MDI ENTERTAINMENT INC, 10KSB, 1999-08-27

MDI ENTERTAINMENT INC
10KSB, 1999-08-27
AMUSEMENT & RECREATION SERVICES

Previous: KOFAX IMAGE PRODUCTS INC, SC 13E3/A, 1999-08-27

Next: EVERGREEN SELECT EQUITY TRUST, NSAR-B, 1999-08-27

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

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-KSB

(Mark one):

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

For the fiscal year ended May 31, 1999.

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

For the transition period from ____________ to _______________

COMMISSION FILE NO. 0-24919

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

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

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

Issuer's telephone number (860) 527-5359

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

Title of each Class Name of each exchange on which registered

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

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

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

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

<PAGE>

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

Not Applicable

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

<PAGE>

10-KSB

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

PART I

Item 1. Description of Business

Item 2. Description of Property

Item 3. Legal Proceedings

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

PART II

Item 5. Market for Common Equity and Related Stockholder Matters

Item 6. Management Discussion and Analysis or Plan of Operation

Item 7. Financial Statements

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

PART III

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

Item 10. Executive Compensation

Item 11. Security Ownership of Certain Beneficial Owners and Management

Item 12. Certain Relationships and Related Transactions

Item 13. Exhibits and Reports on Form 8-K

-1-
<PAGE>

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

PART I

ITEM 1. DESCRIPTION OF BUSINESS

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

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

-2-
<PAGE>

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

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

RECENT DEVELOPMENTS

New Products and Web Site

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

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

Licensed Properties

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

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

-3-
<PAGE>

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

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

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

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

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

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

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

INDUSTRY OVERVIEW

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

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

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

-4-
<PAGE>

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

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

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

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

-5-
<PAGE>

LOTTERY PROMOTIONS

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

LICENSED-BASED GAMES

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

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

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

-6-
<PAGE>

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

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

CONTRACTS WITH LOTTERIES

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

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

-7-
<PAGE>

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

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

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

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

- ---------------------------------------- ------------------------------------- -------------------------------------
Delaware X

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

-8-
<PAGE>

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

GOVERNMENT REGULATION

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

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

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

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

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

-9-
<PAGE>

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

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

COMPETITION

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

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

INTELLECTUAL PROPERTY

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

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

-10-
<PAGE>

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

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

HISTORY AND ORGANIZATION

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

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

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

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

-11-
<PAGE>

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

POTENTIAL EXPANSION OF BUSINESS

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

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

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

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

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

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

-12-
<PAGE>

EMPLOYEES

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

RISK FACTORS

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

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

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

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

-13-
<PAGE>

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

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

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

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

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

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

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

-14-
<PAGE>

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

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

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

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

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

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

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

-15-
<PAGE>

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

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

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

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

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

-16-
<PAGE>

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

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

ITEM 2. DESCRIPTION OF PROPERTY.

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

ITEM 3. LEGAL PROCEEDINGS.

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

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

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

PART II

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

PRICE RANGE OF COMMON STOCK

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

-17-
<PAGE>

High Low
FISCAL YEAR 1998

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

FISCAL YEAR 1999

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

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

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

SALE OF PREFERRED STOCK

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

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

-18-
<PAGE>

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

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

WARRANTS

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

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

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

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

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

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

-19-
<PAGE>

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

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

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

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

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

-20-
<PAGE>

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

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

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

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

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

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

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

-21-
<PAGE>

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

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

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

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

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

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

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

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

-22-
<PAGE>

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

-23-
<PAGE>

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

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

RECENTLY ISSUED ACCOUNTING STANDARDS

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

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

-24-
<PAGE>

YEAR 2000

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

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

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

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

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

-25-
<PAGE>

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

ITEM 7. FINANCIAL STATEMENTS.

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

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

Not applicable

PART III

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

Our directors and executive officers are as follows:

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

-26-
<PAGE>

COMMITTEES

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

Audit Committee: S. David Fineman
Robert J. Wussler

Compensation Committee: Steven M. Saferin
Todd P. Leavitt

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

BIOGRAPHIES

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

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

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

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

-27-
<PAGE>

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

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

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

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

-28-
<PAGE>

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

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

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

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

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

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

-29-
<PAGE>

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

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.

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

ITEM 10. EXECUTIVE COMPENSATION.

