SOURCE MEDIA INC, 10-K405, 1998-03-31

SOURCE MEDIA INC
10-K405, 1998-03-31
TELEGRAPH & OTHER MESSAGE COMMUNICATIONS

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File Number: 0-21894

SOURCE MEDIA, INC.
(Exact Name of Registrant as Specified in its Charter)

DELAWARE 13-3700438
(State of incorporation) (I.R.S. Employer Identification No.)

5400 LBJ FREEWAY, SUITE 680
DALLAS, TEXAS 75240
(Address of principal executive offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 701-5400

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [X] No [ ]

Aggregate market value of Common Stock held by nonaffiliates as of March 24,
1998: $119,593,904

Number of shares of Common Stock outstanding as of March 24, 1998: 11,589,954

DOCUMENTS INCORPORATED BY REFERENCE

Listed below are documents parts of which are incorporated herein by
reference and the part of this report into which the document is incorporated:

(1)Proxy statement for the 1998 annual meeting of stockholders-- Part III
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Unless the context otherwise requires, (a) all references to the "Company" or
"Source" include Source Media, Inc. and its wholly-owned subsidiaries, IT
Network, Inc. ("IT Network"), Interactive Channel, Inc. ("Interactive
Channel"), SMI Holdings, Inc. ("Holdings"), and Interactive Channel
Technologies Inc. ("ICT" which was formerly known as Cableshare Inc.), and (b)
all references to the Company's activities, results of operations or financial
condition prior to June 23, 1995 relate to Holdings.

ITEM 1. BUSINESS.

Source provides on-demand information, services and programming through the
telephone and can provide such information services and programming through
cable television over the Company's proprietary digital operating systems
through its two operating subsidiaries, IT Network and Interactive Channel. IT
Network's products and services are available through the Yellow Pages to over
100 million households, offices and hotel rooms in the United States and
through inserts in daily newspapers with an aggregate circulation of over 24
million. Interactive Channel can provide on-demand information and services
and Internet access to the cable television industry over existing cable
infrastructure and telephone lines, with the addition of an advanced-analog or
digital set-top box.

IT Network provides voice information services through telephone directories
and newspapers and also provides related support services to certain Yellow
Pages directory and newspaper publishers participating with the Company in
offering voice information services ("Publisher Partners"). The Company sells
advertising and provides related support services to advertising clients who
pay to sponsor and deliver a promotional message before and after the delivery
of the voice information. The Company provides voice information services to
eight of the nine largest Yellow Pages directory publishers in the country.

Interactive Channel's Cable SuperSites Network ("Cable SuperSites") can
supply programming and services allowing a subscriber to access on-demand local
and national news, weather, sports and school information, view programming
guides and purchase goods and can allow a subscriber to browse the Internet,
send and receive e-mail and access a variety of other offerings over existing
cable infrastructure and telephone lines, with the addition of an
advanced-analog or digital set-top box. Cable SuperSites can allow the Company
or cable system operators to sell interactive advertising space on cable
screens using text, voice and pictures. Cable SuperSites can be broadcast by
cable operators utilizing the Company's proprietary two-way operating system,
SourceWare. SourceWare can enable any cable television system equipped with a
compatible advanced analog or digital set-top box to deliver two-way, on-demand
programming with the touch of a television remote. In less than one second,
Cable SuperSites can allow subscribers to access interactive programming
delivered over the cable system to their television.

On October 30, 1997, the Company purchased certain of the electronic
publishing assets of Brite Voice Systems, Inc. ("Brite") for $35.6 million and
certain of the assets of Voice News Network ("VNN"), a unit of Tribune Company,
for $9.0 million (the "October 1997 Acquisitions"). The October 1997
Acquisitions have added 111 Yellow Pages directories and 280 newspapers to the
Company's distribution channels and have brought over 6,000 clients to its
existing advertising base of over 2,000 clients.

For financial reporting purposes, the Company operates in two business
segments: IT Network and Interactive Channel. For information regarding
revenues, operating results, identifiable assets and certain other information
by business segment, see Note 13 -"Segment Reporting," as presented in the
Company's Notes to Consolidated Financial Statements. The Company's operations
are conducted through its subsidiaries, IT Network, Inc., Interactive Channel,
Inc. and Interactive Channel Technologies Inc. Holdings was incorporated in
Colorado on July 19, 1988 and reincorporated in Texas in 1991. On June 23,
1995, Holdings merged with a wholly-owned subsidiary of HB Communications
Acquisition Corp. ("HBAC"), a public company formed in Delaware for the purpose
of acquiring a company engaged in the communications industry, with Holdings
surviving as a wholly-owned subsidiary of HBAC (the "Merger"). In connection
with the Merger, HBAC changed its name to Source Media, Inc., and the
outstanding common stock and preferred stock of Holdings were converted into
common stock of the Company. On January 14, 1997, Source acquired all of the
outstanding shares of ICT that it did not already own in exchange for 1,390,000
shares of common stock, making ICT a wholly-owned subsidiary of the Company.
ICT owns the patented technology utilized by Source for the Cable SuperSites
and provides research and development services for Source. In October 1997,
Holdings formed IT Network and Interactive Channel as wholly-owned operating
subsidiaries.

The Company is a Delaware corporation whose principal executive offices are
located at 5400 LBJ Freeway, Suite 680, Dallas, Texas 75240, and whose
telephone number is (972) 701-5400.

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IT NETWORK

The Company and its Publisher Partners place inserts in high circulation
publications including more than 500 Yellow Pages directories and 280 daily
newspapers. The Publisher Partners, who include Ameritech, Bell Atlantic,
BellSouth, Pacific Bell, Southwestern Bell, GTE, Sprint, The Washington Post,
The Chicago Sun Times, The San Francisco Chronicle, The Detroit Free Press and
The Miami Herald, distribute their publications in over 150 designated market
areas ("DMAs") in 46 states. The inserts invite customers to call a specific
local phone number at no additional charge for access to useful information on
over 800 regularly-updated topics ranging from general information, such as
local news, sports and weather updates, to home repair, travel, legal, health
and other more specific topics including stock quotes. The Company's voice
information system enables callers to navigate to specific topics with a four
digit code and often allows the consumer to obtain additional information or
talk directly to the advertiser at the push of a button.

Products and Services

Network Guide. The Company's principal voice information product, the Network
Guide, is an eight to 16 page insert bound in the front of Yellow Pages
directories. The Network Guide contains a local phone number and list of
four-digit codes used to access regularly-updated advertiser-sponsored
information on over 800 topics ranging from general information, such as local
and national news, weather and sports, to more specific topics, such as health,
legal, travel and home repair.

Consumer Tips. Consumer Tips are advertiser-sponsored messages accessed using
a local phone number and 4-digit code interspersed throughout a Yellow Pages
directory. Consumer Tips provide information on topics such as plumbing,
roofing and moving companies.

Local Source. Local Source is a guide of local business Internet addresses
for a specific community that is printed semi-annually and distributed in
newspapers as a stand-alone insert. The Company sells print and audio
advertising in Local Source.

Publisher Partner Support Services. The Company provides the following
services and support to its Publisher Partners who offer similar telephone
directory and newspaper voice information products and services:

o Sales Agency. The Company sells advertising on behalf of Publisher
Partners that distribute similar voice information products.

o Advertiser Management. The Company provides support to the Publisher
Partners' advertising clients by providing advertisers with call
statistics and by updating their voice information advertisements on a
regular basis.

o Voice Information Content. The Company provides hundreds of daily
broadcast voice information content updates, such as national or local
news, to its Yellow Pages and newspaper Publisher Partners over satellite
or telephone lines. To date, this is the predominant service the Company
has provided to its newspaper Publisher Partners.

o Systems Management. The Company provides technical support and maintenance
of voice information systems for certain of its Publisher Partners and
their local businesses.

Distribution

The Company's printed list of information topics, including the Network
Guide, Consumer Tips and Local Source, are delivered to customers through
advertisements or inserts in Yellow Pages directories and/or local newspapers.
IT Network's products and services are available in over 150 DMAs in 46 states
and accessible through the Yellow Pages to over 100 million households, offices
and hotel rooms in the United States and through inserts in daily newspapers
with an aggregate circulation of over 24 million.

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Pursuant to its agreements with its Yellow Pages Publisher Partners, the
Company sells advertising and provides advertiser management, systems
management and information services. The Company either purchases the pages for
a flat fee and retains all revenues in excess of that fee or splits the revenue
with the Yellow Pages Publisher Partner by retaining a percentage without
purchasing the pages. In revenue splitting arrangements, the amount retained by
the Company depends on the level of advertiser management, systems management
and information content services provided to the Publisher Partner and the
amount charged for the services. The Company's typical arrangement with its
Yellow Pages Publisher Partners is three years in duration with a range of one
to five years.

Pursuant to its agreements with its newspaper Publisher Partners, the Company
provides voice information content to newspaper publishers for a fee. The fee
is determined by the amount of content purchased, the size of the market and
the circulation of the newspaper. These agreements typically have a term of one
year.

Yellow Pages. The Company and its Publisher Partners provide voice
information services in over 500 Yellow Pages directories with a total
distribution of over 100 million. Some of the Publisher Partners include
Ameritech, Bell Atlantic, BellSouth, Pacific Bell, Southwestern Bell, GTE,
Sprint, Southern New England Telephone and R.H. Donnelly and various
independent Yellow Pages publishers.

