IMAGINON INC /DE/
S-1/A, 2000-01-12
PREPACKAGED SOFTWARE
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<PAGE>


   AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 12, 2000
                                                      REGISTRATION NO. 333-88729


                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

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

                              AMENDMENT NO. 2 TO
                                   FORM S-1
            REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

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

                                IMAGINON, INC.
              (Exact name of Registrant as specified in its charter)

             Delaware                        7372               84-1217733

  (State or other jurisdiction of      (Primary Standard       (IRS Employer
   incorporation or organization)       Industrial Code)     Identification No.)

                          1313 Laurel Street, Suite 1
                         San Carlos, California 94070
                                (650) 596-9300
         (Address, including zip code, and telephone number, including
            area code, of Registrant's principal executive offices)

                               David M. Schwartz
        President, Chairman, Chief Executive Officer, Chief Financial
                             Officer and Treasurer
                          1313 Laurel Street, Suite 1
                         San Carlos, California 94070
                                (650) 596-9300
           (Name, address, including zip code, and telephone number,
                  including area code, of agent for service)

                       Copies of all correspondence to:

                              Gerald Raskin, Esq.
                             John W. Kellogg, Esq.
             Friedlob Sanderson Raskin Paulson & Tourtillott, LLC
                         1400 Glenarm Place, Suite 300
                            Denver, Colorado 80202
                                (303) 571-1400

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after the effective date of this Registration Statement as determined by
market conditions.

If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: [X]

If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check this following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering. [_]

If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offer. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

<TABLE>
<CAPTION>
                                          CALCULATION OF REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF SECURITIES TO       AMOUNT TO BE         PROPOSED            PROPOSED          AMOUNT OF
            BE REGISTERED                  REGISTERED(1)         MAXIMUM             MAXIMUM         REGISTRATION
                                                            OFFERING PRICE PER      AGGREGATE             FEE
                                                                SHARE(3)          OFFERING PRICE
- -----------------------------------------------------------------------------------------------------------------
<S>                                       <C>                  <C>                 <C>                 <C>
Common Stock issuable upon                  2,716,163           $ 2.34375           $6,366,008          $1,770
 conversion of Series F Convertible
 Preferred Stock (2)
- -----------------------------------------------------------------------------------------------------------------
Common Stock issuable upon                    122,553           $ 2.8125            $  344,680          $   96
 exercise of Group F warrant
- -----------------------------------------------------------------------------------------------------------------
TOTAL                                       2,838,716                               $6,710,688          $1,866(4)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  Pursuant to Rule 457(c), the average of the bid and ask price of ImaginOn,
     Inc. common stock as quoted on the NASDAQ SmallCap Market on October 4,
     1999 was 2.34375.

(2)  Represents 150% of the number of shares of common stock issuable upon
     conversion of the Series F Convertible Preferred Stock.  The registrant
     believes this is a reasonable estimate of the maximum number of shares
     issuable upon conversion of the Series F Convertible Preferred Stock.

(3)  Pursuant to Rule 457(g), the proposed maximum offering price per share of
     common stock is $2.34375. The current exercise price of the Group F Warrant
     is $2.8125.

(4)  A registration fee of $1,945 was previously paid.

The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>


                 PRELIMINARY PROSPECTUS DATED JANUARY 12, 2000
PROSPECTUS

                              [LOGO APPEARS HERE]

                       2,838,716 shares of common stock


     This prospectus relates to the proposed sale from time to time of up to
2,838,716 shares of our common stock by the selling securityholder.  The selling
securityholder acquired its shares in connection with the Series F 12%
Convertible Preferred Stock transaction.  We will not receive any of the
proceeds from the sale of these securities.

     The selling securityholder listed on page 45 is offering:

          .   1,810,775 shares of common stock issuable upon conversion of the
              Series F Convertible Preferred Stock

          .   122,553 shares of common stock issuable upon exercise of the
              Group F Warrant

     An additional 905,388 shares of common stock are being registered and
issued pursuant to the registration rights agreement.

     The selling securityholder may sell all or any portion of its shares of
common stock in one or more transactions on the NASDAQ SmallCap Market or in
private, negotiated transactions.  The selling securityholder will pay all
selling expenses, including any brokerage commissions.  ImaginOn will pay the
registration fee.

     Our common stock trades on the NASDAQ SmallCap Market under the symbol
"IMON."  On November 19, 1999, the last reported sale price of our common stock
was $ 2.625 per share.

     We may amend or supplement this prospectus from time to time by filing
amendments or supplements as required.  You should read this entire prospectus
and any amendments or supplements carefully before you make your investment
decision.


     See "Risk Factors" starting on page 8 to read about material risks you
should consider before you purchase shares of our common stock.

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

     Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed upon the
adequacy or accuracy of this prospectus.  Any representation to the contrary is
a criminal offense.

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


                      Prospectus dated January 12, 2000.
<PAGE>

                               TABLE OF CONTENTS
Section                                                                    Page
- -------                                                                    ----


Where You Can Find Additional Information................................. -iii-
Forward-looking Statements................................................ -iii-
Summary...................................................................   -1-
Risk Factors..............................................................   -8-
Use of Proceeds...........................................................  -12-
Dividend Policy...........................................................  -12-
Selected Financial Data...................................................  -12-
Managements Discussion And Analysis
   of Financial Condition And Results of Operations.......................  -13-
ImaginOn, Inc.............................................................  -25-
Management................................................................  -37-
Certain Relationships and Related Transactions............................  -43-
Principal Stockholders....................................................  -43-
Price Range of Our Common Stock...........................................  -45-
Selling Securityholder....................................................  -45-
Description of Securities.................................................  -46-
Plan of Distribution......................................................  -51-
Legal Matters.............................................................  -53-
Experts...................................................................  -53-
Index to Financial Statements.............................................   F-1


                                     -ii-
<PAGE>


                   Where You Can Find Additional Information


     We have filed with the SEC a registration statement on Form S-1 to register
the shares of common stock offered hereby. This prospectus is a part of that
registration statement. As allowed by the SEC rules, this prospectus does not
contain all the information you can find in the registration statement or the
exhibits to that registration statement. For further information with respect to
us and the common stock offered hereby, reference is made to the registration
statement and the exhibits to that registration statement. Statements in this
prospectus concerning the contents of any contract or any other document are not
necessarily complete. If a contract or document has been filed as an exhibit to
the registration statement, we refer you to that exhibit. Each statement in this
prospectus relating to a contract or document filed as an exhibit to the
registration statement is qualified by the filed exhibits. You can obtain a copy
of the registration statement and the exhibits through the SEC, at the SEC's
public reference rooms at 450 Fifth Street, N.W., Washington, D.C. 20549, Seven
World Trade Center, 13/th/ Floor, New York, New York, 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661, or the SEC's
website at http://www.sec.gov. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms and their copy charges.


     We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent auditors. We will also file
annual, quarterly and current reports, proxy statements and other information
with the SEC. You can also request copies of these documents, for a copying fee,
by writing the SEC.

     Our common stock is traded as "SmallCap Market Securities" on the Nasdaq
SmallCap Market.  Material filed by us can be inspected at the offices of the
National Association of Securities Dealers, Inc., Reports Section, 1735 K
Street, N.W., Washington, D.C. 20006.

     . Our Annual Report on Form 10-KSB for the year ended December 31, 1998
     . Our Quarterly Report on Form 10-QSB for the quarter ended March 31, 1999
     . Our Quarterly Report on Form 10-QSB for the quarter ended June 30, 1999
     . Our Quarterly Report on Form 10-QSB for the quarter ended
       September 30, 1999

     . Our Current Reports on Form 8-K and 8-K/A filed February 3, 1999,
       March 23, 1999, April 5, 1999, May 25, 1999, June 28, 1999,
       July 8, 1999, September 14, 1999, October 26, 1999 and October 27, 1999



     You may request free copies of these filings by writing or telephoning us
at our principal offices, which are located at the following address:

               1313 Laurel Street, Suite 1
               San Carlos, CA 94070
               (650) 596-9300
               Attn: Secretary



                          FORWARD-LOOKING STATEMENTS

     Certain statements under the captions "Summary," "Risk Factors," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "ImaginOn, Inc." and elsewhere in this prospectus are
"forward-looking statements." These forward-looking statements include, but are
not limited to, statements about our plans, objectives, expectations, prospects
and intentions, markets in which we participate and other statements contained
in this prospectus that are not historical facts. When used in this prospectus,
the words "expect," "project," "anticipate," "believe," "estimate," "intend,"
"plan," "seek" and similar expressions are generally intended to identify
forward-looking statements. Because these forward-looking statements involve
risks and uncertainties, there are important factors that could cause actual
results to differ materially from those expressed or implied by these forward-
looking statements, including changes in our plans, objectives, expectations,
prospects and intentions and other factors discussed under "Risk Factors" and
elsewhere in this prospectus. We cannot guarantee any future levels of activity,
performance or achievements. We will update these forward-looking statements, to
the extent required by law, to reflect material changes in the information
previously disclosed.

                                     -iii-
<PAGE>


                                    SUMMARY

     The information below is only a summary of more detailed information
included in other sections of this prospectus.  The other information is
important, so please read this entire prospectus carefully.


                                IMAGINON, INC.

OUR BUSINESS

     We are an information technology company focused on developing and
marketing broadband Internet television systems to businesses and institutions.
Our Internet television system, ImOn.comTV, is a licensed turnkey package that
enables any website to present interactive television within a standard browser
window on any suitably connected computer.  The ImOn.comTV interactive virtual
console offers its users video on demand, video that branches under user
command, automated Web searching, and many additional features, customized for
each licensee.

     David Schwartz and Leonard Kain started ImaginOn in 1996 to develop better
ways for businesses and consumers to take advantage of the Internet and personal
computers.


     Our patented core software technology, Transformational Database Processing
and Playback, TDPP, has three components:

     . database analysis
     . network synthesis
     . real-time adaptive playback


     TDPP has a set of 14 software tools used to create new applications and
content characterized by seamless real-time access to video, audio, graphics,
text HTML and 3D objects from multiple remote or local databases.


     For end users or viewers of ImOn.comTV, the product features three unique
components developed by ImaginOn:


     . WEBZINGER(R) ONLINE is a data mining Research Engine that searches the
     Web, which is short for the World Wide Web, downloads each website's
     highlights, then formats the results into an illustrated report, complete
     with audio and video.

     . N-BRANCHING MOVIES, INCLUDING WORLDCITIES 2000(TM) is a series of
     interactive travel planners for distribution on broadband Internet, CD and
     DVD. Travelers will use WorldCities to interactively tour a city, on film,
     from the driver's seat. Each tour contains up to 120 minutes of TV quality
     video in-depth topical information and links to over 1,000 websites.

     . SELLONSTREAM(TM) is an e-commerce solution used by advertisers who want
     to sell products via the Web and at the same time use full-bandwidth video
     content to motivate buyers with highly entertaining product-related pitches
     and one-click access to e-commerce websites.


     On October 26, 1999, to demonstrate our Internet TV system, we created the
ImOn.com Internet portal that uses the high bandwidth capabilities of our
patented technology in a wide variety of user applications, including:

     . advanced on-line research,
     . interactive travel planning,
     . video e-commerce, and
     . interactive movies and gameplay.

                                      -1-
<PAGE>


     The goal of our ImOn.comTV product is to make the Internet easier and more
productive for small businesses, educational institutions and individuals.
ImOn.comTV integrates our WebZinger research engine, WorldCities 2000 Series of
interactive travel planners, sellONstream video e-commerce solutions and our
never-released interactive movie and PC videogame, American Hero.  Additionally,
licensees of ImOn.comTV get our software authoring tool, ImaginAuthor, which
enables authoring of interactive TV content such as interactive movies like
World Cities 2000, and e-commerce video presentations, like sellONstream.
Corporate training departments and educational content developers can use our
ImaginAuthor authoring tool for creating learning on demand applications.
ImOn.comTV's features will be useful in interactive education/training and
interactive advertising markets.


MARKET SEGMENT

     To attract licensees by demonstrating the quality and capability of
ImOn.comTV, we operate a high-bandwidth Internet portal, ImOn.com.  This
Internet TV station is built out of our software components, plays original
video content produced by us using our authoring tool, and features our own
search engine.  The fact that virtually all aspects of this system are owned by
us reassures potential customers that we can deliver and support ImOn.comTV in
all respects, from authoring content to streaming Internet broadcasting.  This
industry segment is made up of a relatively small number of brand-name portals.

     Additional markets where ImOn.comTV's features will be useful include
interactive education/training and interactive advertising.  The market for
computer-based educational and training systems is already a $6 billion industry
serviced by thousands of small vendors.

     ImOn.comTV addresses the e-commerce software market with its sellONstream
component.  E-commerce is a new and rapidly growing segment of the Internet,
defined as transactions made online.  For the calendar year 1998, e-commerce
sales were about $4 billion.  Of this, $2.3 billion was during the holiday
season alone, up from $1.1 billion in the same period during 1997.  E-commerce
is expected to exceed $40 billion in 1999.

     The market for ImOn.comTV is all businesses and institutions that are heavy
Internet users for their own internal purposes or service the general public
over the Internet. Since the market for ImOn.comTV is so large and diffuse, we
will focus our efforts on those businesses that have the most to gain by
licensing the product as soon as they become aware of it.

     We are developing a "lite" downloadable version of our ImaginAuthor
authoring tool.  Unlike the full-featured pro version of ImaginAuthor, the
downloaded version will be suitable for use by anyone who can use a word
processor.  Corporate training departments and educational content developers
can then create original training and education content that can be "broadcast"
on the internet in text and video, all interactive as desired.


INDUSTRY AND COMPETITION

     In the internet television systems industry segment, we have no direct
competition.  In the high bandwidth interactive streaming video authoring and
playback software business, we have no direct competitor, yet.  Among the
competitors that provide software components that can be used to build a
similar, lower performance, less capable system, are Microsoft, Broadcast.com,
RealNetworks, Oracle and Macromedia.

     Within the Internet search engine marketplace, there are at least two dozen
products aimed at Web users for the purpose of searching the Internet.  All of
these search engines are primarily list generators; leaving the actual data
evaluation and retrieval to the user.  The few search engines that do offer data
retrieval, do not provide much control or formatting of the output.  Positioned
as a Research Engine, WebZinger actually does the substantial work of finding,
retrieving and formatting rich media assets from the Web.

                                      -2-
<PAGE>


STRATEGY

     Numerous companies, large and small, offer some portion of the services or
capabilities of ImOn.comTV, but there are no other single vendor integrated
solutions.  Our competitive advantage in this field is derived from our unique
proprietary technology that integrates interactive video playback with media-
intensive data mining.  We anticipate that revenues will be generated by ISP
services, license agreements, memberships, advertising and commissions stemming
from video e-commerce sales.

     New products created with our tools are characterized by seamless real-time
access to video, audio, graphics, text, HTML and 3D objects from multiple remote
or local databases.  We will license our tool set to businesses for building e-
commerce, data mining, interactive entertainment and training applications.


ABOUT US

     Prior to January 20, 1999, under previous management, none of whom are
currently employed by ImaginOn, we operated under the name of California Pro
Sports, Inc.  We imported and distributed products in three participant sport
categories:

          .  in-line skates;
          .  hockey equipment; and
          .  snowboard equipment.

     However, this was not successful and the company sold the assets related to
these businesses in 1997. During 1998, we commenced negotiations with
ImaginOn.com and on January 20, 1999, we merged with ImaginOn.com and changed
our name to ImaginOn, Inc.

                                      -3-
<PAGE>


     You will read about our operations under the name California Pro Sports,
Inc., in several sections of this prospectus, including, the Summary financial
statements, Selected financial data, ImaginOn, Inc., Management's discussion and
analysis of financial conditions and results of operations, and our Consolidated
financial statements. However, the information you will read about California
Pro Sports, Inc. is mainly historical and does not reflect our current
operations as an information technology company.  Below is a schematic drawing
of the structure of our company and its subsidiaries.





                             [CHART APPEARS HERE]

                                      -4-
<PAGE>


RISK FACTORS

     In connection with an investment in ImaginOn you should consider the
following risk factors which are more fully discussed beginning on Page 8:

     . You may experience substantial dilution.

     . We are a development stage company and do not have a relevant operating
       history to evaluate our performance or prospects.

     . We will require additional financial resources to fund our new product
     development and growth. The failure to acquire additional funding could
     impede new product development and growth and ultimately affect our
     performance and prospects.

     . Our earnings growth depends primarily upon market acceptance of our
     software products.

     . Our products may not be able to be successfully marketed or achieve
     customer acceptance.

     . Our success is heavily dependent upon unpredictable consumer approval of
     our products.

     . Slow development of new or replacement software or products offered could
     cause us to experience:

          . lower operating revenues
          . lower net revenues
          . lower cash flows
          . less liquidity

     . The market for Internet products and computer software evolves rapidly
     and is characterized by numerous industry participants with technology that
     may dominate the market for Internet products and computer software.

     . We are dependent upon our founders and executive officers.  The loss of
     the services of either individual could have a material adverse effect on
     our business and prospects.  We do not hold "key-person" life insurance on
     either of our founders.

     . We entered into agreements and informal relationships with other software
     and computer companies that if terminated or altered could have any of the
     following effects:

          . limit or eliminate the market for our products
          . limit or eliminate public recognition of the "ImaginOn" name
          . reduce revenues
          . lower cash flows
          . impair liquidity

     . Effective trademark, patent, copyright and trade secret protection may
     not be available in every country in which our products and media
     properties will be distributed or made available through the Internet.

     . We could be held liable for some of the services we provide or may be
     held liable for Year 2000 problems.

                                      -5-
<PAGE>


                                  THE OFFERING

Shares offered
     The selling securityholder is offering up to 1,933,328 of the aggregate
     2,838,716 shares of our common stock to be registered.


Public price
     The shares will be sold to the public at the prevailing market price at the
     time of sale.


Use of proceeds
     The net proceeds for the sale of the shares will be paid to the selling
     securityholder. We will not receive any of the proceeds from this offering,
     except to the extent that any of the warrants are exercised. See "Use of
     Proceeds".


Trading symbol
     Our common stock currently trades on the NASDAQ SmallCap Market under the
     symbol "IMON".

                                      -6-
<PAGE>


                             SUMMARY FINANCIAL DATA

     The following table summarizes certain financial information about our
business.  Because of our recent change in business, the historic information
reflected below may not be a good basis for evaluating our current and future
performance.  For a more detailed explanation of this data, see  "Management
discussion and analysis of financial condition and results of operations" and
our financial statements located elsewhere in this prospectus.
<TABLE>
<CAPTION>
                                     Nine Months Ended September 30         Years Ended December 31
                                     ------------------------------      ------------------------------
                                        1999(2)           1998(1)           1998(1)            1997
                                     ------------      ------------      ------------      ------------
<S>                                 <C>                <C>               <C>               <C>
STATEMENT OF
OPERATIONS DATA:

Net Sales                            $    259,783      $        223      $          0      $  9,087,767

Gross Profit                              161,244               223                 0         1,642,423

Loss                                   (4,906,801)       (1,252,341)       (2,729,826)       (4,075,182)
from operations

Loss                                   (4,854,090)       (1,294,663)       (3,497,587)       (5,192,920)
before extraordinary item

Net loss                               (4,854,090)       (1,294,663)       (3,497,587)       (4,809,215)

Net loss applicable to common        $ (6,064,019)     $ (1,294,663)     $ (4,617,587)     $ (4,809,215)
shareholders                         ============      ============      ============      ============

Earnings (loss)
per share:
before extraordinary items           $       (.16)     $       (.06)     $      (0.48)     $      (0.94)

Extraordinary item                             --                --                --              0.07
                                     ------------      ------------      ------------      ------------
Loss per common share                $       (.16)     $       (.06)     $      (0.48)     $      (0.87)
                                     ============      ============      ============      ============
Weighted average common shares         37,786,268        20,581,152         9,549,353         5,544,833
 outstanding                         ============      ============      ============      ============
</TABLE>
                             September 30,                        December 31,
                                 1999                                1998
                             -------------                        ------------
BALANCE SHEET DATA:

Current assets               $ 3,639,410                          $ 2,304,830

Total assets                   6,116,199                            2,558,615

Working capital                2,854,303                              807,733

Shareholders' equity           5,331,092                            1,005,198


(1) During 1998 we did not have any significant revenues.

(2) On January 20, 1999, we completed a merger with ImaginOn.com, Inc. (IMON).
The transaction was recorded as an acquisition of ImaginOn, Inc. by IMON and a
recapitalization of IMON.

                                      -7-
<PAGE>


                                  RISK FACTORS

     You should carefully consider the risk factors listed below and the other
information contained in this prospectus before purchasing our common stock and
warrants. Investing in our common stock and warrants involves a high degree of
risk. Any or all of the risks listed below could have a material adverse effect
on our business, operating results or financial condition, which could cause the
market price of our stock to decline, in which event you could lose your
investment in our common stock. You should also keep these risk factors in mind
when you read forward-looking statements. We have identified all of the material
risks which we believe may affect our business and the principal ways in which
we anticipate that they may affect our business or financial condition.

RISKS RELATING TO OUR BUSINESS

WE HAVE OUTSTANDING CONVERTIBLE SECURITIES THAT MAY CAUSE SUBSTANTIAL DILUTION
TO HOLDERS OF OUR COMMON STOCK.

     The conversion terms of our outstanding Series F Convertible Preferred
Stock may cause substantial dilution in the book value per share of our common
stock.  The conversion feature in the Series F Convertible Preferred Stock
allows the selling securityholder to purchase increasing shares of common stock
as a result of a decreasing common stock price including but not limited to the
following circumstances:

     . To the extent that the selling securityholder converts or exercises and
       then sells common stock, the common stock price may decrease due to the
       additional shares in the market. This could allow the selling
       securityholder to convert or exercise remaining Series F Convertible
       Preferred Stock into greater amounts of common stock, the sales of which
       would further depress the stock price.

     . The significant downward pressure on the price of the common stock could
       encourage short sales and consequently place further downward pressure on
       the price of the common stock.


     . Although the holders of our Series F Convertible Preferred Stock may not
       own more than 4.99% of our outstanding shares of common stock at any
       time, it is possible for holders of our Series F Convertible Preferred
       Stock to circumvent this restriction. By converting an amount of Series F
       Convertible Preferred Stock equal to 4.99% of our outstanding shares of
       common stock, selling those shares into the market and then converting
       another block of Series F Convertible Preferred Stock into common stock,
       holders of our Series F Convertible Preferred Stock create additional
       dilution to the existing holders of our common stock.


     . The conversion of the Series F Convertible Preferred Stock or the
       exercise of the warrant to purchase 122,553 shares of common stock issued
       to the purchaser of the Series F Convertible Preferred Stock may result
       in substantial dilution to the interests of other holders of common
       stock.

     Since we cannot know the conversion price of the Series F Convertible
Preferred Stock until notice of conversion has been provided by the selling
securityholder, we cannot currently determine how many shares of common stock we
will need to issue upon conversion of the Series F Convertible Preferred Stock.
However, pursuant to the related registration rights agreement we are required
to register 150% of the shares ImaginOn common stock convertible from the Series
F Convertible Preferred Stock, which at the current conversion price is
2,959,458 shares of common stock.  For examples of the number of shares issuable
upon certain changes in the conversion price see "Description of Securities"
ON PAGE 46.


OUR SECURITIES MAY BE DE-LISTED FROM THE NASDAQ SMALLCAP MARKET CAUSING OUR
LIQUIDITY TO DECREASE.

     Under the current interpretations of the rules of the Nasdaq SmallCap
Market, we are required to obtain shareholder approval for the issuance of more
than 20% of our then outstanding common stock, including through

                                      -8-
<PAGE>


the conversion of securities. Although we have no plans to enter into an
agreement that would obligate us to issue an aggregate of more than 20% of our
common stock outstanding without stockholder approval, if we do enter into such
an agreement in violation of these rules, our securities could be de-listed from
the Nasdaq SmallCap Market. If our securities are de-listed from the Nasdaq
SmallCap Market, our securities may be quoted on either the electronic bulletin
board or on pink sheets. This would make it more difficult for securityholders
to sell their shares of our common stock on the market and would decrease our
liquidity.

WE ARE A DEVELOPMENT STAGE COMPANY WITH NO RELEVANT OPERATING HISTORY TO
EVALUATE PERFORMANCE OR PROSPECTS.

     We are a development stage company and have only been operating in the
information technology industry since 1996.  We have no relevant operating
history upon which we can evaluate our performance and prospects.  We face all
the risks common to companies in their early stage of development, including:

     .  undercapitalization;
     .  cash shortages;
     .  high capital expenditures;
     .  unproven business model;
     .  difficulties in managing rapid growth; and
     .  lack of sufficient customers, revenue and cash flow

     Although our founders have experience in developing and commercializing new
products based on innovative technologies, unanticipated expenses, problems or
technical difficulties could occur which would result in material delays in
product commercialization.  Our efforts may not result in successful product
commercialization.

WE WILL NEED ADDITIONAL CAPITAL TO FUND OPERATIONS.

     We will require additional financial resources to fund our new product
development and growth. Although we are actively exploring options for funding,
we have received no commitment from any person or source for that financing, and
adequate financing may not be available on reasonable terms.  Our failure to
acquire additional funding when required could impede new product development
and growth and, ultimately, our performance and prospects.

OUR EARNINGS GROWTH IS DEPENDENT UPON ACCEPTANCE OF OUR PRODUCTS.

     Our earnings growth depends primarily upon market acceptance of our
software products.  Our products may not be able to be successfully marketed or
achieve customer acceptance.

OUR SUCCESS DEPENDS ON THE INTRODUCTION OF NEW PRODUCTS AND PRODUCT
ENHANCEMENTS.

     Our success in the software development business is heavily dependent upon
the timely introduction of successful new products or enhancements of existing
products to replace declining revenues from products at the latter stage of a
product cycle.  Consumer preferences for software products are difficult to
predict, and few consumer software products achieve sustained market acceptance.
If revenue from new products or enhancements does not replace declining revenues
from existing products, we may experience:

     .    lower operating revenues
     .    lower net revenues
     .    lower cash flows
     .    less liquidity

                                      -9-
<PAGE>

PRODUCTION DELAYS COULD INHIBIT OUR SUCCESS.

     The process of developing our software products is extremely complex.  A
significant delay in the introduction of one or more new products or
enhancements could have a material adverse effect on the ultimate success of
such products and we may experience:

     .    lower operating revenues
     .    lower net revenues
     .    lower cash flows
     .    less liquidity

WE OPERATE IN A DEVELOPING MARKET WITH INCREASING PARTICIPANTS.

     The market for Internet products and computer software is rapidly evolving
and is characterized by an increasing number of market entrants who have
introduced or developed products and services.  Although we believe that the
diverse segments of the Internet market will provide opportunities for more than
one supplier of products and services similar to those we possesses, it is
possible that a single supplier may dominate one or more market segments.
Additionally, there may be insufficient market acceptance of our products
because the market for Internet products and computer software changes rapidly.

WE ARE HEAVILY DEPENDENT ON OUR MANAGEMENT.

     Our success depends upon the personal efforts of our President and Chief
Executive Officer, David M. Schwartz, and our Vice President of Engineering,
Leonard W. Kain.  The loss of the services of either individual could have a
material adverse effect on our business and prospects.  We do not have "key-
person" life insurance on Messrs. Schwartz or Kain.

OUR SUCCESS IS LINKED TO OUR ABILITY TO HIRE AND MAINTAIN PERSONNEL.

     Our success depends on our ability to hire and retain additional qualified
management, marketing, technical, financial and other personnel.  Competition
for qualified personnel is intense and we may not be able to hire or retain
qualified personnel.

WE ARE DEPENDENT ON CONTRACTS WITH OTHER COMPANIES FOR PROMOTION OF OUR PRODUCTS
AND REPUTATION.

     We have entered into agreements and informal relationships with other
software and computer companies under which the companies will use our products.
We believe these arrangements are important to the promotion of our products and
the public recognition of the "ImaginOn" name.  These arrangements typically are
not exclusive, and may be terminable upon little or no notice.  Termination or
alteration of these agreements could have any of the following effects on us:

     . limit or eliminate the market for our products
     . limit or eliminate public recognition of the "ImaginOn" name
     . reduce revenues
     . lower cash flows
     . impair liquidity

WE REGARD OUR PATENTED TECHNOLOGY AS PROPRIETARY.

     Our success and ability to compete is dependent on our proprietary
technology.  We regard our technology as proprietary and we rely primarily on
U.S. patent, trademark, copyright, trade secret laws, third-party non-disclosure
agreements and other methods to protect our proprietary rights.  The steps taken
by us to protect our proprietary rights may not be adequate and third parties
may infringe or misappropriate our copyrights, trademarks, and similar
proprietary rights.  Additionally, effective trademark, patent, copyright and
trade secret protection may

                                      -10-
<PAGE>

not be available in every country in which our products and media properties
will be distributed or made available through the Internet.

WE COULD BE AFFECTED BY YEAR 2000.


     We are aware of the issues associated with the programming code and
embedded technology in existing systems for the Year 2000.  The "Year 2000
Issue" arises from the potential for computers to fail or operate incorrectly
because the programs incorrectly interpret the two digit date fields "00" as
1900 or some other year, rather than the Year 2000.  The Year 2000 issue creates
risk for us from unforeseen problems in our own computer systems and from third
parties, including customers, vendors, banks etc.  Failures of our and/or third
parties' computer systems could result in an interruption in, or a failure of,
certain normal business activities or operations. Such failures could materially
and adversely affect our results of operations, liquidity, and financial
condition, though the impact is unknown at this time.


     To minimize this risk, in the first quarter 1999, our board of directors
and management went through a series of Year 2000 questionnaires and assessments
that would impact our entire operation.  These questionnaires and assessments
revealed no significant issues with our Internet service provider, technology
infrastructure, facilities or products.  Certain vendors/partners/third parties
themselves have significant Year 2000 programs, the successes of which are also
important to us.  We established a contingency plan for each critical partner,
the activation of which is dependent on the failure of the vendor/partner/third
party to achieve key milestones in their programs.  The total cost of Year 2000
activities is not material to our operations, liquidity or capital resources.
Costs were managed within each department unit.  The total estimated costs did
not exceed $20,000.  Cost excludes expenditures for replacement systems.


     We recognize that failing to resolve Year 2000 issues could increase costs
and limit our ability to conduct business operations as well as limit customers
utilization of the Internet services which we provide.

     Some commentators have stated that a significant amount of litigation will
arise out of Year 2000 compliance issues, and we are aware of a growing number
of lawsuits against other software vendors.  Because of the unprecedented nature
of such litigation, it is uncertain whether or to what extent we may be
affected.

     While we have not experienced any difficulties arising from Year 2000
issues, we cannot be certain that we may not experience such difficulties in the
future.

RISKS RELATED TO THE INTERNET AND THE INTERNET INDUSTRY

WE FACE SIGNIFICANT COMPETITION FROM OTHER PROVIDERS OF INTERNET PRODUCTS AND
COMPUTER SOFTWARE.

     The markets that we intend to enter for our Internet products and computer
software are characterized by intense competition and an increasing number of
new market entrants who have developed or are developing potentially competitive
products.  Further, the cost barriers to these markets are relatively low, which
means our competitors range from small companies with limited resources to
large, more established companies.  Some competitors, regardless of size, have
substantially greater financial, technical, marketing, distribution, personnel
and other resources.  For example, current and future competitors with greater
financial resources than us may be able to carry larger inventories, undertake
more extensive marketing campaigns, adopt more aggressive pricing policies and
make higher offers or guarantees to software developers and co-development
partners than us.  It is possible that we may not have the resources to
withstand these and other competitive forces.

WE MAY BECOME SUBJECT TO GOVERNMENT REGULATION.

     We are not currently subject to direct regulation by any government agency
in the United States, other than general business regulations applicable to
conduct businesses generally.  Currently there are few laws or regulations
regarding access to or commerce on the Internet.  Due to the increasing
popularity and use of the Internet, laws and regulations may be adopted with
respect to the Internet, covering issues such as user privacy, pricing and


                                      -11-
<PAGE>


characteristics and quality of products and services.  These laws or
regulations, if adopted, could also limit the growth of the Internet, which
could, in turn, decrease the demand for our proposed products and services and
increase our cost of doing business.  Inasmuch as the applicability to the
Internet of the existing laws governing issues such as property ownership, libel
and personal privacy is uncertain, any new legislation or regulation or the
application of existing laws and regulations to the Internet could have an
adverse effect on our business and prospects.

WE COULD BE HELD LIABLE FOR SOME OF OUR SERVICES.

     Because materials may be downloaded by the online or Internet services
operated or facilitated by us and may be subsequently distributed to others,
there is a potential that claims will be made against us for defamation,
negligence, copyright or trademark infringement, personal injury or other
theories based on the nature and content of these materials.  These types of
claims have been brought, and sometimes successfully pressed, against online
service providers.  Although we carry general liability insurance, our insurance
may not cover potential claims of this type or may not be adequate to indemnify
us for all liability that may be imposed.  Any impositions of liability or legal
defense expenses are not covered by insurance or in excess of insurance coverage
could effect our revenues, cash-flow and/or liquidity.

                                USE OF PROCEEDS


     We will not receive any proceeds from the issuance of the shares of common
stock issued upon conversion of the Series F Convertible Preferred Stock.  We
will receive approximately $344,680 from the exercise of the Group F Warrant to
purchase 122,553 shares of our common stock. However, we do not expect to
receive these proceeds until the exercise price of the Group F Warrant is below
the market price of the our common stock. In the event we do receive proceeds,
the proceeds from the exercise of the Group F Warrants will be used for working
capital.

                                DIVIDEND POLICY


     Holders of our common stock are entitled to receive such dividends as may
be declared by our board of directors.  We have not paid any dividends on our
common stock and we do not anticipate that we will pay dividends in the
foreseeable future.  Any payments of future dividends will be at the discretion
of our board of directors after taking into account various factors, such as our
financial condition, operating results, current and anticipated cash needs and
plans for expansion and restrictions in our credit documents or other
agreements.  We currently intend to retain any future earnings to fund
operations and continue development of our business.