EXECUTIVE COMPENSATION

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

-30-
<PAGE>

<TABLE>

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

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

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

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

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

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

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

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

</TABLE>

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

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

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

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

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

-31-
<PAGE>

<TABLE>

OPTIONS TABLE

Options Granted in Last Fiscal Year

Individual Grants
<CAPTION>

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

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

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

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

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

</TABLE>

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

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

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

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

DIRECTOR COMPENSATION

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

-32-
<PAGE>

OPTION AND AWARD PLAN

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

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

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

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

-33-
<PAGE>

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

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

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

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

401(k) SAVINGS PLAN

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

EMPLOYMENT AGREEMENTS

Steven M. Saferin

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

-34-
<PAGE>

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

Kenneth M. Przysiecki

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

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

PRINCIPAL STOCKHOLDERS

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

-35-
<PAGE>

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

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

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

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

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

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

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

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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

-36-
<PAGE>

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

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

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

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

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

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

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

-37-
<PAGE>

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

EXHIBIT NO. DESCRIPTION

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

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

-38-
<PAGE>

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

-39-
<PAGE>

SIGNATURE PAGE

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

MDI ENTERTAINMENT, INC.
<TABLE>
<CAPTION>

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

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

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

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

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

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

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

-40-
<PAGE>

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

F-3 Report of Independent Public Accountants

F-4 Consolidated Balance Sheets

F-6 Consolidated Statements of Operations

F-7 Consolidated Statement of Shareholder's Deficit

F-8 Consolidated Statement of Cash Flows

F-9 Notes to Consolidated Financial Statements

F-1
<PAGE>

MDI ENTERTAINMENT, INC. AND SUBSIDIARIES

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

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

CONSOLIDATED FINANCIAL STATEMENTS

AS OF MAY 31, 1999 AND 1998

TOGETHER WITH

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

F-2
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

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

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MDI Entertainment,
Inc. and subsidiaries as of May 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.

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

F-3
<PAGE>

MDI ENTERTAINMENT, INC. AND SUBSIDIARIES

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

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

CONSOLIDATED BALANCE SHEETS

AS OF MAY 31, 1999 AND 1998

ASSETS
------

1999 1998
---- ----

CURRENT ASSETS:

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

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

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

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

F-4
<PAGE>

MDI ENTERTAINMENT, INC. AND SUBSIDIARIES

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

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

CONSOLIDATED BALANCE SHEETS

AS OF MAY 31, 1999 AND 1998

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

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

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

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

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

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

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

F-5
<PAGE>

<TABLE>

MDI ENTERTAINMENT, INC. AND SUBSIDIARIES

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

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

CONSOLIDATED STATEMENTS OF OPERATIONS

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

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

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

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

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

OTHER EXPENSE 10,976 0.1 12,405 0.6

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

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

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

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

</TABLE>

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

F-6
<PAGE>

<TABLE>

MDI ENTERTAINMENT, INC. AND SUBSIDIARIES

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

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

CONSOLIDATED STATEMENTS OF SHAREHOLDER'S DEFICIT

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

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

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

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

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

</TABLE>

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

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

F-7
<PAGE>

MDI ENTERTAINMENT, INC. AND SUBSIDIARIES

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

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED MAY 31, 1999 AND 1998

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

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

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

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

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

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

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

F-8
<PAGE>

MDI ENTERTAINMENT, INC. AND SUBSIDIARIES

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 1999 AND 1998

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

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

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

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

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

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

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

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

F-9
<PAGE>

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

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

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

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

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

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

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

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

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

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

F-10
<PAGE>

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

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

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

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

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

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

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

F-11
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

F-12
<PAGE>

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

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

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

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

Notes payable consists of the following:

1999 1998
---- ----

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

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

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

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

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

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

F-13
<PAGE>

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

Year Ending
May 31,

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

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

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

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

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

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

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

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

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

F-14
<PAGE>

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

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

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

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

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

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

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

Outstanding, May 31, 1998 - $ -

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

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

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

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

F-15
<PAGE>

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

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

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

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

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

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

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

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

F-16
<PAGE>

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

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

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

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

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

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

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

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

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

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

F-17
<PAGE>

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

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

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

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

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

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

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

F-18
<PAGE>

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

F-19
<PAGE>

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

EXHIBIT NO. DESCRIPTION

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

<PAGE>

AMENDED AND RESTATED

BY-LAWS

MDI ENTERTAINMENT, INC.
-----------------------
AS ADOPTED APRIL 27, 1999

<PAGE>

MDI ENTERTAINMENT, INC.
A Delaware Corporation

BY-LAWS
---------------------------

ARTICLE I
OFFICES

The principal office of MDI Entertainment, Inc. (the "Corporation")
shall be located at its principal place of business or such other place as the
Board of Directors ("Board") may designate. The Corporation may have such other
offices, either within or without the State of Delaware, as the Board may
designate or as the business of the Corporation may require from time to time.