Newspapers. The information services business that the Company acquired in
October 1997 are used to provide voice information to a variety of sources.
Currently, the service is provided to over 280 daily newspapers with an
aggregate daily circulation of over 24 million. The Company's newspaper
Publisher Partners include The Washington Post, The Chicago Sun Times, The San
Francisco Chronicle, The Houston Chronicle, The Miami Herald, The Atlanta
Constitution, The St. Louis Post-Dispatch, The Hartford Courant, The Orange
County Register, The Arizona Republic, The Indianapolis Star and The Fort Worth
Star-Telegram.

Technology and Programming

Local news, weather and sports information typically is provided by a local
network television station, and a variety of concert, top ten music lists and
event information is provided by local radio stations. Local media
personalities are able to update local programming by using any touch-tone
telephone.

The Company supports voice information systems through a network that
connects individual computer systems in each of the local markets via telephone
lines from the Company's central administration facility in Irving, Texas.
Multiple telephone lines are connected to each system to process local calls.
Audio information is broadcast to local markets from IT Network's
state-of-the-art production studios in Irving, Texas and Wichita, Kansas.
Information is transmitted over IT Network's digital satellite transmission
network which provides coverage for consumers located across North America,
Hawaii and the Caribbean. Information is also transmitted using a wide variety
of telephony protocols including ISDN, T-1 and analog.

Widely distributed information, such as national news, weather and sports, is
updated from the Company's headquarters. The Company obtains this information
from various sources such as United Press International. The Company's
copywriters prepare written scripts from the information, and the written
scripts are then used to produce recordings with mixed background music and
voice. The Company also edits and produces local advertisers' messages. The
finished audio recording is loaded into a central computer system and
transmitted to the individual markets throughout the day. The information is
available to callers immediately after it has been updated. A majority of the
voice information delivered over the Company's IT Network telephone business is
produced at the Company's headquarters.

INTERACTIVE CHANNEL

Interactive Channel's Cable SuperSites can supply programming and services
allowing a subscriber to access on-demand local and national news, weather,
sports and school information, view programming guides and purchase goods, and
allow a subscriber to browse the Internet, send and receive e-mail and access a
variety of other offerings over existing cable infrastructure and telephone
lines, with the addition of an advanced analog or digital set-top box. Cable
SuperSites can allow the Company cable system operators to sell interactive
advertising space on screens using text, voice and pictures. Cable SuperSites
can be broadcast by cable operators utilizing the Company's proprietary two-way
operating system, SourceWare. SourceWare can enable any cable television system
equipped with a compatible advanced analog or digital set-top box to deliver
two-way, on-demand programming with the touch of a

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television remote. In less than one second, Cable SuperSites can allow
subscribers to access interactive programming delivered over the cable system
to their television.

Programming

Cable SuperSites can offer cable operators three programming groups:
LocalNet, CableNet and Internet Access.

LocalNet. LocalNet can provide a variety of local and national information
on-demand, including local and national news, weather and sports, stock quotes,
local school information such as lunch menus, sports schedules, homework and
artwork, on-line home shopping with companies such as JC Penney, Hallmark
Connections and Waldenbooks, interactive Yellow Pages, television and movie
guides, travel information, games and a variety of other features.

CableNet. CableNet can enable other cable channels and advertisers to become
interactive. CableNet can also allow consumers to toggle back and forth between
a cable channel and an advertiser's interactive programs. This programming can
enable a subscriber to preview future channel program offerings, view a summary
of recent and future programs and view and purchase merchandise offered by the
cable channel or an advertiser. For example, by pressing a button, this
programming can allow consumers to move between the channel itself and the
interactive programming provided by a cable channel or its advertiser. The
Company currently has agreements to offer this service for CourtTV, Bravo and
the Independent Film Channel and is in discussion with additional cable
channels.

Internet Access. Internet Access can be delivered over Cable SuperSites to
subscribers through the television without the need for a personal computer or
other additional equipment. Full Internet browsing and e-mail capabilities can
be delivered by cable operators over existing cable infrastructure and
telephone lines, with the addition of an advanced analog or digital set-top
box, using an alphanumeric remote control.

SourceWare and Subscriber Equipment

SourceWare is the Company's proprietary operating system based on patented
technology deployable over existing cable infrastructure. Consumers require
set-top boxes compatible with Cable SuperSites to access the network. Thus, the
widespread distribution of Cable SuperSites requires the adoption of advanced
analog or digital set-top boxes as the industry standard.

General Instruments has executed an agreement with the Company to manufacture
advanced analog and digital set-top boxes that are compatible with Cable
SuperSites. The Company is working with Scientific Atlanta, the second-largest
manufacturer, to make Scientific Atlanta's new generations of advanced analog
and digital set-top boxes Cable SuperSites compatible.

Distribution

To date, in order to offer Cable SuperSites in a market, the Company has been
required to have a carriage or affiliation agreement with the cable operator.
These agreements authorize the cable operator to sell and promote Cable
SuperSites and contain terms and conditions regarding pricing, revenue sharing
and joint marketing arrangements. The Company currently has agreements with
three of the top ten cable operators and two of these, Century Communications
Corporation ("Century") and Cablevision Systems L.P. ("Cablevision"),
contemplate distribution in multiple markets. The Company has decided to focus
its resources on seeking distribution as part of a tiered package in
advanced-analog or digital systems rather than systems such as Colorado Springs
and Denton where Cable SuperSites is offered as a premium channel. In addition,
Century has informed the Company that it intends to pursue a different strategy
in Colorado Springs. As a result, the Company and Century have agreed to
discontinue carriage of Cable SuperSites in Colorado Springs effective April 1,
1998. There is intense competition among suppliers of programming for access to
channels. There can be no assurance that Source will be able to obtain
agreements with any other cable system operators providing channel access on
terms favorable to Source, if at all.

The Company may from time to time consider strategic arrangements with
industry participants or licensing its technology to such participants. There
can be no assurances that the Company will enter into any such arrangements or
that, if it does so, the Company will do so on terms that are favorable to it.
In addition, the provisions of the indenture (the "Indenture") governing the
12% Senior Secured Notes (the "Notes") and the Certificate of Designation may
operate to hinder the Company's ability to enter into transactions that
management believes are favorable to the Company.

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Proprietary Rights and Intellectual Property

Patents. The deployment and operation of Cable SuperSites utilizes technology
owned by ICT. The technology is the subject of three United States patents
issued to ICT expiring in 2005, 2007 and 2008, respectively, and two Canadian
patents. The Cable SuperSites patents issued in the United States protect a
system for delivering still-frame television images and accompanying audio to
television viewers in response to viewer requests. This protection covers
multiple transmission media, including UHF, microwave, cable line and
satellite. The patents cover technology within such a system that enables
different viewers to receive video images over different television channels.

The Company owns nine United States patents related to interactive home
shopping services. The patents have expiration dates from 2005 through 2010.
The Company's patents cover technology for the selection, storage, retrieval
and presentation of video and audio messages in the form of still-frame images
presented over an interactive cable television system. Although the Company has
not utilized the technology covered by these nine patents in its initial
commercial introduction of Cable SuperSites, the Company believes that one or
more of the patents may be utilized in connection with the development of
future applications for Cable SuperSites.

Source relies on ICT for research and development of on-line television
services, the assembly of multimedia file servers and the development of
certain set-top box integrated circuits. Source's future success will depend in
part on ICT's ability to protect and maintain the proprietary nature of its
technology. Source often enters into confidentiality or license agreements with
certain of its employees, consultants and other outside parties, and generally
seeks to control access to and distribution of its proprietary information.
Despite these precautions, it may be possible for third parties to copy or
otherwise obtain and use Source's products or technology without authorization,
or to independently develop similar products and technology. In addition,
effective copyright and trade secret protection may be unavailable or limited
in certain foreign countries. There can be no assurance that the steps taken by
Source will prevent misappropriation of its technology or that additional
litigation will not be necessary in the future to enforce Source's intellectual
property rights, to protect Source's trade secrets, to determine the validity
and scope of the proprietary rights of others, or to defend against claims of
infringement or invalidity. Such litigation could result in the invalidation of
Source's proprietary rights and, in any event, could result in substantial
costs and diversion of management time, either of which could have a material
adverse effect on Source's business.

COMPETITION

In an industry characterized by extensive capital requirements and rapid
technological change, the Company faces substantial competition for the
acceptance of its on-demand programming and services from a number of
companies, most of which have significantly greater financial, technical,
manufacturing and marketing resources than the Company and may be in a better
position to compete in the industry. In addition, the Company faces competition
for advertiser revenues from other media, including radio, television,
newspapers, and magazines.

IT Network. The Company is aware of other companies currently offering some
of the information services provided by IT Network. Consumers can call a
variety of "900" services for information provided by, among others, Dow Jones
& Company, Inc., AT&T, GTE and certain major newspaper publishers. Callers are
generally charged for calls to these "900" services. In most of its markets,
the Company is aware of a number of companies, local newspapers or radio
stations that provide free on-demand telephone programming similar to that
offered by IT Network. Other competitors, such as some of the RBOCs, certain
independent directories and a subsidiary of Century Telephone Enterprises, and
others have indicated an intent to do so. These competitors may use RBOC or
non-RBOC Yellow Pages directories, newspapers, mailers or other print media to
distribute guides listing their programming services. In addition to these
current providers of on-demand telephone services, potential competitors
include any information service provider, as well as the RBOCs.