                            SELECTED FINANCIAL DATA

     The selected financial data set forth below for the periods ended December
31, 1998, 1997, 1996, 1995, and 1994 have been derived from our consolidated
financial statements included elsewhere in this prospectus. The consolidated
balance sheets and statements of operations data as of and for each of the years
ended December 31, 1998, 1997, 1996, 1995, and 1994 have been derived from our
consolidated financial statements which have been audited by Gelfond Hochstadt
Pangburn & Co. The consolidated balance sheet data and consolidated statement of
operations data as of September 30, 1999, and for each of the nine month periods
ended September 30, 1999 and September 30, 1998, have been derived from
unaudited consolidated financial statements and, in our opinion, includes all
adjustments, consisting only of normal recurring adjustment, necessary for a
fair presentation of the information. Our results for period ended September 30,
1999 are not necessarily indicative of the results we many achieve for the full
year. Because of our recent change in business, the historic information
reflected below may not be a good basis for evaluating our current and future
performance. You should read this information together with the financial
statements and related notes included in this prospectus and the information
under the heading "Management's discussion and analysis of financial condition
and results of operation" in this prospectus.

                                      -12-
<PAGE>

<TABLE>
<CAPTION>

                                      September 30                                   Years Ended December 31
                              ----------------------------    ---------------------------------------------------------------------
                                 1999(2)         1998(1)         1998(1)         1997           1996          1995         1994
                              ------------    ------------    ------------   ------------   ------------   -----------  -----------
<S>                            <C>            <C>              <C>            <C>           <C>             <C>          <C>
STATEMENT OF
OPERATIONS DATA:

Net Sales                     $    259,783    $        223              --   $  9,087,767   $ 16,952,904   $17,128,711  $16,468,567

Gross Profit                       161,244             223              --      1,642,423      2,891,870     4,973,168    4,603,835

Income (loss)                 $ (4,906,801)   $ (1,252,341)   $ (2,729,826)  $ (4,075,182)  $ (4,690,853)  $   428,847  $   302,126
from operations

Income (loss)                 $ (4,854,090)   $ (1,294,663)   $ (3,497,587)  $ (5,192,920)  $ (5,575,882)  $    35,456  $  (170,518)
before extraordinary item     ============    ============    ============   ============   ============   ===========  ===========

Extraordinary item                      --              --              --        383,705             --            --           --

Net income (loss)             $ (4,854,090)   $ (1,294,663)   $ (3,497,587)  $ (4,809,215)  $ (5,575,882)  $    35,456  $  (170,518)

Net income (loss) applicable  $ (6,064,019)   $ (1,294,663)   $ (4,617,587)  $ (4,809,215)  $ (5,575,882)  $    35,456  $  (170,518)
 to common shareholders       ============    ============    ============   ============   ============   ===========  ===========

Earnings (loss)
per share:
before extraordinary items    $       (.16)   $       (.06)   $      (0.48)  $      (0.94)  $      (1.37)  $      0.01  $     (0.08)

Extraordinary item                      --              --              --           0.07             --            --           --

Loss per common share         $       (.16)   $       (.06)   $      (0.48)  $      (0.87)  $      (1.37)  $      0.01  $     (0.08)
                              ============    ============    ============   ============   ============   ===========  ===========
Weighted average common         37,786,268      20,581,152       9,549,353      5,544,833      4,078,864     3,599,320    2,225,054
 shares outstanding           ============    ============    ============   ============   ============   ===========  ===========
</TABLE>

<TABLE>
<CAPTION>
                                        September 30,                                        December 31,
                              ----------------------------    ---------------------------------------------------------------------
                                   1999            1998           1998           1997           1996          1995         1994
                              ------------    ------------    ------------   ------------   ------------   -----------  -----------
<S>                           <C>             <C>              <C>            <C>           <C>            <C>           <C>
BALANCE SHEET DATA:
Current assets                $  3,639,410    $  3,262,552    $  2,304,830   $  1,377,907   $ 10,676,181   $ 7,699,602  $ 7,452,510
Total assets                     6,116,199       3,984,172       2,558,615      2,268,627     21,069,743    10,290,350   10,181,601
Working capital (deficiency)     2,854,303       1,646,195         807,733       (400,625)    (5,263,933)    2,399,163   (2,748,900)
Shareholders' equity             5,331,092       2,337,160       1,005,198        104,946      1,074,255     4,989,350      (19,809)
(deficiency)
</TABLE>

(1) During 1998 we did not have any significant revenues.
(2) On January 20, 1999, the company completed a merger with ImaginOn.com, Inc.
(IMON)The transaction was recorded as an acquisition of ImaginOn, Inc. by IMON
and a recapitalization of IMON.

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

OVERVIEW


     You should note that our business materially changed after December 31,
1998.  We are no longer a participant in the in-line skate business, hockey
business or snowboard business.  We are an information technology company.
Except as otherwise described in this prospectus, the financial information in
this prospectus is given through September 30, 1999.  The information in this
prospectus is mainly historical.

                                      -13-
<PAGE>


RECENT DEVELOPMENTS

     On December 31, 1999, we completed a $5 million private placement of our
restricted common stock through our investment banker, Ladenburg Thalmann & Co.,
Inc.  The net proceeds of $4,700,000 from the placement offering will be used
primarily to fund the marketing of our ImOn.comTV product.  In the offering, we
sold 1,873,360 shares of common stock for $2.67 per share and issued warrants to
acquire up to 749,344 shares of common stock at an exercise price of $3.34 per
share.  The warrants will expire on March 30, 2002.

     In November of 1999, we closed the Imagine Digital Productions I, Inc.
(IDP) in Aspen, Colorado and transferred the IDP operations to our office in San
Carlos, California.  We are continuing to integrate our IDP technology and our
TDPP technology towards developing additional WorldCities 2000 destination
travel planners and Resorts 2000 destinations.

     On September 9, 1999, we released the latest enhanced WebZinger 7.0
version. WebZinger 7.0 incorporates a number of new features, including an
enhanced consumer interface.  This release of WebZinger 7.0 was supported by our
first national consumer print, television and radio advertising campaign,
created by Holland Advertising. The campaign began on August 21 and ended
November 15, 1999.  The campaign included 25 nationwide college and university
markets on top cable networks like Comedy Central, MTV, ESPN, ESPN2 and E!, as
well at high profile campus movie events.  The first television advertisement
started in San Francisco, with nine television spots running on KBHK-TV's
special "Star Trek- The Next Generation" marathon. These initial nine spots
generated over 25,000 hits to www.WebZinger.com in that weekend alone.   After
six weeks into our first national consumer advertising campaign, there were more
than 500,000 hits and the Web traffic continued to grow with per-day free trial
downloads.  The campaign also included demo CD's and print ads in the college-
market focused consumer magazine "LINK" and banner ads on top college sites.

     At the 1999 ISPCON, an industry convention, we unveiled our high-bandwidth
Internet portal, www.ImOn.com, showcasing Internet based interactive television
based on our technology.  Our www.ImOn.com portal is a demonstration site for
ImOn.comTV, which is our turnkey Internet television station product targeted at
businesses that want to upgrade their Web Presence to serve Internet and
intranet users who are connected to the Internet at high speed via T1, cable
modem or DSL.

     The portal provides a variety of functions, including real-time on-line
media searches, interactive TV, music, videos, video games, interactive video
travel planners and video shopping catalogs.  Also included, among others are
traditional features like e-mail, calendar/date books, and customized news
channels. Furthermore, many of the interactive TV programs and commercials
within the portal were built with our "ImaginAuthor" authoring system.

     On September 14, 1999, we announced that we were one of 45 companies around
the world selected by Sony Computer Entertainment, Inc. to provide middleware to
developers creating content for the Internet-enabled Sony PlayStation2(R)
platform scheduled for launch in 2000. Our Chief Executive Officer was invited
and presented ImaginAuthor at Sony's PS2 Developers Conference in Japan during
the week of September 20th.  We were the only company there whose authoring
system supports seamless n-way branching of digital film with integrated
Internet access.  With this unique capability, we expect to license ImaginAuthor
to independent developers creating content for the new Sony
PlayStation2(R).


DISCONTINUED BUSINESS

     Effective December 31, 1998, we, operating under the name of California Pro
Sports, Inc., materially changed our business operations from the in-line skate,
snowboard and hockey business to information technology. The information in this
section is mainly historical and does not reflect our current operating
business.

     Until December 31, 1998, under previous management, we operated under the
name of California Pro Sports, Inc., and imported and distributed products in
three participant sports categories:

     .  in-line skates
     .  hockey
     .  snowboards

                                      -14-
<PAGE>


     In-line skates and related accessory products were marketed under the brand
names California Pro(R) and Rolling Thunder; since August 1, 1994, snowboards
and snowboard accessory products were marketed under the Kemper(R) brand; and
ice and street/roller hockey skates, sticks, related gear and accessories, as
well as figure skates were marketed under the VICTORIAVILLE, VIC(R), Hespeler
and McMartin(R) brands.  We purchased most of our in-line skate and snowboard
products from manufacturers in Taiwan, mainland China, Austria and Canada. Some
of our accessory products were purchased from domestic suppliers.  Approximately
70% of all hockey products sold were manufactured by Davtec, our subsidiary, and
skates and related gear were purchased from foreign suppliers.

     We sold our in-line skate products principally to major retail sporting
goods chains in North America and to U.S. military exchanges worldwide, through
independent sales representative groups, under an exclusive royalty free
perpetual license.  Snowboard products were sold to regional sporting goods
chains and specialty shops through independent sales agencies in the U.S. and
Canada and directly by us to our foreign distributors.  Hockey products were
sold in North America through a network of independent sales representative
groups to major retail sporting goods chains as well as smaller, specialized
independent sporting goods shops.  Internationally, hockey products were sold to
and distributed by independent distributors located in Germany, Switzerland,
Italy, Austria, Czech Republic, Sweden, France, Finland and Brazil.  In 1996 and
1997, due to continuing operating losses, management decided to restructure and
reduce its debt.  Accordingly, in September 1997, we completed the sale of
substantially all of our hockey business assets of Skate Corp.'s direct and
indirect operating subsidiaries, USA Skate and Davtec, to Rawlings Sporting
Goods company, Inc. and Rawlings Canada, Inc.  Consideration to Skate Corp.
consisted of $14.5 million cash, including $1 million retained in escrow for
purchase price adjustments and proven claims by the purchasers, and assumption
of trade payables and accrued liabilities related to the assets purchased.

     An additional component of the restructuring plan included management's
decision to cease operating its California Pro and Kemper licenses, eliminate
most of the operating and overhead expenses associated with its sporting goods
business and begin to concentrate on sub-licensing its trademark rights.
Accordingly, in the second quarter of 1997, we began liquidating remaining
inventories and commenced a search for sub-licensees and a merger candidate.  In
1998, we had no operating revenues, but did realize income from sub-licensing
agreements.

THE MERGER TRANSACTION


     October 2, 1997 we signed a Letter of Intent with ImaginOn.com to merge a
wholly owned subsidiary corporation with ImaginOn.com, whereby there would be an
exchange of 100% of the outstanding ImaginOn.com for an amount equal to 60% of
our outstanding post merger common stock, subject to certain adjustments.


     At a special meeting of our stockholders, held December 10, 1998, the
stockholders approved the proposed merger and also approved changing our name
from California Pro Sports, Inc. to ImaginOn, Inc.  On January 20, 1999,
ImaginOn through ImaginOn Acquisition Corp., completed the merger with
ImaginOn.com.  The shareholders of ImaginOn.com became stockholders of ImaginOn,
Inc. and were issued 20,206,115 shares of ImaginOn common stock.

NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998

     Results of Operations. The following discussion and analysis of ImaginOn's
financial condition and results of operations should be read in conjunction with

                                      -15-
<PAGE>

the condensed consolidated financial statements and notes.  The following table
sets forth certain operating data of ImaginOn for the periods indicated below.

<TABLE>
<CAPTION>
                               Three months ended          Nine months ended
                                  September 30,               September 30,
                               1999          1999          1999         1998
                           -----------    -----------  -----------   -----------
<S>                       <C>            <C>          <C>           <C>
Net revenues              $   168,721    $     148    $   259,783   $       223
Gross profit                  130,887          148        161,244           223
Research and development      206,906      179,809        818,581       711,293
Sales and marketing           719,999       39,538      2,076,463       306,782
General administrative        884,556      122,103      2,173,001       234,489
Net loss                   (1,633,021)    (363,909)    (4,854,090)   (1,294,663)
</TABLE>
"Consolidated" three and nine months ended September 30, 1999 compared to
September 30, 1998 of "ImaginOn.Com", before merger with California Pro Sports,
Inc.


     Net Revenues. Consolidated net revenues for the three and nine months ended
September 30, 1999 increased to $168,721 from $148 in 1998 and to $259,783 from
$223 in 1998 respectively. Approximately 91% of this revenue were from iNOW the
Internet service provider.   For the three and nine months ended September 30,
1998, we were still in the developmental stage and thus, revenues were very
minimal. During this third quarter 1999, we began an advertising and marketing
campaign for WebZinger with increasing revenues of $7,235 and the two
acquisitions of iNOW having $153,474 and IDP having $8,012 total revenues.

     Gross Profit. Gross profit for the three and nine months ended September
30, 1999 and 1998 increased to $130,887 from $148 in 1998 and to $161,244 from
$223 in 1998, respectively.


     Research and Development Expenses. Research and Development expense for the
three months ended September 30, 1999 increased to $206,906 compared to that for
September 30, 1998 of $179,809. This increase was due to additional personnel in
this department.  There was $14,650 for additional purchase of computer and
software equipment and supplies.  These items were all less than $1,000, and
thus, not capitalized.   A $12,096 payment for costs associated with the Sony
Computer Entertainment, Inc. licenses to use for development tools in regards to
the ImaginOnAuthor and Sony PlayStation2(R).  The remaining $6,902 was for
general expenses such as travel, books, and communications. For the nine months
ended September 30, 1999 research and development expenditures increased to
$818,581 compared to that for the nine months ended to September 30, 1998 of
$711,293.  This increase primarily resulted from the continual growth of
personnel in the software and video production department, for improvements such
as WebZinger, WorldCities 2000, video production related to the new ImOn.com
portal and interactive Internet TV technology, and sellOnstream.


     Sales and Marketing Expenses. For the three months ended September 30,
1999, sales and marketing expenses increased to $719,999 compared to the three
months ended September 30, 1998 of $39,538. This increase is due mainly from the
nationwide advertisement and marketing campaign of WebZinger at $473,918, and
for marketing and advertisement of $41,823 for WorldCities 2000 products.
Another $48,000 was expended for the ImOn.com portal graphic design project,
$17,397 and $6,779 for general marketing and advertisement for iNOW and IDP was
spent respectively. Other expenses are for employee payroll and outside sales
and consulting fees of $83,935,  $27,210 for travel and the remaining $20,937
are for sales and marketing supplies, communication, and printing and
reproduction, promotion and related expenses. For the nine months ended
September 30, 1999,

                                      -16-
<PAGE>


sales and marketing expenses increased to $2,076,463 compared with the nine
months ended September 30, 1998 of $306,782, due to our expansion and
growth.


     General and Administrative Expenses. For the three months ended September
30, 1999 these expenses increased to $884,556 compared to the three months ended
September 30, 1998 of $122,103.  The majority of this increase was from payroll
of  $450,553 which included $50,000 bonuses to two executive officers, and
$204,173 for amortization expense for intangible assets of iNOW and Imagine
Digital Productions, $109,429 for legal and auditing expenses, and $27,494 for
rent.  The remaining $92,907 was for general office expenses such as supplies,
furniture, computer equipment, depreciation, insurance and travel expenses. For
the nine months ended September 30, 1999, these expenses increased to $2,173,001
compared to $234,489  nine months ended September 30, 1998 of theses expenses.
This increase was due to the two acquisitions and our growth.

     Interest Expense and Income, Net. For the three months ended September 30,
1999 there was no interest expense primarily due to the elimination of monthly
bridge loans incurred for the Cal Pro and ImaginOn.com merger, compared to the
three months ended September 30, 1998 of $22,621.  Net interest income of
$48,795 was earned from bank deposits such as money market and CD assets
compared to $14 in September 30, 1998. For the nine months ended September 30,
1999, interest expense decreased to $28,203 compared to $42,632 for the nine
months ended September 30, 1998. This difference was primarily due to the
reversal then elimination of the monthly bridge loans incurred from the Cal Pro
merger.  Interest income for the  nine months ended September 30, 1999 was
$55,034 compared to $310 ended September 30, 1998.  Other income for the nine
months ended September 30, 1999 was $64,177 compared to none for the nine months
ended September 30, 1998.

     Liquidity and Capital Resources. As of September 30, 1999, we had cash of
$3,365,483 and  working capital of $2,854,303 as compared to cash of $8,774 and
a working capital deficit of $1,281,991 at September 30, 1998. We used cash of
$3,918,528 in the operating activities for the nine months ended September 30,
1999. During the nine months ended September 30, 1999 the principal uses of cash
were to fund our working capital requirements as well as the purchase of two
acquisitions.

     We expect to incur further losses at least through the end of calendar
1999. However, we are actively seeking additional funding during calendar 1999.
In the absence of receiving additional funding, we anticipate that our existing
capital resources and cash generated from operations, will be adequate to meet
the cash requirements for approximately the next ten months at the anticipated
level of operations. Failure to obtain funding would have a material adverse
effect on our business, financial condition and results of operations. We cannot
assure that any additional financing will be available on acceptable terms, or
at all, when required by us.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

Effective December 31, 1998, we, operating under the name of California Pro
Sports, Inc. materially changed our operations and no longer operated in the in-
line skate, snowboard and hockey business.  We are now an information technology
company as of January 20, 1999.  The information in this section is mainly
historical and does not reflect our current operating business.

     Net Sales.  Net sales for the year ended December 31, 1997 were $9,087,767;
comprised of $7,777,000 for the 1997 period of hockey related products (January
1 through August 31) and sales for our in-line skate and snowboard products
$1,311,000 in the 1997 period.  In 1997, we sold substantially all of the assets
of Skate Corp.'s direct and indirect operating subsidiaries and also ceased
operating our California Pro and Kemper licenses, and began to seek sub-licenses
for these brands.  In 1998, we recognized $103,643 of royalty and other income
compared to $62,312 in the 1997 period.

     Gross Profit.  Gross profit was $1,642,423 for the year ended December 31,
1997.  As a percent of sales, gross profit was 18% in 1997.

     General Administrative and Selling Expenses.  General and administrative
expenses decreased to $2,060,000 for the year ended December 31, 1998, compared
to $5,270,153 for the year ended December 31, 1997. This represents a decrease
of $3,210,152.  The primary reason for the decrease is attributable to our
selling substantially all of the assets of the operating subsidiaries of Skate
Corp. in September 1997.  Included in the 1997 expenses were approximately
$989,000 of selling expenses and $1,561,000 of general and administrative
expenses. Additionally, sales and marketing expenses related to in-line skates
and snowboards decreased by approximately $279,000 in 1998 compared to 1997 as
we no longer directly marketed those product lines and relied instead on our
sub-licensees to market the brands.

     Consulting Fees, Related Party.  Consulting fees, related party decreased
to $180,000 for the year ended December 31, 1998 from $210,000 for the year
ended December 31, 1997.  We paid an officer/ stockholder $10,000

                                      -17-
<PAGE>

per month for services primarily related to long-term strategic planning,
financing and acquisitions and paid an additional $30,000 from USA Skate during
1998. Another officer/stockholder also received $30,000 from USA Skate during
1998. In 1997 $5,000 was paid per month from USA Skate each to two
officers/directors prior to the time we sold substantially all of the operating
assets of USA Skate's operating subsidiaries.

     Impairment Charges.  For the year ended December 31, 1998, we had
impairment charges of $489,825. These charges related to management's re-
evaluation of certain trademarks and licenses ($327,273), other intangibles
($81,825) and goodwill ($80,723).  In 1997, we had impairment charges of
$237,452 related to our write-off of goodwill, which resulted from the sale of
our hockey assets.

     Loss from Operations.  For the year ended December 31, 1998, we had a loss
from operations of $2,729,826 compared to $4,075,182 for the year ended December
31, 1997.  The decrease in the loss of $1,345,356 was a result of lower
operating expenses of $2,987,779 in 1998 compared to in 1997, which were
partially offset by the gross profit of $1,642,423 that was recognized in 1997.

     Other Income/Expenses.  Other expenses for the year ended December 31, 1998
were $709,509 compared to $2,011,339 for the year ended December 31, 1997.  The
decrease of $1,301,830 was primarily attributable to the 1997 loss on the sale
of USA Skate assets (see Note 4 to the consolidated financial statements) of
$751,522 and interest expense related to the operations of USA Skate.
Additionally, interest expense on USA Skate notes was approximately $265,000 in
1997, compared to $105,000 in 1998.

     Income Tax Benefit.  For the year ended December 31, 1997, we had an income
tax benefit of $166,404.

     Liquidity and Capital Resources.  Through September 1, 1997, we funded our
operations principally through a $5.5 million revolving credit facility with a
bank, and, to a lesser degree, loans from private investors and trade credit.
Concurrent with the sale of the USA Skate assets, the revolving line of credit
facility was repaid in full and our other indebtedness was significantly
reduced.

     On September 12, 1997, we sold substantially all of the assets of our
hockey business for $14,500,000 inclusive of $1,000,000 retained in escrow for
purchase price adjustments and proven claims by the purchasers, and assumption
of trade payables and accrued liabilities of approximately $1,600,000 related to
the asset purchased. The proceeds were utilized as follows:

     Secured revolving lines of credit         $ 7,984,000
     Convertible note holders                      949,000
     Secured debt                                  519,000
     Other notes                                   100,000
     Stockholder notes                             505,000
     Payment to previous USA Skate owners        2,678,000
     Interest payments                              85,000
     Cash to escrow account                      1,000,000
     Cash in bank                                  680,000
                                               -----------
                                               $14,500,000

     In February 1998, Rawlings and us agreed to a purchase price reduction of
$395,108 due to a final valuation by Rawlings of the fair value of the net
assets purchased.

     During 1998, we issued 167,754 shares of Series A preferred stock in a
private placement in which we received $166,653.  On July 15, 1998, we issued
525,262 shares of our common stock in exchange for the 167,754 Series A
preferred stock shares.  Also in 1998, we issued 2,080 shares of Series B and C
convertible preferred stock (further described in note 7 to the consolidated
financial statements) for $1,660,026 net of offering costs.

     Finally, during 1998, we received $440,000 for the sale of 580,000 shares
of restricted common stock.

                                      -18-
<PAGE>


     At December 31, 1998, we had working capital of approximately $807,733
compared to a deficit of $400,625,312 at December 31, 1997.  The increase in
working capital was primarily related to our realizing net proceeds of
approximately $2,267,000 from various private placements as described above, and
our converting approximately $684,000 of debt to equity.

     On October 2, 1997, we signed a letter of intent to merge with ImaginOn.
Subsequently, we signed an agreement and plan of merger as of January 30, 1998
whereby there was an exchange of 100% of the outstanding shares of ImaginOn for
an amount equal to 60% of the outstanding post merger our common stock. ImaginOn
is a developmental stage company engaged in the business of designing,
manufacturing and selling consumer software products for the rapidly growing
"edutainment" CD/DVD ROM market as well as an Internet utility and an authoring
tool. ImaginOn's proprietary technology, TDPP, enables the creation of new
business and consumer products that provide user-friendly and entertaining
access to multimedia and mixed-format databases distributed across local disk
storage and networks.

     For payments to foreign suppliers, we utilized trade acceptances, which
generally were paid upon receipt of documentation by our bank, but no later than
time of delivery, utilizing available cash under our revolving line of credit.
For 1997, we negotiated with our suppliers to be paid 50% upon shipment and 50%
on 90 day terms.

     Seasonality.  Our in-line skate and hockey related sales were strongest in
the second and third quarters of each calendar year.  Snowboard product sales
were strongest during the third and fourth quarters of each calendar year.

     Foreign Exchange.  Through September 1997, our products were principally
purchased from suppliers located in Taiwan, mainland China, Korea, Austria and
Canada.  We purchased our in-line skate products for set prices negotiated
annually in U.S. dollars at exchange rates reset annually.  We purchased our
snowboards in Deutsche Marks.  We sold our snowboard and hockey products both
domestically and internationally.  We did not engage in hedging activities.

     Legal Proceedings.  We were named as a defendant in a lawsuit styled
Timothy Wayne Wooten and Tammy Marie Wooten v. Amy Marie Abott and California
Pro Sports, Inc.  The action was filed on October 21, 1998 in the District Court
of Midland, Texas, 238/th/ Judicial District alleging a product defect that
resulted in a wrongful death.  Plaintiffs seek damages in an amount not less
than $10,000,000.  We referred the petition to our insurer, which thereafter
provided a defense.  We intend to vigorously defend ourselves and believe the
matter will be resolved in our favor.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

     Net Sales.  Net sales for the year ended December 31, 1997 decreased to
$9,087,767 from $16,952,904 or by $7,865,137 represented an approximate decrease
of 46%.  This decrease was primarily caused by a reduction of sales of our
hockey products from $11,005,000 in the 1996 period (May 1 through December 31)
to $7,777,000 for the 1997 period (January 1 through August 31).  The reason for
the decline in sales of our hockey products was primarily due to the timing of
our majority ownership position.  The 1996 (May through December) period
included the months when sales activity was the highest while the 1997 time of
majority ownership (January through August) excluded some of the historically
higher sales months.  Additionally, sales for our in-line skate and snowboard
products decreased from $5,948,000 in the 1996 period to $1,311,000 in the 1997
period.  The cause of this decrease included new competitors entering both the
in-line skate and snowboard markets with new product features that took away our
market share.  This significant decrease was a major factor in management's
decision to cease operating its California Pro and Kemper licenses and
concentrated on sub-licensing its trademark rights.

     Gross Profit.  Gross profit decreased to $1,642,423 for the year ended
December 31, 1997 compared to $2,891,870 for the year ended December 31, 1996.
As a percent of sales, gross profit increased to 18.2% in 1997 from 17.1% in
1996.  The primary reason for the increase in gross profit percentage was the
inventory markdowns and adjustments of $1,059,750 incurred by us in 1996
attributable to remaining in-line skate and snowboard

                                      -19-
<PAGE>


inventory. We believed the write downs and adjustments, which accounted for an
approximate 6.3% decline in our gross profit, were necessary to reflect the then
current market value of our inventory.

     Sales and Marketing Expenses.  Sales and marketing expenses decreased to
$1,253,670 for the year ended December 31, 1997, compared to $2,434,255 for the
year ended December 31, 1996.  This represents a decrease of $1,180,585 or
48.4%.  Of this decrease, sales and marketing expenses related to our in-line
skate and snowboard business decreased by $1,059,319 to $263,829 in 1997
compared to $1,359,148 in 1996.  This decrease was due to management's decision
to cease acting distribution of its California Pro and Kemper licensed products.

     General and Administrative Expenses.  General and administrative expenses
increased to $3,387,882 for the year ended December 31, 1997, compared to
$3,037,751 for the year ended December 31, 1996.  This represented an increase
of $350,131.  The primary reason for the increase was attributable to increases
in the following 1997 general and administrative expenses related to USA Skate;
professional fees ($209,250), consulting ($147,375) and bad debt expense
($293,672).  Additionally in 1996, USA Skate reduced its accounts receivable
reserve by $208,000.  These 1997 increases were partially offset by a reduction
in our general and administrative expenses related to in-line skates and
snowboards due to management's decision to cease active distribution of its
California Pro and Kemper licensed products.

     Depreciation and Amortization.  Depreciation and amortization decreased to
$628,601 for the year ended December 31, 1997 from $681,717 for the year ended
December 31, 1996.  The decrease of $53,116 was mainly attributable to decreased
depreciation and amortization of intangible assets as a result of the USA Skate
sale on September 12, 1997.

     Consulting Fees, Related Party.  Consulting fees, related party increased
to $210,000 for the year ended December 31, 1997 from $200,000 for the year
ended December 31, 1996.  We paid an officer/stockholder $10,000 per month for
services primarily related to long-term strategic planning, financing and
acquisitions and an additional $5,000 from USA Skate during the time of our
majority ownership position.  Another officer/stockholder received $5,000 per
month from USA Skate during the time of our majority ownership position.


     Restructuring Charges.  For the year ended December 31, 1997 we recorded a
restructuring charge of $237,452 related to the write down of our investment in
Skate Corp.  For the year ended December 31, 1996, we had restructuring charges
of $1,229,000.  These charges related to management's plan for restructuring
operations, whereby, we wrote off $411,700 related to certain equipment (molds)
for certain of our in-line skate and snowboard product lines.  Additionally, we
re-evaluated certain trademarks and licenses and other intangibles and recorded
expenses of $368,000 and $205,700, respectively.  We signed a distribution
agreement with Skate Corp. to distribute California Pro and Kemper branded
products, resulting in the closure of the previous distribution facility and
termination of warehouse employees at an expense of $76,500 and $22,100,
respectively.  Finally, we wrote off previously deferred expenses related to a
potential acquisition that we elected not to pursue to completion.

     Loss From Operations.  For the year ended December 31, 1997, we had a loss
from operations of $4,075,182 compared to $4,690,853 for the year ended December
31, 1996.  The decrease in loss of $615,671 was a result of a decrease in gross
profit of $1,249,447 and an increase in operating expenses of $1,865,118 offset
by decreases in sales and marketing expenses of $1,180,855, as described above.
Additionally, the restructure charge of $1,229,000 negatively affected the 1996
results of operations.

     Other Income/expenses.  Other expenses for the year ended December 31, 1997
were $2,011,339 compared to $935,848 for the year ended December 31, 1996.  The
increase of $1,055,491 was primarily attributable to the loss on the sale of USA
Skate assets  of $751,522 and other finance fees for the refinancing of the USA
Skate notes of $440,643.  These increases were offset by decreases in interest
expense/other of $414,134 and a gain recorded in 1996 of $479,100 on the book
value of Skate Corp. stock held by California Pro.  The 1996 gain was offset by
a loss on marketable securities of $144,457 that we had received in settlement
of certain obligations.

     Income Tax Benefit.  For the year ended December 31, 1997, we had an income
tax benefit of  $166,404 compared to $244,500 for the year ended December 31,
1996.

                                      -20-
<PAGE>


     Liquidity and Capital Resources.  During 1996 and through September 1,
1997, we funded our operations principally through a revolving credit facility
with a bank, and, to a lesser degree, loans from private investors and trade
credit.  Concurrent with the sale of the USA Skate assets, the revolving line of
credit facility was repaid in full and our other indebtedness was significantly
reduced.

     On September 12, 1997, we sold substantially all of the assets of our
hockey business for $14,500,000 inclusive of $1,000,000 retained in escrow for
purchase price adjustments and proven claims by the purchasers, and assumption
of trade payables and accrued liabilities of approximately $1,600,000 related to
the assets purchased. The proceeds were utilized as follows:

               Secured revolving lines of credit         $ 7,984,000
               Convertible noteholders                       949,000
               Secured debt                                  519,000
               Other notes                                   100,000
               Stockholder notes                             505,000
               Payment to previous USA Skate owners        2,678,000
               Interest payments                              85,000
               Cash to escrow agent                        1,000,000
               Cash in bank                                  680,000
                                                         $14,500,000
                                                         ===========

     In February 1998, Rawlings and us agreed to a purchase price reduction of
$395,108 due to a final valuation by Rawlings of the fair value of the net
assets purchased.  At December 31, 1997, we had a working capital deficit of
approximately $400,625 compared to $5,264,000 at December 31, 1996.  The
reduction in the working capital deficit is primarily related to the sale of USA
Skate as well as converting debt to equity and negotiating settlements at less
than the recorded liability.

     In addition, we announced that the exercise price of our publicly traded
common stock purchase warrants were reduced from $6.00 to $1.50 per share and
the expiration date was extended from January  18, 1998 to December 31, 1998.

     For payments to foreign suppliers, we utilized trade acceptances, which
generally are payable upon receipt of documentation by our bank, but no later
than time of delivery, utilizing available cash under our revolving line of
credit.

     Seasonality.  Our in-line skate and hockey related sales were strongest in
the second and third quarters of each calendar year.  Snowboard product sales
were strongest during the third and fourth quarters of each calendar year.

     Foreign Exchange.  Our products were principally purchased from suppliers
located in Taiwan, mainland China, Korea, Austria and Canada.  We purchased our
in-line skate products for set prices negotiated annually in U.S. dollars at
exchange rates reset annually.  We purchased our snowboards in Deutsche Marks.
We sold our snowboard and hockey products both domestically and internationally.
As a result, extreme exchange rate fluctuations could have had a significant
effect on our sales, costs of goods sold and our gross margins.

                                      -21-
<PAGE>


YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

     We commenced operations on April 1, 1993, when we acquired the in-line
skate business from SCYL, the predecessor company.  The assets acquired from the
predecessor have been recorded at their carrying value to the predecessor.
Except for the amortization of the purchased intangibles, the accounting bases
used by the company are the same as used by the predecessor.

     On August 1, 1994, we acquired certain assets, including an exclusive,
perpetual worldwide  license to the Kemper/(R)/ name and trademark, subject to a
royalty, and approximately $3.5 million of existing purchase orders for
Kemper/(R)/ snowboard products.

     Effective April 30, 1996, We, through our subsidiary, USA Skate Corp.,
began selling hockey related products under an exclusive worldwide license to
the VIC/(R)/, VICTORIAVILLE/(TM)/ and McMartin/(R)/ brand names.

     Net Sales.  Net sales for the year ended December 31, 1996 decreased to
$16,952,904 from $17,128,711 or by $175,807, representing an approximate
decrease of 1.0%.  This decrease was primarily attributable to the decrease in
revenues of $6,126,000 and $5,055,000 of our California Pro in-line skates and
Kemper(R) snowboard products, respectively.  This decrease was offset by
including $10,949,000 of our ice and street/roller hockey equipment sales due to
the acquisition of USA Skate effective April 30, 1996.  We believed the decline
in sales was caused by high inventory levels of in-line skate and
snowboard products at some of our major retail accounts as well as more
competitors entering the snowboard business, some with greater financial and
other resources than us.

     Gross Profit.  Gross profit decreased to $2,891,870 for the year ended
December 31, 1996 compared to $4,973,168 for the year ended December 31, 1995.
As a percent of sales, gross profit decreased to 17.1% in 1996 from 29% in 1995.
The primary reasons for the decline in gross profit were sales at reduced
margins for our in-line skate and snowboard products.  Additionally, we incurred
inventory markdowns and adjustments of $1,059,750 in 1996 attributable to
remaining in-line skate and snowboard inventory.  We believe these write downs
and adjustments, which accounted for an approximate 6.3% decline in its gross
profit, were necessary to reflect the then current market value of our
inventory.

     Sales and Marketing Expenses.  Sales and marketing expenses increased to
$2,434,255 for the year ended December 31, 1996, compared to $1,758,221 for the
year ended December 31, 1995.  This represented an increase of $676,034 or
38.4%.  Sales and marketing expenses related to our in-line skate and snowboard
business were $1,359,148 in 1996 compared to $1,758,221 in 1995, which
represented a decrease of $399,073.  This decrease was offset by the additional
sales and marketing expenses of $1,075,107 related to the revenues of our hockey
business which we acquired effective April 30, 1996.