ARTICLE II
STOCKHOLDERS

Section 2.1 Annual Meeting.

An annual meeting of stockholders for the purposes of electing directors
and of transacting such other business as may come before it shall be held on
such date and time as shall be designated from time to time by the Board or the
President, either within or without the State of Delaware, as may be specified
by the Board.

- 1 -
<PAGE>

Section 2.2 Special Meetings.

Except as otherwise provided for in the Certificate of Incorporation,
special meetings of stockholders for any purpose or purposes may be held at any
time upon call of the Chairman of the Board, if any, the Chief Executive
Officer, the President, the Secretary, or a majority of the Board, at such time
and place either within or without the State of Delaware as may be stated in the
notice. A special meeting of stockholders shall be called by the President or
the Secretary upon the written request, stating time, place, and the purpose or
purposes of the meeting, of stockholders who together own of record 25% of the
outstanding stock of all classes entitled to vote at such meeting.

Section 2.3 Notice of Meetings.

Written notice of stockholders meetings, stating the place, date, and
hour thereof, and, in the case of a special meeting, the purpose or purposes for
which the meeting is called, shall be given by the Chairman of the Board, if
any, the President, any Vice President, the Secretary, or an Assistant
Secretary, to each stockholder entitled to vote thereat at least ten days but
not more than sixty days before the date of the meeting, unless a different
period is prescribed by law.

Section 2.4 Quorum.

Except as otherwise provided by law or in the Certificate of
Incorporation or these By-Laws, at any meeting of stockholders, the holders of a
majority of the outstanding shares of each class of stock entitled to vote at
the meeting shall be present or represented by proxy in order to constitute a
quorum for the transaction of any business. In the absence of a quorum, a
majority in interest of the stockholders present or the chairman of the meeting
may adjourn the meeting from time to time in the manner provided in Section 2.5
of these By-Laws until a quorum shall attend.

- 2 -
<PAGE>

Section 2.5 Adjournment.

Any meeting of stockholders, annual or special, may adjourn from time to
time to reconvene at the same or some other place, and notice need not be given
of any such adjourned meeting if the time and place thereof are announced at the
meeting at which the adjournment is taken. At the adjourned meeting, the
Corporation may transact any business which might have been transacted at the
original meeting. If the adjournment is for more than thirty days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each stockholder of record entitled
to vote at the meeting.

Section 2.6 Organization.

The Chairman of the Board, if any, or in his absence the President, or
in their absence any Vice President, shall call to order meetings of
stockholders and shall act as chairman of such meetings. The Board or, if the
Board fails to act, the stockholders may appoint any stockholder, director, or
officer of the Corporation to act as chairman of any meeting in the absence of
the Chairman of the Board, the President, and all Vice Presidents.

The Secretary of the Corporation shall act as secretary of all meetings
of stockholders, but, in the absence of the Secretary, the chairman of the
meeting may appoint any other person to act as secretary of the meeting.

Section 2.7 Voting.

Except as otherwise provided by law or in the Certificate of
Incorporation or these By-Laws and except for the election of directors, at any
meeting duly called and held at which a quorum is present, a majority of the
votes cast at such meeting upon a given question by the holders of outstanding
shares of stock of all classes of stock of the Corporation entitled to vote
thereon who are present in person or by proxy shall decide such question. At any

- 3 -
<PAGE>

meeting duly called and held for the election of directors at which a quorum is
present, those directors receiving a plurality of the votes cast by the holders
(acting as such) of shares of any class or series entitled to elect directors as
a class shall be elected.

Section 2.8 Action Without a Meeting.

The stockholders may take any action required or permitted to be taken
by them without a meeting unless otherwise prohibited by law or the Certificate
of Incorporation.

ARTICLE III
BOARD OF DIRECTORS

Section 3.1 Number and Term of Office.