Interactive Channel. The Company believes that for the foreseeable future
consumer access to on-demand television will generally be through telephone
lines, cable systems and satellite systems. The Company believes that there are
competitors offering services similar to the Company's three types of Cable
SuperSites programming. Net Channel and WebTV, which is owned by Microsoft,
offer Internet access through the television. It has been announced that the
operating system used for WebTV will be incorporated into the next generation
of cable boxes. In addition, @Home offers Internet services through the cable
system. Wink provides a silent text overlay (with some graphics) displayed when
a consumer presses a button on a television remote control. Worldgate has
announced that it is testing a product that can deliver Internet access. The
concept Worldgate has announced is similar to CableNet. GTE MainStreet is an
on-demand navigational system being commercially deployed in Clearwater,
Florida and Ventura, California,

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and offers interactive programming over coaxial cable systems. As a result of
the settlement of patent litigation with GTE, the Company has licensed its
technology to GTE for a fee. Wink, Worldgate and GTE MainStreet are all
available without the purchase of additional equipment. There are also numerous
companies providing Internet access over the television either through
high-speed cable modems or satellites. These companies compete with Source for
consumers seeking an interactive experience via the television.

To the extent one or more competitors is successful in developing an
on-demand television service, the business of the Company could be materially
adversely affected. The Company believes that, for the foreseeable future, the
public's access to on-demand television will generally be achieved through
cable system operators. Therefore, the Company must compete with other
potential on-demand television service providers, as well as other sources of
programming, to establish relationships with cable system operators. It has
been reported that Microsoft Corporation, the owner of WebTV, has invested in
TCI and Cablevision, two of the largest cable system operators. In addition,
the on-demand television industry and Cable SuperSites face competition for
consumer usage from personal computer on-demand services and companies offering
access to the Internet via the television. Many of those seeking to develop an
on-demand television service are also seeking to develop, or have shifted their
development efforts to, personal computer on- demand services, in particular,
those offered over the Internet. Thus, the Company faces competition in the
interactive and on-line services market from companies in both the on-demand
television and on-demand personal computer services industries.

EMPLOYEES

As of March 15, 1998, the Company had a total of 199 full and part-time
employees. None of the Company's employees are subject to a collective
bargaining agreement. The Company has experienced no work stoppages and
believes that it has good relations with its employees.

REGULATORY MATTERS

The telecommunications and cable television industries are subject to
extensive regulation by federal, state and local governmental agencies.
Existing regulations were substantially affected by the recent passage of the
Telecommunications Act of 1996 (the "1996 Telecom Act") in February 1996. This
legislation was implemented in administrative proceedings conducted by the
Federal Communications Commission ("FCC") and state regulatory agencies.

Most current regulatory and legislative activity addresses how telephone
companies and cable television companies may enter new lines of business, the
manner in which they can participate in new lines of business and the rates
they can charge consumers. Local exchange carriers, including the RBOCs, will
be facing more serious competition and will be able to enter new markets. Cable
television companies are now also permitted to provide telephone service. The
outcome of pending federal and state administrative proceedings may also affect
the nature and extent of competition that will be encountered by the Company.

The on-line information and services industry is evolving and will be
affected in the future by laws, regulations and policies adopted at the
federal, state and local levels of government. There are many laws, regulations
and policies, both existing and proposed, at all levels of government that may
impact, in varying degrees, the manner in which the Company deploys Cable
SuperSites and IT Network products and services. Neither the outcome of these
proposals, nor their impact upon the on-line information and services industry
in general or on the Company in particular, can be predicted at this time.

FORWARD LOOKING INFORMATION AND RISK FACTORS

Source Media, Inc. or its representatives from time to time may make or may
have made certain forward-looking statements, whether orally or in writing,
including without limitation any such statements made or to be made in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations, press releases and other information contained in its various
filings with the Securities and Exchange Commission. The Company wishes to
ensure that such statements are accompanied by meaningful cautionary
statements, so as to ensure to the fullest extent possible the protections of
the safe harbor established in the Private Securities Litigation Reform Act of
1995. Accordingly, such statements are qualified in their entirety by reference
to and are accompanied by the following discussion of certain important factors
that could cause actual results to differ materially from those projected in
such forward- looking statements.

The Company cautions the reader that this list of factors may not be
exhaustive. The Company operates in a rapidly changing business, and new risk
factors emerge from time to time. Management cannot predict every risk factor,
nor can it assess the impact, if

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any, of all such risk factors on the Company's business or the extent to which
any factor, or combination of factors, may cause actual results to differ
materially from those projected in any forward-looking statements. Accordingly,
forward-looking statements should not be relied upon as a prediction of actual
results.

Substantial Leverage; Ability to Service Debt. The Company is highly leveraged
and substantially all its assets are subject to security interests securing its
Notes. As of December 31, 1997, the Company had total indebtedness of
approximately $100 million.

The degree to which the Company is leveraged, together with the covenants
imposed by the Notes and the Preferred Stock, could have adverse consequences,
including the following: (i) substantial cash flow from the Company's
operations will be required for the payment of principal and interest on the
Notes and will not be available for other purposes; (ii) the Company's ability
to obtain additional financing in the future, whether for acquisitions, capital
expenditures, further development of Cable SuperSites, refinancings or
otherwise, may be impaired; (iii) the Company may be more leveraged than
certain of its competitors, which may place it at a competitive disadvantage;
(iv) the Indenture imposes significant financial and operating restrictions;
and (v) the Company's high degree of leverage makes it more vulnerable to
changes in economic conditions and may limit its ability to withstand
competitive pressures and technological developments, consummate acquisitions
and capitalize on significant business opportunities.

The Company will require substantial cash flow to meet its interest payment
obligations with respect to the Notes and any other borrowings. The Company's
cash flow is dependent on the Company's future performance and is subject to
financial, economic and other factors, some of which are beyond its control. If
the Company is unable to generate sufficient cash flow from operations or
otherwise to satisfy its interest obligations on the Notes and other
indebtedness, it may be required to refinance all or a portion of such
obligations or to sell assets. The Company expects that any payment of the
principal of any of the Notes, the redemption of the Preferred Stock or any
other borrowings, whether upon maturity, acceleration, redemption or other
repurchase obligation, such as a change of control, may have to be refinanced
in whole or in part or financed by the sale of assets or similar transactions.
The Indenture contains restrictions on the Company's ability to incur
additional indebtedness and to sell assets and, notwithstanding such
restrictions, the Company may not be able to effect a refinancing or sell
assets on acceptable terms when needed.

Insufficient Collateral. The proceeds of any sale of the collateral following
an event of default under the Indenture would most likely not be sufficient to
repay the Notes in full. Although the collateral consists of substantially all
the assets of the Company, most of the Company's assets consist of cash,
investments, goodwill, other intangibles and accounts receivable. The tangible
assets comprising the collateral, which, as of December 31, 1997, had a net
book value of approximately $5.4 million, will consist primarily of production,
computer and other equipment.

Historical and Projected Losses. The Company has reported an operating loss
and a net loss in each year since its inception, including an operating loss of
$24.5 million and a net loss attributable to common stockholders of $32.8
million in the year ended December 31, 1997. The Company expects to incur
operating losses through 1998 and may incur operating losses thereafter. There
can be no assurance that the Company will be able to operate profitably at any
time or that the Company will not require substantial additional funds to
implement its business plan.

No Prior History of Combined Operations; Risk of Cancellation of Acquired
Contracts. Prior to the October 1997 Acquisitions, the operations of the
Company and the acquired companies were conducted as separate and distinct
businesses, each with its own management team, sales force and operations. The
Company has taken steps to manage its operations and the operations of the
acquired companies as an integrated entity. While the Company believes, based
on its history with prior acquisitions and its experience to date with the
October 1997 Acquisitions, that it can successfully integrate these operations,
there can be no assurance that this will be the case. Although its results to
date have generally been consistent with its expectations, there can be no
assurance that the Company will be able to realize expected operating and
economic efficiencies. Many of the customer contracts acquired by the Company
are either non-transferable, or terminable at will or with little or no notice
and, while the Company has not experienced significant problems to date, there
can be no assurance that the customers under such contracts will not terminate
them or that the Company will be able to renew such contracts. In addition,
certain customer contracts acquired by the Company have expired. The
termination or non-renewal of such contracts would adversely affect the
Company's business.

Change of Control. Upon the occurrence of a change of control (which could
include the disposition of substantially all of the Company's or one of its
subsidiary's assets), the Company will be required to offer to repurchase all
or a portion of the outstanding Notes or Preferred Stock at 101% of, in the
case of the Notes, the principal amount thereof, plus accrued and unpaid
interest to the date of repurchase, and, in the case of the Preferred Stock,
the liquidation preference plus accumulated and unpaid dividends. The

7
<PAGE> 9
source of funds for any such payment at maturity or earlier repurchase will be
the Company's available cash or cash generated from operating or other sources,
including, without limitation, borrowings or sales of assets or equity
securities of the Company. There can be no assurance that sufficient funds will
be available to pay such principal or liquidation preference or to make any
required repurchase. If an offer to repurchase the Notes is required to be made
and the Company does not have available funds sufficient to pay for Notes
tendered for repurchase, an event of default would occur under the Indenture.
The occurrence of an event of default would result in acceleration of maturity
of the Notes unless waived by the holders of the Notes and the Preferred Stock.
Similarly, if the Company is required to offer to repurchase the outstanding
Preferred Stock and the Company does not have available funds sufficient to
repurchase shares of the Preferred Stock tendered for repurchase, the holders
of Preferred Stock would have the right to elect two directors.

Access to Channels on Cable Systems and Uncertainty of Subscriber Acceptance.
The Company's ability to offer Cable SuperSites on any cable television system
depends on obtaining an agreement from the cable operator on terms satisfactory
to the Company. There is intense competition among suppliers of programming for
access to channels. The Company currently has three agreements in place with
cable operators. Two of these agreements may be terminated with little or no
notice. The Company expects that any future distribution agreements may be
terminated with little or no notice. The Company is in active discussions to
obtain channel access for Cable SuperSites with other cable systems. There can
be no assurances that such additional agreements will be entered into. In
addition, as a result of the Company's and Century's decisions to pursue
different strategies for their respective operations, carriage of Cable
SuperSites in Colorado Springs will terminate effective April 1, 1998.