     General and Administrative Expenses.  General and administrative expenses
increased to $3,037,751 for the year ended December 31, 1996, compared to
$2,121,855 for the year ended December 31, 1995.  This represented an increase
of $892,564.  The primary reason for the increase was attributable to $746,887
of general and administrative expenses incurred within our acquired (effective
April 30, 1996) hockey business.

     Depreciation and Amortization.  Depreciation and amortization increased to
$681,717 for the year ended December 31, 1996 from $544,245 for the year ended
December 31, 1995.  The increase of $137,472 was mainly attributable to
depreciation and amortization of $301,437 related to our acquisition of USA
Skate effective April 30, 1996.

     Consulting Fees, Related Party.  Consulting fees, related party were
$200,000 for the years ended December 31, 1996, an increase from $120,000 in
1995.  We paid an officer/shareholder $10,000 per month for services primarily
related to long-term strategic planning, financing and acquisitions.

     Restructuring Charges.  For the year ended December 31, 1996, we had
restructuring charges of $1,229,000.  These charges related to Management's plan
for restructuring operations.  As a result of the restructuring plan, we wrote
off $411,700 related to certain equipment (molds) for certain of our in-line
skate and snowboard product lines.  Additionally, we re-evaluated certain
trademarks and licenses and other intangibles and recorded expenses of $368,000
and $205,700, respectively.  We signed a distribution agreement with Skate Corp.
to distribute California Pro and Kemper branded products, which resulted in the
closure of the previous distribution facility and terminating warehouse
employees at an expense of $76,500 and $22,100.  Lastly, we wrote off previously
deferred expenses related to a potential acquisition that we elected not to
pursue to completion.


                                      -22-
<PAGE>


     Income (Loss) from Operations.  For the year ended December 31, 1996, we
had a loss from operations of $4,690,853 compared to income from operations of
$428,847 for the year ended December 31, 1995. The decrease of $5,119,700 was a
result of a decrease in gross profit of $2,081,298 and increases in sales and
marketing and general and administrative of $676,034 and $892,564, respectively
as described above.  Additionally, the restructure charge of $1,229,000
negatively affected the results of operations.

     Other Income/Expenses.  Other expenses for the year ended December 31, 1996
were $935,848 compared to $280,491 for the year ended December 31, 1995.  The
increase of $655,351 was primarily attributable to interest and other expenses
relating to the acquisition and operation of USA Skate of $1,047,308.  This was
partially offset by a decrease of $391,951 within California Pro.  This decrease
was a direct result of a gain recorded of $479,100 on the book value of Skate
Corp. stock held by California Pro as well as a gain recognized on debt
conversion of $111,366 which were offset by a loss on marketable securities of
$144,457 that we received in settlement of certain obligations.

     Income Tax Expense (Benefit).  For the year ended December 31, 1996, we had
an income tax benefit of $244,500 compared to an income tax expense of $112,900
for the year ended December 31, 1995.

     Liquidity and Capital Resources.  During 1996, we funded our in-line skate
and snowboard operations principally through a $5.5 million revolving credit
facility with a bank, and, to a lesser degree, loans from private investors and
trade credit.  During the first quarter of 1995, we completed our IPO and
realized net proceeds of approximately $4.2 million after payment of offering
expenses.

     Under the bank credit facility related to our in-line skate and snowboard
businesses, the amount we could have borrowed was limited by the level of its
eligible accounts receivable and inventory.  As of December 31, 1996, based upon
the agreed to formulas, the bank was under collateralized by $808,000.
Accordingly, there were no further advances under the in-line skate and
snowboard line of credit.  The U.S. and Canadian bank credit facilities related
to our hockey business were structured the same.  Borrowing was limited to 50%
of eligible inventory, plus 75% of accounts receivable, and was collateralized
by the accounts receivable and inventory.  Loans under the agreements beared
interest at one percent above the bank's prime rate and were due on demand.  The
loan agreement also required the respective operating subsidiaries to maintain a
certain tangible net worth and restricted its ability to (i) incur additional
obligations or debt; (ii) pay dividends on its capital stock; (iii) enter into
any transaction of merger, consolidation, acquisition or sale of assets other
than in the ordinary course of business, and (iv) pay annual aggregate
compensation of its officers and directors in excess of a specified amount,
unless the bank consented to such actions and waived or amended the applicable
restrictions in the loan agreement.  At December 31, 1996, based on the
limitations described above, under the in-line skate/snowboard line of credit we
were eligible to borrow $1,933,000 and the outstanding balance was approximately
$2,742,000.  Under the hockey products lines of credit, we were eligible to
borrow $4,893,000 and the outstanding balance was approximately $5,308,000.

     At December 31, 1996, we had a working capital deficit of approximately
$5,264,000 compared to working capital of approximately $2,399,000 at December
31, 1995.  The decrease in working capital was primarily related to operating
losses as well as debt issued and assumed in the acquisition of USA Skate.  In
addition, as described in the foregoing paragraph, we were in default on
substantially all three of its bank loan agreements.

     In May 1996, we, through USA, completed the acquisition of the outstanding
capital stock of USA Skate. Consideration for the purchase was $10,500,000 which
consisted of $3,650,000 of cash (including approximately $98,000 of cash
acquired), a $1,050,000 8% installment note payable, 250,000 shares of Skate
Corp. common stock valued at $300,000, and assumption of approximately
$5,500,000 of debt.  The cash portion of the purchase price was paid with funds
raised by Skate Corp., including the private placement of 884,667 shares of
Skate Corp.

                                      -23-
<PAGE>


common stock for $961,000, the issuance of $1,080,000 of 9% notes payable to
certain officers/shareholders, and the issuance of $2,515,000 of 9% convertible
promissory notes due January 1997 (which have been extended to July 1, 1997 with
interest adjusted to 12% during the extension period, and were convertible into
Skate Corp. common stock under certain conditions). The debt assumption was
financed in part by a bank loan to USA Skate. Additionally, the former
controlling shareholder of USA Skate signed consulting and noncompete agreements
in consideration for the issuance of 400,000 shares of the company's common
stock valued at $900,000, and USA Skate also entered into a worldwide exclusive
license agreement for use of certain trademarks owned by the former controlling
shareholder of USA Skate in exchange for minimum royalty payments due on or
before December 2001, with an imputed (9.5%) present value of $2,213,235.

     Seasonality.  Our in-line skate and hockey related sales were strongest in
the second and third quarters of each calendar year.  Snowboard product sales
are strongest during the third and fourth quarters of each calendar year.

RECENTLY ADOPTED ACCOUNTING STANDARDS

     In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, and in
February 1998, the FASB issued SFAS No. 132, EMPLOYER'S DISCLOSURE ABOUT
PENSIONS AND OTHER POST RETIREMENT BENEFITS.  Both of these statements require
disclosure only and therefore will not impact our financial statements.

     On January 1, 1998, we adopted SFAS No. 130, REPORTING COMPREHENSIVE
INCOME.  This standard establishes requirements for disclosure of comprehensive
income which includes certain items previously not included in the statements of
operations, including minimum pension liability adjustments and foreign currency
translation adjustments, among others.  During the year ended December 31, 1998,
we had no items of comprehensive income.  The financial statements for the year
ended December 31, 1997 have been reclassified to disclose items of
comprehensive income.  There were no significant tax effects related to these
items.

     In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES.  This statement is effective for fiscal
years beginning after June 15, 1999.  We currently do not use any derivative
financial instruments to hedge our exposure to adverse fluctuations in interest
rates, foreign exchange rates, fluctuations in commodity prices or other market
risks, nor do we invest in speculative financial instruments.  Therefore, SFAS
No. 133 will not have an impact on the financial statements.

                                      -24-
<PAGE>


                                IMAGINON, INC.

     You should note that our business materially changed after December 31,
1998.  We no longer are a participant in the in-line skate, hockey or snowboard
business.  We are now an information technology company. Except as otherwise
described in this prospectus, the information in this prospectus is given
through September 30, 1999.

OUR MISSION

     Our objective is to deliver Internet television to everyone who wants to
communicate, entertain, inform, educate or market in a new way, in a new era.

ABOUT US

     We are an information technology company focused on developing and
marketing broadband Internet television systems to businesses and institutions.
Our Internet television systems, ImOn.comTV, is a licensed turnkey package that
enables any website to present interactive television within a standard browser
window on any suitably connected computer.  Web sites are places on the
Internet.  Every web page has a location where it resides which is called its
site and every site has an address usually beginning with "http://."  The
ImOn.comTV interactive "virtual console" offers its users video on demand, video
that branches under user command, automated Web searching, and many additional
features, customized for each licensee.

     David Schwartz and Leonard Kain started ImaginOn in 1996 to develop better
ways for businesses and consumers to take advantage of the Internet and personal
computers.  Originally, the Internet was called ARPANET after the Advanced
Research Projects Agency of the U.S. Department of Defense.  This electronic
network, which is a multi-dimensional set of items and the connections between
them, connects the hosts together so that a user may go from one Web Page to
another efficiently.  The electronic connection began as a government experiment
in 1969 with four computers connected together over phone lines.  By 1972,
universities also had access to what was by then called the Internet.  On
January 20, 1999, ImaginOn became a public company by completing a merger with
California Pro Sports, Inc., "CALP", in which their shareholders retained 40%
ownership of the merged entity and no representation on our Board of Directors.
All business operations of CALP were discontinued prior to the merger and the
name was changed to ImaginOn, Inc.  ImaginOn currently trades on the Nasdaq
SmallCap Market under the symbol "IMON".

     The software technology invented by our founders is the subject of two U.S.
patents.  The primary functions of our applications are authoring media
intensive data and interactive playback of media intensive data. On the
authoring side, we enable automated data collection and organization, manually
guided collection and organization, or a combination of automated and manual
operations.  Our authoring software is used to create Internet TV content.  On
the playback side, we enable access and manipulation of interactive high
bandwidth streaming video.  A stream is digital data that is transmitted or
delivered as a continuous flow of information within a channel.  The stream may
or may not have a fixed duration.  Examples of streams are digitized audio and
digitized video. To view or hear something in real-time means to see or hear it
immediately and without any slowdowns. Real-time audio on the Internet, for
example, means the user does not have to wait an entire audio file to download,
but can, almost,  immediately start listening to the audio as it is coming to
them.  Our media playback features interactivity that goes beyond simple click-
throughs.  Real-time seamless branching of video streams, and simultaneous real-
time seamless integration of Web research data within Internet TV, are
fundamentally new features created by us.

CORPORATE POSITIONING

     Personal computers with MMX Technology, CD or DVD ROM disc drives and
Internet World Wide Web access are now the standard configuration in the
marketplace.  The World Wide Web is a full-color, multimedia database of
information through web pages connected together through links, which transport
a user from one Internet site to another with just a click of the mouse and are
distinguished by a different color than the rest of the


                                      -25-
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text on the screen for text links and a frame for graphic links. A CD-ROM or
what is also called a Compact Disc has Read Only Memory. A CD-ROM is any compact
disc which contains computer data. These discs can store large amounts of data.
If there is a large amount of data on a CD-ROM, then it is usually impractical
to copy the data to the hard disk, in this case, you must insert the disc
whenever you want to use the data. The ROM simply means that you cannot save
information onto these discs. CD-ROM may also refer to the drive used to read
these discs. DVDs are digital video discs or digital versatile discs. DVD ROM is
similar to a large capacity CD ROM. DVD movies are DVD discs containing
digitalized Hollywood movies. DVD Ram, Random Access Memory, is recordable DVD
media, like CDR, CD Recordable, and CDRW, CD Read/Write discs. Dataquest
projects that the installed base of such machines will be over 100 million by
the end of year 2000. The Software Publishers Association reports that over 60%
of American homes now have a computer. By many estimates, the total number of
"subscribers" to the Web exceeds 50 million in the USA alone. One in five online
users say that they have made a purchase online at least once. E-commerce is
expected to be a $40 Billion business in 1999, and over $1 Trillion by 2003.
Virtually every Fortune 1000 company has established Internet and intranet
electronic information and commerce systems. These new systems connect corporate
staff to each other, suppliers to purchasers, and customers to vendors.

     Todays ongoing PC-Internet revolution is just the beginning , comprising
one half of the future of electronic data processing, interaction and
entertainment.  The second half will be high definition television (HDTV) and
its peripheral equipment, such as Digital Video Disc (DVD) players, DVD
recorders, set-top cable or satellite boxes and camcorders.  This new generation
of TV is designed to be interactive, digital, and compellingly high quality.
The overlap of functionality has already started.  In the opinion of ImaginOn's
management, the eventual convergence of the Web, PCs and TV is inevitable.

     We foresee a future with tens of thousands of TV channels, mostly on the
broadband Internet.  While broadband Internet access serves less than 2 million
users today, it is widely believed that more than 10 million broadband
connections will be deployed by 2002.  Initially, virtually all Internet TV will
be watching, and interacting, on their HDTV sets.  ImaginOn's ImOn.comTV system
delivers Internet TV on PCs with broadband connections today, and will perform
equally well or better on HDTV.

     Our software takes advantage of the PC-Internet infrastructure in both the
business to business and consumer marketplaces.  In the business marketplace,
our ImOn.comTV provides significant competitive advantages and increased
internal efficiencies to business users.  For consumers, ImOn.comTV delivers
faster, higher quality experiences for information, education and entertainment.
For the emerging digital broadcast industry, ImOn.comTV is a comprehensive
solution for creating interactive TV content, video server data management, ad
insertion, user feedback and interactive advertising.

OUR MARKETPLACE

     The market for ImOn.comTV is all business and institutions that are heavy
Internet users for their own internal purposes or service the general public
over the Internet.  Examples of potential client businesses that service the
public include entertainment companies, news companies, cable TV stations, and
Internet portal operators. Examples of potential client businesses that use the
Internet in conjunction with their intranets for internal purposes are large
electronics companies, banking companies, national real estate companies, and
automotive manufacturers and their suppliers.  Institutional examples are
universities, national health care organizations, and governmental agencies.
Since the market for ImOn.comTV is so large and diffuse, we will focus our
efforts on those businesses that have the most to gain by licensing the product
as soon as they become aware of it.  Judging by the companies that have agreed
to purchase ImOn.comTV systems to date, the early adopters will be Internet
companies that are video-media centric.

     To attract licensees by demonstrating the quality and capability of
ImOn.comTV, we operate a high-bandwidth Internet portal, ImOn.comTV.  This
Internet TV station is built out of our software components, plays original
video content produced by us using our authoring tool, and features our own
search engine.  Furthermore, ImOn.comTV is hosted on our own servers at our own
Internet Service Provider, in San Jose CA.  The fact that

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virtually all aspects of this system are owned by us reassures potential
customers that we can deliver and support ImOn.comTV in all respects, from
authoring content to streaming Internet broadcasting.

     ImOn.comTV addresses the e-commerce software market with its sellONstream
component.  E-commerce is a new and rapidly growing segment of the Internet,
defined as transactions made online.  For the calendar year 1998, e-commerce
sales were about $4 billion.  Of this, $2.3 billion was during the holiday
season alone, up from $1.1 billion in the same period during 1997.  E-commerce
is expected to exceed $40 billion in 1999. The top items purchased online are
software, books, computers, travel, music, food/gifts and clothing.  The
software used by the businesses to accomplish e-commerce include website hosting
applications, credit transaction applications, website creation and editing
applications, and database management applications.

     Additional markets where ImOn.comTV's features will be useful include
Interactive Education/Training and Interactive Advertising.  The market for
computer-based educational and training systems is already a $6 billion industry
serviced by thousands of small vendors.  Interactive advertising is just
beginning to be an industry, based on Internet banner ads.  In the near future,
as digital HDTV is deployed, interactive advertising will enter the TV
mainstream.

     We are developing a "lite" downloadable version of our ImaginAuthor
authoring tool.  Unlike the full-featured pro version of ImaginAuthor, the
downloaded version will be suitable for use by anyone who can a word processor.
Corporate training departments and educational content developers can then
create Learning on Demand applications.  Learning on Demand, a term popularized
by Stanford Research Institute, is a feature of training systems that have very
rapid response and delivery capabilities.  When any desired content is delivered
at the time it is requested, or shortly thereafter, for immediate consumption,
learning on demand is enabled.  The learning may be about concepts, products,
business results or any topic at all.  The data itself may be in the form of
digital video, test, audio, web pages, spreadsheets or any mix of those forms.

     As digital broadcast television emerges, and the Internet gains bandwidth,
methods of advertising are adapting; taking advantage of these new environments
to sell smarter and harder.  The first new form of advertising to arrive in this
space is the banner ad.  On some websites today, these small graphical displays
consume up to 20% of the display area on computer screens.  Most banners are
composed of a stationary graphic image or message, like a small ad on a magazine
page.  Some banners are animated, like simple TV cartoons, to improve their eye
appeal. It is estimated that the annual business of banner ads will reach $700
million in 1999.  By the year 2000, this business may exceed $1 billion, not
counting ads within digital television.

     Today's banner ads are weakly interactive; limited to hyperlinking to the
ad sponsors website.  When the ad is clicked, the user is transported by their
browser to a new website.  This abrupt change of venue is cited by many Web
users as the primary reason they do not like banner ads.  A more sensible,
effective, and user-friendly approach is needed.  ImOn.comTV's video ads respond
to user clicks with context-based sensitivity.

BUSINESS MODEL

     In the short run, we will generate revenues in two ways: selling Internet
connectivity via iNow, and selling ImOn.comTV licenses.  The two revenue sources
are synergistic, in the sense that iNow  will use ImOn.comTV to attract ISP
clients, and ImOn.comTV can point potential clients to iNow.  Both parts of the
business are aimed at the same high-end market.  Over the longer haul, as more
businesses license ImOn.comTV, the ISP percentage of revenues is expected to
decline.

     iNows's target client is a business or institution that wants a single-
source package deal, including Internet connectivity at high bandwidth, the
hardware to do it, a website, e-commerce support and technical support.  As a
high end, high performance supplier, we believe iNow's gross margin is
substantially higher than that of a commodity ISP, like Earthlink.

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IMON.comTV FEATURES

     To demonstrate our Internet TV system, we created the ImOn.comTV Internet
portal.  This portal has guest demo pages where any visitor with a connection
speed of 384 kbps or higher can preview the key features of the portal in a
three minute interactive video presentation.  This presentation is based
entirely on our technology, clearly illustrating its benefits.  Guests
experience our unique real-time seamless branching video with integral Web data,
plus a WebZinger research report on the same topic in the same window.  The
following are brief summaries of the content of our Internet portal.

     WEBZINGER(TM) ONLINE

     WebZinger is a data mining Research Engine that searches the Web, downloads
each website's highlights, then formats the results into an illustrated report,
complete with audio and video.  WebZinger acts as a personal research assistant,
substantially increasing the efficiency of Web searches for both naive and
sophisticated users. WebZinger is fully integrated into ImOn.comTV's virtual
console.

     A unique feature of ImOn.comTV is that Web searches are automatically
performed based on the topic of the current video window whenever the user
clicks the "Go" button on the console.  For example, while touring New York City
in video, the State of Liberty is shown.  If the user clicks the Go button at
that point, WebZinger starts a search on "Statue of Liberty", without having to
type anything.  Of course, WebZinger does have a search term entry window, so
users can type into it at any time, as with a standard search engine.  When
WebZinger has results ready, usually within a few minutes, a formatted report is
presented on-screen.

     WORLDCITIES 2000(TM)

     WorldCities 2000 is a series of interactive travel planners for
distribution on broadband Internet, CD and DVD.  Travelers will use WorldCities
in interactively tour a city, on film, from the driver's seat, deciding which
way to turn and what to see.  Integrated Web access provides in-depth topical
information about whatever is in front of the driver.  By the end of Janaury,
2000, the first volume will be complete, containing San Francisco, New York,
London and Paris.  Each city tour contains over 120 minutes of TV-quality video
and links to over 1000 Websites.

     WorldCities 2000 travel planners are virtual tourism that is useful to both
business and consumer travelers. On any PC or advanced digital cable TV, the
user can navigate real cities as if they, themselves, were driving the car
through the city.  The camera's viewpoint is the driver's seat, looking through
the windshield.  At key intersections, the user can turn the car left or right,
without stopping.  An on-screen button labeled "Go Online" instantly connects
the user to the Web page most relevant to the view ahead.  For example, in
WorldCities 2000 San Francisco, when the user sees Pier 30's Underwater World,
the Go Online button causes the browser to open a window an display Underwater
World's website, live.  Since the website is updated frequently by Underwater
World, the information about show times and pricing it always current.

     sellONstream(TM)

     The same underlying software engine that powers WorldCities 2000 also
powers sellONstream, our video e-commerce solution.  Advertisers who want to
sell products via the Web, and at the same time use full-bandwidth video content
to motivate buyers will distribute sellONstream CD ROMs as stuff-ins to
catalogs, magazines and newspapers.  Viewers will insert the CD into their PC
and get a highly entertaining product-related pitch with one-click access to e-
commerce websites.  High bandwidth Internet users can access sellONstream
presentations directly from ImOn.comTV, or any ImOn.comTV enabled website, using
the CDs only to validate special offers and product discounts.

     The unique selling proposition of sellONstream is that it is the only way
to deliver TV-quality interactive video fully integrated with the Internet to
users with 28.8 or 56 kbps modem connections.  Even low bandwidth users do not
see any discontinuity between the video playback and Web pages.  The single-
focus branded window approach guarantees businesses that their message is the
sole message the viewer will see when their presentation is on screen.

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     Initially, we will produce the sellONstream presentations for clients,
converting their existing videotape. Eventually, clients will use our
ImaginAuthor tools and produce the CDs or website-sourced interactive streaming
video themselves.

     AMERICAN HERO

     The never-released interactive movie and PC videogame, American Hero, was
developed by our founders while at Atari Corp before that company's demise, and
our startup.  At ImOn.com, Internet TV users can play this interactive movie
today.  In addition to being a novelty item for the ImOn.comTV demo site,
American Hero will also serves as an example of how interactive film can be
released on the Web.  The goal is to attract film producers, who will license
our tools to create their own interactive movies.

     IMAGINAUTHOR(TM)

     Our authoring tool for creating interactive video with integral Web data,
ImaginAuthor, is a large CAD system-like environment that enables the creation
of large, complex software products like WorldCities 2000, sellONstream and
American Hero, without programming.  All licensees of ImOn.comTV receive a copy
of ImaginAuthor for their own use in creating interactive content.  To increase
awareness of our technology, and to generate free content for ImOn.comTV, a no-
cost, limited, but fully functional version of ImaginAuthor, including the
ImaginOn Player, will be downloadable from ImOn.comTV sometime in 2000.  Content
created with ImaginAuthor can then be played back on any suitable PC, burned
onto CD ROM or interactively streamed from ImOn.comTV stations.

OUR TECHNOLOGY

     Our core technology, TDPP, has been granted two U.S. patents.  The
embodiment of TDPP is a set of fourteen software tools.  In the hands of
webmasters and programmers, these tools are used to create new applications and
content.  New products created with our tools are characterized by seamless
real-time access to video, audio, graphics, text, HTML and 3D objects from
multiple remote or local databases.  HTML is Hypertext Mark-Up Language and is
not really a programming language, but a way to format text by placing marks
around the text.  For example, HTML allows a user to make word bold or underline
it.  It is the foundation for most web pages. Java applets are mini-software
programs written in the Java language that run inside a Web browser window.  A
Web browser is a tool program that allows a user to look around the web.
Objects are self-contained items of information that have predefined attributes
and behaviors.  Objects are used by computer programs to store data and
represent data.  Examples of objects are digital images, a text page, a display
window. With our intellectual property secured by patents, we will license our
tool set to businesses for building e-commerce, data mining, interactive
entertainment and training applications.

     Our core technology, TDPP has three components:

     .  database analysis
     .  network synthesis
     .  real-time adaptive playback

     The source database for our analysis can be any data file or set of data
files which may contain multiple classes of data, such as text, video or audio.
In the case of WebZinger, the source database is the entire World Wide Web,
where allowable data classes are images, movies, audio, text, HTML and Java
applets.  In the case of WorldCities 2000, the source database contains text,
Uniform Resource Locators which are the address of an Internet site, video, and
audio files.  During database analysis, filters based on selection criteria are
used to screen out irrelevant data and accept desirable data.  The organization
of the data with respect to its position in the database is preserved.

     Our network synthesis is the process of creating a "playable" network
consisting of data items and decision points.  The synthetic network is
hierarchical and tree-like in that it has a trunk, branches and leaves.
Decision

                                      -29-
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nodes, which are the points within a network where an item resides, or a
connection is made to an item in the network, connect the branches to the trunk
and the leaves to the branches. The distance from the trunk at which a data item
is placed out on a branch is usually determined by its quality of match to the
database analysis criteria. The network synthesis process can be entirely
automatic or manually guided.

     Our real-time playback is the part of TDPP technology that most users see.
The desired data items selected during database analysis and organized within a
synthetic network are played in real time, sequentially and seamlessly.  When
the synthetic network contains solely digitized film clips, the resulting
playback forms an interactive movie.  If the network is populated with still
images, such as Web pages, playback forms an interactive slide show.  Our
network filled with text pages is a hypertext electronic book, magazine or
newspaper.  Hypertext is text on a web page that links the user to another web
page.  The hypertext, or links will usually be a different color than the other
text on the page and is usually underlined.  Our synthetic networks can be
layered one on top of the other, with live cross-references.  For example, in
our WorldCities 2000 interactive travel planners, a network made of video clips
references the Web, providing a whole new way of navigating data space visually.

     The current implementation of ImOn.comTV utilizes Apple Quicktime for its
video streaming.  In addition, we have updated our basic playback engine to
allow for use over the Internet.  There are two basic ImOn.comTV software
components used to create an ImOn.comTV station.  The first is a streaming video
interface that is net savvy and recognizes Quicktime formats. The second is a
group of java servlets, designed to make Mac, Windows and other future target
systems behave the same way with all stations.

OUR SOFTWARE TOOLS

     We have developed the following basic tools that can be combined in many
different ways to create software application programs.  Each tool can be used
as a standalone application when needed, plus, each tool is designed to
communicate and interoperate with every other tool in the set.  ImOn.comTV,
WebZinger, sellONstream, American Hero and WorldCities 2000 were each built
using different combinations of the basic tools:

     SEARCH DRIVER contains a set of parameters and interfaces to commercially
available search engines and database query engines.  Input to Search Driver is
plain English text.  Search Driver's output is specific to every engine it
supports.

     NETWORK ANALYZER takes a text description of a complex network, such as the
netlist of a drawing tree or a schematic diagram and determines the system
requirements for real-time playback of the data elements or objects.

     NETWORK WALKER traverses a data network such as a LAN or the Internet and
compiles a map that can be utilized by our other tools.  Network Walker is
guided by user-controlled parameters.

     FILTER filters data sets or data objects to determine the degree of match
to a set of user-defined parameters. The filtering process is based on the
digital signal processing (DSP) model in which filters can be cascaded, tapped
and fed back on each other in many configurations.

     FORMATTER normalizes data objects so that they can be displayed or played
in real time.  This process can be lossy, which is a digital process that loses
information, or lossless, which is a digital process that preserves information,
depending on user requirements.

     NETWORK BUILDER constructs a synthetic network of data elements or objects
that can be traversed in real time.

     NETWORK COMPILER takes the netlist created by Network Builder and data
objects processed by Formatter and generates an output file that Presenter can
use.  A compiler is a software program that processes a structured set of data
and creates another data set.  If the data is a computer program written in a
human-readable language, the output will usually be a set of instructions that
can be executed by a computer to perform the tasks the programmer intended.

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     LIVE LINKER manages a list of active Web addresses and the pointers to
specific data objects in the playback stream, enabling the Browser tool to
include live Web pages side by side with "canned" data objects, such as video
recordings.  Live Linker is used to create the hybrid of CD data plus Web pages.

     SMART BUFFER reads the compiled network of links and objects, then fetches
data ahead of time, from disk or network, so Presenter never has to stop or
pause during playback.  A buffer is a storage area for a finite amount of data
in a computer system or digital transmission system.

     PRESENTER displays, or plays back, data objects to the user in real time.
Presenter allows the user to make real-time choices among data objects as they
are played back.

     BROWSER allows users to visit websites and hyperlink to other websites.  A
hyperlink is a data object, such as text or an image, that has a dual purpose.
The first purpose is to convey information in the form of text or a picture.
The second purpose is to connect the user to another data object, that may be
somewhere else entirely separate from the text or image presented.  For example,
on an Internet Web page, the word "Poodle" within a text about dogs might serve
to connect the user to another web page specifically about poodles, when the
user clicks their mouse button while their cursor is on the word "Poodle."
Browser is similar in functionality to Microsoft Internet Explorer and Netscape
Navigator, minus features like email and editing.  Browser is based on the Java
Ice Browser, which we have licensed.

     USER PROFILER monitors the playback of data objects and decisions made by
the user with respect to those objects.  The user profile derived from this
history can be used to automate playback as well as adapt playback to the user's
preferences.

     STREAMING VIDEO INTERFACE, a low level video format interface, allows our
technology to be used with many types of video formats of different programming
interface models.  It allows for the same code base to support CD formats,
Internet formats and in the future, cable and set-top formats without
significant modification.

     COMMUNICATIONS SERVLET, a set of servlets running on a server, allows our
products to support interfaces with various web browsers on selected platforms
without specific modifications to each component.  This allows for easy plug-in
to different platforms and browsers.

OUR COMPETITION

     In the Internet Television Systems industry segment, we have no direct
competition.  Numerous companies, large and small, offer some portion of the
services or capabilities of ImOn.comTV, but there are no other single vendor
integrated solutions.  Our competitive advantage in this field is derived from
our unique proprietary technology that integrates interactive video playback
with media-intensive data mining.

     In the high bandwidth interactive streaming video authoring and playback
software business, we have no direct competitor, yet.  Several companies offer
components that can be used to implement portions of a networked system, but no
other company offers a complete turnkey solution like ours.  Among the
competitors that provide software components that can be used to build a
similar, lower performance, less capable system, are Microsoft, Broadcast.com,
RealNetworks, Oracle and Macromedia.

     Oracle is a relational database management systems company whose products
work well within any single operating system, operating on data collected by
some other system or process.  Oracle's SQL database query system allows diverse
data display systems to access formatted data.  Oracle's position is that of
"middleware"; processing data from one place and making it available to
someplace else.  This arrangement suffices for conventional transactional and
customer information systems.  However, when the data is of many types, spanning
multiple operating systems in diverse locations, timely response is not
guaranteed.  Furthermore, when the requested data content is not in the system
at all, Oracle must request another system to search, locate and fetch the data.

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     On the display side, the fundamental design of Oracle's software dictates
that the playback of data content be handled by a separate process that usually
runs in a separate computer or playback device.  This provides generality at the
expense of performance.  For media-rich sets of data such as digital video,
audio and Web pages, the separation of processing systems from display systems
results in delays and difficulty in providing real-time playback.  The
intermittent stop and start look of streaming video is partially caused by these
delays.

     RealNetworks Realvideo and Microsoft's Mediaplayer are the main streaming-
only video players in the market today.  Neither systems' authoring tools or
playback mechanism allows for real-time branching or integrated Web browser
data.  To get from one video clip to the next, these systems stop.  To show Web
information, they require a separate browser window.  Our authoring and playback
systems remove both of these limitations, enabling true TV image quality and
videogame-like branching, with live Web pages inside the player.

     Our software tightly couples data acquisition, processing and display into
a single solution, which can be distributed among processors in a network or be
entirely located in a single PC.  This architecture is the best guarantee that
data will always be presented in real time.  For applications such as broadband
Internet, interactive TV, and hybrid CDs or DVDs, this is our main competitive
advantage.

     Macromedia is another company that provides tools that can solve part of
real-time multimedia network delivery problem.  Their "Director" software can
manage mixed data format objects within the context of creating a multimedia
application.  Macromedia dominates the market for multimedia authoring.
However, Director is not a general-purpose system, nor does it support real-time
playback.  To Director's further disadvantage, its content authoring system is
based on a proprietary non-standard programming language called "Lingo".

     Our competitive advantage with respect to Macromedia in Macromedia's own
market is our software's customizability based on a programming-free assemblage
of software tools, and its real-time playback capability. The steep and lengthy
learning curve associated with Director's Lingo programming language is a major
barrier to its widespread use for corporate training products.  Director's
sluggish almost-real-time playback is one of the reasons multimedia in general
has earned such a poor reputation in the entertainment products marketplace.

     Within the Internet search engine marketplace, there are at least two dozen
products aimed at Web users for the purpose of searching the Internet.  All of
these search engines are primarily list generators; leaving the actual data
evaluation and retrieval to the user.  The few search engines that do offer
media retrieval, do not provide much control or formatting of the output.
Positioned as a Research Engine, WebZinger actually does the heaving lifting of
finding, retrieving and formatting rich media assets from the Web.

STRATEGIC CORPORATE RELATIONSHIPS

     Our management realizes that partnering and associating with larger
companies are critical to our success. So far, four large companies, Intel, Sun,
Apple and Sony are working with us.  Their participation in our marketing
activities has been limited in part by our perceived financial instability
during our startup phase, and the high maintenance requirements in terms of our
staff time.  As we become more stable, and marketing activities increase, it is
anticipated that these relationships will become more productive.

     INTEL

     In March, 1997, our demonstration of the world's first and only broadcast-
quality interactive movie caught the attention of Intel Corporation engineers
and marketing staff.  Intel and us agreed to Intel use of our demo software in
return for loans of Intel computers and some reimbursement of expenses.  Intel
first used our demo in the keynote address opening COMDEX 97 in Japan and has
since used our demonstrations at the launch of the Pentium II, PC Expo, COMDEX
Canada and many other events.  We have adopted Intel's concepts of knowledge
management and visual computing.

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     SUN MICROSYSTEMS

     In July, 1997, we demonstrated an early version of our Web research
software to Sun software engineers and marketing staff.  They liked what they
saw and assisted us in achieving 100% Pure Java certification. ImaginOn has been
an invited Java and E-commerce Partner participant in five trade shows with Sun.

     APPLE COMPUTER

     In mid-1998, ImaginOn, Inc. and Apple agreed to cooperate in optimizing
WebZinger for K-12 school use, on Apple hardware.  Upon successful completion of
that development work, Apple introduced us to Apple's educational market
national distributors, who began evaluating WebZinger School Edition.
Subsequently, 1n 1999, these distributors included WebZinger SE in their
marketing programs.