The business, property, and affairs of the Corporation shall be managed
by or under the direction of a board of at least five directors; provided,
however, that the Board, by resolution adopted by vote of a majority of the then
authorized numbers of directors, may increase or decrease the number of
directors. The directors shall be elected by the holders of shares entitled to
vote thereon at the annual meeting of stockholders, and each shall serve
(subject to the provisions of Article IV) until the next succeeding annual
meeting of stockholders and until his respective successor is elected and
qualified.

Section 3.2 Chairman of the Board.

The directors may elect one of their members to be Chairman of the
Board. The Chairman shall be subject to the control of and may be removed by the
Board. He shall perform such duties as may from time to time be assigned to him
by the Board.

- 4 -
<PAGE>

Section 3.3 Meetings.

Regular meetings of the Board may be held without notice at such time
and place as shall from time to time be determined by the Board.

Special meetings of the Board shall be held at such time and place as
shall be designated in the notice of the meeting whenever called by the Chairman
of the Board, if any, the President, or by a majority of the directors then in
office.

Section 3.4 Notice of Special Meetings.

The Secretary, or, in his absence, any other office of the Corporation,
shall give each director notice of the time and place of holding of special
meetings of the Board by mail at least five days before the meeting, or by
telex, telecopy, telegraph, cable or overnight courier at least three days
before the meeting. Unless otherwise stated in the notice thereof, any and all
business may be transacted at any meeting without specification of such business
in the notice.

Section 3.5 Quorum and Organization of Meetings.

A majority of the total number of members of the Board as constituted
from time to time shall constitute a quorum for the transaction of business,
but, if at any meeting of the Board (whether or not adjourned from a previous
meeting) there shall be less than a quorum present, a majority of those present
may adjourn the meeting to another time and place, and the meeting may be held
as adjourned without further notice or waiver. Except as otherwise provided by
law or in the Certificate of Incorporation or these By-Laws, a majority of the
directors present at any meeting at which a quorum is present may decide any
question brought before such meeting. Meetings shall be presided over by the
Chairman of the Board, if any, or in his absence, by the President, or in the
absence of both by such other person as the directors may select. The Secretary
of the Corporation shall act as secretary of the meeting, but in his absence

- 5 -
<PAGE>

the chairman of the meeting may appoint any person to act as secretary of the
meeting.

Section 3.6 Committees.

The Board may, by resolution passed by a majority of the whole Board,
designate one or more committees, each committee to consist of one or more of
the directors of the Corporation. The Board may designate one or more directors
as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board to
act at the meeting in place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board, shall have and
may exercise all the power and authority of the Board in the management of the
business, property, and affairs of the Corporation, and may authorize the seal
of the Corporation to be affixed to all papers which may require it; but no such
committee shall have power or authority which is prohibited to such committee by
the General Corporation Law of the State of Delaware. Each committee which may
be established by the Board pursuant to these By-Laws may fix its own rules and
procedures. Notice of meetings of committees, other than of regular meetings
provided for by the rules, shall be given to committee members. All action taken
by committees shall be recorded in minutes of the meetings.

- 6 -
<PAGE>

Section 3.7 Action Without Meeting.

The Board or any committee designated by the Board may take any action
required or permitted to be taken by them without a meeting unless otherwise
prohibited by law or the Certificate of Incorporation.

Section 3.8 Telephone Meetings.

Nothing contained in these By-laws shall be deemed to restrict the power
of members of the Board, or any committee designated by the Board, to
participate in a meeting of the Board, or committee, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other.

ARTICLE IV
OFFICERS

Section 4.1 Executive Officers.

The executive officers of the Corporation shall be a Chairman of the
Board, a Chief Executive Officer, a President, one or more Vice Presidents, a
Treasurer, and a Secretary, each of whom shall be elected by the Board. The
Board may elect or appoint such other officers (including a Controller and one
or more Assistant Treasurers and Assistant Secretaries) as it may deem necessary
or desirable. Each officer shall hold office for such term as may be prescribed
by the Board from time to time. Any person may hold at one time two or more
offices.

Section 4.2 Powers and Duties.