Even if the Company does have channel access, there can be no assurance that
a significant market for on-demand interactive television will develop or that
cable subscribers will use the television as a source of on-demand information
and services. In addition, Cable SuperSites will be competing with other
on-demand information and entertainment sources. This competition includes
services offering access to the Internet through the television. There can be
no assurance that Cable SuperSites will prove more desirable than such
services. If Cable SuperSites does not achieve market acceptance, Source will
be unable to implement its business strategy and Source's business will be
materially adversely affected.

Evolving Nature of Business. The on-line information and services industry is
experiencing rapid change. Products or technologies developed by others could
render obsolete or otherwise significantly diminish the value of the Company's
products or technologies, Interactive Channel or IT Network. The Company's
future performance will depend substantially on its ability to respond to
competitive developments, to upgrade its technologies and programming, to
commercialize products and services incorporating upgraded technologies and
programming and to adapt its operational and financial control systems as
necessary to respond to continuing changes in its businesses. There can be no
assurance that the Company will be successful in these efforts.

Transaction Risks. Source may consider strategic transactions in either of
its lines of business from time to time. Any assessment of potential
transactions is necessarily inexact and its accuracy is inherently uncertain.
There can be no assurances that management of Source would recognize the risks
and uncertainties associated with such transaction. In addition, the purchase
price of any such acquisitions would have to be funded either with common stock
or cash. Future issuances of common stock could have a dilutive effect on the
Company's current shareholders and any expenditure of cash could impair the
ability of the Company to service its debt or fund operations, or both, any of
which could have a material adverse effect on Source's business, financial
condition or results of operations.

Availability of Programming. To the extent it obtains distribution for Cable
SuperSites, the success of the Interactive Channel will be highly dependent on
the availability of high-quality programming applications. The Company will
depend on independent programming sources, such as third-party suppliers, local
media, retailers and information service providers, to create, produce and
update the programming disseminated on Cable SuperSites at no, or minimal, cost
to the Company. There can be no assurance that Source will succeed in
attracting and retaining such independent programming sources. If independent
programming sources do not develop high quality, up-to-date information,
shopping, entertainment and other programming applications that are capable of
being delivered on Cable SuperSites and that appeal to subscribers, or if such
suppliers are unwilling to provide such applications to Source on terms
favorable to Source, Source would have to increase the extent to which it
supplements these independent programming services with its internal
programming, which would increase the cost of operating Cable SuperSites.

Reliance Upon Proprietary Technology. Source often enters into
confidentiality or license agreements with certain of its employees,
consultants and other outside parties, and generally seeks to control access to
and distribution of its proprietary information. Despite these precautions, it
may be possible for third parties to copy or otherwise obtain and use Source's
products or

8
<PAGE> 10
technology without authorization, or to independently develop similar products
and technology. In addition, effective copyright and trade secret protection
may be unavailable or limited in certain foreign countries. There can be no
assurance that the steps taken by Source will prevent misappropriation of its
technology or that litigation will not be necessary in the future to enforce
Source's intellectual property rights, to protect Source's trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Such litigation could
result in the invalidation of Source's proprietary rights and, in any event,
could result in substantial costs and diversion of management time, either of
which could have a material adverse effect on Source's business.

Year 2000. The Company is currently utilizing internal resources to identify
the potential impact of the year 2000 on the processing of date-sensitive
information by the Company's computerized information and support systems. The
Company expects to complete this process during the second quarter of 1998.
Once it has identified the consequences of the year 2000 on its operations, the
Company will take whatever steps it can to minimize the impact. The year 2000
problem is the result of software that uses two digits (rather than four) to
define the applicable year. Any software or hardware that utilizes
date-sensitive coding may recognize a date using "00" as the year 1900 rather
than the year 2000, which could result in miscalculations or system failures.
At this time, the Company is unable to assess the potential impact of the
problem or to determine whether the costs of addressing potential problems will
have a material adverse impact on the Company's financial position, results of
operations, or cash flows in future periods. If the Company, its customers or
vendors are unable to adequately resolve such processing issues in a timely
manner, the Company's operations and financial results may be adversely
affected. Because the resources available to address the year 2000 problem are
scarce, to the extent the Company identifies problems that require the services
of third parties, it will most likely incur significant expenses in its
attempts to address such problems, if it is able to obtain such services at
all.

Unavailability of Equipment; Reliance on Sole Supplier. The Company and
General Instruments have entered into an agreement to incorporate the Company's
SourceWare operating system in its advanced-analog and digital set-top boxes.
Although General Instruments has agreed to manufacture set-top boxes compatible
with the Company's technology, General Instruments has not agreed to
manufacture such units in any certain quantities. If General Instruments fails
to incorporate the Company's SourceWare operating system into its set-top boxes
or fails to manufacture them in sufficient quantities, the Company would be
required to seek to enter into such arrangement with a different set-top box
manufacturer or continue to purchase its own set-top boxes. Because General
Instruments produces over 62% of the United States' set-top boxes, an agreement
with any other manufacturer would not be as beneficial to the Company. In
addition, if the Company were required to purchase its own set-top boxes, the
Company estimates that its capital costs related to such purchases would
increase significantly compared to the estimated cost of incorporating the
Company's SourceWare operating system into General Instrument's set-top boxes.
If the Company is forced to pursue either of these alternatives, its business
prospects and financial condition would be materially adversely affected.

To incorporate SourceWare technology in advanced analog set-top boxes
requires the addition of the Company's chip for such set-top boxes to access
Cable SuperSites. Consequently, such chip is likely to be a key factor in the
success of the Interactive Channel. LSI Logic is currently the only
manufacturer of these chips and is therefore the Company's sole supplier of
this important component. The Company has no guaranteed supply arrangements
with LSI Logic, and there can be no assurance that LSI Logic will be able to
meet its requirements. Unless alternative supply sources are identified for
this chip, the Company could be subject to pricing risks, delivery delays and
quality control problems or even unavailability of this component, any of which
would have a material adverse effect on the Company.

Reliance on Key Personnel. The Company's future performance depends in large
part on the services of certain executive officers and other key personnel, the
loss of any one of which could be detrimental to the Company's success. In
addition, for the Company to implement its strategy and continued development
and growth, it will be necessary for the Company to attract and retain
qualified personnel in all areas.

Competition. In an industry characterized by extensive capital requirements
and rapid technological change, Source faces potential competition for the
acceptance of its on-line programming and services from a number of companies,
most of which have significantly greater financial, technical, manufacturing
and marketing resources than Source and may be in a better position to compete
in the industry. In addition, Source faces competition for advertiser revenues
from other media, including radio, television, newspapers, and magazines.
Source believes that for the foreseeable future, public access to on-line
television will generally be through cable operators. Accordingly, Source must
compete with other providers of television programming to establish
relationships with cable operators to gain channel access.

9
<PAGE> 11
In addition, certain RBOCs have provided voice information services in the
past. There can be no assurance that the RBOCs will not provide such services
again in the future. If one or more RBOCs were to begin providing such
services, the resulting competition could have a material adverse effect on the
Company's financial condition and results of operations.

Government Regulation. The telecommunications and cable television industries
are subject to extensive regulation by federal, state and local governmental
agencies. Existing regulations were substantially affected by the passage of
the 1996 Telecom Act in February 1996, which allowed cable television companies
and telephone companies both to enter and participate in new lines of business.
This introduced the possibility of new, non-traditional competition for both
cable television and telephone companies and resulted in greater potential
competition for Source. The outcome of federal and state administrative
proceedings may also affect the nature and extent of competition that will be
encountered by Source. In addition, future regulations may prevent Source from
generating revenues from sales of database information about consumers obtained
by Source from its television and telephone business. BellSouth is also allowed
to terminate its agreement with the Company if it determines that regulatory
changes would impact the Company's ability to perform under such agreement.
These competitive developments, as well as other regulatory requirements
relating to privacy issues, may have a material adverse effect on Source's
business.

ITEM 2. PROPERTIES

The Company's corporate office is located in leased space at 5400 LBJ
Freeway, Suite 680, Dallas, Texas. Source leases approximately 16,200 square
feet of office space at 5400 LBJ Freeway for its corporate offices and Cable
SuperSites. This lease expires in September 2001. The Company also subleases
from GTE Directories Corporation approximately 18,500 square feet of office
space at 5601 Executive Drive, Irving, Texas where it conducts IT Network
operations. This sublease expires in September 1999. The Company also has
offices in major DMAs where it maintains the on-line voice response system that
supports IT Network voice information services. The Company maintains five
regional sales offices throughout the country from which its sales force is
based. These offices operate under various leases which expire in February
2001. The Company believes that its existing facilities are suitable to meet
its requirements for the immediate future but will evaluate facilities to
accommodate the Company's growth as necessary. Substantially all of the
Company's assets are subject to a security interest granted in connection with
the issuance of the Notes.