     SONY COMPUTER ENTERTAINMENT INC. (SCEI)

     After years of periodic contacts and presentations to software development
personnel at SCEI in nearby Foster City CA, Sony developer relations staff
visited us in the Summer of 1999 to be briefed on our authoring tools for
branching digital video.  After a series of follow up meetings at SCEI, we were
invited to submit ImaginAuthor for approval as "middleware" for the
PlayStation2(R) (PS2) computer entertainment system.  SCEI approved ImaginAuthor
for this use, and consequently we became a Sony licensee for Playstation2
development.

     Our management believes that some Playstation2 developers will adopt
ImaginAuthor for creating interactive movie titles, both with and without
Internet access.  Since most PS2 developers are in Japan, we reached a
distribution agreement with AiCube of Tokyo, Japan, to localize ImaginAuthor and
support Japanese users. Depending on the success of ImaginAuthor as a
development tool for PS2, Sony may take further interest in our technology and
products.

OVERCOMING BARRIERS TO SUCCESS

     Since our inception, we have developed a base of intellectual property
(IP), software tools to implement our technology, and software applications that
demonstrate the value of our IP.  Both the software tools and the applications
have the potential to become revenue generating lines of business.  The main
barriers to achieving business success are:

     .  Cost of a successful market entry
     .  Critical approval and customer acceptance
     .  Proof of commercial viability of the tool set

     All of the above barriers can be overcome with sufficient corporate
infrastructure, funding, time and effort. Success depends on planning and
accomplishing highly targeted activities that will have a cumulative,
synergistic effect.  A shotgun approach that spends a little bit here and there
promoting each of our tools and application in parallel is doomed to failure.
By focusing all of our marketing and sales efforts on the ImOn.comTV product, we
will maximize the effect of promotions and advertising.

     Critical approval and customer acceptance will never totally overlap.  Nor
is customer acceptance dependent entirely on critical approval.  Nonetheless,
they are closely linked.  The few initial reviews of our Beta versions and demos
of our products have been good.  American Hero was selected as a finalist in New
Media magazines annual software competition.  An early version of WebZinger was
favorably reviewed in PC Magazine. WorldCities 2000 was favorable reviewed in
New Media magazine.  With the emphasis now on ImOn.comTV, we will be targeting
business and Internet media with PR and advertising.

OUR HISTORY

     The genesis of our technology was at Atari Corporation in June, 1994.
David Schwartz, a senior staff engineer and head of the Jaguar CD project,
conceived of a new type of interactive entertainment product, named "GameFilm",
merging videogame and film formats.  Between July, 1994 and June, 1996,
Schwartz' team of

                                      -33-
<PAGE>


software engineers and a film production company successfully developed the
first Jaguar CD ROM GameFilm title, "American Hero", a Windows 95 runtime
engine, as well as a prototype suite of software authoring tools. Len Kain
served as a part time consultant to Atari for the GameFilm project.

     Atari went out of business as a result of a reverse merger with JTS Corp.
in July, 1996.  In the context of this change in business, Mr. Schwartz (a vice
president of Atari since October, 1994) negotiated to leave with an Asset
Purchase and Licensing Agreement for the GameFilm technology.  The Agreement
transferred the new technology from Atari to us for a cash price of $258,000.

     Mr. Schwartz incorporated FilmMagic in May, 1996, changing its name to
ImaginOn in October, 1996, when Len Kain formally joined the company.  During
1996, we concentrated on developing our intellectual property position.  During
1997, we hired our core staff, set up our offices and developed our tool set.
In 1998, we developed software applications based on our technology and began
field testing our software.  Since becoming a publicly owned company in 1999, we
have concentrated on building a sales/marketing organization, growing the
business by acquisitions, and consolidating our software and services as the
ImOn.comTV product, which was introduced on October 26, 1999 at the ISPCON trade
show and conference.

PRIOR BUSINESS

     Prior to January 20, 1999, under previous management, we operated under the
name California Pro Sports, Inc., and we imported and distributed products in
three participant sport categories:

     .  in-line skates
     .  hockey equipment, and
     .  snowboard equipment

     In 1993, we acquired the California Pro in-line skate business from
California Pro USA Corp. Playmaker Co., LTD ("Playmaker"), the in-line skate
manufacturer and majority owner of the seller, granted to us, an exclusive,
perpetual, non-royalty bearing license to the California Pro names and
trademarks and entered into a five-year manufacturing agreement to supply
substantially all of our in-line skate products.  In another acquisition
completed on August 1, 1994, we purchased certain assets, including an
exclusive, perpetual world-wide license to the Kemper(R) name and trademark,
subject to a royalty.  We acquired our license directly from the registered
owner of the Kemper(R) name and trademark, Front 500 Corporation ("Front 500").
In 1995, we formed USA Skate Corporation, a Delaware corporation, ("Skate
Corp.").  Skate Corp. was our majority owned (approximately 62%) subsidiary and
its financial statements are consolidated with ours in this prospectus.
Effective as of April 30, 1996, Skate Corp. acquired 100% of USA Skate Co., Inc.
("USA Skate"), a New York corporation, in a stock purchase transaction.  USA
Skate owned, directly or indirectly, all of the capital stock of Les Equipments
Sportifs Davtec, Inc. ("Davtec"), a Canadian corporation.

     Our in-line skate products were sold in the United States, Canada, the
Caribbean and U.S. military bases world wide.  Our snowboards and related
accessories were sold primarily in the United States and European countries.
Through September 1997, we sold our hockey-related products through independent
sales representatives and independent distributors  in the United States, Canada
and various other countries.

     We had continual operating losses and in 1996 and 1997, when our management
decided to restructure the company and reduce our debt. The components of the
restructuring plan included management's decision to

     .  cease operating its California Pro and Kemper licenses,
     .  begin to concentrate on sub-licensing its trademark rights
     .  eliminate most of the operating and overhead expenses, and
     .  look for a merger candidate in a new line of business.


                                      -34-
<PAGE>


     MANAGEMENT'S PLAN OF RESTRUCTURE

     As a result of continuing operating losses, our Board of Directors, early
in 1997, decided to restructure and de-leverage the company.  Accordingly, in
September 1997, we and Skate Corp. sold assets of the ice hockey related
business (including the trademark rights to VIC(R), VICTORIAVILLE and
McMartin(TM)) to Rawlings for $14.5 million plus the assumption of $1million of
debt. The proceeds of the sale were substantially utilized to pay secured
revolving lines of credit, purchase the remainder of the trademarks from the
previous owner, and partially reduce notes payable of Skate Corp. to
unaffiliated note holders.

     As a result of the sale to Rawlings, and other restructuring and
deleveraging activities, including the assumption and assignment of certain
notes and trade payables to third parties in exchange for our common and/or
preferred stock, we reduced our liabilities from approximately $18,988,000 at
January 1, 1997 to approximately $1,500,000 at December 31, 1998.

      As part of the restructuring plan, we eliminated most of the overhead
expenses associated with our sporting goods business and entered into two sub
license agreements regarding the use of the Kemper name. Effective May 1, 1997,
we entered into an agreement through April 30, 2000 with United Merchandising
Corp., a California corporation ("UMC").  We granted UMC a non-exclusive, non-
transferrable license to manufacture and/or purchase and sell various
snowboarding apparel bearing the name and/or logo of "Kemper", in its retail
stores in the United States.  The royalty rate was 7.5% of the cost to UMC with
a minimum of $30,000 per annum. UMC has an option to renew for one or two
additional years. From May 1, 1997 through April 30, 1998 we received royalties
of approximately $34,300.

     Effective in February 1998 we entered into a two year exclusive Licensing
Agreement with Jaysport International, Inc, ("Jaysport").  Subject to the prior
sub-license granted to UMC, we sub-licensed to Jaysport the exclusive worldwide
right to use the Kemper name and trademark on snowboards, related equipment,
clothing and accessories (the "Products").  Jaysport had the option to renew the
agreement for additional two year periods thereafter.  The agreement included a
royalty payment of 3% of net sales on all products with a minimum royalty of
$25,000 per annum.

     Accordingly, in the second quarter of 1997, we began liquidating remaining
inventories and commenced a search for sub-licensees and a merger candidate. As
a result of its search, on October 2, 1997, we signed a letter of intent to
merge with ImaginOn.  Thereafter, we signed an agreement and plan of merger as
of January 30, 1998 under which there was an exchange of 100% of the outstanding
shares of ImaginOn for approximately 60% of the outstanding post merger common
stock of the company.  The transaction was completed on January 20, 1999.

LEGAL PROCEEDINGS

     We were named as a co-defendant in a lawsuit filed by Cord Investment
Company and Frances Peppy.  The action was filed March 12, 1999 in the District
Court, City and County of Denver, Colorado alleging violations of state
securities laws and other common law torts stemming from a private placement of
securities. On November 3, 1999, an order staying all proceedings for one year
was entered by the court, to allow completion of a settlement agreement not
involving ImaginOn, Inc.

     We were also named as a co-defendant in a lawsuit filed June 3, 1999 by
Bertrand T. Ungar in the U. S District Court for the District of Colorado
alleging among other things, conversion, civil theft and breach of fiduciary
duties stemming from the transfer of pledged securities. Plaintiff seeks damages
in the excess of $600,000. We are vigorously defending against this law suit and
believe that the matter will be resolved in our favor.

     We were named as a defendant in a lawsuit styled Timothy Wayne Wooten and
Tammy Marie Wooten v. Amy Marie Abott and California Pro Sports, Inc.  The
action was filed on October 21, 1998 in the District Court of Midland, Texas,
238/th/ Judicial District alleging a product defect that resulted in a wrongful
death.  Plaintiffs seek damages in an amount not less than $10,000,000.  We
referred the petition to our insurer, which thereafter provided a defense.  We
intend to vigorously defend ourselves and believe the matter will be resolved in
our favor.

                                      -35-
<PAGE>


PERSONNEL

     Our founders are David M. Schwartz, President, and Leonard W. Kain, Vice
President, Engineering.  The total staff size is 33 persons, plus 13 consultants
and contractors.  The Executive Committee is composed of the founders, plus our
Chief Financial Officer, Vice President of Business Development, and Vice
President of Marketing.





                                      -36-
<PAGE>

                                  MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

     Our officers and directors are listed below.  Our directors are elected to
hold office until the next annual meeting of stockholders and until their
respective successors have been elected and qualified.  Officers are elected by
the Board of Directors and hold office until their successors are elected.

     The chart below identifies persons who currently serve as officers and/or
directors.


Name                    Age   Positions
- ----                    ---   ---------
David M. Schwartz        51   Chairman, Chief Executive Officer, President
                              and Director
Leonard W. Kain          38   Executive Vice President, Secretary and Director
James A. Newcomb         53   Chief Financial Officer
Sue Ann von Kaeppler     52   Vice President of Business Development
Abe Matar                29   Vice President of Marketing
Mary E. Finn             40   Director
Dennis Allison           57   Director
Jim Polizotto            63   Director

     DAVID M. SCHWARTZ has been Chairman, Chief Executive Officer, President and
Director of ImaginOn since January 20, 1999.  Mr. Schwartz has been principally
employed as an officer and director of ImaginOn.com Inc., our wholly-owned
subsidiary, since its formation in 1996.  From 1992 until 1996, Mr. Schwartz was
Vice President of New Media Systems and Technology Atari Corporation, where he
invented GameFilm technology for videogame applications, and served as a
principal designer of the Atari Jaguar CD peripheral.  From 1990 to 1992, Mr.
Schwartz was a senior member of the technical staff at Tandy Electronics
Research Labs in San Jose, California, where he headed the software team
developing the first writable and erasable CD ROM.  In 1983, Mr. Schwartz
started and led CompuSonics Corporation, which went public in 1984.  CompuSonics
ceased operations in 1989.  In 1985, CompuSonics introduced the CompuSonics
DSP1000, the first consumer audio recorder for floppy or optical disks.  The
CompuSonics Video PC Movie-Maker, introduced in 1986, inaugurated real-time
digital video recording and editing on desktop computers.  Mr. Schwartz earned a
Bachelor of Arts in Architecture from Carnegie-Mellon University, after
completing a multidisciplinary program in Architecture, Engineering and Computer
Science. He also participated in post-graduate studies at Carnegie-Mellon in the
school of Industrial Administration.

     LEONARD W. KAIN has been Executive Vice President, Secretary and a Director
of ImaginOn since January 20, 1999.  Mr. Kain was principally employed as an
officer and director of ImaginOn.com, our wholly-owned subsidiary, since its
formation in 1996.  From 1991 until July 1996, Mr. Kain served as the manager of
real-time systems at Compression Labs, Inc..  At Compression Labs, he supervised
all aspects of multimedia and video communications, including networking,
communications framing, audio-video compression, real-time system design and
user interface design.  From 1988 until 1991, Mr. Kain was software manager at
Telebit Corporation where he managed development of domestic and international
high speed modems and network products.  From 1986 until 1988, Mr. Kain served
with Mr. Schwartz as director of software development at CompuSonics
Corporation.  Mr. Kain earned a Bachelor's Degree in Engineering from Stevens
Institute of Technology in New Jersey in 1983, and a Masters Degree in
Electrical Engineering from Stanford University in 1985.  In 1998, Mr. Kain
earned a Masters of Business Administration from the University of Phoenix.

     JAMES A. NEWCOMB has been Chief Financial Officer of ImaginOn since
November 19, 1999.  He came to us from Displaytech, Inc., in Longmont, Colorado,
a privately held company that manufactures high resolution micro displays for,
among other devices, digital still cameras, camcorder viewfinders, and
projection displays for computer monitors and televisions.  As Chief Financial
Officer, Mr. Newcomb played a key role in implementing the financial aspects of
Displaytech's key alliances, both domestically and internationally.  Before
this, he was with the NASDAQ listed Fischer Imaging Corporation, in Denver,
Colorado, where he served from 1995 through 1998

                                      -37-
<PAGE>


as Vice President and Chief Financial Officer. Prior to serving at Fischer
Imaging Corporation, Mr. Newcomb held the position of Vice President and Chief
Financial Officer at the $200-million computer services firm, Neodata Services,
Inc., in Boulder, Colorado, from 1993 to 1994. From 1989 through 1993 he was
Vice President and Controller at NYSE listed Teco Energy, Inc., in Tampa,
Florida, a $1.2-billion diversified electric utility holding company. From 1982
to 1989 he was at the Allied-Signal Corporation, Morristown, New Jersey, where
he held several positions, including Vice President of Finance, Defense Systems
Company (1985-1989) and Assistant Corporate Controller (1982-1985). A member in
good standing of the Financial Executives Institute, Mr. Newcomb was awarded a
Masters of Business Administration degree in Finance by the Amos Tuck School at
Dartmouth College, Hanover, New Hampshire, in 1970. He received a BA degree in
Economics from Beloit College, Beloit, Wisconsin, in 1968.

     SUE ANN VON KAEPPLER has been Vice President of Business Development of
ImaginOn since October 22, 1999.  Prior to joining our company, Ms. von Kaeppler
served from 1979-1998 in a number of strategic positions at AT&T, Pacific
Bell/Telesis, and Southwestern Bell Corporation, including Program Director of
Emerging Markets, Director of Channel Management, and a wide variety of
management positions including reengineering, product development, and sales and
marketing. Recently, as a business consultant, Ms. von Kaeppler counted among
her clients Digital Interiors, Inc., Sage Systems, Inc., and HealthCentral.com.
For all three early-stage, high technology and Internet start-up companies, she
developed integrated sales, marketing and business development programs.

     ABE MATAR has been Vice President of Marketing of ImaginOn since March 8,
1999.  Born in Jerusalem, Mr. Matar came to the US to go to school in 1987.
After completing his Masters degree in Electrical Engineering from San Jose
State University, he began his career working for Silicon Valley companies such
as Apple, EO, an AT&T subsidiary, and Compression Labs.  During that period, he
developed experience and knowledge in managing and running engineering projects
in the communications field.  As a founding member of iNOW Internet Services,
Mr. Matar has been involved in the day-to-day operation and management of the
business, and is overseeing its expansion.

     MARY E. FINN has been a Director of ImaginOn since January 20, 1999.  She
has more than 15 years experience in various media fields, utilizing her skills
in writing, editing, broadcasting, teaching and management. From 1994 to 1997,
Ms. Finn served as publicity director for the local chapter of FEMALE, a
national mother's support group.  From 1988 to 1991, Ms. Finn served as a talk
show producer and engineer at KNBR in San Francisco, California.  From 1982 to
1986, Ms. Finn taught radio production at Phillips Academy in Andover,
Massachusetts.  Ms. Finn earned a Bachelor of Arts degree in Communication from
the University of Michigan in 1981, and a Master's degree in Media Management
from Emerson College in Boston in 1987. Ms. Finn is married to David Schwartz,
ImaginOn's Chairman, Chief Executive Officer and a Director.

     DENNIS ALLISON, has been a Director of ImaginOn since March 4, 1999.  He is
a Stanford University Computer Systems Laboratory Lecturer.  Mr. Allison is also
an independent consultant and an editorial advisor on computer science and
electrical engineering to Addison-Wesley-Longham.  A former Series Advisor on
the Prentice-Hall Series on Innovative Technology, Mr. Allison also served on
the editorial board of Microprocessor Report.  He was also the co-founder of HaL
Computer Systems and of the People's Computer ImaginOn, a non-profit
organization that played a pivotal role in the development of the personal
computer.  He is also a past IEEE CS Governing Board Member and a past member of
the editorial boards of IEEE Computer and IEEE Software.

     JIM POLIZOTTO has been a Director of ImaginOn since March 4, 1999.  Mr.
Polizotto has served an Engineering Director of VTEL Corporation, Sunnyvale,
California, since 1994, where he is responsible for the Sunnyvale Validation
organization.  He also has corporate responsibility to ensure interoperability
with other vendors' systems.  VTEL Corporation is a world leader in Digital
Visual Communications.  Prior to 1994, Polizotto helped to create a multimedia
development laboratory for IBM in Silicon Valley and was responsible for the
development of many IBM multimedia breakthroughs, including the 1993 launch of
IBM's Internet-based multimedia video streaming server.  Mr. Polizotto also
serves on the board of the International Multimedia Teleconferencing Consortium,
Inc., a non-profit corporation comprised of more than 150 companies from around
the world.

                                      -38-
<PAGE>


COMPENSATION OF THE BOARD OF DIRECTORS

     Our outside directors receive stock options equivalent to $10,000 per year
of service.  All directors are reimbursed their expenses incurred in attending
Board of Directors meetings.

     In 1998, former directors Messrs. Simpson and Yang each received 10,000
shares of common stock in connection with their services as directors.
Additionally, Mr. Yang exercised 15,000 previously granted options.  In 1998,
10,000 incentive stock options were granted to Messrs. Yang and Simpson each at
an exercise price of $1.42.

     August 31, 1999, the compensation committee approved a $50,000 bonus to
each David Schwartz and Leonard Kain for recognition of their services to us and
to reflect current compensation of executives at other information technology
companies.

AUDIT COMMITTEE

     We have an audit committee that:

     .  monitors our financial reporting and our internal and external audits;
     .  reviews and approves material accounting policy changes;
     .  monitors internal accounting controls;
     .  recommends the engagement of independent auditors;
     .  reviews transactions between us and our officers or Directors; and
     .  performs other duties when requested by the Board of Directors.

     Directors, Allison, Polizotto and Finn are members of the audit committee.

COMPENSATION COMMITTEE

     We also have a compensation committee that reviews and approves the
compensation and benefits paid to our executive officers, and administers our
employee stock option plan.  Messrs. Allison and Polizotto are members of the
compensation committee.

1994 STOCK OPTION PLAN

     Our stockholders adopted the 1994 stock option plan which provides for the
issuance of options to purchase up to 200,000 shares of common stock to
employees, officers, directors of, and consultants to ImaginOn, then operating
as California Pro Sports, Inc.  The purposes of the 1994 stock option plan are
to encourage stock ownership by our employees, consultants and directors so that
they may acquire or increase their proprietary interest in us, to reward
employees, directors and consultants for past services to us and to encourage
such persons to become employed by or remain in the employ of or otherwise
continue their association.  All options under the 1994 stock option plan have
been granted.

1997 STOCK OPTION PLAN

     The stockholders of ImaginOn.com, a California corporation, adopted the
1997 stock option plan which provides for the reservation of up to 2,710,000
shares of our common stock.  The purpose of the 1997 stock option plan is to
provide additional incentive to our employees and consultants.  Unless sooner
terminated, the 1997 stock option plan will expire in 2007.

1999 STOCK OPTION PLAN

     The board of directors of ImaginOn, Inc. , a Delaware corporation after
merger with California Pro Sports, Inc., recently approved the 1999 Incentive
Stock Option Plan.  The board of directors plans to submit the 1999 Incentive
Stock Option Plan to the shareholders for their approval at the next shareholder
annual meeting.

                                      -39-
<PAGE>


     The following table provides summary information about our stock option
plans as of September 30, 1999:

               Shares authorized   Options outstanding   Options exercisable
               -----------------   -------------------   -------------------

1994 Plan                200,000                   -0-                   -0-

1997 Plan              2,710,000               847,302               390,050
                       ---------               -------               -------
Total                  2,910,000               847,302               390,050
                       =========               =======               =======

     Our stock option plans are administered by our compensation committee.
They determine additional conditions of the options granted, including the
exercise price and the number of shares to grant.

     Options may be granted as incentive stock options intended to qualify for
special treatment under the Internal Revenue Code of 1986, as amended (the
"Code"), or as non-statutory stock options which are not intended to so qualify.
Only our employees or employees of our subsidiary are eligible to receive
incentive options.  The period during which options may be exercised may not
exceed ten years.  The exercise price for incentive options may not be less than
100% of the fair market value of the common stock on the date of grant; except
that the exercise price for incentive options granted to persons owning more
than 10% of the total combined voting power of the common stock may not be less
than 110% of the fair market value of the common stock on the date of grant and
may not be exercisable for more than five years.  The exercise price for non-
statutory options may not be less than 80% of the fair market value of the
common stock on the date of grant.

     The option plans contain provisions for proportionate adjustment of the
number of shares issuable upon the exercise of outstanding options and the
exercise price per share in the event of stock dividends, recapitalization
resulting in stock splits or combinations or exchanges of shares.

     In the event of our dissolution or liquidation, a corporate separation or
division or the merger or consolidation of us, the Board may adopt resolutions
which provide that all outstanding options under the option plans may be
exercised on such terms as it may have been exercised immediately prior to, or
will expire by a fixed date on or prior to, the date of such dissolution,
liquidation, corporate separation, division, merger or consolidation. The option
plans also provide for the acceleration of the vesting of all outstanding
options in the event of any merger or consolidation in which we are not the
surviving corporation, or any sale or transfer by us of all or substantially all
its assets or any tender offer or exchange offer for or the acquisition,
directly or indirectly, by any person or group or all or a majority of the our
then outstanding voting securities.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

     Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires our officers and directors and persons who own more
than ten percent of a registered class of our securities, collectively,
"reporting persons", to file reports of ownership and changes in ownership on
Forms 3, 4, and 5 with the Securities and Exchange Commission, "SEC".

     Based solely upon a review of the copies of such forms it has received and
representations from the Reporting Persons, we believe all reporting persons
have complied with the applicable filing requirements.

EXECUTIVE COMPENSATION

     For the year ending December 31, 1999:

David Schwartz            President, CEO                        $120,000

Leonard Kain              Executive Vice President              $120,000


                                      -40-
<PAGE>


Abe Matar                 Vice President of Marketing           $105,000

Sue Ann von Kaeppler      Vice President Business Development   $120,000

James A. Newcomb          Chief Financial Officer               $120,000

Note: the latter three executives are now reported due to the recent creation of
an "Executive Committee."

     SUMMARY COMPENSATION TABLE

     The following table sets forth information regarding compensation paid to
(i) our Chief Executive Officer and (ii) each of our other executive officers
whose total annual compensation exceeded $100,000 for the years ended December
31, 1996, 1997 and 1998.  None of our executive officers received awards or
payments of any long-term compensation during the period covered.  The
executives listed below resigned and are no longer our employees.

<TABLE>
<CAPTION>
                                                Annual                              Long Term          All Other
                                             Compensation                          Compensation      Compensation
                                         =====================                   ================  ===============
                                                                                     Securities
                                                                                     Underlying
Name and Position                      Year   Salary        Bonus        Other     Options /SARs
=================                      ====   ======        =====        =====     =============
<S>                                   <C>    <C>           <C>          <C>       <C>                 <C>
Henry Fong,                            1998   150,000(1)      -0-          -0-             -0-               -0-
President, former Chief Executive      1997   165,000(1)      -0-          -0-             -0-               -0-
Officer and Chairman of the Board      1996   160,000(1)      -0-          -0-             -0-          $300,000(2)
Resigned January 20, 1999

Barry S. Hollander,                    1998   155,000      76,313(3)       -0-             -0-               -0-
Treasurer and                          1997   117,738         -0-          -0-             -0-               -0-
Chief Financial Officer                1996   125,000         -0-          -0-             -0-               -0-
Resigned January 27, 1999

Michael S. Casazza, President          1998       -0-         -0-          -0-             -0-               -0-
Chief Operating Officer and Director                         1997      157,500         413,000(4)            -0-
Resigned September 1997                1996   190,000         -0-          -0-             -0-           300,000(2)
</TABLE>
__________
(1)   Mr. Fong was not an employee of the company and received fees of $10,000
      per month for consulting services rendered to the company and received an
      additional $30,000 fee primarily related to long-term strategic planning,
      financing and acquisitions in connection with the Company's prior
      business.
(2)   Represents guaranty fees accrued in connection with the USA Skate
      acquisition.  These fees were paid at December 31, 1996 in shares of
      common stock based on a price of $1.375 per share, the December 31, 1996
      market price.
(3)   In January 1998, the company issued 18,500 shares of Series A preferred
      stock to Mr. Hollander.  The shares were valued based upon the trading
      price of the company's common stock, adjusted for the one for three
      conversion feature of the preferred stock, and accordingly, the company
      recognized an expense of $76,313.
(4)   Represents a bonus of 236,000 shares of common stock of the company, for
      among other things, the forgiveness of the remaining amount of $149,000 of
      the $400,000 promissory note, making other loans to the company and/or its
      subsidiaries in order for the company to meet immediately due obligations,
      and his effort in negotiating and moving the USA Skate asset sale forward
      to completion.

                                      -41-
<PAGE>


                    OPTION/SAR GRANTS IN LAST FISCAL YEAR.

- ------------------------------------------------------------------------------
                               Individual Grants
- ------------------------------------------------------------------------------
                 Number Of         Percent Of
                Securities        Total Options/
                Underlying        SARs Granted     Exercise Of
               Options/SARs      To Employees      Base Price       Expiration
   Name          Granted (#)     in Fiscal Year       ($/sh)           Date
   (a)              (b)             (c) (1)           (d)              (e)
Henry Fong      133,200                                1.42            2003
                148,000                                1.70            2003
                 74,000                                1.98            2003
                 74,000                                2.27            2003
                 74,000                                2.55            2003
                 74,000                                2.83            2003
                 74,000                                3.54            2003
                 74,000                                4.25            2003
____________   --------          ----------
Total                               66%
- ------------------------------------------------------------------------------
Barry Hollander  46,800                                1.42            2003
                 52,000                                1.70            2003
                 26,000                                1.98            2003
                 26,000                                2.27            2003
                 26,000                                2.55            2003
                 26,000                                2.83            2003
                 26,000                                3.54            2003
                 26,000                                4.25            2003
                                 ----------
                                    23%
______________
Total
- ------------------------------------------------------------------------------
(1)   For the year ended December 31, 1998,  1,100,000 options were granted. The
      percentage in this column is based on the total number of options granted
      to Henry Fong (725,200) and Barry Hollander (254,800) by California Pro
      Sports, Inc.

      AGGREGATED OPTION/SAR EXERCISES AND YEAR-END 1998 OPTION/SAR VALUES.

- --------------------------------------------------------------------------------
                                                                 Value Of
                                       Number Of Securities    Unexercised
                                     Underlying Unexercised    In-The-Money
                                          Options/SARs         Options/SARs
                                      At December 31, 1998  At December 31, 1998
                 Shares        Value           (#)                  ($)
               Acquired On    Realized    Exercisable/          Exercisable/
   Name        Exercise (#)      ($)      Unexercisable        Unexercisable
   (a)             (b)           (c)           (d)                  (e)
- --------------------------------------------------------------------------------
Henry Fong        77,200           0       0/725,200              $83,025/0
                 =======     =======
- --------------------------------------------------------------------------------
Barry Hollander  134,500     135,142       0/254,800              $     0/0
                 =======     =======
- --------------------------------------------------------------------------------


                                      -42-
<PAGE>


                CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      On January 8, 1998, we lowered the exercise of all the warrants held by
Messrs. Fong and Casazza to $1.00 per share. In January 1999, Mr. Casazza sold
his 201,400 warrants.

      In September 1997, Mr. Fong agreed to convert $181,000 owed to him by us,
for a note payable by us, assigned to Mr. Fong, at the September 30, 1997 market
price of $2.00 per share.  In December 1997, Mr. Fong agreed to convert the
common shares issued September 30, 1997 to our Series A Preferred Shares.  Upon
stockholder approval of a recapitalization measure in July 1998, Mr. Fong
received 90,500 shares of our common stock in exchange for the Series A
Preferred Stock.

      In January 1998, so as to infuse us with short-term working capital, Mr.
Hollander agreed to exercise 85,000 options to purchase shares of common stock
granted pursuant to an Incentive Stock Option Agreement dated April 23, 1997. In
exchange for this exercise, we awarded Mr. Hollander 29,500 non-statutory stock
options and 18,500 shares of Series A Preferred Stock. On July 15, 1998, the
Series A Preferred Shares were converted to 55,500 shares of common stock.

      In January 1998, we authorized the issuance of 50,000 shares of common
stock to Mr. Casazza in exchange for consulting services for the period
September 12, 1997 through January 12, 1998, at the January 5, 1998 market price
of $1.375.

      In May 1998, at our request, Barry Hollander exercised 49,500 options so
as to infuse us with short-term working capital.

      In June of 1998, at our request, Henry Fong exercised a total of 77,200
options so as to infuse us with short-term working capital.

      Transactions between us and our officers, directors, employees and
affiliates were on terms no less favorable to us than would have been available
from unaffiliated parties.  Any such transactions were subject to the approval
of a majority of the disinterested members of the Board of Directors.

                            PRINCIPAL STOCKHOLDERS

      Set forth below is certain information as of November 19, 1999, with
respect to ownership of our common and preferred stock held of record or
beneficially by (i) our executive officers named in the summary compensation
table, (ii) our directors, (iii) each person who owns beneficially more than
five percent of our outstanding common and preferred stock; (iv) all directors
and executive officers as a group and (v) the selling shareholder:

                                         NUMBER OF COMMON   PERCENTAGE OWNED OF
NAME AND ADDRESS OF BENEFICIAL OWNER       SHARES OWNED        COMMON SHARES
- ------------------------------------     ----------------   -------------------
David Schwartz                               5,431,743             12.37%
Officer and Director
1313 Laurel Street, Suite 1
San Carlos, CA 94070

Gulfstream 1998 Irrevocable Trust            2,938,815              6.70%
3155 Miro Drive North
Palm Beach Gardens, FL 33410


                                      -43-
<PAGE>


Leonard Kain                                 2,680,000              6.11%
Director
1313 Laurel Street, Suite 1
San Carlos, CA 94070

Mary E. Finn                                       -0-(1)            -0-
Director
1313 Laurel Street, Suite 1
San Carlos, CA 94070

Dennis Allison                                     -0-               -0-
Director
1313 Laurel Street, Suite 1
San Carlos, CA 94070

Jim Polizotto                                      -0-               -0-
Director
1313 Laurel Street, Suite 1
San Carlos, CA 94070

Abe Matar                                      125,000               -0-
Vice President of Marketing
1313 Laurel Street, Suite 1
San Carlos, CA 94070

Sue Ann von Kaeppler                             5,000               -0-
Vice President of Business Development
1313 Laurel Street, Suite 1
San Carlos, CA 94070

James A. Newcomb                                   -0-               -0-
Chief Financial Officer
1313 Laurel Street, Suite 1
San Carlos, CA 94070

Wayne W. Mills                               2,486,668              5.67%
c/o R. J. Steichen & Co.
5500 Wayzata Blvd., Suite 290
Golden Valley, MN 55402

Gage LLC                                     1,933,328              4.41%(2)
Attn: Sabrina Hew
c/o Citco Trustees Cayman Limited
Commercial Centre
P.O. Box 31106SmB
Grand Cayman, Cayman Islands
British West Indies

All Directors and executive officers as a    8,111,743             18.48%
 group (5 persons)

_____________________
(1)   Does not include 5,431,743 shares owned by her spouse, David M. Schwartz,
      as to which she disclaims beneficial ownership.
(2)   The percentage is based on 43,895,387 shares of common stock outstanding
      after 2,838,716 shares of common stock have been issued and registered
      pursuant to this registration statement/prospectus.


                                      -44-
<PAGE>


      This percentage of ownership is in compliance with the requirement that
      holders of our Series F Convertible Preferred Stock own no more than 4.99%
      of our currently outstanding shares of common stock.

                        PRICE RANGE OF OUR COMMON STOCK


     Our securities have been traded over-the-counter since January 18, 1995 and
were quoted on the NASDAQ SmallCap Market under the symbols CALP and CALPW,
respectively through January 3, 1999.  On December 18, 1998, we changed our name
from California Pro Sports, Inc. to ImaginOn, Inc.  On January 4, 1999, the
common stock and publically traded warrants began to trade under the symbols
IMON and IMONW, respectively.  On June 7, 1999 our publically traded warrants
were redeemed and are no longer traded. The following table sets forth the range
of high and low bid prices of our common stock and warrants as quoted by NASDAQ.
These market quotations reflect inter-dealer prices without retail mark-up,
mark-down or commissions and may not represent actual transactions.