The Chairman of the Board, if any, or, in his absence, the Chief
Executive Officer, or in his absence, the President, shall preside at all
meetings of the stockholders and of the Board. The Chief Executive Officer shall
be the chief executive officer of the Corporation. In the absence of the

- 7 -
<PAGE>

Chief Executive Officer, the President and, in the absence of the President, a
Vice President appointed by the President or, if the President fails to make
such appointment, by the Board, shall perform all the duties of the Chief
Executive Officer. The officers and agents of the Corporation shall each have
such powers and authority and shall perform such duties in the management of the
business, property and affairs of the Corporation as generally pertain to their
respective offices, as well as such powers and authorities and such duties as
from time to time may be prescribed by the Board.

ARTICLE V
RESIGNATIONS, REMOVALS, AND VACANCIES

Section 5.1 Resignations.

Any director or officer of the Corporation, or any member of any
committee, may resign at any time by giving written notice to the Board, the
Chief Executive Officer, the President, or the Secretary of the Corporation. Any
such resignation shall take effect at the time specified therein or, if the time
be not specified therein, then upon receipt thereof. The acceptance of such
resignation shall not be necessary to make it effective.

Section 5.2 Removals.

The Board, by a vote of not less than a majority of the entire Board, at
any meeting thereof, or by written consent, at any time, may, to the extent
permitted by law, remove with or without cause, from office or terminate the
employment of any officer or member of any committee and may, with or without
cause, disband any committee.

Any director or the entire Board may be removed, with or without cause,
by the holders of a majority of the shares entitled at the time to vote at an
election of directors.

- 8 -
<PAGE>

Section 5.3 Vacancies.

Any vacancy in the office of any director or officer through death,
resignation, removal, disqualification, or other cause, and any additional
directorship resulting from any increase in the number of directors, may be
filled at any time by a majority of the directors then in office (even though
less than a quorum remains) or, in the case of any vacancy in the office of any
director, by the stockholders, and, subject to the provisions of this Article V,
the person so chosen shall hold office until his successor shall have been
elected and qualified; or, if the person so chosen is a director elected to fill
a vacancy, he shall (subject to the provisions of this Article IV) hold office
for the unexpired term of his predecessor.

ARTICLE VI
CAPITAL STOCK

Section 6.1 Stock Certificates.

The certificates for shares of the capital stock of the Corporation
shall be in such form as shall be prescribed by law and approved, from time to
time, by the Board.

Section 6.2 Transfer of Shares.

Shares of the capital stock of the Corporation may be transferred on the
books of the Corporation only by the holder of such shares or by his duly
authorized attorney, upon the surrender to the Corporation or its transfer agent
of the certificate representing such stock properly endorsed.

Section 6.3 Fixing Record Date.

In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof
or to express consent to corporate action in writing without a meeting, or
entitled to receive payment of any dividend or other distribution

- 9 -
<PAGE>

or allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion, or exchange of stock, or for the purpose of any other lawful
action, the Board may fix, in advance, a record date, which, unless otherwise
provided by law, shall not be more than sixty nor less than ten days before the
date of such meeting, nor more than sixty days prior to any other action.

Section 6.4 Lost Certificates.

The Board or any transfer agent of the Corporation may direct a new
certificate or certificates representing stock of the Corporation to be issued
in place of any certificate or certificates theretofore issued by the
Corporation, alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate to be lost,
stolen, or destroyed. When authorizing such issue of a new certificate or
certificates, the Board (or any transfer agent of the Corporation authorized to
do so by a resolution of the Board) may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen, or
destroyed certificate or certificates, or his legal representative, to give the
Corporation a bond in such sum as the Board (or any transfer agent so
authorized) shall direct to indemnify the Corporation against any claim that may
be made against the Corporation with respect to the certificate alleged to have
been lost, stolen, or destroyed or the issuance of such new certificates, and
such requirement may be general or confined to specific instances.

Section 6.5 Regulations.

The Board shall have power and authority to make all such rules and
regulations as it may deem expedient concerning the issue, transfer,
registration, cancellation, and replacement of certificates representing stock
of the Corporation.

- 10 -
<PAGE>

ARTICLE VII
MISCELLANEOUS

Section 7.1 Corporate Seal.

The corporate seal shall have inscribed thereon the name of the
Corporation, the year of its organization, and the words "Corporate Seal" and
"Delaware".

Section 7.2 Fiscal Year.

The fiscal year of the Corporation shall be determined by resolution of
the Board.

Section 7.3 Notices and Waivers Thereof.