ITEM 3. LEGAL PROCEEDINGS AND CLAIMS

Lerch. On December 15, 1993, Marvin Lerch, the former Chief Executive Officer
and a former shareholder of ICT, and certain of his relatives who are also
former ICT Shareholders, commenced a legal proceeding in Ontario, Canada in the
Ontario Court (General Division) against Source and certain executive officers
of Source and a former director of ICT on the grounds that the defendants took
actions intended to depress the value of ICT to allow Source to acquire a
portion of ICT at a favorable price. The plaintiffs seek, among other things,
orders that certain actions by ICT's board were invalid; a declaration that
ICT's board was incapable of managing its affairs due to conflicts of interest;
an injunction against Source from voting its ICT shares for three years;
purchase by the defendants of the plaintiffs' ICT shares for Cdn$20 per share
or exchange of the plaintiffs' ICT shares for Source common shares of equal
value; and damages in the amount of Cdn$8 million to compensate the plaintiffs
for the reduced value of their ICT shares and damages in the amount of Cdn$6
million to compensate Mr. Lerch for the loss of certain ICT stock options. ICT
disputes all of the claims and no trial date has as yet been set. The
plaintiffs have amended their statement of claim for punitive damages in the
amounts of Cdn$1 million against Source and an aggregate of Cdn$2 million
against certain officers of Source. Although the ultimate outcome of this
action cannot be determined at this time, management believes the claims are
without merit. In addition, management believes the ultimate outcome of these
actions will not have a material impact on the consolidated financial condition
or results of operations of Source.

On January 25, 1994, Mr. Lerch also commenced a proceeding against ICT and
several persons who are, or have been, officers and directors of ICT claiming
wrongful termination of Mr. Lerch's employment with ICT and sought damages in
the amount of Cdn$350,000. ICT denied the claim. The trial of this action began
in London, Ontario on April 23, 1996 and was completed May 3, 1996. Judgment
was rendered against ICT in the amount of Cdn$200,000. ICT's appeal of this
decision was denied and ICT has applied for review of this decision before a
three judge panel, which granted the Company leave to appeal the decision. A
decision on the Company's appeal is not expected for approximately two years.

Others. The Company is aware of certain claims against the Company and ICT
that have not developed into litigation, or if they have, are dormant. Further,
the Company and ICT are parties to ordinary routine litigation incidental to
their business, none of which

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<PAGE> 12
is expected to have a material adverse effect on the Company's results of
operations or financial condition.

EXECUTIVE OFFICERS OF THE COMPANY

Information regarding Source's executive officers including their respective
ages at March 24, 1998, is set forth below.

<TABLE>
<CAPTION>
Name Age Position with the Company
---- ------ -------------------------
<S> <C> <C>
Timothy P. Peters 40 Chairman of the Board and Chief Executive Officer
John J. Reed 40 President and Director
W. Scott Bedford 40 Chief Financial Officer and Treasurer
Maryann Walsh 50 Corporate Counsel and Secretary
Daniel D. Maitland 47 Executive Vice President and President of IT Network
W. Thomas Oliver 55 Executive Vice President and President of Interactive Channel
</TABLE>

Timothy P. Peters has served as a director of Holdings since its inception in
1988 and was elected Chief Executive Officer in December 1992 and Chairman of
the Board of Holdings in August 1994. Mr. Peters was President of Holdings from
1988 to 1996. Mr. Peters has served as Chairman of the Board, Chief Executive
Officer and a director of the Company since June 23, 1995, the effective date
of the Merger and was President from that date until 1996. In 1986, Mr. Peters
founded Information Express, Co., an operator-assisted Yellow Pages company
that served the Denver area, where he acted as a Vice President from 1986 to
1988.

John J. Reed has served as a director of Holdings since its inception in 1988
and as President of Holdings since 1996. Mr. Reed has served as a director of
the Company since June 23, 1995, the effective date of the Merger and served as
Executive Vice President from that date until 1996, when he was appointed
President. From 1990 to December 1996, Mr. Reed served in various positions
with Holdings, including Executive Vice President of Sales and Marketing. Mr.
Reed was Chairman of the Board of ICT from November 1991 to October 1993. From
1986 to 1989, Mr. Reed was President of Reed & Associates, a Dallas-based real
estate brokerage and professional services firm, of which he is the sole
shareholder. Mr. Reed has conducted business through this firm from time to
time since 1989.

A.Scott Bedford has served as Chief Financial Officer and Treasurer since
December 1997 and served as Chief Operating Officer of Holdings from December
1992 until December 1997. Mr. Bedford served as Chief Operating Officer since
June 23, 1995, the effective date of the Merger, until December 1997. From 1988
to December 1992, Mr. Bedford served in various positions with Holdings,
including Executive Vice President, Vice President of Sales and Secretary. From
its inception in 1988 to September 1997, Mr. Bedford served as a director of
Holdings and from June 23, 1995 to September 1997 served as a director of the
Company. From October 1993, until January 1997, Mr. Bedford served as Chairman
of the Board of ICT.

Maryann Walsh has served as General Counsel of the Company since January 1995
and Secretary of the Company since March 1995. Together with Mr. Peters, she
founded Information Express, Co. and served as its Corporate Counsel and
Secretary. In 1981, she worked for a law firm in London, England and most
recently was with a law firm in Jakarta, Indonesia from 1989 through 1994. She
was also a counsel with Mobil Oil Corporation in New York City and Denver and
handled U.S. Supreme Court and federal court matters for the U.S. Department
of Justice.

Daniel D. Maitland has served as President of IT Network since October 1997,
prior to which he had served as President of the Company's telephone division
since November 1996 and as an Executive Vice President of the Company since
September 1997. In 1986, Mr. Maitland founded BDR Audiotex Inc., a telephone
information services company. In 1990, that company merged with Perception
Technology. Mr. Maitland became the Executive Vice President and General
Manager of Percepion Electronic Publishing. In 1993, Perception Technology
merged with Brite Voice Systems.

W. Thomas Oliver has served as President of the Interactive Channel since
October 1997, prior to which he had served as President of the Company's
television division since June 1996 and as an Executive Vice President of the
Company since September 1997. Mr. Oliver was Executive Vice President of DMX
from 1994 to 1995; President and Chief Executive Officer of International
Cablecasting Technologies from 1987 to 1994 and as a Senior Vice President of
Home Box Officer from 1973 to 1987.

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<PAGE> 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock has been quoted on The Nasdaq Stock Market under
the symbol "SRCM" since December 8, 1995. Prior to that, the Company's common
stock was quoted on the OTC Bulletin Board.

The following table sets forth the high and low closing sales prices per
share for the common stock for the periods indicated subsequent to the Merger
(as adjusted to estimate the effect of the Reverse Split in the case of
quotations for periods prior to October 10, 1995).

<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1995
Second Quarter (beginning June 22, 1995) $ 11.50 $ 10.50
Third Quarter 12.00 8.50
Fourth Quarter 12.88 9.13

1996
First Quarter $ 9.63 7.63
Second Quarter 11.25 8.38
Third Quarter 10.88 7.38
Fourth Quarter 11.50 7.00

1997
First Quarter $ 7.38 3.63
Second Quarter 10.06 3.63
Third Quarter 12.00 8.38
Fourth Quarter 13.88 8.25
</TABLE>

On March 24, 1998, the last reported sale price of the common stock was
$13.25 per share. As of March 24, 1998, there were 168 record holders of the
Common Stock.

The Company has never paid cash dividends. Management intends to retain any
future earnings for the operation and expansion of the Company's business and
does not anticipate paying any cash dividends in the foreseeable future. In
addition, the Indenture and the Certificate of Designations restrict the
Company's ability to pay cash dividends to the holders of its common stock.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Monetary revenues $6,431 $9,194 $9,342 $8,575 $12,387
Nonmonetary revenues (1) 18,752 21,749 15,944 9,944 6,044
------ ------ ------ ----- -----
Total revenues 25,183 30,943 25,286 18,519 18,431
Monetary cost of sales 4,456 5,248 4,937 3,485 8,611
Nonmonetary cost of sales (1) 18,752 21,749 15,944 9,944 6,044
------ ------ ------ ----- -----
Total cost of sales 23,208 26,997 20,881 13,429 14,655
------ ------ ------ ------ ------
Gross profit 1,975 3,946 4,405 5,090 3,776
Selling, general and administrative expenses 6,785 8,987 7,952 11,747 19,599
Amortization of intangible assets 1,656 1,684 1,031 1,031 4,987
Research and development expenses 1,339 2,706 3,750 6,331 3,680
</TABLE>

12
<PAGE> 14
<TABLE>
<S> <C> <C> <C> <C> <C>
Write-down of intangible assets -- 1,900 -- -- --
-- ----- -- -- --
Operating loss (7,805) (11,331) (8,328) (14,019) (24,490)
Interest expense, net 227 296 137 (174) 4,498
Other (income) expense (2) (139) 1,231 (277) 10 (62)
Charges related to financing incentives 2,026 -- 1,581 -- --
----- -- ----- -- --
Net loss before extraordinary item (9,918) (12,857) (9,769) (13,855) (28,926)
Extraordinary loss - extinguishment of debt -- -- -- -- 3,455
Net loss (9,918) (12,857) (9,769) (13,855) (32,381)
Preferred stock dividends 769 1,621 833 -- 416
--- ----- --- -- ---
Net loss attributable to common shareholders $ (10,687) $(14,478) $(10,602) $(13,855) $(32,797)
======== ======== ======== ======== ========
Net loss per common share $ (2.66) $(3.22) $(1.65) $(1.39) $(2.89)
====== ====== ====== ====== ======
Weighted average common shares outstanding 4,022 4,498 6,413 9,935 11,354
===== ===== ===== ===== ======
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $1,235 $127 $17,479 $4,303 $8,431
Working capital (deficit) (3,329) (7,608) 12,223 (466) 31,285
Total assets 13,248 8,219 24,195 15,897 113,502
Long-term debt and capital lease
obligations (including current portion) 701 653 219 4,720 100,042
Redeemable convertible preferred stock (3) 10,065 16,236 -- -- --
Senior PIK preferred stock -- -- -- -- 13,698
Total stockholders' equity (capital deficiency) (8,202) (21,965) 13,037 30 (12,432)
(3)
</TABLE>

(1) Nonmonetary revenues and nonmonetary cost of sales associated with
barter transactions are included in the consolidated statements of
operations at the estimated fair values of advertising time and
information content received. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 2 of Notes to
the Consolidated Financial Statements.