                                        Common Stock          Warrants
                                         Bid Prices           Bid Prices
                                       --------------       --------------
                1999                   High       Low       High       Low
                ----                   ----       ---       ----       ---
   First Quarter (1/1/99-3/31/99)     $15.25    $1.1875   $ 12.375   $.71875
   Second Quarter(4/1/99-6/30/99)     $5.8125   $1.9375   $   3.75   $.90625
   Third Quarter (7/01/99-9/30/99)    $3.7183   $1.5625      *          *

                1998
                ----
   First Quarter (1/1/98-3/31/98)     $1.625    $ 1.125   $  .8125   $ .4375
   Second Quarter (4/1/98-6/30/98)    $1.9375   $1.1875   $   .875   $   .50
   Third Quarter (7/1/98-9/30/98)     $1.50     $   .75   $  .6875   $ .4375
   Fourth Quarter (10/1/98-12/31/98)  $2.625    $   .50   $  1.375   $   .25

                1997                  $1.5312   $ .8125   $ .40625   $   .25
                ----
   First Quarter (1/1/97-3/31/97)     $2.00     $ .9375   $  .6875   $.21875
   Second Quarter (4/1/9-6/30/97)     $2.375    $ 1.375   $    .75   $ .4375
   Third Quarter (7/1/97-9/30/97)     $3.0625   $1.0625   $1.15623   $ .6875
   Fourth Quarter (10/1/97-12/31/97)

      As of November 19, 1999, there were approximately 335 record holders of
ImaginOn common stock.

* Warrants were redeemed June 7, 1999 and no longer trade.

                            SELLING SECURITYHOLDER

      The following table lists the securities to be registered and offered for
sale by the selling securityholder including the total number of shares to be
registered by this registration statement. The term "selling securityholder"
include donees, pledgees, transferees and other successors in interest selling
shares received from the selling securityholder after the date of this
prospectus.


      Because the selling securityholder may offer all or part of the shares of
common stock received upon conversion of the Series F Convertible Preferred
Stock or exercise of the Group F Warrant and because this offering is not being
underwritten on a firm commitment basis, no estimate can be given as to the
number of shares of common stock that the selling securityholder is going to
sell.  Pursuant to the registration rights agreement, ImaginOn is required to
register 150% of the estimated number of shares of common stock issuable upon
conversion of the Series F Convertible Preferred Stock.  We believe this is a
reasonable estimate of the maximum number of shares issuable upon conversion.
The shares of common stock received upon conversion of the Series F Convertible
Preferred Stock or exercise of the Group F Warrant offered by this prospectus
may be offered from time to time by the selling securityholder.

                                      -45-
<PAGE>


      On May 4,1999 we sold 4,000 shares of the Series F Convertible Preferred
Stock to Gage LLC and the Group F Warrant to purchase 122,553 shares of common
stock. The proceeds from this transaction of approximately $3,042,000 were
utilized to redeem the remaining 2,510 shares of our then outstanding Series D
Preferred Stock and the Series E Preferred Stock. In connection with the
placement of the Series F Convertible Preferred Stock and the Group F Warrant,
$240,000 was paid to placement agents. All remaining proceeds were used to fund
operating expenses. For a more detailed description of this previous transaction
see "Description of securities."

      The selling security holder, Gage LLC, is not a broker-dealer and is not
affiliated with any registered broker-dealer. Gage LLC is engaged in the
business of buying and selling securities for its own account for investment
purposes. Mr. David Sims has the sole voting and depositive powers with respect
to the Series F Convertible Preferred Stock owned of record by Gage LLC.

      Pursuant to the Stock Purchase Agreement dated May 4, 1999, the
securityholder cannot hold at any one time more than 4.99% of the outstanding
common stock. The registration rights agreement requires ImaginOn to register up
to 150% of the number of shares of common stock convertible from the Series F
Convertible Preferred Stock, which would be 2,716,163 shares of common stock,
plus 100% of the common stock underlying the Group F Warrant, which would be
122,553 shares of common stock.

SHARES UNDERLYING WARRANTS AND CONVERTIBLE PREFERRED STOCK OFFERED BY THE
SELLING SECURITYHOLDER

<TABLE>
<CAPTION>
                          Shares of          Shares of          Total                                Percent of
                        common stock       common stock       shares of          Amount of          outstanding
                       issuable upon        exercisable     common stock to     common stock        common stock
     Selling          conversion of the    underlying the   be offered for        owned by            owned by
 securityholder     Series F Convertible      Group F      securityholder's    securityholder     securityholder after
      name           Preferred Stock (2)      Warrant         account(1)     after the offering      the offering
- ----------------------------------------------------------------------------------------------------------------------
<S>                  <C>                     <C>               <C>                 <C>                   <C>
Gage LLC                 1,810,775           122,553          1,933,328                   0                       0
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
___________________
(1)  The selling securityholder may offer all or part of the shares of common
     stock received upon the conversion of the Series F Convertible Preferred
     Stock and exercise of the Group F Warrant.

(2)  Pursuant to the Registration Rights Agreement dated May 4, 1999, the number
     of shares of common stock issuable is determined using the trading day
     immediately preceding the filing of the initial registration statement on
     October 8,1999. Using October 7, 1999, the conversion price of the Series F
     Convertible Preferred Stock is $2.209. The number of shares of common
     stock issuable upon conversion of the Series F Convertible Preferred Stock
     is 1,810,775 shares.

                           DESCRIPTION OF SECURITIES

COMMON STOCK

     We are authorized to issue up to 50,000,000 shares of common stock, $.01
par value per share.  As of November 19, 1999, 41,056,671 shares are
outstanding.  All outstanding shares of common stock are fully paid and non-
assessable, and all shares of common stock offered in the offering, when issued,
will be fully paid and non-assessable.  The holders of ImaginOn common stock:

                                      -46-
<PAGE>

     .  have equal ratable dividends from funds legally available, when and
        if declared by our Board of Directors;

     .  are entitled to share ratably in all our assets available for
        distribution to holders of common stock upon liquidation, dissolution
        or winding up of the affairs of ImaginOn;

     .  do not have preemptive, subscription or conversion rights and there
        are no redemption or sinking fund provisions applicable thereto; and

     .  are entitled to one vote per share on all matters on which
        stockholders may vote at all meetings of stockholders.

     The holders of our common stock do not have cumulative voting rights, which
means that the holders of a majority of the outstanding shares represented at
any stockholder meeting at which a quorum is present, voting for the election of
directors, can elect all of the directors to be elected, if they so choose and,
in such event the holders of the remaining shares will not be able to elect any
of the directors.


PREFERRED STOCK

     We are authorized to issue up to 5,000,000 shares of preferred stock with
such designations, rights and preferences as may be determined from time to time
by the Board of Directors.  Accordingly the Board of Directors is empowered,
without stockholder approval, to issue preferred stock with dividend,
liquidations, conversion, voting or other rights that adversely affect the
voting powers or other rights of ImaginOn's Common Stockholders. Currently there
are 4,000 shares of Series F Convertible Preferred Stock issued and outstanding.

     On May 4, 1999 we issued 4,000 shares of Series F Convertible Preferred
Stock and the Group F Warrant to purchase 122,553 shares of our common stock.
The holders of the Series F Convertible Preferred Stock are entitled to receive
dividends out of legally available funds, subject to declaration by the Board of
Directors.  Such dividends are cumulative and shall be paid prior to and in
preference to any dividend on the common stock at an annual rate of 12% of the
$1,000 stated value.  Such dividends begin to accrue from the date if issuance
and are payable upon redemption or conversion.  Dividends are payable, at the
holders option in cash or unrestricted common stock.  The Series F Convertible
Preferred Stock shall rank prior to the common stock.

     CONVERSION OF PREFERRED STOCK into common stock can only occur by
submitting a Notice of Conversion. After October 31, 1999, 180 days after date
of issue date, the holders of Series F Convertible Preferred Stock may convert
any whole number of the Series F Convertible Preferred Stock into common stock
provided that:

     .  redemption notice has not been provided by us; or

     .  holders of Series F Convertible Preferred Stock do not or as a result
        of such conversion, own more than 4.99% of our outstanding shares of
        common stock at any time. However, it is possible for holders of our
        Series F Convertible Preferred Stock to circumvent this restriction. By
        converting an amount of Series F Convertible Preferred Stock equal to
        4.99% of our outstanding shares of common stock, selling those shares
        into the market and then converting another block of Series F
        Convertible Preferred Stock into common stock, holders of our Series F
        Convertible Preferred Stock create additional dilution to the existing
        holders of our common stock.

     The conversion rate for issuing shares of our common stock in exchange for
Series F Convertible Preferred Stock is determined by dividing 1,000 by the
conversion price. The conversion price will be the lowest of:

     .  125% of the average closing bid price of ImaginOn common stock on the
        five consecutive trading days ending on the trading day immediately
        preceding the issuance date; or

                                      -47-
<PAGE>

     .  94% of the average of the five lowest closing bid prices of ImaginOn
        common stock during 22 trading days immediately preceding the
        conversion date.


     The number of shares of Series F Convertible Preferred Stock being
converted is then multiplied by the conversion rate to determine the number of
shares of our common stock to be issued in the conversion.

     For example and for illustrative purposes only, if the issuance date is May
4, 1999, the average closing bid price for the five consecutive trading days
from April 27, 1999 through May 3, 1999 is $3.444, 125% of $3.444 is $4.305; and
if the conversion date is May 4, 1999, the average of the five lowest closing
bid prices of common stock during the 22 days prior to the conversion date is
$3.444, 94% of $3.444 is $3.237. Therefore, the lower of $4.305 and $3.237 is
$3.237and is the conversion price per share.

     The following table sets forth, for illustrative purposes only, the effect
of decreasing stock prices and its result on the conversion price per share and
number of shares issued upon conversion of the Series F Convertible Preferred
Stock.


<TABLE>
<CAPTION>

                                Number of shares of    Aggregate number of                 Number of shares
                                   common stock         shares of common                    of common stock
 Price per                    convertible per share     stock convertible                    issuable upon      Percentage of
 share of       Conversion         of Series F          from all Series F        Warrant    exercise of the      outstanding
  common         price per    Convertible Preferred   Convertible Preferred      exercise   Group F Warrant        common
  stock          share (1)          Stock(2)                 Stock(3)             price          (5)              stock(6)
- ------------------------------------------------------------------------------------------------------------------------------
<S>             <C>              <C>                      <C>                 <C>             <C>                <C>
$4.0312(7)       $2.591                  386               1,544,000           $2.8125(4)         122,553           3.900%
- ------------------------------------------------------------------------------------------------------------------------------
$3.023(8)        $3.023(8)               331               1,324,000           $ 3.023(8)         122,553           3.403%
- ------------------------------------------------------------------------------------------------------------------------------
$2.016(9)        $2.016(9)               497               1,988,000           $ 2.016(9)         122,553           4.889%
- ------------------------------------------------------------------------------------------------------------------------------
$5.039(10)       $5.039(10)              199                 796,000           $ 5.039(10)        122,553           2.188%
- ------------------------------------------------------------------------------------------------------------------------------
$6.047(11)       $6.047(11)              166                 664,000           $ 6.047(11)        122,553           1.879%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)  The conversion price is the lesser of (a) 125% of the average closing bid
     price of the five consecutive trading days prior to the conversion date or
     (b) 94% of the average closing bid price of the five lowest trading days
     out of the 22 most consecutive trading days prior to the conversion date.

(1)  Rounds the conversion rate up to the next whole share.

(3)  Assumes that all 4,000 shares of Series F Convertible Preferred Stock will
     be converted into common stock and there have been no prior conversions of
     the Series F Convertible Preferred Stock.

(4)  The price per share of common stock (the "Warrant Exercise Price") of the
     Group F Warrant may be subject to changes in the current market price of
     the underlying common stock. The Warrant Exercise Price is the lesser of:
     110% of the bid price on the trading day immediately preceding the date of
     the warrant which was $3.1875 on May 3, 1999; 100% of the bid price on the
     first trading day immediately following the day demand and proper notice
     for registration of the common stock was received by us on June 7, 1999
     which was $2.8125; or 100% of the bid price on the day all shares of Series
     F Convertible Preferred Stock are redeemed in full by us which would be
     $4.0312 assuming that the holder of the Series F Convertible Preferred
     Stock deiced to convert on December 27, 1999 and reflects the closing bid
     price of one share of ImaginOn common stock as quoted by the NASDAQ
     SmallCap Market on December 23, 1999 (the "Base Closing Bid Price").

                                      -48-
<PAGE>


(5)  The number of shares of common stock acquired as a result of the exercise
     of the Group F Warrant (the "Warrant Shares") is constant and does not
     fluctuate.

(6)  Assumes 41,056,671 outstanding shares of ImaginOn common stock prior to the
     conversion of the Series F Convertible Preferred Stock and exercise of the
     Group F Warrant.

(7)  Assumes that the holder of the Series F Convertible Preferred Stock deiced
     to convert on December 27, 1999 and reflects the Base Closing Bid Price.

(8)  Reflects a 25% reduction from the Base Closing Bid Price.

(9)  Reflects a 50% reduction from the Base Closing Bid Price.

(10) Reflects a 25% increase from the Base Closing Bid Price.

(11) Reflects a 50% increase from the Base Closing Bid Price.

     However, the number of shares of our common stock is subject to adjustment
in each of the following cases:

     .  stock dividend
     .  declaration of dividends payable in cash while offering a right to
        purchase more common stock at the dividend price
     .  stock split
     .  combination of outstanding shares of common stock
     .  issue or reclassify common stock
     .  consolidation, merger, sale or lease of substantially all of our assets
     .  capital reorganization or reclassification of common stock

     REDEMPTION OF PREFERRED STOCK by us may occur at any time provided that
there is one of the following:

     .  available full cash amount of the redemption price; or
     .  available credit facility to pay the cash redemption price; or
     .  a combination or readily available cash and credit facility to pay the
        redemption price.

     The redemption price is subject to adjustment of the conversion price in
the event of a stock split, stock dividend or combination of shares or similar
event.  The redemption price is 110% of the aggregate stated value of the
redeemed shares plus all accrued and unpaid interest if redeemed after October
31, 1999, 180 days after the issue date.

     As long as Series F Convertible Preferred Stock is outstanding, we are
required to reserve and keep available out of our authorized but unissued common
stock no less that 200% of the number of shares of common stock needed to
convert the Series F Convertible Preferred Stock.  A two-thirds vote of the
Series F Convertible Preferred Stockholders is required to amend our Certificate
of Incorporation if such amendment does any of the following:

     .  create senior preferred stock

     .  reduce payment to Holders of Series F Convertible Preferred Stock due to
        voluntary or involuntary liquidation or winding up
     .  cancel or modify conversion rights


     Additionally, we cannot establish a par value of any shares of stock
receivable on conversion of Series F Convertible Preferred Stock or consolidate,
merger or permit such unless such acquirer assumes in writing all the
obligations of the Series F Convertible Preferred Stock.

                                      -49-
<PAGE>


WARRANTS

     Prior to this offering, we redeemed all of our outstanding public warrants.
As part of the Series F Convertible Preferred Stock purchase agreement dated
May 4, 1999 the purchaser of the Series F Convertible Preferred Stock also
negotiated for a warrant that expires on or prior to May 3, 2003 to purchase
122,553 shares of common stock (the "Group F Warrant").  The exercise price of
the common stock, Group F Warrant Exercise Price, will be the lower of the
following:

     .  $3.1875, which is 110% of the bid price on a trading day immediately
        preceding the date of the warrant; or

     .  100% of the bid price on the day all shares of Series F Convertible
        Preferred Stock are redeemed in full by us; or

     .  $2.8125, which is 100% of the bid price on the first trading day
        immediately following the day demand and proper notice for registration
        of the common stock was received by us on June 7, 1999.

     The Group F Warrant Exercise Price is subject to fluctuation and is
reflected on page 51; however the number of common shares underlying the warrant
is fixed prior to adjustment at 122,553 shares of common stock.

     The Group F Warrant Exercise Price is subject to adjustment in certain
events including but not limited to the following:

     .  amendment to our Certificate of Incorporation changing the
        designation of common stock or the rights, privileges, restrictions or
        conditions in respect of the common stock or division of common stock;

     .  subdivision to our outstanding stock or declare a dividend or make
        any distribution to shareholders payable in common stock;

     .  issue more than 100,000 share of common stock or options to purchase
        common stock or securities convertible into common stock with an
        exercise price less than the Group F Warrant Exercise Price either
        through a public or private placement but not including options
        granted pursuant to our Stock Option Plan or shares issued in an
        acquisition, or shares issuable pursuant to our convertible
        debentures; or

     .  merger, consolidation, reorganization or sale of substantially all
        our assets.


REGISTRATION RIGHTS

     Under the registration rights agreement, we are obligated to register 150%
shares of common stock which may be issued upon conversion of the Series F
Convertible Preferred Stock which includes 1,810,775 shares of common stock plus
an additional 905,388 shares of common stock for future conversions of the
Series F Convertible Preferred Stock, and 100% of the 122,553 shares of common
stock exercisable under the Group F Warrant.  We are fulfilling our obligations
under the registration rights agreement with this registration statement and
prospectus.


INDEMNIFICATION PROVIDED IN CONNECTION WITH THE OFFERING BY THE SELLING
SECURITYHOLDER

     The selling securityholder agreed to indemnify and hold harmless ImaginOn,
its directors, officers, agents and employees, each person who controls
ImaginOn, and the directors, officers, agents or employees of such controlling
persons, to the fullest extent permitted by applicable law, from and against all
losses arising solely out of or based solely upon any untrue statement of a
material fact contained in this registration statement, any prospectus, or any
form of prospectus, or solely out of or based solely upon any omission of a
material fact required to be stated in herein not misleading to the extent, but
only to the extent, that such untrue statement or omission is contained in

                                      -50-
<PAGE>

any information so furnished in writing by the selling securityholder to
ImaginOn specifically for inclusion in this registration statement or such
prospectus or to the extent that such information related to the selling
securityholder or the selling securityholder's proposed method of distribution
of the securities and was reviewed and expressly approved in writing by the
selling security holder expressly for use in this registration statement, such
prospectus or form of prospectus.


INDEMNIFICATION PROVIDED IN CONNECTION WITH THE OFFERING BY IMAGINON

     ImaginOn agreed to indemnify and hold harmless the selling securityholder,
its directors, officers, agents, employees, each person who controls the selling
securityholder, and the directors, officers, agents or employees of such
controlling persons, to the fullest extent permitted by applicable law, from and
against all losses arising solely out of or based solely upon any untrue
statement of a material fact contained in this registration statement, or any
related prospectus or similar document, or arise out of or are based upon the
omission or alleged omission to state a material fact required to be stated or
necessary to make such statements not misleading; however, ImaginOn will not be
liable in any such case to the extent such loss, claim damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in this registration statement or
prospectus or similar document in reliance upon, and in conformity with, written
information furnished to ImaginOn by the selling securityholder, specifically
for the use in the preparation of such document or to the extent that such
information related to the selling securityholder's method of distribution of
the securities and was reviewed expressly by the selling securityholder.


                             PLAN OF DISTRIBUTION

     We are registering the shares offered by the selling securityholder and no
underwriters are participating in this offering.

     We will pay all costs and expenses in connection with the preparation of
this prospectus and the registration of the shares.  Brokerage commissions and
similar selling expenses, if any, attributable to the sale of shares will be
borne by the selling securityholder.  The selling securityholder may sell its
shares from time to time in one or more types of transactions, which may include
block transactions, on the Nasdaq SmallCap Market.  The types of transactions
include:

     . negotiated transactions;
     . put or call option transactions;
     . short sales; or
     . a combination of the above transaction at market prices at the time of
       sale or at negotiated prices.


     These transactions may or may not involve brokers or dealers.  The selling
securityholder has advised us that it has not entered into any agreements,
understandings or arrangements with any underwriters or broker-dealers regarding
the sale of the shares, nor is there an underwriter or coordinating broker
acting in connection with the proposed sale of shares by the selling
securityholder.  Pursuant to the certificate of designation of the Series F
Convertible Preferred Stock, the securityholder cannot own more than 4.99% of
the issued and outstanding common stock at any one time. This requirement does
not interfere with the securityholder's right to convert the Series F
Convertible Preferred Stock over time, which in the aggregate would be greater
than 4.99%.  The selling securityholder can buy and immediately sell or hold up
to 4.99% of the outstanding common stock provided that at no time can the
selling securityholder own more than 4.99% of the outstanding common stock.

     We have agreed to indemnify the selling securityholder and the officers,
directors and each person who controls the selling securityholder against all
losses, claims, damages, liabilities and expenses caused by:

     . any untrue or alleged untrue statement of material fact contained in the
       registration statement, this prospectus or any amendment or supplement to
       these documents; or

                                      -51-
<PAGE>

     . any omission or alleged omission to state a material fact in the
       registration statement, this prospectus or any amendment or supplement to
       these documents that is required to be stated or necessary to ensure that
       the documents are not misleading.

     The selling securityholder will not be indemnified if the claims relating
to or arising from untrue statements or omissions if:

     . the statements or omissions are based on written information provided by
       the selling securityholder for use in the preparation of the registration
       statement, this prospectus or any amendments or supplements to these
       documents; or

     . the selling securityholder fails to deliver a copy of this prospectus to
       a buyer.

     The selling securityholder and any broker-dealers that act in connection
with the sale of securities might be deemed to be underwriters within the
meaning of Section 2(a)(11) of the Securities Act, and any commissions received
by those broker-dealers and any profit on the resale of the securities sold by
them while acting as principals might be deemed to be underwriting discounts or
commissions under the Securities Act.

     Because the selling securityholder may be deemed to be an underwriter
within the meaning of Section 2(a)(11) of the Securities Act, the selling
securityholder will be subject to the prospectus delivery requirements of the
Securities Act.  We have informed the selling securityholder that the anti-
manipulative provisions of Regulation M promulgated under the Exchange Act may
apply to its sales in the market.

     The selling securityholder also may resell all or a portion of the shares
in open market transactions in reliance upon Rule 144 under the Securities Act,
provided it meets the criteria and conform to the requirements of that Rule.


NASDAQ LISTING


     According to NASDAQ, the issuance of future priced securities that are
convertible into common stock, such as our Series F Convertible Preferred Stock
may cause ImaginOn to be delisted from the NASDAQ SmallCap Market listing if
ImaginOn does not comply with the following:

     . shareholder approval is generally required in the event the futures
       priced securities make up 20% or were of the outstanding common stock.

     . voting rights given to the future priced securityholders cannot be
       greater than the voting rights given to the pre-existing common stock
       holders.

     . the bid price of underlying convertible stock, the common stock, must be
       $1 or more.

     . a listing of additional shares and associate fee must be filed with
       NASDAQ.

     . the future priced security is not and will not result in a change of
       control.


     Although we do not know the exact number of shares of common stock to be
issued for the conversion of the Series F Convertible Preferred Stock, because
the conversion price is dependent on the market price at the time of conversion,
we are confident that our securities will not be de-listed due to the issuance
of more than 20% of our common stock outstanding. Based upon NASD Rule IM-4300,
Interpretive Material Regarding Future Priced Securities Summary, the maximum
potential issuance of common shares for the conversion of the Series F
Convertible Preferred Stock is 1,235,713 shares. There are potentially 122,553
shares of common stock issuable upon exercise of the Group F Warrant.
Potentially, we must issue a total of 1,358,266 shares of common stock for the
conversion of the Series F Convertible Preferred Stock and the exercise of the
Group F Warrant. Based upon our 41,056,671 outstanding shares of common stock as
of November 19, 1999, this is substantially below the 8,211,335 share limit of
20% of our outstanding common stock.

                                      -52-
<PAGE>


     We believe that we have complied with NASDAQ's future priced securities
policy and, therefore we will continue to be listed on the NASDAQ SmallCap
Market.


                                 LEGAL MATTERS

     Friedlob Sanderson Raskin Paulson & Tourtillott, LLC, Denver, Colorado, as
our counsel, has issued an opinion as to the validity of the common stock and
purchase warrants.

                                    EXPERTS

     The audited consolidated financial statements of ImaginOn, Inc. and
subsidiaries included in this registration statement have been audited by
Gelfond Hochstadt Pangburn & Co., independent certified public accountants, for
the periods and to the extent set forth in their report appearing in this
registration statement.  Such financial statements have been so included in
reliance upon the report of such firm given upon their authority as experts in
auditing and accounting.

                                      -53-
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES

                 YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996

                         Index to financial statements

                                                                          Page
                                                                          ----
Independent auditors' report                                               F-2

Consolidated financial statements:

Balance sheets                                                             F-3

Statements of operations and comprehensive loss                            F-4

Statements of shareholders' equity                                 F-5  -  F-8

Statements of cash flows                                          F-9   - F-10

Notes to financial statements                                    F-11  -  F-34

Unaudited September 30, 1999 Financial Statements:                        F-35

Balance Sheet                                                             F-36

Statement of operations and comprehensive losses                          F-37

Statement of shareholders' equity                                  F-38 - F-40

Statement of cash flows                                            F-41 - F-42

Notes of financial statements                                      F-43 - F-47

                                      F-1
<PAGE>

                         INDEPENDENT AUDITORS' REPORT

Board of Directors
ImaginOn, Inc.

We have audited the accompanying consolidated balance sheets of ImaginOn, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations and comprehensive loss, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1998.
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 ImaginOn, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.



GELFOND HOCHSTADT PANGBURN & CO.


Denver, Colorado
March 22, 1999

                                      F-2
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                Assets
                                ------
                                                  Unaudited         December 31,     December 31,
                                                  Pro forma             1998             1997
                                                  ---------         ------------     ------------
                                                                                       (Note 7)

<S>                                          <C>                 <C>               <C>
Current assets:
  Cash                                        $   2,714,103       $      74,103     $      13,969
  Notes and accounts receivable, less allowance
    for doubtful accounts of $216,000 in 1997:
    Trade                                                                                  10,000
    Related parties (Note 10)                     1,477,217           1,477,217           131,270
    Other                                           104,226             104,226            90,000
  Prepaid expenses and other                         25,000              25,000            28,141
  Assets of subsidiary held for sale (Note 4)                           624,284         1,104,527
                                              -------------       -------------     -------------
      Total current assets                        4,320,546           2,304,830         1,377,907
                                              -------------       -------------     -------------
Furniture and equipment, net of accumulated
  depreciation ($469,379,1998;$319,866,1997)          2,674               2,674           153,387
                                              -------------       -------------     -------------
Other assets, net of accumulated amortization
  ($16,666, 1998; $66,137, 1997):
  Deferred merger costs                             167,777             167,777
  Goodwill                                                                                191,121
  Trademark license costs and other                  83,334              83,334           546,212
                                              -------------       -------------     -------------
                                                    251,111             251,111           737,333
                                              -------------       -------------     -------------
                                              $   4,574,331       $   2,558,615     $   2,268,627
                                              =============       =============     =============

                 Liabilities and Shareholders' Equity
                 ------------------------------------
Current liabilities:
  Accounts payable and accrued expenses       $     278,333       $     233,532     $      64,393
  Liabilities of subsidiary held for sale (Note 4)                    1,263,565         1,714,139
                                              -------------       -------------     -------------
      Total liabilities (all current)               278,333           1,497,097         1,778,532
                                              -------------       -------------     -------------
Minority interest                                                        56,320           385,149
                                              -------------       -------------     -------------
Commitments and contingencies (Notes 4, 5, and 10)
Shareholders' equity (Note 7):
  Preferred stock, $0.01 par value; authorized
    5,000,000 shares:
      Series A, issued and outstanding
        1,099,685 shares                                                                   10,997
      Series B/C, issued and
        outstanding 1,630 shares                  1,300,902           1,300,902
      Series D/E, issued and
        outstanding 3,000 shares                    935,000
Common stock, $0.01 par value; authorized
50,000,000  shares; issued 13,434,731 shares        134,347             134,347            67,344
Warrants                                            394,200             394,200           394,200
Capital in excess of par                         15,583,849          13,968,849        11,080,758
Accumulated deficit                             (14,052,300)        (14,052,300)      (10,554,713)
Treasury stock held by subsidiary, at cost,
  1,204,950  shares of common stock, 1998;
    360,000 shares of common stock and
    750,471 shares of preferred stock, 1997                            (740,800)         (893,640)
                                              -------------       -------------     -------------
      Total shareholders' equity                  4,295,998           1,005,198           104,946
                                              -------------       -------------     -------------
                                              $   4,574,331       $   2,558,615     $   2,268,627
                                              ===================================================
</TABLE>
                See notes to consolidated financial statements.

                                      F-3
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES
         CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
                 YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>

                                                       1998             1997            1996
                                                 -------------      ------------     ------------
<S>                                             <C>                <C>              <C>
Net sales                                        $                  $  9,087,767     $ 16,952,904
                                                 -------------      ------------     ------------
Cost of sales:
  Substantially from a related party (Note 1)                                           3,148,423
  Others                                                               7,445,344        9,852,861
  Inventory markdowns and adjustments                                                  1,059,750
                                                 -------------      ------------     ------------
                                                                       7,445,344       14,061,034
                                                 -------------      ------------     ------------
    Gross profit                                                       1,642,423        2,891,870
                                                 -------------      ------------     ------------
Operating expenses:
  General, administrative and selling expenses       2,060,001         5,270,153        6,153,723
  Consulting fees, related party (Note 5)              180,000           210,000          200,000
  Restructuring and Impairment
    charges (Note 11)                                  489,825           237,452        1,229,000
                                                 -------------      ------------     ------------
Total operating expenses                             2,729,826         5,717,605        7,582,723
                                                 -------------      ------------     ------------
Loss from operations                                (2,729,826)       (4,075,182)      (4,690,853)
                                                 -------------      ------------     ------------
Other expenses (income):
  Interest income, related party (Note 10)             (43,948)
  Interest expense:
    Related parties                                                      297,338          305,947
    Other                                              141,040           669,140        1,083,274
  Foreign currency gains                                                 (59,791)          44,012
  Royalty and other income                            (103,643)          (62,312)         (51,376)
  Loss on marketable securities (Note 3)                                  62,392          144,457
  Gain on sale of investment in subsidiary (Note 4)                      (87,593)        (111,366)
  Gain from issuance of common stock by
    subsidiary (Note 4)                                                                  (479,100)
  Finance fees (Notes 4 and 7)                         591,060           440,643
  Loss on sale of USA Skate assets (Note 4)            125,000           751,522
                                                 -------------      ------------     ------------
                                                       709,509         2,011,339          935,848
                                                 -------------      ------------     ------------
Loss before income taxes and minority interest      (3,439,335)       (6,086,521)      (5,626,701)
Income tax benefit (Note 6)                                             (166,404)        (244,500)
                                                 -------------      ------------     ------------
Loss before minority interest                       (3,439,335)       (5,920,117)      (5,382,201)
Minority interest                                       58,252          (727,197)         193,681
                                                 -------------      ------------     ------------
Loss before extraordinary item                      (3,497,587)       (5,192,920)      (5,575,882)
Extraordinary item (Note 8)                                              383,705
                                                 -------------      ------------     ------------
Net loss                                            (3,497,587)       (4,809,215)      (5,575,882)
                                                 =============      ============     ============
Other comprehensive income (loss):
  Foreign currency translation adjustments                                 7,774           (7,774)
                                                 -------------      ------------     ------------
Comprehensive loss                               $  (3,497,587)     $ (4,801,441)    $ (5,583,656)
                                                 =============      ============     ============

Net loss                                         $  (3,497,587)   $   (4,809,215)    $ (5,575,882)
Amortization of discount on preferred stock         (1,120,000)
                                                 -------------      ------------     ------------
Net loss applicable to common shareholders       $  (4,617,587)     $ (4,809,215)    $ (5,575,882)
                                                 =============      ============     ============

Basic and diluted loss per share:
  Before extraordinary item                      $       (0.48)     $      (0.94)    $      (1.37)
  Extraordinary item                                                        0.07
                                                 -------------      ------------     ------------
Basic and diluted loss per common share          $       (0.48)     $      (0.87)    $      (1.37)
                                                 =============      ============     ============

Weighted average number of shares outstanding        9,549,353         5,544,833        4,078,864
                                                 =============      ============     ============
</TABLE>
                See notes to consolidated financial statements.