Wherever any notice whatever is required by law, the Certificate of
Incorporation, or these By-Laws to be given to any stockholder, director, or
officer, such notice, except as otherwise provided by law, may be given
personally, or by mail, telex, telecopy, telegraph, cable or overnight courier
addressed to such address as appears on the books of the Corporation. Any notice
given by telex, telecopy, telegraph or cable shall be deemed to have been given
when it shall have been delivered for transmission, and any notice given by mail
or overnight courier shall be deemed to have been given when it shall have been
deposited in the United States mail with postage thereon prepaid or given to
such courier service, as applicable.
Whenever any notice is required to be given by law, the Certificate of
Incorporation, or these By-Laws, a written waiver thereof, signed by the person
entitled to such notice, whether before or after the meeting or the time stated
therein, shall be deemed equivalent in all respects to such notice to the full
extent permitted by law.

- 11 -
<PAGE>

Section 7.4 Stock of Other Corporations or Other Interests.

Unless otherwise ordered by the Board, the Chief Executive Officer, the
President, the Secretary, and such attorneys or agents of the Corporation as may
be from time to time authorized by the Board, the Chief Executive Officer, or
the President, shall have full power and authority on behalf of the Corporation
to attend and to act and vote in person or by proxy at any meeting of the
holders of securities of any corporation or other entity in which the
Corporation owns or holds shares or other securities, and at such meetings shall
possess and may exercise all the rights and powers incident to the ownership of
such shares or other securities which the Corporation, as the owner or holder
thereof, might have possessed and exercised if present. The Chief Executive
Officer, the President, the Secretary, or such attorneys or agents, may also
execute and deliver on behalf of the Corporation powers of attorney, proxies,
consents, waivers, and other instruments relating to the shares or securities
owned or held by the Corporation.

ARTICLE VIII
AMENDMENTS

The holders of shares entitled at the time to vote for the election of
directors shall have power to adopt, amend, or repeal the By-laws of the
Corporation by vote of not less than a majority of such shares, and except as
otherwise provided by law, the Board shall have power equal in all respects to
that of the stockholders to adopt, amend, or repeal the By-Laws by vote of not
less than a majority of the entire Board. However, any By-Laws adopted by the
Board may be amended or repealed by vote of the holders of a majority of the
shares entitled at the time to vote for the election of directors.

- 12 -
<PAGE>

ARTICLE IX
PROVISIONS OF LAW

The By-Laws shall be subject to such provisions of the statutory and
common laws of the State of Delaware as may be applicable to corporations
organized under the laws of the State of Delaware. References herein to
provisions of law shall be deemed to be references to the aforesaid provisions
of law unless otherwise explicitly stated. All references in the By-Laws to such
provisions of law shall be construed to refer to such provisions as from time to
time amended.

ARTICLE X
CERTIFICATE OF INCORPORATION

The By-Laws shall be subject to the Certificate of Incorporation of the
Corporation. All references in the By-Laws to the Certificate of Incorporation
shall be construed to mean the Certificate of Incorporation of the Corporation
as from time to time amended.

- 13 -

THIRD LEASE MODIFICATION AGREEMENT
----------------------------------

THIS AGREEMENT made as of the 25th day of March, 1999, by and between
KWK IV, LLC, a Connecticut limited liability company with its office located in
the Town of West Simsbury, County of Hartford and State of Connecticut,
(hereinafter referred to as "Landlord"), as successor in interest TO ANN STREET
LIMITED PARTNERSHIP, and MEDIA DROP-IN PRODUCTIONS, INC., a Delaware
corporation, with its office located in the Town of Hartford, County of Hartford
and State of Connecticut, (hereinafter referred to as "Tenant").

WITNESSETH

WHEREAS, Landlord and Tenant entered into a Lease on or about June,
1992 and as further modified by a certain Addendum To Lease dated July 2, 1992
and as further modified by certain Lease Modification Agreement dated December
1, 1992 and the Second Lease modification Agreement dated August 14, 1997 for
the premises consisting of approximately 5,179 square feet of space in the
Building known as 199-203 Ann Street, Hartford, Connecticut; and

WHEREAS, the parties hereto desire to modify certain terms of the
Lease as hereinafter set forth to reflect changes in the terms and duration of
the Lease and the leasing of additional space.