(2) Includes $1,479,000 of expenses related to a discontinued public
offering for the year ended December 31, 1994.

(3) All of the outstanding redeemable convertible preferred stock was
converted to common stock as part of the Merger. See Note 1 of Notes to
the Consolidated Financial Statements.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

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<PAGE> 15
infrastructure and telephone lines, with the addition of an advanced analog or
digital set-top box. Cable SuperSites can allow the Company or cable system
operators to sell interactive advertising space on cable screens using text,
voice and pictures. Cable SuperSites can be broadcast by cable operators
utilizing the Company's proprietary two-way operating system, SourceWare.
SourceWare can enable any cable television system equipped with a compatible
advanced analog or digital set-top box to deliver two-way, on-demand
programming with the touch of a television remote. In less than one second,
Cable SuperSites can allow subscribers to access interactive programming
delivered over the cable system to their television.

The Company has earned monetary revenues through advertising sponsorships in
the Network Guide, which are recorded as unearned income when billed and
recognized on a straight-line basis as earned over the terms of the respective
contracts (which are typically from three to 12 months). The Company also has
earned monetary revenues from sales of voice information services to certain
Publisher Partners. The Company is beginning to earn a significant percentage
of its monetary revenues by acting as a sales agent for advertising in
directories published by Publisher Partners and providing voice information
services in those directories.

In each of its markets, the Company has entered into nonmonetary barter
agreements with local television and radio stations. These media sponsors
provide the Company with advertising time on their stations and update local
news, weather and sports voice information messages in exchange for promotional
messages and print advertisements in the Network Guide. Revenues and cost of
sales associated with these nonmonetary barter transactions are included in the
Company's consolidated statements of operations at the estimated fair value of
the on-air advertisements and information content provided to the Company by
media sponsors. The Company expects that nonmonetary revenues as a percentage
of total revenues will continue to decline in the future as the Company earns a
higher percentage of its revenues as a service provider or sales agent rather
than from sales of advertising in the Network Guide.

On January 14, 1997, the Company acquired all of the outstanding shares that
it did not already own of ICT in exchange for 1,390,000 shares of the Company's
common stock, making ICT a wholly-owned subsidiary of the Company. ICT owns the
patented technology utilized by the Company for the Cable SuperSites channel
and provides research and development services for the Company. The Company's
historical consolidated results of operations and financial condition include
ICT as the Company owned a majority interest in ICT before the acquisition of
the remaining interest.

On October 30, 1997, the Company purchased certain of the electronic
publishing assets of Brite for $35.6 million and certain of the assets of VNN,
a unit of Tribune Company, for $9.0 million. As a result, depreciation and
amortization will increase significantly.

YEARS ENDED DECEMBER 31, 1997 AND 1996

Monetary revenues increased 44% to $12.4 million for the year ended December
31, 1997 from $8.6 million for the year ended December 31, 1996. The net
increase of $3.8 million was the result of an increase of (i) $3.1 million
attributable to the Company's voice information services related to new service
contracts acquired from Donnelly and GTE, (ii) $1.9 million attributable to
contracts acquired from Brite and VNN, and (iii) $302,000 attributable to the
introduction of the Company's Local Source product. These increases were
partially offset by declines of (i) $727,000 attributable to ICT, (ii) $526,000
attributable to the Network Guide and (iii) $213,000 attributable to the
Company's Consumer Tips service.

The decline in Network Guide monetary revenues primarily reflects the
termination of distribution of the Network Guide in 20 DMAs, 12 of which are
located in the Ameritech region, five within the Southwestern Bell region, and
three of which are located within the DonTech region. Total Network Guide
revenues in the 20 terminated DMAs were $231,000 for the year ended December
31, 1997 compared with $1.7 million for the year ended December 31, 1996. This
decline was partially offset by increases of $618,000 related to 12 new DMAs in
which the Network Guide is distributed and $313,000 in the Company's other 39
existing DMAs.

The decrease in ICT's revenues reflects a portion of the one-time license fee
paid in 1996 to ICT by GTE Corporation and GTE MainStreet for the use of ICT's
United States patents as part of an agreement to end litigation between ICT
and GTE, as well as certain hardware and software sales made in connection with
a trial of ICT technology.

The decline in Consumer Tips revenues is the result of the February 1996
termination of the Company's agreement with Ameritech. Ameritech Consumer Tips
revenues ended completely in the second quarter of 1996.

Nonmonetary revenues and nonmonetary cost of sales declined 39% to $6.0
million for the year ended December 31, 1997 from

14
<PAGE> 16
$9.9 million for the year ended December 31, 1996. Substantially all of this
$3.9 million decline in nonmonetary revenues and nonmonetary cost of sales
occurred because of the termination of distribution agreements in certain DMAs
and because, in other DMAs, the Company reduced the amount of space devoted to
information provided by media sponsors in its Network Guide and, accordingly,
renewed its barter contracts with such media sponsors for lesser amounts of
promotional advertising.

Monetary cost of sales increased 147% to $8.6 million for the year ended
December 31, 1997 from $3.5 million for the year ended December 31, 1996. This
increase resulted from (i) operating personnel salaries, depreciation expenses,
and various other operating expenses totaling $2.2 million attributable to
Cable SuperSites operations in Colorado Springs and Denton, (ii) a $2.0 million
write-off of certain analog assets and related electronic components in
connection with the Company's decision to pursue a digital set-top box
strategy, and (iii) increased operating personnel salaries and various other
operating expenses totaling $985,000 incurred by IT Network to support new
services and advertising contracts acquired from Donnelly, GTE, Brite and VNN
as well as its new Local Source product. In the prior period, costs incurred by
Interactive Channel were research and development in nature, because Cable
SuperSites had not been commercially deployed.

Selling, general and administrative expenses, including amortization of
intangible assets increased 92% to $24.6 million for the year ended December
31, 1997 from $12.8 million for the year ended December 31, 1996. This increase
resulted from (i) increases of certain programming, personnel salaries,
subscriber acquisition, travel and various other Cable SuperSites expenses
totaling $5.0 million, (ii) increased customer service, sales, marketing and
administrative expenses incurred by IT Network to support new services and
advertising contracts acquired from Donnelly, GTE, Brite and VNN as well as its
new Local Source product, (iii) costs associated with, and settlement of, a
legal dispute in 1997 and (iv) a $327,000 write-off of certain analog assets.
Amortization of intangible assets increased by $4.0 million in 1997 as a result
of the amortization of patents related to the Company's acquisition of the
remaining shares of ICT during 1997 as well as the amortization of certain
contract rights and/or goodwill acquired from Donnelly, GTE, Brite and VNN. In
the prior period, costs incurred by Interactive Channel were research and
development in nature, because Cable SuperSites had not been commercially
deployed.

Research and development expenses declined 42% to $3.7 million for the year
ended December 31, 1997 from $6.3 million for the year ended December 31, 1996.
This decrease reflects lower Interactive Channel development expenses following
the commercial introduction of Cable SuperSites.

Other income and expenses. Net interest expense was $4.5 million for the year
ended December 31, 1997 compared with net interest income of $175,000 in 1996.
Net interest expense in 1997 consisted of (i) interest expense on higher debt
balances outstanding during 1997 and (ii) the approximate $1.1 million
estimated fair market value of warrants issued by the Company related to an
interest payment in kind on an outstanding senior debt security. In 1996, net
interest income was generated from the proceeds from a public offering of the
Company's common stock in December 1995.

YEARS ENDED DECEMBER 31, 1996 AND 1995

Monetary revenues declined 8% to $8.6 million for the year ended December 31,
1996 from $9.3 million for the year ended December 31, 1995. The net decline of
$767,000 included declines of $1.5 million attributable to the Network Guide
and $884,000 attributable to Consumer Tips. These declines were partially
offset by (i) increases of $1.0 million in revenues attributable to product
development trials of Cable SuperSites and license fees from ICT technology,
and (ii) $597,000 related to the Company's other voice information services.

The decline in Network Guide monetary revenues primarily reflects the
termination of distribution of the Network Guide in 18 DMAs, eight of which are
located within the Southwestern Bell region, six of which are located within
the Ameritech region, three of which are located within the DonTech region and
one of which is located in the BellSouth region. Total Network Guide revenues
within the 18 terminated DMAs were $1.1 million for the year ended December 31,
1996 and $2.8 million for the year ended December 31, 1995. These declines were
partially offset by increases of $137,000 related to 12 new DMAs in which the
Network Guide is distributed and $54,000 in the Company's other 41 existing
DMAs.