                                      F-4
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                 YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
                                                                      Series A                  Series B and C
                                       Common Stock                Preferred Stock              Preferred Stock
                                  ----------------------        ----------------------      ----------------------
                                    Shares        Amount          Shares       Amount         Shares       Amounts      Warrants
                                  ----------    --------        ----------    --------      ----------    --------      ---------
<S>                              <C>           <C>             <C>           <C>           <C>           <C>           <C>
Balances, January 1, 1996          3,783,511    $ 37,835                                                                 $394,200

Issuance of 400,000 shares
 of common stock (Note 7)            400,000       4,000

Issuance of 36,000 shares
 of common stock in
 settlement of an account             36,000         360
 payable (Note 7)

Issuance of 480,000 shares
 of common stock in
 settlement of payables to
 officers/shareholders (Note
 7)                                  480,000       4,800

Net loss for 1996

Cumulative foreign currency
 translation adjustment
                                  ----------    --------        ----------    --------      ----------    --------      ---------
Balances, December 31,1996         4,699,511    $ 46,995                                                                 $394,200

Issuance of 371,493 shares
 of common stock in exchange
 for 480,417 shares of the
 Company's
 subsidiary stock (Note 4)           371,493       3,715

Issuance of 75,000 shares of
 common stock in
 satisfaction of 300,000
 options to purchase common
 stock (Note 5)                       75,000         750

Issuance of 75,000 shares of
 common stock for consulting
 and financial services
 (Note 5)                             75,000         750

Issuance of 865,225 shares
 of common stock in
 satisfaction of
 $1,171,656 of liabilities
 (Note 7)                            865,225       8,652

Issuance of 235,701 shares
 of common stock for
 extending maturity date on
 certain notes (Note 4)              235,701       2,357

                                                                  Foreign
                                                                 currency
                                  Capital in                    translation        Treasury
                                 excess of par       Deficit    adjustment          stock              Total
                                 -------------     -----------   ---------         --------        -----------
Balances, January 1, 1996         $ 4,727,492      $  (169,616)                                    $  4,989,911

Issuance of 400,000 shares
 of common stock (Note 7)
Issuance of 36,000 shares
 of common stock in
 settlement of an account
 payable (Note 7)                     896,000                                                          103,000

Issuance of 480,000 shares
 of common stock in
 settlement of payables to
 officers/shareholders (Note 7)       655,200                                                          660,000

Net loss for 1996                                   (5,575,862)                                     (5,575,882)

Cumulative foreign currency
 translation adjustment                                          $  (7,774)                             (7,774)
                                  -----------      -----------   ---------         --------        -----------
Balances, December 31,1996        $ 6,386,332      $(5,745,498)  $  (7,774)                        $ 1,074,255

Issuance of 371,493 shares
 of common stock in exchange
 for 480,417 shares of the
 Company's
 subsidiary stock (Note 4)            407,677                                                          411,392

Issuance of 75,000 shares of
 common stock in
 satisfaction of 300,000
 options to purchase common
 stock (Note 5)                        69,563                                                           70,313

Issuance of 75,000 shares of
 common stock for consulting
 and financial services
 (Note 5)                              74,250                                                           75,000

Issuance of 865,225 shares
 of common stock in
 satisfaction of
 $1,171,656 of liabilities
 (Note 7)                           1,163,004                                                        1,171,656

Issuance of 235,701 shares
 of common stock for
 extending maturity date on
 certain notes (Note 4)               438,284                                                          440,641
</TABLE>

                                  (Continued)

                                      F-5
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
                 YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                      Series A                  Series B and C
                                       Common Stock                Preferred Stock              Preferred Stock
                                  ----------------------        ----------------------      ----------------------
                                    Shares        Amount          Shares       Amount         Shares       Amounts      Warrants
                                  ----------    --------        ----------    --------      ----------    --------      ---------
<S>                              <C>           <C>             <C>           <C>           <C>           <C>           <C>
Issuance of 52,500 shares of
 common stock upon the
 exercise of options (Note 7)         52,500         525

Issuance of 349,214 Class A
 Series Preferred Stock
 (Note 7)                                                          349,214    $  3,492

Issuance of stock to
 subsidiary
 in satisfaction of $893,640
 liabilities (Note 7)                360,000       3,600           750,471       7,505

Net loss for 1997

Foreign currency translation
 adjustment
                                  ----------    --------        ----------    --------      ----------    --------      ---------
Balances, December 31, 1997        6,734,430    $ 67,344         1,099,685    $ 10,997                                 $  394,200

Issuance of 437,593 shares
 of common stock in
 consideration for extending
 the date on certain notes
 (Note 5)                            437,593       4,376

Issuance of 50,000 shares of
 common stock for consulting
 services (Note 5)                    50,000         500

Issuance of 534,200 shares
 of common stock upon
 exercise of options (Note 5)        534,200       5,342

Issuance of 18,500 shares of
 Series A preferred stock
 (Note 5)                                                           18,500         185

Issuance of 167,754 shares
 of Series A preferred stock
 in a private placement                                            167,754       1,678
 (Note 4)

Issuance of 41,667 shares of
 Series A preferred stock in
 satisfaction of $150,000 of
 liabilities                                                        41,667         417

Issuance of 3,982,818 shares
 of common stock in exchange
 for 1,327,606 shares of
 Series A preferred stock
 (Note 5)                          3,982,818      39,828        (1,327,606)    (13,277)

                                                                  Foreign
                                                                 currency
                                  Capital in                    translation        Treasury
                                 excess of par       Deficit    adjustment          stock              Total
                                 -------------     -----------  ----------         --------        -----------
Issuance of 52,500 shares of
 common stock upon the
 exercise of options (Note 7)          94,475                                                            95,000

Issuance of 349,214 Class A
 Series Preferred Stock
 (Note 7)                           1,564,638                                                         1,563,130

Issuance of stock to
 subsidiary
 in satisfaction of $893,640
 liabilities (Note 7)                 882,535                                      $ (893,640)

Net loss for 1997                                   (4,809,215)                                      (4,809,215)

Foreign currency translation
 adjustment                                                        7,774                                  7,774
                                  -----------      -----------   ---------         ----------       -----------
Balances, December 31, 1997       $11,080,758     $(10,554,713)                    $ (893,640)      $   104,946

Issuance of 437,593 shares
 of common stock in
 consideration for extending
 the date on certain notes
 (Note 5)                             538,426                                                           502,802

Issuance of 50,000 shares of
 common stock for consulting
 services (Note 5)                     68,250                                                            68,750

Issuance of 534,200 shares
 of common stock upon
 exercise of options (Note 5)         574,068                                                           573,420

Issuance of 18,500 shares of
 Series A preferred stock
 (Note 5)                              76,128                                                            76,313

Issuance of 167,754 shares
 of Series A preferred stock
 in a private placement               164,975                                                           166,653
 (Note 4)

Issuance of 41,667 shares of
 Series A preferred stock in
 satisfaction of $150,000 of
 liabilities                          149,583                                                           150,000

Issuance of 3,982,818 shares
 of common stock in exchange
 for 1,327,606 shares of
 Series A preferred stock
 (Note 5)                             (26,551)
</TABLE>
                                  (Continued)

                                      F-6
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
                 YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                      Series A                  Series B and C
                                       Common Stock                Preferred Stock              Preferred Stock
                                  ----------------------        ----------------------      ----------------------
                                    Shares        Amount          Shares       Amount         Shares       Amounts      Warrants
                                  ----------    --------        ----------    --------      ----------    --------      ---------
<S>                              <C>           <C>             <C>           <C>           <C>           <C>           <C>
Issuance of 245,520 shares
 of common stock owned by
 Skate Corp. in satisfaction
 of $245,520 of liabilities

Issuance of 316,256 shares
 of common stock in
 satisfaction of $288,826 of
 liabilities                         316,256       3,163

Issuance of 2,080 shares of
 Series B and C preferred
 stock in connection with
 private placement, net of
 costs (Note 4)                                                                                 2,080     $ 540,026

Issuance of 1,327,000 shares
 of common stock owned by
 Skate Corp. In exchange for
 884,667 shares of Skate
 Corp (Note 5)

Issuance of 80,000 shares of
 common stock in a private
 placement                            80,000         800

Issuance of 500,000 shares
 of common stock for
 $400,000 (Note 7)                   500,000       5,000

Issuance of 36,790 shares of
 common stock for penalty on
 Series B/C preferred stock
 (Note 7)                             36,790         368

Issuance of 742,644 shares
 of common stock in exchange
 for 450 shares of Series B
 & C preferred stock (Note 7)        742,644       7,426                                         (450)     (359,124)

Issuance of 20,000 shares to
 outside members of the
 Board of Directors                   20,000         200


Sale of 84,212 shares of
 treasury owned by subsidiary

Amortization of Class B/C
 Series preferred stock                                                                                   1,120,000


                                                                  Foreign
                                                                 currency
                                  Capital in                    translation        Treasury
                                 excess of par       Deficit    adjustment          stock              Total
                                 -------------     -----------  ----------         --------        -----------
Issuance of 245,520 shares
 of common stock owned by
 Skate Corp. in satisfaction
 of $245,520 of liabilities           161,503                                        84,017             245,520

Issuance of 316,256 shares
 of common stock in
 satisfaction of $288,826 of
 liabilities                          285,663                                                           288,826

Issuance of 2,080 shares of
 Series B and C preferred
 stock in connection with
 private placement, net of
 costs (Note 4)                     1,120,000                                                         1,660,025

Issuance of 1,327,000 shares
 of common stock owned by
 Skate Corp. In exchange for
 884,667 shares of Skate
 Corp (Note 5)                       (107,797)                                      450,099             346,302

Issuance of 80,000 shares of
 common stock in a private
 placement                             39,200                                                            40,000

Issuance of 500,000 shares
 of common stock for
 $400,000 (Note 7)                    395,000                                                           400,000

Issuance of 36,790 shares of
 common stock for penalty on
 Series B/C preferred stock
 (Note 7)                              47,890                                                            48,258

Issuance of 742,644 shares
 of common stock in exchange
 for 450 shares of Series B
 & C preferred stock (Note 7)         351,698

Issuance of 20,000 shares to
 outside members of the
 Board of Directors                    19,800                                                            20,000

Sale of 84,212 shares of
 treasury owned by subsidiary         150,255                                        28,724             178,979

Amortization of Class B/C
 Series preferred stock            (1,120,000)
</TABLE>
                                  (Continued)

                                      F-7
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
                 YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
                                                                      Series A                  Series B and C
                                       Common Stock                Preferred Stock              Preferred Stock
                                  ----------------------        ----------------------      ----------------------
                                    Shares        Amount          Shares       Amount         Shares       Amounts      Warrants
                                  ----------    --------        ----------    --------      ----------    --------      ---------
<S>                              <C>           <C>             <C>           <C>           <C>           <C>           <C>
Receipt  by subsidiary of
 250,000 shares of common
 stock from third party in
 settlement of an amount due
 to subsidiary from third
 party (Note 4)

Net loss for the year ended
 December 31, 1998
                                  ----------    --------        ----------    --------      ----------    ----------    ---------
                                  13,434,731    $134,347                                         1,630    $1,300,902    $ 394,200
                                  ==========    ========        ==========    =========     ==========    ==========    =========

                                                                  Foreign
                                                                 currency
                                  Capital in                    translation        Treasury
                                 excess of par       Deficit    adjustment          stock              Total
                                 -------------     -----------  ----------         --------        -----------
Receipt  by subsidiary of
 250,000 shares of common
 stock from third party in
 settlement of an amount due
 to subsidiary from third
 party (Note 4)                                                                   (414,033)            (414,000)

Net loss for the year ended
 December 31, 1998                                  (3,497,587)                                      (3,497,587)
                                  -----------     ------------   ---------       ---------          -----------
                                  $13,968,849     $(14,052,300)                  $(740,800)         $ 1,005,198
                                  ===========     ============   =========       =========          ===========
</TABLE>

                                      F-8
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                 YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                         1998             1997                 1996
                                                                    -------------    ---------------      --------------
<S>                                                                <C>              <C>                  <C>
Cash flows from operating activities:
  Net loss                                                          $  (3,497,587)   $    (4,809,215)     $   (5,575,882)
                                                                    -------------    ---------------      --------------
  Adjustments to reconcile
  net loss to net cash used in operating activities:
    Extraordinary gain                                                                       (383,705)
    Inventory markdowns and adjustments                                                                        1,059,750
    Net unrealized holding loss                                                                62,392            144,457
    Gain on sale of investment in subsidiary                                                  (87,593)          (111,366)
    Gain from issuance of common stock by
      subsidiary                                                                                                (479,100)

    Loss on sale of USA Skate assets                                      125,000             751,522
    Expense incurred upon issuance of
      common stock and options                                            756,122             724,223
    Depreciation and amortization                                         230,821             628,601            681,717
    Amortization of license fee payable
      and other                                                                                88,867            214,688
    Provision for losses on accounts receivable                           272,086             250,836            228,000
    Foreign currency gains (loss)                                                             (59,791)            44,012
    Minority interest                                                      58,252            (727,197)           193,681
    Restructuring and impairment charges                                      825             237,452          1,229,000
  Decrease (increase) in assets:
    Accounts receivable                                                                      (135,947)         2,432,580
    Income taxes receivable                                                                   221,624           (221,624)
    Due from related parties                                           (1,345,947)           (310,369)            22,866
    Inventories                                                                             1,806,578          2,578,805
    Prepaid expenses and other                                            (82,898)            436,111           (236,638)
    Assets of subsidiary held for sale                                   (205,843)
  Increase (decrease) in liabilities:
    Accounts payable and accrued expenses                                 853,585            (394,606)        (1,210,188)
    Payables to officers/shareholders and other
      related parties                                                                         (36,804)           136,250
    Income taxes payable                                                                                        (208,304)
    Liabilities of subsidiary held for sale                              (450,574)         (1,340,648)
                                                                    -------------    ---------------      --------------
        Total adjustments                                                 700,429           1,731,546          6,498,586
                                                                    -------------    ---------------      --------------
Net cash provided by (used in) operating, activities                   (2,797,158)         (3,077,669)           922,704
                                                                    -------------    ---------------      --------------
Cash flows from investing activities:
  Payment from sale of USA Skate Co., Inc.                                                  14,500,000
  Payment or purchase of subsidiary, net
    of cash acquired                                                                                          (3,551,760)
  Payment for intangible assets                                                                                 (436,600)
  Capital expenditures                                                                         (95,141)         (237,545)
  Proceeds from sale of marketable securities                                                  166,260
  Acquisition, offering and financing costs                                                                     (421,770)
  Deferred merger costs                                                  (167,777)
                                                                    -------------    ---------------      --------------
Net cash provided by (used in) investing activities                      (167,777)           4,571,119        (4,647,675)
                                                                    -------------    ---------------      --------------
</TABLE>

                                      F-9
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                 YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                              1998                 1997                 1996
                                                          ------------         ------------         ------------
<S>                                                      <C>                 <C>                   <C>
Cash flows from financing activities:
  Proceeds from notes payable and long-term debt                                    174,545            4,543,522
  Repayments of notes payable, license fees
    and long-term debt                                                          (11,713,124)          (1,587,263)
  Proceeds from sale of treasury stock                         178,980
  Net proceeds from issuance of
    common stock and warrants                                2,846,089                                   819,600
                                                          ------------         ------------         ------------
Net cash provided by (used in) financing
  activities                                                 3,025,069          (11,538,579)           3,775,859
                                                          ------------         ------------         ------------
Net increase (decrease) in cash                                 60,134              (45,129)              50,888

Cash, beginning                                                 13,969               59,098                8,210
                                                          ------------         ------------         ------------
Cash, ending                                              $     74,103         $     13,969         $     59,098
                                                          ============         ============         ============
Supplemental disclosure of cash flow information:
  Cash paid for interest                                  $    152,000         $    826,000         $  1,041,900
                                                          ============         ============         ============
  Cash paid for income taxes                                                                        $     89,300
                                                                                                    ============
Supplemental disclosure of noncash
  investing and financing activities:
  Purchase (disposition) of USA Skate Co., Inc.
    net of cash acquired:
      Fair value (cost) of assets acquired (disposed of)                       $(16,937,947)        $ 11,334,200
      Intangible assets                                                                                2,777,774
      Liabilities (assumed) disposed of                                           1,899,533           (9,210,214)
      Fair value of assets exchanged                                                                  (1,350,000)
      Loss on disposition                                                           538,414
                                                                               ------------         ------------
Total cash paid (received), net of cash acquired                               $(14,500,000)        $  3,551,760
                                                                               ============         ============
Issuance of 400,000 shares of common stock in
  exchange for consulting and non-compete agreements                                                $    900,000
                                                                                                    ============
Issuance of 480,000 shares of common stock in
  settlement of payables to officers/shareholders                                                   $    660,000
                                                                                                    ============
Minimum royalties payable in exchange
  for a license agreement                                                                           $  2,213,235
                                                                                                    ============
Issuance of 371,493 shares of common stock in
  exchange for 480,417 shares of Company's
  Subsidiary stock                                        $    411,392
                                                          ============
Issuance of 316,256, 865,225, and 36,000  shares of
  common stock in 1998, 1997 and 1996, respectively,
  in satisfaction of amounts due                          $    288,826         $  1,171,656         $    108,000
                                                          ============         ============         ============
Issuance of 1,327,000 shares of common
  stock owned by subsidiary in exchange
  for 884,667 shares of Skate Corp.                       $    346,302
                                                          ============
Issuance of 41,667 preferred shares
  in satisfaction of amounts due                          $    150,000
                                                          ============
Receipt by subsidiary of 250,000
  shares of common stock from third
  party in settlement of an amount due
    from subsidiary to third party                        $    414,000
                                                          ============
</TABLE>

                                      F-10
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996

1. Basis of presentation, business and plan of restructuring:

   Basis of presentation:

   The accompanying consolidated financial statements include the accounts of
     ImaginOn, Inc. (formerly known as California Pro Sports, Inc.) (the
     "Company") and its subsidiaries, California Pro, Inc. ("CP"), USA Skate
     Corporation ("Skate Corp.") and ImaginOn Acquisition Corp.  Skate Corp. was
     formed in 1995 to acquire USA Skate Co., Inc. ("USA Skate") and its
     subsidiary, Les Equipments Sportifs Davtec, Inc., a Canadian corporation
     ("Davtec").

   Effective April 30, 1996, the Company, through Skate Corp.,completed the
     acquisition of all of the outstanding capital stock of USA Skate.  The
     acquisition was accounted for as a purchase.  Accordingly, the consolidated
     statements of operations include the results of operations of USA Skate and
     Davtec beginning May 1, 1996.  In September 1997, Skate Corp. sold
     substantially all of the operating assets of USA Skate and Davtec.

   On December 31, 1998 and 1997, the Company owned 100% of the outstanding CP
     capital stock, and the Company owned 89.8% and 62.3% of the outstanding
     Skate Corp. capital stock, respectively.  Minority interest represents
     Skate Corp.'s minority shareholders' 10.2% and 37.7% ownership interest in
     Skate Corp at December 31, 1998 and 1997, respectively.  In addition, on
     December 31, 1998, the Company owned 100% of the ImaginOn Acquisition Corp.
     capital stock.  Intercompany transactions have been eliminated in
     consolidation.

                                      F-11
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996


1. Basis of presentation, business and plan of restructuring (continued):

   Business and plan of restructuring:

   In 1997, due to continuing operating losses, management decided to
     restructure and deleverage the Company. In connection with these plans, the
     Company:

     a. Ceased operating the California Pro and Kemper licenses, eliminated most
        of the operating and overhead expenses associated with its sporting
        goods business and began to concentrate on sub-licensing the Company's
        trademark rights.

     b. Sold substantially all of its Skate Corp. sporting goods related assets
        in September 1997 (Note 4).

     c. Completed various private equity placements throughout 1998 and into
       1999 (Note 7).

     d. Completed the  merger of the Company and IMON in January 1999 (Note 10).

     e. Completed the sale of Skate Corp. in January 1999 (Note 4).

   Prior to the second quarter of 1997, the Company sold in-line skates and
     accessories, under the brand names California Pro(R) and Rolling Thunder,
     to retail sporting goods stores principally in North America, and sold
     snowboards and accessories under the Kemper(R) brand name to retail
     sporting goods stores in North America and distributors in Europe and
     Japan.  In connection with its restructuring and deleverage plans, in the
     second quarter of 1997, the Company began liquidating remaining in-line
     skate, snowboard and accessories inventories.  Prior to September 1997, the
     Company also manufactured, imported and marketed VICTORIAVILLE, VIC(R), and
     McMartin ice and street/roller hockey skates, sticks and related protective
     gear and accessories for sale to retail sporting goods stores in the United
     States and Canada and independent distributors primarily located in Europe.
     In September 1997, Skate Corp., sold substantially all of the operating
     assets of USA Skate and Davtec.  During 1998, the Company operated
     exclusively as a licensor of trade names and trademarks.  The Company
     currently receives income from sub-licenses it has entered into regarding
     the use of the Kemper brand name.  The Company has no other sporting goods
     related business.

                                      F-12
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996

2. Significant accounting policies:

   Use of accounting estimates in financial statement preparation:

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

   Inventories:

   Inventories are stated at the lower of cost (first-in first-out method) or
     market.  At December 31, 1997, there are no remaining inventories

   Furniture, equipment, and depreciation:

   Furniture and equipment are stated at cost. Depreciation is provided by use
     of accelerated and straight-line methods over the estimated useful lives (5
     to 10 years) of the related assets.

   Intangible assets:

   Intangible assets at December 31, 1998 and 1997 consist of trademark licence
     costs related to Kemper and California Pro perpetual license agreements.
     Goodwill at December 31, 1997, represents the cost of the Company's
     investments in Skate Corp. and its subsidiaries in excess of the net
     tangible assets acquired. Trademark license costs are amortized on the
     straight-line method over 5 to 12 years.  Goodwill is amortized on the
     straight-line method over 15 to 25 years.

                                      F-13
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996


2. Significant accounting policies:

   Intangible assets (continued):

   Management assesses the carrying value of intangible and other long-lived
     assets for impairment when circumstances warrant such a review, primarily
     by comparing current and projected sales, operating income and annual cash
     flows on an undiscounted basis, with the related annual amortization
     expenses. The Company has not been successful in concluding any
     arrangements with regard to sub-licensing of the California Pro brand and
     currently is not in any discussions with third parties. Therefore, in 1998,
     the Company wrote-off the remaining balance of $409,102 related to the
     California Pro trademark. In 1998, the Company also wrote-off the remaining
     balance of $80,723 related to goodwill that arose on the 1996 acquisition
     of USA Skate.

   In 1997, goodwill related to Skate Corp. with a carrying value of $428,573
     was written down to $191,121 (Note 4). In 1996, intangible assets with a
     carrying value of $9,192,506 were written down to $8,473,806 (Note 11).

   The resulting expense of $489,825, $237,452, and $718,700 for 1998, 1997, and
     1996, respectively, were included in restructuring and impairment charges.

   Deferred merger costs:

   Costs incurred through December 31, 1998 related to the merger of the Company
     and IMON (Note 11) have been deferred.  The merger was completed in January
     1999 and at that time the Company charged the costs, as well as additional
     amounts incurred in January 1999, directly to equity.

   Revenue recognition:

   The Company's revenue recognition policy is to record sales as product is
     shipped and recognize royalty and other income when sub-licenses report
     royalties and the Company receives payment.

                                      F-14
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996


2. Significant accounting policies (continued):

   Foreign currency transactions:

   In 1997, CP primarily purchased and sold its in-line skate products in US
     dollars.  CP primarily purchased its snowboard products in German Deutsche
     Marks ("DM") and sold to its customers in either DM or US dollars. USA
     Skate primarily purchased and sold its products in US dollars, and Davtec
     primarily purchased its goods in Canadian dollars and sold to customers in
     both US and Canadian dollars.  Gains and losses on foreign currency
     transactions are included in determining consolidated net loss.

   Convertible preferred stock:

   During 1998, the Company issued Series B and C convertible preferred stock
     for which the conversion feature was "in the money" at the date of issue (a
     "beneficial conversion feature"). The Company allocated a portion of the
     proceeds equal to the intrinsic value of beneficial conversion feature to
     capital in excess of par. This amount has been amortized to preferred stock
     from the date of issuance through the date the securities are first
     convertible.

   Net loss per share:

   Basic loss per share is computed by dividing loss applicable to common
     shareholders by the weighted-average number of common shares outstanding
     for the year.  In arriving at loss applicable to common shareholders,
     amortization of the beneficial conversion feature related to the Series B
     and C preferred stock has been deducted from net loss.  Diluted loss per
     share reflects the potential dilution that could occur if dilutive
     securities and other contracts to issue common stock were exercised or
     converted into common stock or resulted in the issuance of common stock
     that then shared in the earnings of the Company, unless the effect is to
     reduce a loss or increase earnings per share.  The Company had no potential
     common stock instruments which would result in diluted loss per share in
     1998, 1997, and 1996.

                                      F-15
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996


2. Significant accounting policies (continued):

   Fair value of financial instruments:

   The carrying value of the Skate Corp. convertible promissory notes payable,
     included in liabilities of subsidiary held for sale on the consolidated
     balance sheet (Note 4), is not practicable to estimate because management
     believes that due to the financial condition of the Company, similar
     instruments with similar terms could not be obtained elsewhere.  The fair
     values of the Company's receivables to related parties are not practicable
     to estimate, due to the related party nature of the underlying transactions
     and indefinite payment terms.  The carrying amounts of the Company's other
     financial instruments approximates their fair values because of the short
     maturities of these instruments.

   Subsidiary equity transactions:

   In 1996, the Company adopted an accounting policy to recognize in its
     consolidated financial statements, gains and losses resulting from the
     sales of previously unissued stock by its subsidiaries, which have the
     effect of reducing the parent's percentage equity holding.  There were no
     gains or losses in 1998 or 1997.  The Company recorded a gain of $479,100
     in 1996 (Note 4).

   Stock-based compensation:

   Statement of Financial Accounting Standard ("SFAS") No. 123,  Accounting for
     Stock-Based Compensation, defines a fair-value-based method of accounting
     for stock-based employee compensation plans and transactions in which an
     entity issues its equity instruments to acquire goods or service from non-
     employees, and encourages but does not require companies to record
     compensation cost for stock-based employee compensation plans at fair
     value.  The Company has chosen to continue to account for stock-based
     compensation using the intrinsic value method prescribed in Accounting
     Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
     ("APB No. 25") and related interpretations.  Accordingly, compensation cost
     for stock options is measured as the excess, if any of the quoted market
     price of the Company's stock at the date of the grant over the amount an
     employee must pay to acquire the stock.

                                      F-16
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996


2. Significant accounting policies (continued):

   Recently issued accounting standards:

   On January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
     Income.  This standard establishes requirements for disclosure of
     comprehensive income which includes certain items previously not included
     in the statements of operations, including minimum pension liability
     adjustments and foreign currency translation adjustments, among others.
     During the year ended December 31, 1998, the Company had no items of
     comprehensive income.  The financial statements for the year ended
     December 31, 1997 have been reclassified to disclose items of
     comprehensive income. There are no significant tax effects related to
     these items.

   In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
     No. 131, Disclosures about Segments of an Enterprise and Related
     Information, and in February 1998, the FASB issued SFAS No. 132, Employer's
     Disclosure about Pensions and Other Post Retirement Benefits. Both of
     these statements require disclosure only and therefore will not impact
     the Company's financial statements.

   In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
     Instruments and Hedging Activities. This statement is effective for fiscal
     years beginning after June 15, 1999.  Currently, the Company does not have
     any derivative financial instruments and does not participate in hedging
     activities.  Therefore, management believes that SFAS No. 133 will not have
     an impact on its financial statements.

   Reclassifications:

   Certain amounts reported in the 1997 and 1996 financial statements have been
     reclassified to conform to the 1998 presentation.

3. Marketable securities:

   In 1996, the Company received marketable securities from an affiliate in
     payment of an amount owed to the Company by a related party, which the
     Company classified as trading securities under SFAS No. 115, Accounting for
     Certain Investments in Debt and Equity Securities. In 1997, the Company
     sold these securities and recognized a loss of $62,392. This amount is
     included in loss on marketable securities in the consolidated statements of
     operation and comprehensive loss.

                                      F-17
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996


4. Skate Corp. transactions:

   Gain from issuance of common stock by subsidiary:

   During 1996, Skate Corp. sold 884,667 shares of its common stock at $1.20 per
     share in a private placement for $1,061,600 and issued 250,000 shares of
     common stock at $1.20 per share valued at $300,000 in connection with the
     acquisition of USA Skate.  Before these transactions, the Company owned
     100% of Skate Corp. These transactions resulted in a gain from the issuance
     of stock by the subsidiary of $479,100.

   Gain on sale of investment in subsidiary:

   In June 1996, the Company satisfied $260,000 of amounts payable to
     officers/shareholders by transferring to the officers/shareholders 216,667
     shares of Skate Corp. common stock from the Company's original investment
     in 2,000,000 Skate Corp. shares.  The recorded cost of the Skate Corp.
     shares transferred was $148,634, and the fair value of those shares was
     $260,000 (based on sales of the Skate Corp. shares to third parties),
     resulting in a gain of $111,366.

   In March 1997, the Company satisfied payables in the amount of $106,500 by
     exchanging 88,750 shares of Skate Corp. common stock held by the Company in
     satisfaction of the liability.  The carrying value of the Skate Corp.
     shares was $61,237 and the estimated fair value of those shares was
     $106,500.   The Company also sold 83,000 shares of Skate Corp. common stock
     held by the Company to a third party.  The carrying value of the Skate
     Corp. shares was $57,270 and the sales price was $99,600.  These
     transactions resulted in total gains of $87,593.

   Purchase of subsidiary common stock:

   In May and September 1997, the Company acquired 230,417 shares of Skate Corp.
     common stock from two shareholders (one of which was an officer) in
     exchange for 238,160 shares of common stock of the Company.  In 1997, the
     Company also issued 133,333 shares of common stock to acquire 250,000
     shares of Skate Corp. common stock, that otherwise the Company would have
     been obligated to redeem.  The Company accounted for these transactions
     under the purchase method of accounting based upon the market value of the
     common stock issued by the Company.

                                      F-18
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996


4. Skate Corp. transactions (continued):

   Sale of USA Skate assets:

   On September 12, 1997, the Company sold substantially all of the operating
     assets of USA Skate for $14,500,000, with $1,000,000 to be held in escrow
     for potential purchase price adjustments and other claims. The proceeds of
     the sale were used to repay the Company's outstanding lines of credit and
     other liabilities. Subsequent to September, purchase price and other
     adjustments have reduced the principle amount of the escrow account by
     approximately $423,000 and approximately $180,000 of the escrow account was
     disbursed and used to partially repay a trade liability.  The Company
     recognized a loss in 1997 of approximately $752,000 on the sale of the USA
     Skate assets, and due to the post closing adjustments an additional loss of
     $125,000 in 1998.

   The remaining account balances of Skate Corp. have been classified as assets
     and liabilities held for sale in the accompanying consolidated balance
     sheets and consist of the following at December 31, 1998 and 1997:

                                                 1998          1997
                                             -----------    ----------
     Assets held for sale:
       Cash                                  $    39,782
       Cash held in escrow                       397,002    $  472,002
     Accounts receivable:
       Trade                                      47,525
       Related parties                           187,500       585,000
                                             -----------    ----------
                                             $   624,284    $1,104,527
                                             ===========    ==========
     Liabilities held for sale:
       Accounts payable and accrued expenses $   545,451    $  589,239
       Note payable, related party                50,000
       Convertible promissory notes payable      718,114     1,074,900

                                             $ 1,263,565    $1,714,139
                                             ===========    ==========


                                      F-19
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996


4. Skate Corp. transactions (continued):

   Sale of USA Skate assets (continued):

   The accounts receivable, related parties are non-interest bearing and are due
     January 1999 through 2000.  The convertible promissory notes were
     originally due in January 1997 with interest at 9%.  In January 1997, the
     due date of the notes was extended to July 1997 and the interest rate was
     adjusted to 12%.  Beginning July 1997, substantially all of the note
     holders agreed to extend the notes for 30 day intervals in exchange for the
     Company issuing the note holders common stock of the Company at each
     extension date.  During, 1997, the Company had issued 235,701 shares of
     common stock and recognized financing fees of approximately $440,641.
     During 1998, the Company issued 437,593 shares of common stock, and
     recognized financing fees of $542,802 for the note extensions.  The notes
     were paid in full in January 1999.

   In December 1998, Skate Corp. negotiated and received 250,000 shares of
     common stock of the Company in settlement of accounts receivable of
     $580,000. The market price on the day of settlement was $1.656 and
     accordingly Skate Corp. realized a loss of $166,000 which is included in
     the consolidated operating expenses in the financial statements. The
     250,000 shares are included in treasury stock.

   Subsequent sale of the Company's investment in Skate Corp.:

   In April 1998, the Company received commitments from a group of accredited
     investors to purchase for $1,400,000 the shares of common stock of Skate
     Corp. owned by the Company along with an option to acquire shares of the
     Company in exchange for the purchased shares of Skate Corp.  The options
     allowed the investors to exchange each common share of Skate Corp. for 1.5
     shares of the Company's common stock.  In April and May 1998, the Company
     received gross proceeds of $255,000 (net proceeds of $166,653) from
     investors acquiring 335,507 shares of Skate Corp.  Each of the investors
     exercised their options to exchange those shares for 167,754 shares of the
     Company's Series A preferred stock, which automatically converted to
     503,261 shares of the Company's common stock on July 15, 1998 upon the
     shareholders approving an increase in the authorized common shares of the
     Company from 10,000,000 to 20,000,000.

                                      F-20
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996


4. Skate Corp. transactions (continued):

   Subsequent sale of the Company's investment in Skate Corp. (continued):

   Subsequent to the receipt of the $255,000, this offering was closed to
     further investors. The offering was closed to further investors as the
     Company was able to obtain similar financing on terms more beneficial to
     the Company through the sale of preferred stock as discussed in Note 7.
     Upon the closing of the offering, two officers/shareholders of the Company
     agreed to purchase the shares of Skate Corp. from the Company for $90,000
     with no conversion rights. The purchase price was based on the net book
     value of the Company's investment in Skate Corp. at the time of the
     agreement. The sale of Skate Corp. was completed, and the Company received
     the $90,000, in January 1999.

5. Commitments and contingencies:

   Office lease:

   The Company is currently leasing office space in South Carolina on a
     month-to-month basis for $3,000 per month plus certain real estate and
     property taxes. Total rent expense for 1998, 1997, and 1996 was
     approximately $41,000, $227,000 and $277,000, respectively, and includes
     rent expense and lease termination fees in 1997 on the Company's prior
     operating warehouses and office space.

   In-line skate license agreements:

   The Company has various license agreements with Playmaker, Co. Ltd.
     ("Playmaker") under which the Company has the exclusive, royalty-free right
     to use the California Pro and Rolling Thunder names and trademarks on in-
     line skates, accessories and other products in the United States, Canada,
     certain areas of the Caribbean and U.S. military exchanges worldwide.  The
     Company has also entered into an agreement with Playmaker whereby Playmaker
     will pay the Company a 5% royalty on all sales of any product made by
     Playmaker to any new customer of Playmaker generated by the Company.  No
     royalties have been agreed to or paid to date under this agreement.  The
     agreements are subject to cancellation if the Company does not meet certain
     sales and/or purchase requirements.

                                      F-21
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996

5. Commitments and contingencies (continued):

   In-line skate license agreements (continued):

   The Company has a patent license agreement related to one feature on several
     of the Company's in-line skate models. Under the license agreements, the
     Company pays royalty fees based on its sales of the related items.
     Playmaker reimburses the Company for a portion of the royalties paid. The
     royalties were not significant in 1998, 1997, or 1996.

   Kemper license agreements:

   The Company has a license agreement for the exclusive, perpetual use of the
     Kemper name on snowboards and accessories.  The Company pays a royalty
     based on net sales of products sold under this license.

   In 1997, the Company entered into a three-year exclusive sub-license
     agreement with a third party which allows the third party to manufacture
     and sell certain Kemper products. The agreement provides for the Company to
     receive license fees based on manufacturing costs, or an annual minimum
     guaranteed payment.

   In February 1998, the Company entered into a two-year agreement with a third
     party snowboard manufacturer and marketer.   The agreement, in effect,
     assigns all of the Company's license rights to the Kemper name (except for
     the sub-license described above) to the third party in exchange for the
     greater of a royalty fee based on sales, or an annual minimum guaranteed
     payment.

   Employment and consulting agreements:

   On a month to month basis, the Company accrues expense to an officer/
       shareholder consulting fees of $10,000 per month. Skate Corp. paid
       consulting fees to two Company officers/shareholders that totaled $60,000
       in 1998,  and $90,000 in 1997 and 1996, respectively.

   Prior to 1997, the Company had issued warrants to purchase 300,000 shares of
     common stock to an unrelated financial advisory consultant.  In 1997, in
     lieu of the warrants to purchase 300,000 shares of common stock, the
     Company issued the party 75,000 shares of common stock.

                                      F-22
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996


5. Commitments and contingencies (continued):

   Employment and consulting agreements (continued):

   In 1997, the Company entered into a financial advisory and consulting
     agreement with an unrelated third party. Under this agreement, the Company
     issued 75,000 shares of common stock and 33,333 shares of Series A
     preferred stock to the consultant (included in total Series A preferred
     stock issuances on the consolidated statement of shareholders' equity). In
     1998, the Company began working with another financial consultant who was a
     former director and officer of the Company. Under the agreement, the
     Company issued 50,000 shares of common stock to the consultant. The Company
     recorded consulting expense for the shares issued based on the market value
     of the common stock.