NOW THEREFORE, in consideration of the promises and the mutual
undertakings, covenants and agreements herein contained, the parties agree as
follows:

1 . Effective upon substantial completion of the renovations
designated in the Floor Plan by Amenta/Emma Architects dated November 30, 1998
(the "Floor Plan") attached as Exhibit A hereto, the "Demised Premises" of the
Lease shall be modified to include the "Additional Space" of approximately 1,800
square feet as shown on Exhibit A. The Demised Premises shall consist of
approximately 5,179 square feet of space as shown and depicted on Exhibit A.

2. Paragraph 4 of the Lease shall be modified to provide that the
term of the Lease shall be extended to December 31, 2004 (the "Termination
Date").

3. Paragraph 6(a) of the Lease shall be modified as follows:

A. Commencing as of today until the day of substantial completion of
renovations as provided for in Exhibit A, the fixed minimum rent for the Demised
Premises shall be payable by Tenant at the annual rate of FORTY FIVE THOUSAND
SIX HUNDRED SIXTEEN AND 50/100 ($45,616.50) DOLLARS payable in advance in equal
monthly installments of THREE THOUSAND EIGHT HUNDRED ONE AND 38/100 ($3,801.38)
DOLLARS on the 1st day of each month.

-1-
<PAGE>

B. Commencing upon the substantial completion of renovations as
provided for in Exhibit A through and including December 31, 2000, the fixed
minimum rent for the Demised Premises shall be payable by Tenant at the annual
rate of SIXTY NINE THOUSAND NINE HUNDRED SIXTEEN AND 50/100 ($69,916.50) DOLLARS
payable in advance in equal monthly installments of FIVE THOUSAND EIGHT HUNDRED
TWENTY SIX AND 38/100 ($5,826.38) DOLLARS on the 1st day of each month.

C. Commencing January 1, 2001 through and including December 31,
2001, the fixed minimum rent for the Demised Premises shall be payable by Tenant
at the annual rate of SEVENTY TWO THOUSAND FIVE HUNDRED SIX AND 00/100
($72,506.00) DOLLARS payable in advance in equal monthly installments of SIX
THOUSAND FORTY TWO AND 17/100 ($6,042.17) DOLLARS on the 1st day of each month.

D. Commencing January 1, 2002 through and including December 31,
2002, the fixed minimum rent for the Demised Premises shall be payable by Tenant
at the annual rate of SEVENTY FIVE THOUSAND NINETY FIVE AND 50/100 ($75,095.50)
DOLLARS payable in advance in equal monthly installments of SIX THOUSAND TWO
HUNDRED FIFTY SEVEN AND 96/100 ($6,257.96) DOLLARS on the 1st day of each month.

E. Commencing January 1, 2003 through and including December 31,
2003, the fixed minimum rent for the Demised Premises shall be payable by Tenant
at the annual rate of SEVENTY SEVEN THOUSAND SIX HUNDRED EIGHTY FIVE AND 00/100
($77,685.00) DOLLARS payable in advance in equal monthly installments of SIX
THOUSAND FOUR HUNDRED SEVENTY THREE AND 75/100 ($6,473.75) DOLLARS on the 1st
day of each month.

F. Commencing January 1, 2004 through and including December 31,
2004, the fixed minimum rent for the Demised Premises shall be payable by Tenant
at the annual rate of EIGHTY THOUSAND TWO HUNDRED SEVENTY FOUR AND 50/100
($80,274.50) DOLLARS payable in advance in equal monthly installments of SIX
THOUSAND SIX HUNDRED EIGHTY NINE AND 54/100 ($6,689.54) DOLLARS on the 1st day
of each month.

4. Paragraph 6(b) of the Lease shall be deleted in its entirety and
shall be replaced as follows:

"(b) The phrase "minimum rent" shall mean the fixed minimum rent
above specified without any set-offs or deductions whatsoever and without any
prior notice or demand by Landlord being required therefor."

5. "Tenant's Share" pursuant to Paragraph 7 of the Lease shall
henceforth be 17.65%.

6. Tenant's "Base for Operating Expenses" and "Base for Special
Operating Expenses" pursuant to Paragraph 7 for the Lease shall be calendar year
2000.

-2-
<PAGE>

7. Tenant's "Base for Taxes" pursuant to Paragraph 7 of the Lease
shall be the Grand List of October 1, 1999.

8. Paragraph 48, Parking Privileges, of the Lease shall be deleted in
its entirety and replaced as follows:

Tenant shall procure five (5) parking spaces in an adjacent surface
paved parking lot for the entire term of this Lease, the cost of which is
included in the minimum rent payable by Tenant to Landlord until December 31,
1999. Thereafter, the Landlord shall not be responsible in any manner for
locating or paying for such parking spaces, and any costs incurred by the Tenant
associated with obtaining or use of any parking spaces shall not be included in
the minimum rent.