Until February 1, 1996, the Company published the Network Guide in Yellow
Pages directories in certain DMAs within the Ameritech region and produced the
related voice information messages in exchange for a share of the Network Guide
revenues generated in those DMAs. The Company's agreement with Ameritech was
terminated by Ameritech, and the Network Guide has not been included in any
Ameritech Yellow Pages directories published after September 1996. Accordingly,
revenues in those Ameritech DMAs ended in the third quarter 1997 due to the
conclusion of revenue from Network Guide contracts in effect prior to the

15
<PAGE> 17
termination of the Ameritech agreement. In June 1997, the Company and Ameritech
entered into a definitive agreement pursuant to which the Company will be the
exclusive voice information sales agent and service provider in up to 38
Ameritech Yellow Pages directories for a three-year period, which commenced in
the fourth quarter of 1997. Total monetary revenues for both the Network Guide
and Consumer Tips products in the Ameritech region accounted for approximately
20% and 32% of the Company's monetary revenues in 1996 and 1995, respectively.
The Company expects to partially offset such revenue declines in future periods
with revenues generated through (i) its sales agency agreement with Donnelly to
sell the Network Guide in Yellow Pages published by Donnelly in five top-100
DMAs in the mid-Atlantic region, (ii) its purchase of certain assets from
Donnelly and a related voice information service contract with Donnelly under
which the Company will provide voice information services in Yellow Pages
published by Donnelly in eight top-100 DMAs located throughout the United
States, (iii) its sales agency agreement with GTE to sell the Network Guide in
Yellow Pages published by GTE in four top-100 DMAs located throughout the
United States, (iv) its purchase of certain assets from GTE and a related voice
information service contract with GTE under which the Company will provide
voice information services in Yellow Pages published by GTE in 9 top-100 DMAs
located throughout the United States, and (v) its sales agency agreement with
Southern New England Telephone ("SNET") to sell the Network Guide in Yellow
Pages published by SNET in a top-100 DMA located in the northeastern United
States.

The decline in Consumer Tips revenues is the result of the February 1996
termination of the Company's agreement with Ameritech. Consumer Tips revenues,
which were $213,000 and $1.1 million for the years ended December 31, 1996 and
1995, respectively, ended completely in the second quarter of 1996.

Nonmonetary revenues and nonmonetary cost of sales declined 38% to $9.9
million for the year ended December 31, 1996 from $15.9 million for the year
ended December 31, 1995. Substantially all of this $6.0 million decline in
nonmonetary revenues and nonmonetary cost of sales occurred because of the
termination of distribution agreements in certain DMAs and because, in other
DMAs, the Company reduced the amount of space devoted to information provided
by media sponsors in its Network Guide and, accordingly, renewed its barter
contracts with such media sponsors for lesser amounts of promotional
advertising.

Monetary cost of sales declined 29% to $3.5 million for the year ended
December 31, 1996 from $4.9 million for the year ended December 31, 1995. In
certain regions, the Company has operated under comprehensive Network Guide
agreements whereby the Company has agreed to share a portion of its advertising
revenues with the Publisher Partner in return for pages in the Publisher
Partner's Yellow Pages directories and use of the Publisher Partner's voice
information equipment and telephone lines. As DMAs within a region become
governed by such a Network Guide agreement, the Company's monetary cost of
sales reflect increasing revenue sharing expense and declining Yellow Pages
purchase expense and telephone line charges in such region. Monetary cost of
sales for the years ended December 31, 1996 and December 31, 1995 was primarily
comprised of (i) revenue sharing expenses associated with Network Guide
agreements with Ameritech, DonTech and BellSouth of $1.9 million and $2.0
million, respectively, a 9% decrease, resulting from lower monetary revenues in
certain regions pursuant to revenue-sharing operating agreements, (ii)
operations personnel salaries of $494,000 and $584,000, respectively, a 15%
decrease, (iii) Yellow Pages purchase expenses of $454,000 and $1.2 million,
respectively, a 63% decrease, reflecting the discontinuation of distribution in
all eight DMAs within the Southwestern Bell region as well as lower Yellow
Pages purchase prices and the Company's decision to purchase fewer pages in the
Pacific Bell region, (iv) telephone line charges of $292,000 and $369,000,
respectively, a 21% decrease, primarily reflecting fewer DMAs in the
Southwestern Bell region, and (v) satellite broadcasting charges of $141,000
and $357,000, respectively, a 60% decline, reflecting the Company's decision in
1996 to update its voice information systems via telephone lines rather than
satellites. Monetary cost of sales attributable to the Cable SuperSites channel
were minimal as the related revenues primarily consisted of sales of
programming and license fees.

Selling, general and administrative expenses, including amortization of
intangible assets increased 42% to $12.8 million for the year ended December
31, 1996 from $9.0 million for the year ended December 31, 1995. This increase
resulted primarily from increased subscriber acquisition costs associated with
the commercial introduction of Cable SuperSites. These costs included such
items as advertising agency creative fees, television production costs of
commercials and an infomercial, promotional, direct mail and newspaper
advertising fees.

Research and development expenses increased 72% to $6.3 million for the year
ended December 31, 1996 from $3.8 million for the year ended December 31, 1995.
This increase occurred due to (i) the addition of personnel by the Company and
by ICT to support business development activities as well as to continue the
development of cable converter boxes that were intended to be deployed in Cable
SuperSites subscriber households, (ii) the continued modification of Cable
SuperSites on-line television technology to operate on a UNIX-based platform
which increases the speed and capacity of Cable SuperSites headend equipment,
(iii) the continued

16
<PAGE> 18
development of a Windows-based media presentation workstation that could be
used by the Company and others to create and edit programming for Cable
SuperSites, and (iv) other related development activities associated with the
commercial introduction of Cable SuperSites.

Other Income and Expenses. Net interest income was $175,000 for the year
ended December 31, 1996 compared with net interest expense of $137,000 for the
same period in 1995, reflecting interest earned during 1996 on the proceeds
from a public offering of the Company's common stock in December 1995. The
Company incurred $1.6 million of charges related to financing incentives during
1995 as a result of the issuance of certain warrants in January 1995 and in
connection with interim financings in May 1995.

LIQUIDITY AND CAPITAL RESOURCES

Since its inception, the Company has experienced substantial operating losses
and net losses as a result of its efforts to (i) develop, deploy and support IT
Network, (ii) acquire a controlling interest in ICT, and (iii) develop, conduct
trials and commercially launch Cable SuperSites. As of December 31, 1997, the
Company had an accumulated deficit of approximately $89.7 million and had used
cumulative net cash in operations of $52.6 million. The difference at December
31, 1997 between the accumulated deficit and cumulative net cash used in
operations since inception was attributable primarily to nonmonetary charges
related to financing incentives and extinguishment of debt, write-down of analog
set-top boxes and intangible assets, depreciation and amortization and other
non-cash expenses. The Company will incur operating losses in 1998, although it
expects that cash used in operations will decline as a result of the October
1997 Acquisitions discussed below.

Since its inception, the Company has financed its operations primarily
through an aggregate $156.6 million raised from various financing activities,
including the incurrence of debt and issuance of the Company's common stock and
preferred stock. In October 1997, the Company issued $100.0 million of it
Senior Secured Notes and $20.0 million of its Senior PIK Preferred Stock. The
Company's primary source of liquidity is its cash and cash equivalents and
short-term investments, which totaled $24.0 million at December 31, 1997.

As a result of the October 1997 Acquisitions, the Company expects that its
revenues, operating costs and depreciation and amortization expenses will
increase. The interest escrow account created pursuant to the Indenture will be
used to fund the first four interest payments on the Senior Secured Notes. The
Company believes its resources will be sufficient to meet the Company's
anticipated cash needs for working capital and other capital expenditures
related to the further development of Cable SuperSites and IT Network at least
through 1999.

The Company's future capital requirements will depend on many factors,
including, but not limited to the following factors, some of which are outside
the Company's control: (i) the operating results of IT Network, including the
Company's ability to successfully integrate its acquired businesses into its
existing business, (ii) the success and timing of the development, introduction
and deployment of Cable SuperSites, (iii) the extent to which the Company is
able to generate revenues from licensing its proprietary technology, (iv) the
number of file servers and other equipment which the Company purchases in
support of Cable SuperSites, (v) the levels of advertising expenditures
necessary to increase awareness of Cable SuperSites, (vi) the extent of market
acceptance of such products, (vii) potential acquisitions or asset purchases,
(viii) the deployment of digital set-top boxes incorporating the Company's
technology, and (ix) competitive factors.

YEAR 2000 DISCLOSURE

17
<PAGE> 19
scarce, to the extent the Company identifies problems that require the services
of third parties, it will most likely incur significant expenses in its
attempts to address such problems, if it is able to obtain such services at
all.

NET OPERATING LOSS CARRYFORWARDS

At December 31, 1997, Holdings had net operating loss carryforwards of
approximately $60.9 million for U.S. Federal income tax purposes, which begin
to expire in 2003. See Note 11 of Notes to the Consolidated Financial
Statements included elsewhere herein. The Internal Revenue Code of 1986, as
amended, imposes limitations on the use of net operating loss carryforwards if
certain stock ownership changes occur. Consequently, the Company's utilization
of pre- 1996 net operating losses is limited to approximately $9.0 million in a
given year.

FACTORS THAT MAY AFFECT FUTURE RESULTS

This Management's Discussion and Analysis of Financial Condition and Results
of Operations includes certain forward- looking statements of the Company
including future market trends, estimates regarding the economy and the
information service industry in general and key performance indicators which
impact the Company. In developing any forward-looking statements, the Company
makes a number of assumptions including expectations for continued market
growth, anticipated revenue and gross margin levels, and cost savings and
efficiencies. If the industry's or the Company's performance differs materially
from these assumptions or estimates, the Company's actual results could vary
significantly from the estimated performance reflected in any forward-looking
statements. Accordingly, forward-looking statements should not be relied upon
as a prediction of actual results.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Report of Independent Auditors, and the consolidated financial statements
of the Company and the notes thereto appear on pages 22 through 42 of this
Report.

ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The section entitled "Election of Directors" appearing in the Company's proxy
statement for the annual meeting of stockholders to be held on May 13, 1998
sets forth certain information with respect to the directors of the Company and
is incorporated herein by reference. Certain information with respect to
persons who are or may be deemed to be executive officers of the Company is set
forth under the caption "Executive Officers of the Company" in Part I of this
report.