   Litigation:

   The Company is involved in various claims and legal actions arising in the
     ordinary course of business.  In the opinion of management, the ultimate
     disposition of these matters will not have a material effect on the
     financial statements of the Company.

6. Income taxes:

   The Company recognizes deferred tax liabilities and assets for the expected
     future tax consequences of events that have been recognized in the
     financial statements or tax returns.  Under this method, deferred tax
     liabilities and assets are determined based on the difference between the
     financial statement carrying amounts and tax bases of assets and
     liabilities using enacted tax rates in effect in the years in which the
     differences are expected to reverse.

                                      F-23
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996

6. Income taxes (continued):

   The provision (benefit) for income taxes for the years ended December 31,
     1998, 1997, and 1996 consists of the following:
<TABLE>
<CAPTION>
                                    1998                  1997                 1996
                                   ------                ------               ------
<S>                                <C>                    <C>                 <C>
Current:
  Federal                                                                       $  (174,000)
  State and local                                                                    41,900
  Foreign                          ------------           $  (166,404)              (29,300)
                                   ------------           -----------          ------------
                                                             (166,404)             (161,400)
Deferred:
  Federal                          $ (1,089,000)           (1,345,000)           (1,393,000)
  State and local                      (108,000)             (219,000)             (230,600)
  Foreign                          ------------              (120,000)               46,000
                                   ------------           -----------          ------------
                                     (1,197,000)           (1,684,000)           (1,577,600)
                                   ------------           -----------           ------------
Change in valuation allowance
 for deferred tax assets              1,197,000             1,684,000              1,494,500
                                   ------------          ------------           ------------
 Income tax benefit                $                     $   (166,404)          $   (244,500)
                                   ============          ============           ============
</TABLE>


A reconciliation of the statutory federal income tax rate to the Company's
     effective income tax rate for the years ended December 31, 1998, 1997, and
     1996 is as follows:
<TABLE>
<CAPTION>

                                        1998     1997     1996
                                        ----     ----     ----
  <S>                                    <C>      <C>      <C>
   Statutory income tax benefit         (34%)    (34%)    (34%)
   State and local income taxes                             1%
   Deferred income tax valuation
     allowance                           35%      28%      24%
   Other                                 (1%)      3%       5%
                                        ----     ----     ----
                                                  (3%)      4%
                                        ====     ====     ====

</TABLE>

                                      F-24
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996

6. Income taxes (continued):

   The following is a summary of the Company's deferred tax assets and
     liabilities at December 31, 1998, and 1997:
<TABLE>
<CAPTION>
                                          1998            1997
                                          ----            ----
<S>                                       <C>           <C>
    Deferred tax assets:
     Net operating loss carryforward    $ 4,012,000    $ 2,919,000
     Intangible assets                      492,000        308,000
     Accounts receivable                     94,000        174,000
                                         -----------    ----------
     Inventories                          4,598,000      3,401,000

    Valuation allowance for deferred
     tax assets                          (4,598,000)    (3,401,000)
                                        $              $
                                        ===========    ===========
</TABLE>

   Net operating loss carry forwards of approximately $10,700,000 are available
     to offset future taxable income, if any, through 2018. The net operating
     loss carry forwards may be subject to certain restrictions due to the sale
     of Skate Corp. assets, the IMON merger and other transactions. A valuation
     allowance has been provided to reduce the deferred tax assets, as
     realization of the assets is not assured.

7. Shareholders' equity:

   Series A preferred stock:

   In 1997, the Company issued 349,214 shares of Series A preferred stock
     (including 30,167 to an officer/shareholder) in satisfaction of $1,568,130
     of liabilities (including $181,000 due to the officer/shareholder).  In
     1997, the Company also issued 750,471 shares of Series A preferred stock
     and 360,000 shares of common stock to its subsidiary in satisfaction of
     intercompany liabilities, which resulted in an increase in treasury stock
     of $893,640.  The shares were valued based upon the trading price of the
     Company's common stock, adjusted for the one for three conversion feature
     of the preferred stock.

                                      F-25
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996

7. Shareholders' equity (continued):

   Series A preferred stock (continued):

   During 1998, the Company issued 18,500 shares of Series A preferred stock to
     an officer of the Company. The shares were valued based upon the trading
     price of the Company's common stock, adjusted for the one for three
     conversion feature of the preferred stock, and accordingly, the Company
     recognized an expense of approximately $76,313. During 1998, the Company
     also issued 167,754 shares of Series A preferred stock in a private
     placement, in which the Company received $166,653, and the Company issued
     41,667 shares of Series A preferred stock in satisfaction of $150,000 of
     liabilities.

   Each share of outstanding Series A Convertible Preferred Stock automatically
     converted to three shares of common stock in July 1998 upon shareholder
     approval of a recapitalization measure that increased the authorized number
     of common shares of the Company, from 10,000,000 to 20,000,000. Upon
     conversion of the Series A Preferred Stock into common stock, there were no
     Series A Preferred shares outstanding and accordingly all rights for Series
     A stockholders have been terminated.

   Series B/C preferred stock:

   During 1998, the Company issued 2,080 shares of Series B and C convertible
     preferred stock ("Series B/C") for $1,660,026 (net of offering costs) at a
     price of $1,000 per share.  The Series B/C stock is convertible at the
     option of the holder at any time after 90 days from the closing date, into
     a number  of shares of common stock equal to $1,000 divided by the lower of
     65% of the average market price of the common stock for the five trading
     days immediately prior to the conversion date, or the market price on the
     day of first closing.  During the fourth quarter of 1998, the Company
     issued 36,790 shares of common stock to the Series B/C shareholders as a
     penalty for not completing a registration statement within an agreed upon
     time period.  The Company recorded financing fee expense of $48,258 based
     on the market value of the common shares issued.  The registration
     statement was filed in the fourth quarter of 1998 and the  holders of
     Series B and C convertible preferred stock converted 450 shares into
     742,644 shares of common stock of the Company.  At December 31, 1998, 1,630
     shares of Series B/C remain outstanding.

                                      F-26
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996

7. Shareholders' equity (continued):

   Series D/E preferred stock:

   In January 1999, the Company with the assistance of its financial consultant
     completed  private placements whereby the Company received net proceeds of
     $2,550,000 from accredited investors introduced to the Company by the
     consultant, for the purchase of 1,500 shares each of Series D and E
     Convertible Preferred Stock, par value $.01 ("Series D/E") at a price of
     $1,000 per share.  The Series D/E stock is convertible at the option of the
     holder at any time after 90 days from the closing date into a number of
     shares of common stock equal to the lower of $1,000 divided by 75% of the
     average closing bid price of the common stock for the five trading days
     immediately prior to the conversion date, or 120% of the market price on
     the day of closing.  In connection with the placement of the Series D/E,
     the Company issued warrants to purchase 300,000 shares of common stock to
     financial advisors that assisted with placements.  One-half of the warrants
     are exercisable at $7.28063 per share (the market price of the common stock
     at the date of issuance).  All warrants expire in January 2004.

   Unaudited pro forma balance sheet:

   The accompanying consolidated balance sheet includes an unaudited pro forma
     consolidated balance sheet as of December 31, 1998, that gives effect to
     the following transactions as if these transactions had been consummated on
     December  31, 1998:

     a. The receipt of $2,550,000 cash from investors who purchased 3,000 shares
        of Series D/E preferred stock from the Company as described above.  The
        portion of the proceeds equal to the intrinsic value of the beneficial
        conversion feature ($1,615,000) has been allocated to capital in excess
        of par.

                                      F-27
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996

7. Shareholders' equity (continued):

   Unaudited pro forma balance sheet (continued):

     b. The receipt of  $90,000 cash from two officers/shareholders of the
        Company to purchase all of the Company's shares of Skate Corp. common
        stock as described in Note 4,  "Subsequent sale of the Company's
        investment in Skate Corp."  Thus the unaudited pro forma balance sheet
        reflects the receipt of $90,000 of cash in exchange for the assets and
        liabilities held for sale, the elimination of the historical Skate Corp.
        minority interest, the decrease in treasury stock that had been
        recognized  in   the historical consolidation, and  the recognition  of
        $44,801  of intercompany accounts payable due to Skate Corp. that had
        been eliminated in the historical consolidation.  The pro forma
        adjustment does not result in any gain or loss to the Company.

   The unaudited pro forma consolidated balance sheet should be read in
     conjunction with the historical financial statements of the Company. The
     unaudited pro forma consolidated balance sheet does not purport to be
     indicative of the financial position of the Company had the transactions
     occurred on December 31, 1998.

   Issuances of common stock:

   During the year ended December 31, 1998, the Company issued 437,593 shares of
     its common stock at prices from $.70 to $1.72 per share in exchange for the
     extensions of the maturity date on notes of Skate Corp.  The Company
     recognized finance fee expense of $542,902 related to these services.
     Additionally, the Company issued 50,000 shares of its common stock at
     $1.375 per share (the market value of the stock on the effective date of
     issuance) to a consultant who was a former director and officer of the
     Company.  The Company recognized $68,750 of consulting expenses related to
     this issuance.  During the year ended December 31, 1998, 534,200 options
     and/or warrants were exercised at $1.00 to $1.15 per share, by officers
     (211,700), consultant (300,000), director (15,000) and an employee (7,500).

    In July 1998, the Company sold 80,000 shares of restricted common stock in a
     private placement to a third party for $40,000.  During the year ended
     December 31, 1998, the Company received proceeds of $400,000 cash from
     investors who acquired 500,000 shares of restricted common stock from the
     Company.

                                      F-28
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996

7. Shareholders' equity (continued):

   Issuances of common stock (continued):

   In 1998, the Company issued 316,256 shares of common stock in satisfaction of
     $288,826 of liabilities.  In 1997, the Company issued 865,225 shares of
     common stock (including 299,633 to officers/shareholders) in satisfaction
     of $1,171,656 of liabilities (including $493,995 due to the
     officers/shareholders).  The shares were valued at the trading price of the
     Company's common stock.

   Issuance of stock to Skate Corp.:

   In 1997, the Company issued 750,471 shares of preferred stock and 360,000
     shares of common stock to Skate Corp. in satisfaction of intercompany
     liabilities of $893,640. This transaction was accounted for as a treasury
     stock transaction in the consolidated financial statements.

   During the year ended December 31, 1998, the Company issued 245,520 treasury
     shares owned by Skate Corp. with a carrying value of $84,017 in
     satisfaction of $245,520 of Skate Corp. liabilities held for sale.  As a
     result of this transaction, the treasure stock balance has been reduced by
     $84,017.

   During December 1998 Skate Corp. sold 84,212 treasury shares with a carrying
     value of $28,724 for cash of $178,979.  As a result of this sale the
     carrying value of treasury stock has been reduced by $28,724 and capital in
     excess of par was increased by $150,255.

   The Company also issued 1,327,000 treasury shares owned by Skate Corp. with a
     carrying value of $454,099 in exchange for 884,667 shares of Skate Corp.
     As a result of this transaction, the treasury stock balance has been
     reduced by $454,099.

                                      F-29
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996

7. Shareholders' equity (continued):

   Issuances of common stock in 1996:

   During 1996, the Company issued 400,000 shares of the Company's common stock
     at an agreed value of $900,000, or $2.25 per share, as compensation under a
     consulting and non-compete agreement; and 36,000 shares of common stock at
     $3.00 per share (the trading price of the stock at the date the Board of
     Directors authorized the issuance) in satisfaction of a $108,000 account
     payable. The Company also issued 480,000 shares of the Company's common
     stock to officers/shareholders of the Company at $1.37 per share (the
     trading price of the stock at the date the Board of Directors authorized
     the issuance) in satisfaction of $660,000 of payables.

   Stock options:

   The Company has a stock option plan (the "1994 Stock Option Plan") which
     provides for the issuance to employees, officers, directors, and
     consultants of the Company options to purchase up to 200,000 shares of
     common stock.  Options may be granted as incentive stock options or as non-
     statutory options.  Only employees are eligible to receive incentive
     options.  For options that are granted, the exercise period may not exceed
     ten years.  The exercise price for incentive options may not be less than
     100% of the fair market value of the Company's common stock on the date of
     grant, except for options issued to persons controlling more than 10% of
     the  Company's common stock, for which the option price may not be less
     than 110% of the fair market value of the Company's common stock on the
     date of grant.  The exercise price for non-statutory options may not be
     less than 80% of the fair market value of the Company's common stock on the
     date of grant.

   In 1997, the Company granted options to purchase 150,000 shares of common
     stock to non-employees for services provided to the Company. General and
     administrative expense were charged $42,500.

                                      F-30
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996

7. Shareholders' equity (continued):

   Stock options (continued):

   A summary of the status of the Company's stock options and weighted average
     exercise prices is as follows:
<TABLE>
<CAPTION>

                                 1994 Plan                    Other               Total
                               ---------------------------------------------------------------------
                      Shares             Price        Shares         Price      Shares         Price
                      ------------------------------------------------------------------------------
    <S>                                  <C>          <C>           <C>         <C>           <C>
   Outstanding,
     January 1, 1996                      36,500      $2.50                                    36,500    $2,50
    Forfeited  (16,500)                    $2.50         --                --     (16,500)      $2.50
   Outstanding,
    December 31, 1996                     20,000      $2.50                                    20,000    $2.50

   Granted     130,000                     $1.00    150,000             $0.83     280,000       $0.95
   Exercised   (22,500)                    $1.00    (30,000)            $1.00     (52,500)      $1.00
                                          ------    -------             -----     --------      -----
   Outstanding,
    December 31, 1997                    127,500      $1.24           120,000       $0.89     247,500    $1.07

   Canceled  (20,000)                     $2.50    (100,000)           $0.88    (120,000)      $1.15
   Granted    49,500                      $1.00   1,100,000            $2.22   1,149,500       $2.17
   Exercised (157,000)                    $1.00          --               --    (157,000)      $1.00
   Outstanding,
    December 31, 1998                        --          --        1,120,000       $2.20   1,120,000     $2.20
                                         ======    ========        =========    ========   =========     =====
</TABLE>
   The 1994 Plan options expire from 1999 through 2003. The other options expire
     from 2000 through 2002.

   Had compensation cost for the 1994 options granted in 1997 been determined
     based on the fair value at the grant dates consistent with the provisions
     of SFAS No. 123, the Company's net loss and loss per share would not have
     been materially different from that reported.

                                      F-31
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996

7. Shareholders' equity (continued):

   Warrants:

   The Company has outstanding warrants to purchase 1,990,000 shares of common
     stock at $1.00 per share that expire in June 1999 (the "Warrants").
     The Company also has outstanding warrants to purchase 120,000 Warrants
     at $0.30 per Warrant that expire in June 1999.

    In 1997, the exercise price of warrants to purchase 500,000 shares of the
     Company's common stock that had been granted to two officers/shareholders
     of the Company were reduced from $2.38 per share to $1.00 per share (which
     approximated fair value). These warrants expire from 2002 through 2003.

    The Company also has outstanding warrants to purchase 58,331 shares of
     common stock at $4.81 per share that expire in 2000.

8. Extraordinary item:

   The Company recognized an extraordinary gain of $383,705 in 1997 (of which
     $149,000 related to debt due to officer/shareholder) from the
     extinguishment of debt for amounts less than the carrying value of the
     liabilities.

9. Foreign operations and export sales:

   Information about the Company's operations in the United States and Canada
     for the years ended December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>

    1997:
                                      United                                           Combined
                                      States         Canada      Eliminations            total
                                     --------       --------    --------------         -------
     <S>                                <C>            <C>            <C>             <C>
      Sales to unaffiliated
        customers                  $ 5,494,000       $3,594,000                      $ 9,088,000
      Intercompany sales                                740,000      $ (740,000)
                                   -----------       ----------      ----------      -----------
      Net sales                    $ 5,494,000       $4,334,000      $ (740,000)     $ 9,088,000
                                   ===========       ==========      ==========      ===========

      Loss from operations         $(3,650,000)      $ (418,000)     $   (7,000)     $(4,075,000)
                                   ===========       ==========      ==========      ===========

          Identifiable assets      $ 2,269,000                                       $ 2,269,000
                                   ===========                                       ===========

</TABLE>

                                      F-32
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996

9. Foreign operations and export sales (continued):
<TABLE>
<CAPTION>

   1996:
                                     United                                           Combined
                                     States       Canada        Eliminations          total
      <S>                            <C>          <C>           <C>                   <C>
      Sales to unaffiliated
        customers                 $11,877,000    $ 5,076,000                          $16,953,000
      Intercompany sales                            8410,000    $  (841,000)
                                  -----------    -----------    -----------           -----------
     Net sales                    $11,877,000    $ 5,917,000    $  (841,000)          $16,953,000
                                  ===========    ===========    =============        ============

      Income (loss) from
         operations               $(5,366,000)   $  (590,000)   $    85,000           $(4,691,000)
                                  ===========    ===========    =============        ============

During the years ended December 31, 1997, and 1996, sales by geographic
regions were as follows:

                                                                     1997                1996
                                                                    ------              ------
     Europe and other                                            $ 1,395,330         $ 3,225,000
        Canada                                                     3,185,923           4,949,000
     Japan                                                           101,595             312,000
                                                                 -----------         -----------
           Total exports                                           4,682,848           8,486,000
           USA sales                                               4,404,919           8,467,000

           Total sales                                           $ 9,087,767         $16,953,000
                                                                 ===========         ===========
</TABLE>

10. Merger agreement:

    On January 20, 1999, the Company, through ImaginOn Acquisition Corp., a
     newly formed, wholly owned subsidiary of the Company, completed a merger
     with ImaginOn.com, Inc. of San Carlos, California ("IMON"), a privately
     held company. IMON, formed in March 1996, designs, manufactures and sells
     consumer software products for Internet users. At closing, IMON's
     shareholders received approximately 60% of the post merger issued and
     outstanding common stock of the Company (21,248,665 shares) in exchange for
     their IMON common stock.

                                      F-33
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996

10. Merger agreement (continued):

    The Company filed a proxy statement relating to the transaction in November
     1998 that includes financial statements of IMON, unaudited pro forma
     financial information reflecting the merger, and other information about
     IMON and the merger. The merger transaction was approved December 1998 by
     the boards of directors of both companies and was also approved by the
     Company's shareholders. The merger transaction was consummated on January
     20, 1999. During 1998, the Company advanced ImaginOn $1,433,269 at 9%
     interest. This amount, plus interest receivable of $43,948, is classified
     as notes receivable, related party on the consolidated balance sheet.

    On March 8, 1999, the Company acquired Network Specialists, Inc., an
     internet service provider for $230,000 cash and approximately 260,000
     shares of the Company's common stock.

11. Restructuring and impairment charges:

    The Company initiated its restructuring plan in 1996, which included the
     implementation of product line changes and a cost reduction program
     beginning in the fourth quarter of 1996.  The Company recorded
     restructuring an impairment charges with consists of the following:
<TABLE>
<CAPTION>

                                   Non-cash asset        Other
                                     write downs        charges      Total
<S>                                  <C>                <C>          <C>
   1996:
       Equipment                      $  411,700                     $  411,700
       Trademarks                        368,000                        368,000
       Organization costs and other
        Intangibles                      205,000                        205,500
       Consulting costs                  145,500                        145,500
       Severance                                         22,100          22,100
       Lease termination                                 76,500          76,500
                                      ----------       ========      ==========
                                      $1,130,400       $ 98,600      $1,229,000
                                      ==========       ========      ==========
   1997:
       Goodwill                       $  237,452                     $  237,452
                                      ==========                     ==========

   1998:
      Goodwill                        $  489,825                     $  489,825
                                      ==========                     ==========
</TABLE>

                                      F-34
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES
                      (A Company in the Development Stage)

                           CONSOLIDATED BALANCE SHEET

                               SEPTEMBER 30, 1999
                                  (UNAUDITED)

                                     ASSETS


Current assets:
   Cash                                         $ 3,365,483
   Accounts receivable, less allowance for
    doubtful accounts of $6,000                     129,847
   Inventory                                         43,851
   Prepaid expenses and other                       100,229
                                                -----------
     Total current assets                         3,639,410

Furniture and equipment, net of accumulated
 depreciation of $128,765                           159,276
                                                -----------
Other assets, net of accumulated
  amortization of$394,093:
   Goodwill                                       2,227,957
   Trademark and license costs                       77,085
   Other                                             12,471
                                                -----------
                                                  2,317,513

                                                $ 6,116,199
                                                ===========

                LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
 Accounts payable                               $   115,608
 Accrued expenses                                   469,499
 Other payable                                      200,000
                                                -----------
       Total liabilities (all current)              785,107
                                                -----------
Shareholders' equity (Note 5):
 Preferred stock,$0.01 par value, authorized
  5,000,000 shares Series F convertible preferred
  stock, 4,000 shares issued and outstanding      3,684,610
 Common stock, $0.01 par value; authorized
  50,000,000 shares; issued 41,205,887              412,060
 Warrants                                            84,736
 Capital in excess of par                         9,085,396
 Deficit accumulated during
  the development stage                          (7,935,710)
                                                -----------
       Total shareholders' equity                 5,331,092
                                                -----------
                                                $ 6,116,199
                                                ===========


                                      F-35
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES
                      (A Company in the Development Stage)

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                 THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
                                  (UNAUDITED)

                                                     Three months ended
                                                        September 30,
                                                 -------------------------
                                                    1999          1998
                                                 ----------     ----------
Revenues                                        $   168,721     $       148

Cost of revenues                                     37,834              --

Gross profit                                        130,887             148
                                                -----------     -----------
Operating expenses:
 Research and development                           206,906         179,809
 Selling expense                                    719,999          39,538
 General and administrative expense                 884,562         122,103
                                                -----------      ----------
                                                  1,811,461         341,450
                                                -----------      ----------
Loss from operations                             (1,680,574)       (341,302)
                                                -----------      ----------
Other expenses (income):
 Interest expense                                                     22,621
 Interest income                                    (48,755)             (14)
 Other income                                         1,196
                                                -----------      -----------
                                                    (47,559)          22,607

Net loss                                         (1,633,021)        (363,909)

Amortization of discount on preferred stock        (127,659)
                                                -----------      -----------
Net loss applicable to common shareholders      $(1,760,680)     $  (363,909)
                                                ===========      ===========

Loss per share                                  $      (.04)     $      (.02)
                                                ===========      ===========

Weighted average number of shares outstanding    41,186,568       20,192,115
                                                ===========      ===========

                                      F-36
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES
                      (A Company in the Development Stage)

                     CONSOLIDATED STATEMENTS OF OPERATIONS

               NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 AND
                 CUMULATIVE PERIOD FROM MARCH 29, 1996 (DATE OF
                        INCEPTION) TO SEPTEMBER 30, 1999
                                  (UNAUDITED)
<TABLE>
<CAPTION>

                                                                                                Cumulative
                                                                                               period from
                                                          Nine months ended                   March 29, 1996
                                                            September 30,                   (date of inception)
                                                   -------------------------------              to September
                                                      1999                   1998                30, 1999
                                                   ----------             ---------         --------------------
<S>                                                <C>                    <C>                   <C>
Revenues                                           $   259,783           $       223            $   265,328

Cost of revenues                                        98,539                                       99,603
                                                   ------------          -----------            -----------
Gross profit                                           161,244                   223                165,725
                                                   ------------          -----------            -----------
Operating expenses:
 Research and development                              818,581               711,293              2,621,871
 Selling expense                                     2,076,463               306,782              2,726,398
 General and administrative expense                  2,173,001               234,489              2,645,249
                                                   -----------           -----------            -----------
                                                     5,068,045             1,252,564              7,993,518
                                                   -----------           -----------            -----------
Loss from operations                                (4,906,801)           (1,252,341)            (7,827,793)
                                                   -----------           -----------            -----------
Other expenses (income):
 Interest expense                                       28,203                42,632                197,899
 Interest income                                       (16,737)                 (310)               (17,047)
 Other income                                          (64,177)                                     (72,935)
                                                   -----------           -----------            -----------
                                                       (52,711)               42,322                107,917
                                                   -----------           -----------            -----------
Net loss                                            (4,854,090)           (1,294,663)            (7,935,710)

Amortization of discount on preferred stock         (1,209,929)                                  (1,209,929)
                                                   -----------           -----------            -----------
Net loss applicable to common
 shareholders                                      $(6,064,019)          $(1,294,663)           $(9,145,639)
                                                   ===========           ===========            ===========

Loss per share                                     $      (.16)          $      (.06)           $      (.45)
                                                   ===========           ===========            ===========
Weighted average number of shares outstanding       37,786,268            20,581,152             20,391,632
                                                   ===========           ===========            ===========
</TABLE>

                                      F-37
<PAGE>

                        IMAGINON, INC., AND SUBSIDIARIES
                     ( A Company in the Development Stage)

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                     CUMULATIVE PERIOD FROM MARCH 29, 1996
                   (DATE OF INCEPTION) TO SEPTEMBER 30, 1999
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                         Series D, E and F
                                 Common stock               convertible                                 Deficit
                                                          preferred stock                             Accumulated
                              -----------------         --------------------              Capital      during the         Total
                                                                                         in excess     development     shareholders'
                                Shares     Amount      Shares      Amount    Warrants      of par        stage            equity
                               --------   --------    --------    --------  ---------    ---------    -------------    ------------
<S>                             <C>        <C>         <C>         <C>        <C>          <C>          <C>                <C>
Issuance of common stock
 for services                 9,033,332     90,333                                        (87,000)                         3,333
Net loss                                                                                                (394,906)       (394,906)
                             ----------    -------    -------     --------  ---------    ---------      ---------      ---------
Balances, December 31, 1996   9,033,332     90,333                                         (87,000)     (394,906)       (391,573)

Issuance of common stock for
 cash, net of issuance
 costs of $49,686            10,073,067    100,731                                         601,833                       702,564

Issuance of common stock to
 employees in exchange for
 earned bonuses at $0.15 per
 share                           67,750        678                                           3,072                         3,750

Exercise of common stock
 warrants for     cash          121,950      1,220                                           5,530                         6,750

Exercise of common stock
 warrants in exchange for
 note payable                   154 574      1,546                                           7,010                         8,556

Issuance of warrants to
 purchase shares of common
 stock, net                                                                  72,158                                       72,158

Net loss                                                                                                (946,512)       (946,512)
                             ----------    -------    -------     --------  ---------    ---------      ---------      ---------
Balances, December 31, 1997  19,450,673    194,508                           72,158        530,445     (1,341,418)      (544,307)

Issuance of common stock and
 warrants for cash, net of
 issuance cost of $348,438    1,138,200     11,382                          313,353        165,180                       489,915

Issuance of common stock to
 employees in exchange for
 earned bonus                   135,500      1,355                                           61,145                       62,500


Issuance of common stock in
 exchange for accounts
 payable                         23,742        237                                           10,714                       10,951
</TABLE>

                                      F-38
<PAGE>

                        IMAGINON, INC., AND SUBSIDIARIES
                     ( A Company in the Development Stage)

          CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)

                     CUMULATIVE PERIOD FROM MARCH 29, 1996
                   (DATE OF INCEPTION) TO SEPTEMBER 30, 1999
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                         Series D, E and F
                                 Common stock               convertible                                 Deficit
                                                          preferred stock                             Accumulated
                              -----------------         --------------------              Capital      during the         Total
                                                                                         in excess     development     shareholders'
                                Shares     Amount      Shares      Amount    Warrants      of par        stage            equity
                               --------   --------    --------    --------  ---------    ---------    -------------    ------------
<S>                             <C>        <C>         <C>         <C>        <C>          <C>          <C>                <C>
Repurchase of common stock     (542,000)  (5,420)                                         (119,580)                        (125,000)

Issuance of warrants to
 purchase shares of common
 stock in connection with
 the issuance of a bridge
 financing                                                                     12,398                                        12,398

Issuance of options to a
 consultant                                                                                  1,987                            1,987

Net loss                                                                                                 (1,740,202)
                               --------   --------    --------    --------  ---------    ---------    -------------    ------------
Balances, December 31, 1998  20,206,115    202,062                            397,909      649,891       (3,081,620)     (1,831,758)

Exercise of 4,075,065
 warrants at exercise prices
 between $.055 and $2.10      4,075,065     40,751                            (757,177)   4,562,527                       3,846,101

Shares issued in acquisition
 (Note 5)                    16,000,602    160,006       3,000     1,570,000   394,200    2,574,915                       4,699,121

Issuance of 123,200 shares
 to employees                   123,200      1,232                              65,577      611,012                         677,821

Issuance of 260,000 shares
 of common stock in
 connection with acquisition
 (Note 3)                       260,000      2,600                                        1,399,320                       1,401,920

Issuance of 88,540 shares of
 common stock in exchange
 for cashless conversion of
 119,060 warrants to
 purchase common stock           88,540        885                                             (885)

Exercise of stock options        27,000        270                                             1,225                          1,495

Amortization of Series D and
 E preferred stock                                                 1,000,000              (1,000,000)

</TABLE>

                                      F-39
<PAGE>

                        IMAGINON, INC., AND SUBSIDIARIES
                     (A Company in the Development Stage)

          CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)

                     CUMULATIVE PERIOD FROM MARCH 29, 1996
                   (DATE OF INCEPTION) TO SEPTEMBER 30, 1999
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                          Series D, E and F                                 Deficit
                                                             convertible                                  Accumulated
                                    Common stock            preferred stock                    Capital     during the    Total
                                 --------------------     ---------------------               in excess   development shareholders'
                                  Shares       Amount     Shares       Amount        Warrants   of par       stage      equity
                                 ----------   -------     ------     ----------      -------- ----------   ----------  ----------
<S>                               <C>          <C>        <C>        <C>           <C>         <C>           <C>         <C>
Issuance of 165,410 shares of
  common stock in exchange
  for 490 shares of
  Series E preferred stock
    (Note 5)                        165,410     1,654       (490)      (419,768)                 418,114

Issuance of 305,000 shares of
  common stock in connection
  with acquisition of Imagine
  Digital Productions               305,000     3,050                                            664,290                  667,340

Issuance of 4,000 shares of
  Series F preferred stock
  (Note 5)                                                 4,000      3,474,681                  175,319                3,650,000
Amortization of Series F
  preferred stock (Note 5)                                              209,929                 (209,929)
Redemption of Series D and E
  preferred stock (Note 5)                                (2,510)    (2,150,232)                (891,872)              (3,042,104)
Redemption of 74,823 public
  warrants at $.05 each                                                              (15,773)     12,031                   (3,742)
Repurchase of 45,045 shares of
  previously issued common stock    (45,045)     (450)                                           (49,550)                 (50,000)
Proceeds received from                                                                           168,988                  168,988
  Section 16c
Net loss for nine months ended
  September 30, 1999                                                                                       (4,854,090) (4,854,090)
                                 ----------   -------     ------     ----------      -------  ----------   ----------  ----------
Balances, September 30, 1999     41,205,887   412,060      4,000      3,684,610       84,736   9,085,396   (7,935,710)  5,331,092
                                 ==========   =======     ======     ==========      =======  ==========   ==========  ==========
</TABLE>

                                      F-40
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES
                     (A Company in the Development Stage)

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

               NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 AND
                 CUMULATIVE PERIOD FROM MARCH 29, 1996 (DATE OF
                        INCEPTION) TO SEPTEMBER 30, 1999
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                      Cumulative
                                                                                      period from
                                                        Nine months ended            March 29,1996
                                                          September 30,           (date of inception)
                                                    ---------------------------      to September
                                                        1999          1998             30, 1999
                                                    ------------  -------------   -----------------
<S>                                                 <C>            <C>               <C>
Cash flows from operating activities:
 Net loss                                           $(4,854,090)   $(1,294,663)      $(7,935,710)
 Adjustments to reconcile net loss to net
   cash used in operating
   activities:
  Depreciation and amortization                         418,491         14,977           443,826
  Bad debt expense                                        6,000                            6,000
  Interest expense for issuance of notes
   payable                                                                                77,942
  Expense incurred upon issuance of common
   stock                                                677,821         62,500           760,342
  Changes in operating assets and
   liabilities, net of effects of
   business acquisition
    Accounts receivable                                (127,257)                        (127,257)
    Inventories                                         (35,183)                         (35,183)
    Prepaid expenses and other                          (85,935)        (5,772)         (103,493)
    Accounts payable and accrued expenses                81,625         92,937           462,857
                                                    -----------     ----------       -----------
  Total adjustments                                     935,562        164,642         1,485,034
                                                    -----------     ----------       -----------
Net cash used in operating activities                (3,918,528)    (1,130,021)       (6,450,676)
                                                    -----------     ----------       -----------
Cash flows from investing activities:
 Cash paid on business acquisitions,
   net of cash acquired                                (337,485)                        (337,485)
 Capital expenditures                                   (59,666)        (7,740)          (96,812)
                                                    -----------     ----------       -----------
Net cash used in investing activities                  (397,151)        (7,740)         (434,297)
                                                    -----------     ----------       -----------
Cash flows from financing activities:
 Bank overdraft                                                         (1,587)
 Proceeds from notes payable and advances             3,099,550        801,636         4,627,304
 Payments on notes payable                                            (143,429)         (153,429)
 Redemption of preferred stock and warrants          (3,095,846)                      (3,095,846)
 Proceeds from issuance of common stock,
  preferred stock, warrants, and other, net           7,666,584        489,915         8,872,427
                                                    -----------     ----------       -----------
Net cash provided by financing activities             7,670,288      1,146,535        10,250,456
                                                    -----------     ----------       -----------
Net increase in cash                                  3,354,609          8,774         3,365,483
Cash, beginning                                          10,874
                                                    -----------     ----------       -----------
Cash, ending                                        $ 3,365,483    $     8,774       $ 3,365,483
                                                    ===========    ===========       ===========

</TABLE>

                                      F-41
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES
                      (A Company in the Development Stage)

               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

               NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 AND
                 CUMULATIVE PERIOD FROM MARCH 29, 1996 (DATE OF
                        INCEPTION) TO SEPTEMBER 30, 1999
(UNAUDITED)

<TABLE>
<CAPTION>
                                                                                          Cumulative
                                                                                          period from
                                                              Nine months ended           March 29,1996
                                                                September 30,          (date of inception)
                                                         ---------------------------      to September
                                                             1999          1998             30, 1999
                                                         ------------  -------------   -----------------
<S>                                                       <C>           <C>             <C>
Supplemental disclosure of cash flow information:
  Cash paid for interest                                  $         -     $       -        $    18,351
                                                          ===========     =========        ===========
  Cash paid for taxes                                     $         -     $       -        $     3,593
                                                          ===========     =========        ===========
Supplemental disclosure of non-cash investing and
 financing activities:

  Purchase of Network Specialists, Inc., net of cash
   acquired:
      Fair value of assets acquired                       $   115,000             -        $   115,000
      Intangible assets                                     1,600,000             -          1,600,000
      Liabilities assumed                                    (100,000)            -           (100,000)
      Fair value of assets exchanged                       (1,402,000)            -         (1,402,000)
                                                          -----------     ---------        -----------
      Cash paid, net of cash acquired                     $   213,000             -        $   213,000
                                                          ===========     =========        ===========
  Purchase of Imagine Digital Productions I, Inc., net
   of cash acquired:
      Fair value of assets acquired                       $    27,000             -        $    27,000
      Intangible assets                                     1,010,000             -          1,010,000
      Liabilities assumed                                     (45,000)            -            (45,000)
      Fair value of assets exchanged                         (867,000)            -           (867,000)
                                                          -----------     ---------        -----------
                                                          $   125,000             -        $   125,000
                                                          ===========     =========        ===========
  Issuance of warrants to purchase common stock           $         -     $ 313,353        $   397,909
                                                          ===========     =========        ===========

  Exercise of common stock warrants in exchange
   for note payable                                       $         -     $       -        $     8,556
                                                          ===========     =========        ===========
</TABLE>

                                      F-42



<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES
                      (A Company in the Development Stage)

               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

               NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 AND
                 CUMULATIVE PERIOD FROM MARCH 29, 1996 (DATE OF
                        INCEPTION) TO SEPTEMBER 30, 1999
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                       Cumulative
                                                                                      Period from
                                                             Nine months ended      March 29, 1996
                                                                September 30,     (date of inception)
                                                        -------------------------     to September
                                                            1999          1998          30, 1999
                                                        -----------    ----------  ------------------
<S>                                                      <C>             <C>              <C>
 Conversion of warrants for shares of common stock             885       $     -       $      885
                                                         =========       =======       ==========
 Issuance of common stock in exchange for
   accounts payable                                              -       $10,951       $   10,951
                                                         =========       =======       ==========
 Common stock issued in connection with the merger
  between the Company and ImaginOn.com                   4,669,121       $     -       $4,669,121
                                                         =========       =======       ==========
</TABLE>

                                      F-43
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES
                      (A Company in the Development Stage)

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
                                  (UNAUDITED)

1. The interim financial statements:

   The interim financial statements have been prepared by ImaginOn, Inc. (the
   "Company", formerly known as California Pro Sports, Inc.), and in the opinion
   of management, reflect all material adjustments which are necessary to a fair
   statement of results for the interim periods presented, including normal
   recurring adjustments. Certain information and footnote disclosures made in
   the last annual report on Form 10-KSB have been condensed or omitted for the
   interim statements. The financial statements presented are those of the
   surviving entity from the merger (see Note 2). It is the Company's opinion
   that, when the interim statements are read in conjunction with the December
   31, 1998 Annual Report on Form 10-KSB and the Company's proxy statement dated
   December 10, 1998, the disclosures are adequate to make the information
   presented not misleading. The results of operations for the three and nine
   months ended September 30, 1999 and 1998, are not necessarily indicative of
   the operating results for the full year.

