

/s/ Carl Shaifer                  Director                                      
---------------------------                                                     
Carl Shaifer                                                                    

/s/ Wayne Weisman                 Director                                      
---------------------------                                                     
Wayne Weisman                                                                   

/s/ Peter R. Flanagan             Vice President and Chief Financial Officer    
---------------------------                                                     
Peter R. Flanagan                 (Principal Financial and Accounting Officer)  

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 EXHIBIT INDEX

Exhibit No.                                                                     
-----------                                                                     

3.1                        Amended and Restated Bylaws                          

11.1                       Statement re: Computation of Per Share Earnings      

21.1                       List of Subsidiaries                                 

27.1                       Financial Data Schedules                             

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘10KSB’ Filing		Date		First		Last			Other Filings
		2/16/00		50
		6/30/99		10		16
		5/23/99		46
		2/28/99		10		16
		2/16/99		50
		4/15/98		16
		12/15/97		41					8-K
		10/1/97		42
		8/1/97		10
		7/15/97		27		43
		6/30/97		43					10QSB,  NT 10-Q
		6/15/97		27		43
		5/31/97		10		16
		5/15/97		27		43			10QSB
Filed on:		4/22/97
		4/21/97		32
		4/18/97		52
		4/15/97		2		51
		4/6/97		51
		3/31/97		21		43			10QSB,  NT 10-K
		3/24/97		28		51
		3/21/97		32
		3/19/97		51
		3/18/97		51
		2/18/97		50					8-K,  8-K/A
For Period End:		12/31/96		1		48			10KSB/A,  NT 10-K
		10/24/96		26		49			8-K,  8-K/A
		8/30/96		41
		6/30/96		43					10QSB
		5/23/96		44					SB-2/A
		3/1/96		44		49
		1/1/96		39		45
		12/31/95		29		49
		12/18/95		7
		10/1/95		26		41
		9/30/95		26
		9/15/95		44
		1/1/95		11		41
		12/31/94		35
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