9. Paragraph 49, Option To Renew, of the Lease, shall be deleted in
its entirety.

10. Paragraph 50, Tenant's Right of First Refusal To Lease Additional
Space, shall be deleted in its entirety.

11. Every term, provision, obligation, agreement covenant, promise,
right and power contained in and under the Lease shall continue in full force
and effect, affected only to the extent of the changes herein set forth.

12. All provisions of the Addendum To Lease dated July 2, 1992, the
Lease Modification Agreement dated December 1, 1992 and the Second Lease
Modification Agreement dated August 14, 1997 shall no longer continue in force
and effect upon execution of this Agreement and shall be null and void.

13. This Modification Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective successors, and assigns.

14. The Landlord, at its own expense, shall perform the renovations
as provided under the Floor Plan attached hereto as Exhibit A.

15. The Landlord shall pay Sentry Commercial Real Estate Services,
Inc., the Tenant's broker, a commission fee equal to 2.5% of the aggregate lease
amount upon Tenant's first payment to Landlord of monthly rental for the entire
5,179 square foot of space of the Demised Premises.

16. The Landlord shall complete the renovations per the Amenta/Emma
Plan within 90 days of the signing of this Amendment. The majority of work shall
be done during nonbusiness hours and the Landlord shall make its best efforts to
disrupt the business as little as possible. The Tenant agrees to cooperate to
its fullest in order for the Landlord to meet this 90-day requirement. If said
improvements are not substantially completed by this date, Tenant would have the
right to complete work themselves and offset any costs against rent.

-3-
<PAGE>

TO HAVE AND TO HOLD unto the said Landlord and unto its successors
and assigns forever, to its and their own and proper use and behoof.

IN WITNESS WHEREOF, the parties have hereunto caused these presents
to be signed and sealed the day and year first above recited.

Signed, Sealed and Delivered in the presence of:

LANDLORD
KWK IV LLC

BY /s/ Ronald Webber
-----------------
Ronald Webber, Member

TENANT: MEDIA DROP-IN PRODUCTIONS, INC.

BY /s/ Kenneth M. Przysiecki
-------------------------
Its Chief Financial Officer

-4-
<PAGE>

STATE OF CONNECTICUT
COUNTY OF HARTFORD

Personally appeared Ronald Webber, as Member of KWK IV, LLC, Signer
and Sealer of the foregoing Instrument, and acknowledged the same to be his free
act and deed and the free act and deed of said company before me.

Comissioner of the Superior Court
Notary Public

STATE OF CONNECTICUT
COUNTY OF HARTFORD

Personally appeared Kenneth M. Przysiecki, CFO/Secretary of MEDIA
DROP-IN PRODUCTIONS, INC., Signer and Sealer of the foregoing Instrument, and
acknowledged the same to be his free act and deed and the free act and deed of
said MEDIA DROP-IN PRODUCTIONS, INC., before me.

Commissioner of the Superior Court
Notary Public
-5-

SUBSIDIARIES OF MDI ENTERTAINMENT, INC.
---------------------------------------

Media Drop-In Productions, Inc. a Delaware Corporation

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> May-31-1999
<PERIOD-START> Jun-1-1998
<PERIOD-END> May-31-1999
<CASH> 340,350
<SECURITIES> 0
<RECEIVABLES> 817,614
<ALLOWANCES> 0
<INVENTORY> 57,596
<CURRENT-ASSETS> 1,273,813
<PP&E> 456,627
<DEPRECIATION> (350,605)
<TOTAL-ASSETS> 1,829,362
<CURRENT-LIABILITIES> 3,064,390
<BONDS> 0
0
0
<COMMON> 7,777
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,829,362
<SALES> 7,204,712
<TOTAL-REVENUES> 7,204,712
<CGS> 3,812,169
<TOTAL-COSTS> 3,812,169
<OTHER-EXPENSES> 2,158,849
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,200
<INCOME-PRETAX> 1,215,346
<INCOME-TAX> 55,700
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,159,646
<EPS-BASIC> 0.15
<EPS-DILUTED> 0.14

</TABLE>