2. Organization and merger:

   On January 20, 1999, the Company, through ImaginOn Acquisition Corp., a
   wholly owned subsidiary of the Company, completed a merger with ImaginOn.com,
   Inc. of San Carlos, California (formerly known as ImaginOn, Inc., "IMON") a
   privately held company. IMON, formed in March 1996, designs, manufactures and
   sells consumer software products for Internet users. At closing, IMON's
   shareholders received approximately 60% of the outstanding post-merger common
   stock of the Company (20,206,115 shares) in exchange for their IMON common
   stock. The transaction has been recorded as an acquisition of ImaginOn, Inc.
   by IMON and a recapitalization of IMON.

   The accompanying consolidated financial statements include the accounts of
   ImaginOn, Inc., and its wholly owned subsidiaries, ImaginOn Acquisition
   Corp., IMON, and Network Specialists, Inc. and Imagine Digital Production I,
   Inc. (Note 3). Intercompany transactions have been eliminated in
   consolidation. The Company is in the development stage and since inception
   has devoted substantially all of its efforts to product research and
   development, raising capital and recruiting personnel.

                                      F-44
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES
                      (A Company in the Development Stage)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
                                  (UNAUDITED)

3. Business acquisitions:

   On March 8, 1999, the Company acquired Network Specialists, Inc. ("iNOW"), an
   internet service provider for $230,000 cash and 260,000 shares of the
   Company's common stock valued at approximately $1,402,000.

   Effective July 1, 1999, the Company acquired Imagine Digital Productions I,
   Inc. ("IDP"), a multi-media production studio and publishing company, through
   its subsidiary ImaginOn Digital Productions, Inc., for $125,000 cash, a
   $200,000 payable (which was paid in October 1999), and 305,000 shares of the
   Company's common stock valued at approximately $667,000. In addition, the
   Company agreed to issue as contingent consideration, up to 105,000 shares of
   the Company's common stock on June 30, 2000, subject to IDP satisfying
   certain performance criteria, as defined in the purchase agreement.

   Each acquisition was accounted for as a purchase, and the results of
   operations of iNOW and IDP are included in the Company's consolidated
   statement of operations from the date of each acquisition. The total purchase
   price of each acquisition was allocated to the assets and liabilities
   acquired based on their estimated fair values, including total goodwill of
   approximately $2,610,000, which is being amortized by the use of the
   straight-line method over three years.

   The following unaudited pro forma financial information for the nine months
   ended September 30, 1999 and 1998 give effect to the acquisitions as if
   they had occurred effective at the beginning of each respective period:

<TABLE>
<CAPTION>
                                                         Nine months
                                                      ended September 30,
                                                 -------------------------
                                                     1999           1998
                                                 -----------   -----------
<S>                                              <C>            <C>
Revenue                                          $   385,000   $   361,000
Net loss                                          (4,920,000)   (1,360,000)
 Net loss applicable to common shareholders       (6,130,000)   (1,360,000)
  Loss per share                                        (.16)         (.06)
Shares used in per share calculation              38,052,458    21,146,152
</TABLE>

   The unaudited pro forma financial information above does not purport to
   represent the results which would actually have been obtained if the
   acquisitions had been in effect during the period covered or any future
   results which may in fact be realized.


4. Sale of the Company's investment in USA Skate Corporation:

   In 1998, two former officers/shareholders of the Company agreed to purchase
   all of the shares of USA Skate Corporation (a subsidiary of the Company
   through January 1999) that were owned by the Company for $90,000. The
   purchase price was based on the net book value of the Company's investment in
   Skate Corp. at the time of the agreement. The sale of Skate Corp. was
   completed and the Company received the $90,000 in January 1999. The
   transaction did not result in any gain or loss to the Company.

5. Shareholders' equity:

   Issuance of common stock prior to the January 20, 1999 merger:

   At December 31, 1998, ImaginOn, Inc. had 13,434,731 shares of common stock
   outstanding and 1,630 shares of Series B and C ("Series B/C") convertible
   preferred stock outstanding.  In January 1999, prior to the merger, these
   preferred shares were converted into 1,879,626 shares of common stock.  In
   January 1999, an additional 39,845 shares of common stock were issued to
   the Series B/C shareholders as a penalty for not completing a

                                      F-45
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES
                      (A Company in the Development Stage)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
                                  (UNAUDITED)



   registration statement within an agreed upon time period. The Company
   recorded an expense of $81,500 based upon the market value of the shares
   issued.

   In January 1999, the Company issued 125,000 shares of common stock to a
   consultant to the Company for introducing accredited investors to the
   Company who purchased $5,000,000 of Series B/C and Series D and E
   convertible preferred stock.

   The Company issued 521,400 shares of common stock in connection with the
   exercise of 521,400 options, and the Company received $521,400 in connection
   with the exercise at prices ranging from $.75 to $1.25 per share.

   As a result of these transactions, ImaginOn, Inc. had 16,000,602 shares of
   common stock outstanding at the date of the merger with IMON.

                                      F-46
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES
                      (A Company in the Development Stage)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
                                  (UNAUDITED)


5. Shareholders' equity (continued):

   Issuance of common stock subsequent to the January 20, 1999 merger:

   In the period ended September 30, 1999 the Company issued 4,075,065 shares of
   common stock upon the exercise of 4,075,065 options at exercise prices from
   $.055 to $2.10 per share. The total net proceeds the Company received was
   $3,846,101.

   For the period ended September 30, 1999, the Company issued 123,200 shares of
   common stock as bonuses given to new employees.  In connection with these
   issuances, the Company recognized $677,821 of expense.

   In connection with the acquisitions of iNOW and IDP, in March 1999, the
   Company issued 260,000 shares to the former shareholders of Network
   Specialists, Inc., and in July 1999, the Company issued 305,000 shares to the
   former shareholders of Imagine Digital Production I, Inc.

   In March and April 1999, the Company issued 88,540 shares of common stock in
   exchange for the exercise of 119,060 warrants. The warrant holders utilized a
   cashless exercise provision included in their agreement. In April 1999, the
   Company issued 165,410 shares of common stock in exchange for 490 shares of
   its Series E convertible preferred stock. In June 1999, the Company
   repurchased 45,045 shares of previously issued common stock for $50,000 and
   in August and September 1999, the Company issued 27,000 shares of common
   stock upon the exercise of stock options.

                                      F-47
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES
                      (A Company in the Development Stage)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
                                  (UNAUDITED)

5. Shareholders' equity (continued):

   Series D/E preferred stock:

   In January 1999 prior to the merger, the Company, with the assistance of its
   financial consultant, completed private placements whereby the Company
   received net proceeds of $2,570,000 from accredited investors introduced to
   the Company by the consultant, for the purchase of 1,500 shares each of
   Series D and E convertible preferred stock par value $.01 ("Series D/E") at
   a price of $1,000 per share.  The Series D/E stock is convertible at the
   option of the holder at any time after 90 days from the closing date into a
   number of shares of common stock equal to the lower of $1,000 divided by
   75% of the average closing bid price of the common stock for the five
   trading days immediately prior to the conversion date, or 120% of the
   market price on the day of closing.  In connection with the placement of
   the Series D/E, the Company issued warrants to purchase 300,000 shares of
   common stock to financial advisors that assisted with placements.  The
   warrants are exercisable at $7.28063 per share (120% of the market price as
   defined in the agreement, of the common stock at the date of issuance).
   All warrants expire in January 2004.

   The conversion feature was "in the money" at the date of issue (a "beneficial
   conversion feature").  The Company allocated $1,000,000 of the proceeds,
   equal to the intrinsic value of the beneficial conversion feature to
   capital in excess of par.  At September 30, 1999, the entire amount has
   been amortized to preferred stock for the period beginning from the date of
   issuance.

   In April 1999, 490 shares of Series E preferred stock were converted into
   165,410 shares of common stock.  The remaining 250 shares of Series D/E
   were redeemed in May 1999 at 120% of face value plus unpaid dividends for a
   total redemption of approximately $3,042,000.

                                      F-48
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES
                      (A Company in the Development Stage)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
                                  (UNAUDITED)

5. Shareholders' equity (continued):

   Series F convertible preferred stock:

   In May 1999, the Company issued 4,000 shares of 12% Series F convertible
   preferred stock (the "Series F") for $3,650,000 (net of offering costs) at a
   price of $1,000 per share. The Series F is convertible at the option of the
   holder at any time after 180 days from the closing date into a number of
   shares of common stock equal to the lower of 125% of the five day average
   closing bid price of the Company's common stock immediately preceding the
   closing date, or 94% of the low five-day average closing bid price of the
   Company's common stock for the 22 consecutive trading days prior to the
   trading day on which the notice of conversion is sent by the preferred
   shareholders. Additionally 122,553 warrants were issued to purchase common
   stock with an exercise price of the warrants equal to the lesser of 110% of
   the closing bid price of the common stock on the closing date, or 100% of the
   closing bid price of the common stock on the date the convertible preferred
   shares are redeemed, or 100% of the closing bid price of the common stock on
   the first trading day after the Company has filed a registration statement
   covering the shares of common stock to be issued upon conversion of the
   Series F and exercise of the warrants.

   The conversion feature was "in the money" at the date of issue (a "beneficial
   conversion feature"). The Company allocated $255,319 of the proceeds, equal
   to the intrinsic value of the beneficial conversion feature to capital in
   excess of par. At September 30, 1999, 209,929 has been amortized to preferred
   stock for the period beginning from the date of issuance.

                                      F-49
<PAGE>


   You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not making an offer
to sell these securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information appearing in this prospectus
is accurate as of the date on the front cover of this prospectus only. Our
business, financial condition, results of operations and prospects may have
changed since that date.

   Until ______, 2000, all dealers effecting transactions in the common stock,
whether or not participating in this distribution, may be required to deliver a
prospectus.  This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.



                         2,838,716 Shares Common Stock

                      ____________________________________

                                   PROSPECTUS
                      ____________________________________

                          [LOGO OF IMAGINON APPEARS HERE]

                                January 12, 2000
<PAGE>

                PART II - INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13 - OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

   The following is an itemization of all expenses (subject to future
contingencies) incurred or to be incurred by the Registrant in connection with
the issuance and distribution of the securities being offered.  All expenses are
estimated except the registration and NASD filing fees.

<TABLE>
<CAPTION>
<S>                                    <C>
     Registration and filing fee        $ 1,945
     Printing                             1,000
     Accounting fees and expenses         5,000
     Legal fees and expenses             25,000
     Blue sky fees and expenses             500
     Transfer Agent                       1,000
     Other                                  555
                                        -------
          Total                         $35,000
                                        =======
</TABLE>

ITEM 14 - INDEMNIFICATION OF DIRECTORS AND OFFICERS

INDEMNIFICATION PROVIDED UNDER IMAGINON'S CERTIFICATE OF INCORPORATION

     Section 145 of the Delaware General Corporation Law and Article Ninth of
the Registrant's Certificate of Incorporation provides for, under certain
circumstances, the indemnification of the Registrant's officers, directors,
employees and agents against liabilities which they may incur in such
capacities.  A summarization of the circumstances in which such indemnifications
provided for is contained herein, but that description is qualified in its
entirety by reference to Article Ninth of the Registrant's Certificate of
Incorporation and the relevant Section of the Delaware General Corporation Law.

     In general, the statute provides that any director, officer, employee or
agent of a corporation may be indemnified against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement, actually and reasonably
incurred in a proceeding (including any civil, criminal, administrative or
investigative proceeding) to which the individual was a party by reason of such
status.  Such indemnity may be provided if the indemnified person's actions
resulting in the liabilities: (i) were taken in good faith; (ii) were reasonably
believed to have been in or not opposed to the Registrant's best interest; and
(iii) with respect to any criminal action, such person had no reasonable cause
to believe the actions were unlawful.  Unless ordered by a court,
indemnification generally may be awarded only after a determination of
independent members of the Board of Directors or committee thereof, by
independent legal counsel or by vote of the stockholders that the applicable
standard of conduct was met by the individual to be indemnified.

     The statutory provisions further provide that to the extent a director,
officer, employee or agent is wholly successful on the merits or otherwise in
defense of any proceeding to which he was a party, he is entitled to receive
indemnification against expenses, including attorneys' fees, actually and
reasonably incurred in connection with the proceeding.

     Indemnification in connection with a proceeding by or in the right of
ImaginOn in which the director, officer, employee or agent is successful is
permitted only with respect to expenses, including attorneys' fees actually and
reasonably incurred in connection with the defense. In such actions, the person
to be indemnified must have acted in good faith, in a manner believed to have
been in ImaginOn's best interest and must not have been adjudged liable to
ImaginOn unless and only to the extent that the Court of Chancery or the court
in which such action or suit was brought shall determine upon application that,
despite the adjudication of liability, in view of all the circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such
expense which the Court of Chancery or such other court shall deem proper.
Indemnification is otherwise prohibited in connection with a proceeding brought
on behalf of the Registrant in which a director is adjudged liable to the
Registrant, or in connection with any proceeding charging improper personal
benefit to the director in which the director is adjudged liable for receipt of
an improper personal benefit.

     Delaware law authorizes the Registrant to reimburse or pay reasonable
expenses incurred by a director, officer, employee or agent in connection with a
proceeding in advance of a final disposition of the matter.  Such advances of
expenses are permitted if the person furnishes to the Registrant a written
agreement to repay such advances if it is determined that he is not entitled to
be indemnified by ImaginOn.

                                      II-1
<PAGE>

     The statutory section cited above further specifies that any provisions for
indemnification of or advances for expenses does not exclude other rights under
the Registrant's Certificate of Incorporation, Bylaws, resolutions of its
stockholders or disinterested directors, or otherwise.  These indemnification
provisions continue for a person who has ceased to be a director, officer,
employee or agent of ImaginOn and inure to the benefit of the heirs, executors
and administrators of such persons.

     The statutory provision cited above also grants the power to the Registrant
to purchase and maintain insurance policies which protect any director, officer,
employee or agent against any liability asserted against or incurred by him in
such capacity arising out of his status as such.  Such policies may provide for
indemnification whether or not ImaginOn would otherwise have the power to
provide for it.  No such policies providing protection against liabilities
imposed under the securities laws have been obtained by the Registrant.

     Article VIII of the Registrant's Bylaws provides that the Registrant shall
indemnify its directors, officers, employees and agents to the fullest extent
permitted by the Delaware General Corporation Law.  In addition, the Registrant
has entered into agreements with its directors indemnifying them to the fullest
extent permitted by the Delaware General Corporation Law.

ITEM 15 - RECENT SALES OF UNREGISTERED SECURITIES

     On April 13, 1997, the Registrant issued warrants to purchase up to 150,000
shares of its common stock as payment for consulting services.  Of these
warrants, 50,000 are exercisable at $1.00 per share and 100,000 are exercisable
at $.87 per share.  The Registrant relied on the exemptions from registration
provided by Sections 4(2) and/or 4(6) of the Securities Act of 1933 (the
"Securities Act") related to the issuance of these warrants.

     On April 13, 1997, the Registrant granted stock options to purchase up to
45,000 shares of its common stock as compensation to its non-employee directors.
These options are exercisable at $1.00 per share.  The Registrant relied on the
exemption from registration provided by Section 4(6) of the Securities Act
related to the issuance of these options.

     On April 13, 1997, the Registrant issued 776 shares of its common stock as
payment for a debt owed in the amount of $995.  Payment was made based on $1.25
per share, representing the closing price of the common stock on April 11, 1997
as reported on the Nasdaq SmallCap Market.  The Registrant relied on the
exemption from registration provided by Section 4(6) of the Securities Act
related to the issuance of these shares.

     On April 23, 1997, the Registrant issued 75,000 shares of common stock,
valued at $1.00 per share, to a consultant for services rendered prior to April
1, 1997.  The Registrant relied on the exemptions from registration provided by
Sections 4(2) and/or 4(6) of the Securities Act because the recipient of these
shares was a sophisticated and/or accredited investor.

     On April 23, 1997, the Registrant granted options to purchase 100,000
shares of common stock under its 1994 Stock Option Plan as additional
compensation to one officer and four other employees of the Registrant.  The
exercise price for these options is $1.00 per share, representing the closing
price of the common stock as reported by the Nasdaq SmallCap Market on the date
of grant.  The Registrant relied on the exemptions from registration provided by
Sections 4(2) and/or 4(6) of the Securities Act related to the grant of these
stock options.

     On May 6, 1997, the Registrant issued 75,000 shares of common stock in
exchange for outstanding options to purchase 300,000 shares of common stock
initially issued to a consultant for services.  The services were valued at
$75,000, or $1.00 per share.  The Registrant relied on the exemption from
registration provided by Section 4(6) and 4(2) of the Securities Act because the
recipients of these shares were sophisticated and/or accredited investors.

     On May 31, 1997, the Registrant issued 214,416 shares of its common stock,
valued at $1.00 per share representing the average of the closing bid and asked
prices of the Registrant's common stock as quoted by Nasdaq for the ten
consecutive trading days immediately preceding the date of the agreement of the
parties to the transactions.  Of these shares 170,000 were issued in exchange
for 141,667 shares of common stock of USA Skate Corporation (the Registrant's
majority owned subsidiary).  In March 1996, one of the Registrant's officers
made a loan of $170,000 to the Registrant and, in June 1996, the Registrant
transferred 141,667 shares of USA Skate Corporation owned by the Registrant to
this officer in repayment thereof based on a valuation of $1.20 per USA Skate
common share.  In the May 1997 transaction, the officer returned the 141,667
shares of USA Skate Corporation to the Registrant in exchange for 170,000 shares
of common stock of the Registrant.  The other 44,416 shares of common stock of
the Registrant were issued to one holder to repay a debt owed by the Registrant
for services performed and acknowledged.  The Registrant relied on the exemption
from registration provided by Section 4(6) of the Securities Act because the
recipients of the 342,645 shares were accredited investors.

                                      II-2
<PAGE>

     On June 30, 1997, the Registrant issued 271,264 shares of common stock to
an entity in exchange for assumption of certain trade payables of the Registrant
totaling $450,000.  The Registrant relied on the exemptions from registration
provided by Sections 4(2) and/or 4(6) of the Securities Act because the
recipient of these shares was an accredited investor.

     On August 1, 1997, the Registrant issued 138,923 shares of its common stock
in exchange for the extension of the maturity date to September 15, 1997 on
notes of USA (the Registrant's majority owned subsidiary). The amount owed was
based upon 10% of the outstanding principal and payment was made based on
$1.8125 per share of common stock, representing the average closing bid price
for the 10 days immediately preceding the date of issuance.  The Registrant
relied on the exemption from registration provided by Section 4(6) of the
Securities Act related to the issuance of these shares.

     In August 1997, 30,000 warrants were exercised, purchasing 30,000 shares of
common stock.

     On September 11, 1997, the Registrant issued 258,857 shares of its common
stock as payment for fees  and forgiveness of debt to two officers/shareholders
of the Registrant.  Payment was made based on $1.75 per share. The Registrant
relied on the exemption from registration provided by Section 4(6) of the
Securities Act related to the issuance of these shares.

     On September 12, 1997, the Registrant issued 68,160 shares of its common
stock to a third party, valued at $1.5625 per share representing the closing
price on the date the agreement was reached.  These shares were issued in
exchange for 88,750 shares of common stock of USA.  The Registrant transferred
the 88,750 shares of USA owned by the Registrant in payment of rent and other
related expenses based on a valuation of $1.20 per USA common share.  The
individual returned the 88,750 shares of USA in exchange for 68,160 shares of
common stock of the Registrant.

     On September 15, 1997, the Registrant issued 36,490 shares of its common
stock in exchange for the extensions of the maturity date to October 15, 1997 on
notes of USA.  The amount owed was based upon 5% of the outstanding principal
balance, and payment was based on $1.725 per share.

     On September 30, 1997, the Registrant issued 114,979 shares of common stock
to an entity in exchange for assumption of certain trade payables of the
Registrant totaling $214,463.  The Registrant relied on the exemptions from
registration provided by Section 4(2) and/or 4(6) of the Securities Act because
the recipient of these shares was an accredited investor.

     On September 30, 1997, the Registrant issued 100,000 shares of common stock
to a consultant for services rendered during the three month period ended
September 30, 1997.  Payment was made based on $1.92 per share, representing the
average close price of the common stock at the end of each calendar month during
the quarter ended September 30, 1997.  The Registrant relied on the exemption
from registration provided by Section 4(b) of the Securities Act related to the
issuance of these shares.

     On September 30, 1997, the Registrant issued 90,500 shares of its common
stock to an officer/shareholder in exchange for assumption of certain note
payables of the Registrant assumed by the officer/shareholder.  The Registrant
relied on the exemption from registration provided by Section 4(b) of the
Securities Act related to the issuance of these shares.

     On January 5, 1998, the Registrant issued 37,467 shares of its common stock
in exchange for the extensions of the maturity date to February 5, 1998 on notes
of Skate Corp.  The amount was owed based upon 5% of the outstanding principal
balance, and payment was based on $1.43 per share.  The Registrant relied on the
exemption from registration provided by Section 4(6) of the Securities Act
related to the issuance of these shares.

     On January 12, 1998, the Registrant issued 50,000 shares of its common
stock to a consultant for services rendered.  Payment was made based on $1.375
per share representing the market price of the common stock.  The Registrant
relied on the exemption from registration provided by Section 4(6) of the
Securities Act related to the issuance of these shares.

     On January 16, 1998, the Registrant issued 85,000 shares to an officer of
the Registrant upon the exercise of a previously granted option under the
Registrant's 1994 Stock Option Plan.  The Registrant relied on the  exemption
from registration provided by Section 4(6) of the Securities Act related to the
issuance of these shares.

     On January 8, 1998, the Registrant issued 18,500 Series A Convertible
Preferred Stock to an officer of the Registrant for among other things, his
agreement to exercise 85,000 options so as to infuse the Registrant with

                                      II-3
<PAGE>

short-term working capital. The Registrant relied on the exemption from
registration provided by Section 4(6) of the Securities Act related to the
issuance of these shares.

     On February 5, 1998, the Registrant issued 35,125 shares of its common
stock in exchange for the extensions of the maturity date to March 5, 1998 on
notes of Skate Corp.  The amount was owed based upon 5% of the outstanding
principal balance and payment was made based on $1.52 per share.  The Registrant
relied on the exemption from registration provided by Section 4(6) of the
Securities Act related to the issuance of these shares.

     On March 5, 1998, the Registrant issued 39,222 shares of its common stock
in exchange for the extensions of the maturity date to April 5, 1998 on notes of
Skate Corp.  The amount owed was based upon 5% of the outstanding principal
balance and payment was made based on $1.35 per share.  The Registrant relied on
the exemption from registration provided by Section 4(6) of the Securities Act
related to the issuance of these shares.

     On March 26, 1998, the Registrant issued 15,000 shares to a director of the
Registrant upon the exercise of a previously granted option under the
Registrant's 1994 Stock Option Plan.

     On March 31, 1998, the Registrant issued 7,500 shares of its common stock
to an employee of the Registrant upon the exercise of a previously granted
option under the Registrant's 1994 Stock Option Plan.

     On June 30, 1998, the Registrant issued 3,000 shares of Series B 4%
Convertible Preferred Stock.  The Registrant relied on the exemption from
registration provided by Section 4(2) of the Securities Act related to the
issuance of these securities.

     On August 3, 1998, the Registrant issued 1,030 shares of Series C 4%
Convertible Preferred Stock.  The Registrant relied on the exemption from
registration provided by Section 4(2) of the Securities Act related to the
issuance of these shares.

     On October 1, 1998, the Registrant issued 20,000 shares of its common stock
to two directors of the Registrant for services rendered.

     On October 5, 1998, the Registrant issued 43,191 shares of its common stock
in exchange for the extensions of the maturity date to November 5, 1998 on notes
of Skate Corp.  The amount owed was calculated at 5% of the outstanding
principal balance and payment was made based on $.70 per share.  The Registrant
relied on the exemption from registration provided by Section 4(6) of the
Securities Act related to the issuance of these shares.

     On November 5, 1998, the Registrant issued 56,477 shares of its common
stock in exchange for the extensions of the maturity date to December 5, 1998 on
notes of Skate Corp.  The amount owed was calculated as 5% of the outstanding
principal balance and payment was made based on $.71 per share.  The Registrant
relied on the exemption from registration provided by Section 4(6) of the
Securities Act related to the issuance of these shares.

     On November 23, 1998, the Registrant issued 525,073 shares of its common
stock in exchange for the conversion of 245 shares of Series B Convertible
Preferred Stock.

     On November 27, 1998, the Registrant issued 122,675 shares of its common
stock in exchange for the conversion of 95 shares of Series B Convertible
Preferred Stock.

     On December 2, 1998, the Registrant issued 100,000 shares of its common
stock to a consultant upon the exercise of a previously granted option.

     On December 5, 1998, the Registrant issued 21,922 shares of its common
stock in exchange for the extensions of the maturity date to January 5, 1999 on
notes of Skate Corp.  The amount owed was calculated at 5% of the outstanding
principal balance and payment was made based on $1.73 per share.  The Registrant
relied on the exemption from registration provided by Section 4(6) of the
Securities Act related to the issuance of these shares.

     From December 24 through December 31, 1998, the Registrant issued 131,686
shares of its common stock stock in exchange for the conversion of 110 shares of
Series C Convertible Preferred Stock.

     On December 31, 1998, the Registrant issued 232,256 shares of its common
stock in exchange for assumption of certain liabilities of the Registrant
totaling $239,326, the Registrant relied on the exemptions from registration
provided by Section 4(2) and/or 4(6) of the Securities Act.

                                      II-4
<PAGE>

     On January 15 1999, the Registrant issued 1,500 shares of Series D
preferred stock whereby the Registrant received net proceeds of $1.5 million.
The Registrant relied on the exemptions from registration provided by Section
4(2) of the Securities Act.

     On April 6, 1999, the Registrant issued 1,500 of Series E preferred stock
whereby the Registrant received net proceeds of approximately $1.5 million.  The
Registrant relied on exemptions from registration provided by Section 4(2) of
the Securities Act.

     In addition, the Registrant announced that the exercise period of its
publicly traded common stock purchase warrants exercisable at $1.50 per share
has been extended from December 31, 1998 through June 30, 1999.

     On May 4, 1999 the Registrant issued 4,000 shares of Series F Convertible
Preferred Stock to redeem the Series D & E Preferred Stock.  The Registrant
received approximately $4 million net proceeds.  The Registrant relied on the
exemptions from registration provided by Section 4(2)of the Securities Act.

     On December 31, 1999, we completed a $5 million private placement of our
restricted common stock through our investment banker, Ladenburg Thalmann &
Co., Inc.  The net proceeds of $4,700,000 from the placement offering will
be used primarily to fund the marketing of our ImOn.comTV product.  In the
offering, we sold 1,873,360 shares of common stock for $2.67 per share and
issued warrants to acquire up to 749,344 shares of common stock at an
exercise price of $3.34 per share.  The warrants will expire on March 30,
2002.

                                      II-5
<PAGE>


ITEM 16 - EXHIBITS

          The following is a complete list of exhibits filed as part of this
          registration statement:

        No.  Description

        3(i).1  Certificate of Incorporation of the Registrant*

        3(i).2   Certificate of Designations for Series F 12% Convertible
                 Preferred Stock*

        3(i).3   Amendment to Certificate of Incorporation dated July 22, 1998*

        3(i).4   Amendment to Certificate of Incorporation dated December 17,
                 1998*

        3(ii).1  Bylaws as currently in effect*

        4.1      Specimen of common stock certificate*

        4.2      Series F Convertible Preferred Stock Purchase Agreement dated
                 May 4, 1999*

        4.3      Series F Convertible Preferred Stock Registration Rights
                 Agreement dated May 4, 1999*

        4.4      Common stock Warrant Numbered F-1*

        5.1      Opinion of Friedlob Sanderson Raskin Paulson &
                 Tourtillott, LLC*

        10.1     1997 Stock Option Plan*

        10.2     Agreement and Plan of Merger, dated January 30, 1998*

        10.3     Merger Agreement and Plan of Reorganization, dated February 9,
                 1999 by and among Network Specialists, Inc., iNOW and
                 ImaginOn, Inc.*

        10.4     First Amendment to Merger Agreement and Plan of Reorganization
                 dated as of March 8, 1999*

        10.5     Side Agreement to Merger Agreement and Plan of Reorganization
                 dated March 8, 1999*

        10.6     Agreement and Plan of Merger and Reorganization effective as of
                 June 23, 1999*

        21.1     Subsidiaries of Registrant*

        23.1     Consent of Independent Certified Public Accountants

        23.2     Consent of Friedlob Sanderson Raskin Paulson & Tourtillott, LLC
                 (See Exhibit 5.1)

        27.1     Financial Data Schedule*

        *Previously filed

                                      II-6
<PAGE>

ITEM 17 - UNDERTAKINGS

        The undersigned Registrant hereby undertakes:

        (1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:

        (i)   To include any prospectus required by Section 10(a)(3) of the
              Securities Act of 1933;

        (ii)  To reflect in the prospectus any facts or events arising after the
              effective date of the registration statement (or the most recent
              post-effective amendment thereof) which, individually or in the
              aggregate, represent a fundamental change in the information set
              forth in the registration statement. Notwithstanding the
              foregoing, any increase or decrease in volume of securities
              offered (f the total dollar value of securities offered would not
              exceed that which was registered) and any deviation from the low
              or high end of the estimated maximum offering range may be
              reflected in the form of prospectus filed with the Commission
              pursuant to Rule 424(b) if, in the aggregate, the changes in
              volume and price represent no more than 20 percent change in the
              maximum aggregate offering price set forth in the "Calculation of
              Registration Fee" table in the effective registration statement;
              and

        (iii) To include any material information with respect to the plan of
              distribution not previously disclosed in the registration
              statement or any material change to such information in the
              registration statement.

        (2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

        (3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.

                                      II-7
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of the Securities Act of 1933, the Registrant
and has duly caused this amended registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Carlos,
State of California, on January 11, 2000.

                                    IMAGINON, INC.


                                      By:/s/ David M. Schwartz
                                         --------------------------------
                                         David M. Schwartz,
                                         Chairman, Chief Executive Officer
                                         and President

     Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.


<TABLE>
<CAPTION>
                  SIGNATURES                        TITLE                  DATE
                  ----------                        -----                  ----
     <S>                                        <C>                       <C>
                     *                     Chief Executive Officer   January 11, 2000
      ---------------------------------    and Director
      David M. Schwartz

                     *                     Chief Financial Officer   January 11, 2000
      ---------------------------------
      James A. Newcomb

                     *                            Director           January 11, 2000
      ---------------------------------
      Leonard W. Kain

                     *                            Director           January 11, 2000
      ---------------------------------
      Dennis Allison

                     *                            Director           January 11, 2000
      ---------------------------------
      Jim Polizotto

                     *                            Director           January 11, 2000
      ---------------------------------
      Mary E. Finn
</TABLE>



*/s/David M. Schwartz
- ------------------------
David M. Schwartz
Attorney in fact

                                      II-8

<PAGE>

                                                                    Exhibit 23.1





                         INDEPENDENT AUDITORS' CONSENT


We hereby consent to the use in this Form S-1 Registration Statement (Amendment
No. 2) of our report dated March 22, 1999, relating to the consolidated
financial statements of ImaginOn, Inc. and subsidiaries, and to the reference to
our Firm under the caption "Experts" in the Prospectus.




GELFOND HOCHSTADT PANGBURN & CO.

Denver, Colorado
January 11, 2000


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