ITEM 11. EXECUTIVE COMPENSATION

The section entitled "Executive Compensation" appearing in the Company's
proxy statement for the annual meeting of stockholders to be held on May 13,
1998 sets forth certain information with respect to the compensation of
management of the Company and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT

The section entitled "Security Ownership of Certain Beneficial Owners and
Management" appearing in the Company's proxy statement for the annual meeting
of stockholders to be held on May 13, 1998 sets forth certain information with
respect to the ownership of the Company's common stock and is incorporated
herein by reference.

18
<PAGE> 20
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

The section entitled "Certain Transactions" appearing in the Company's proxy
statement for the annual meeting of stockholders to be held on May 13, 1998
sets forth certain information with respect to certain business relationships
and transactions between the Company and its directors and officers and is
incorporated herein by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as a part of this report:

(1) Financial Statements included in Item 8 herein: Report of
Independent Auditors Consolidated Balance Sheets as of December 31,
1996 and 1997 Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997 Consolidated Statements of
Stockholders' Equity (Capital Deficiency) for the years ended December
31, 1995, 1996, and 1997 Consolidated Statements of Cash Flows for the
years ended December 31, 1995, 1996, and 1997 Notes to Consolidated
Financial Statements

(2) Financial Statement Schedules included in Item 8 herein:

All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable or immaterial in
relation to the consolidated financial statements and, therefore, have been
omitted.

(3) Exhibits:

The information required by this Item 14(a)(3) is set forth in the Index to
Exhibits accompanying this Annual Report on Form 10-K.

(b) Reports on Form 8-K filed during the quarter ended December 31, 1997:

Report on Form 8-K filed November 13, 1997 regarding October 1997
Acquisitions and sale of Notes and Units.

Report on Form 8-K/A filed November 25, 1997 regarding historical financial
statements of Brite, historical financial statements of VNN and unaudited
pro forma condensed consolidated financial statements.

19
<PAGE> 21
SIGNATURES

Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, Source Media, Inc. has duly caused this Annual Report to
be signed on its behalf by the undersigned, thereunto duly authorized.

Date: March 24, 1998 SOURCE MEDIA, INC.

By /s/ TIMOTHY P. PETERS
--------------------------------
Timothy P. Peters
Chairman of the Board and Chief
Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed by the following persons in the capacities and on
the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C> <C>
/S/ TIMOTHY P. PETERS Chairman of the Board and Chief Executive Officer March 24, 1998
----------------------------------------- (Principal Executive Officer)
Timothy P. Peters

/S/ W. SCOTT BEDFORD Chief Financial Officer and Treasurer March 24, 1998
-----------------------------------------(Principal Financial and Accounting Officer)
A. Scott Bedford

/S/ JOHN J. REED President and Director March 24, 1998
-----------------------------------------
John J. Reed

/S/ DAVID L. KUYKENDALL Director March 24, 1998
-----------------------------------------
David L. Kuykendall

/S/ JAMES L. GREENWALD Director March 24, 1998
-----------------------------------------
James L. Greenwald

/S/MICHAEL J. MAROCCO Director March 24, 1998
-----------------------------------------
Michael J. Marocco

/S/ ROBERT H. ALTER Director March 24, 1998
-----------------------------------------
Robert H. Alter

/S/ ROBERT J. CRESCI Director March 24, 1998
-----------------------------------------
Robert J. Cresci

/S/ BARRY RUBENSTEIN Director March 24, 1998
-----------------------------------------
Barry Rubenstein
</TABLE>

20
<PAGE> 22
REPORT OF INDEPENDENT AUDITORS

Board of Directors Source Media, Inc.

We have audited the accompanying consolidated balance sheets of Source Media,
Inc. (the Company) as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity (capital
deficiency), and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Source Media,
Inc., at December 31, 1996 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

Dallas, Texas
February 13, 1998

22
<PAGE> 23
SOURCE MEDIA, INC.
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,302,943 $ 8,430,941
Short-term investments -- 15,615,419
Restricted investments 611,182 11,709,921
Trade accounts receivable, less allowance
for doubtful accounts of $62,504 and $153,964
in 1996 and 1997, respectively 956,078 2,796,241
Deferred expenses 729,819 990,687
Prepaid expenses and other current assets 1,167,201 843,005
------------ ------------
Total current assets 7,767,223 40,386,214

Property and equipment:
Production equipment 3,951,502 5,693,939
Computer equipment 1,937,826 2,652,103
Other equipment 2,520,885 753,883
Furniture and fixtures 128,235 523,516
------------ ------------
8,538,448 9,623,441

Accumulated depreciation 3,576,999 4,193,484
------------ ------------

Net property and equipment 4,961,449 5,429,957

Intangible assets:
Patents 3,597,989 14,942,465
Goodwill 3,010,137 22,372,837
Contract rights 1,121,000 24,487,000
------------ ------------
7,729,126 61,802,302

Accumulated amortization 5,541,770 10,528,869
------------ ------------

Net intangible assets 2,187,356 51,273,433

Restricted investments -- 11,090,574
Other non-current assets 980,745 5,321,848
------------ ------------

Total assets $ 15,896,773 $113,502,026
============ ============
</TABLE>

23
<PAGE> 24

SOURCE MEDIA, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)

<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Current liabilities:
Trade accounts payable $ 917,462 $ 1,654,404
Accrued interest 173,063 2,066,667
Accrued payroll 420,926 150,062
Other accrued liabilities 1,310,310 1,184,192
Amounts payable related to acquisitions 1,350,000 --
Unearned income 3,976,244 4,024,164
Current portion of capital lease obligations 85,683 21,349
------------ ------------
Total current liabilities 8,233,688 9,100,838

Long-term debt, net of discount of $712,979 in 1996 4,612,021 100,000,000
Capital lease obligations, less current portion 22,706 20,884

Minority interests in consolidated subsidiaries 3,665,104 3,839,552
Note receivable and accrued interest from minority
stockholder, net of discount of $137,152 and
$95,437 in 1996 and 1997, respectively (666,931) (723,645)
------------ ------------
2,998,173 3,115,907

Senior Redeemable Payment-in-kind (PIK) preferred stock,
$25 liquidation preference, $.001 par value, net of
discount
Authorized shares - 1,000,000, Issued shares - 800,000 -- 13,696,799

Stockholders' equity (capital deficiency):
Common stock, $.001 par value:
Authorized shares - 50,000,000
Issued shares - 10,327,041 and 11,969,039 in 1996
and 1997, respectively 10,327 11,969
Less treasury stock, at cost - 381,351 shares in 1996
and 410,963 in 1997, respectively (3,757,641) (4,075,127)
Capital in excess of par value 60,815,785 81,482,951
Accumulated deficit (56,931,832) (89,729,242)
Foreign currency translation 3,737 (23,760)
Notes receivable and accrued interest
from stockholders (110,191) (99,193)
------------ ------------
Total stockholders' equity (capital deficiency) 30,185 (12,432,402)
------------ ------------

Total liabilities and stockholders' equity (capital deficiency) $ 15,896,773 $113,502,026
============ ============
</TABLE>

See accompanying notes.

24
<PAGE> 25
SOURCE MEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1996 1997
----------- ----------- -----------

<S> <C> <C> <C>
Monetary revenues $ 9,341,720 $ 8,574,823 $12,387,459
Nonmonetary revenues 15,944,656 9,944,082 6,043,859
----------- ----------- -----------
Total revenues 25,286,376 18,518,905 18,431,318

Monetary cost of sales 4,936,729 3,485,045 8,611,267
Nonmonetary cost of sales 15,944,656 9,944,082 6,043,859
----------- ----------- -----------
Total cost of sales 20,881,385 13,429,127 14,655,126
----------- ----------- -----------

Gross profit 4,404,991 5,089,778 3,776,192

Selling, general and administrative expenses 7,951,837 11,747,155 19,599,557
Amortization of intangible assets 1,031,337 1,031,337 4,987,099
Research and development expenses 3,750,244 6,330,745 3,679,786
----------- ----------- -----------
12,733,418 19,109,237 28,266,442
----------- ----------- -----------

Operating loss (8,328,427) (14,019,459) (24,490,250)

Interest expense 354,333 614,037 5,234,433
Interest income (217,284) (788,629) (736,638)
Other expense (income) (24,782) (36,173) (53,344)
Minority interest in earnings (losses) of consolidated
subsidiaries (252,689) 46,475 (8,970)
Charges related to financing incentives 1,581,250 -- --
----------- ----------- -----------

Net loss before extraordinary item (9,769,255) (13,855,169) (28,925,731)

Extraordinary loss - early extinguishment of debt -- -- 3,455,551

----------- ----------- -----------
Net loss (9,769,255) (13,855,169) (32,381,282)

Preferred stock dividends 832,651 -- 416,129
----------- ----------- -----------

Net loss attributable to common stockholders ($10,601,906) ($13,855,169) ($32,797,411)
=========== =========== ===========

Basic and diluted net loss per common share:
Net loss attributable to common stockholders
before extraordinary item ($1.65) ($1.39) ($2.59)
Extraordinary item -- -- ($0.30)
----------- ----------- -----------
Net loss attributable to common stockholders ($1.65) ($1.39) ($2.89)
=========== =========== ===========

Weighted average common shares outstanding 6,412,690 9,935,455 11,354,203
=========== =========== ===========
</TABLE>

See accompanying notes.

25
<PAGE> 26

SOURCE MEDIA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK CAPITAL IN FOREIGN RECEIVABLE
--------------------- TREASURY EXCESS OF ACCUMULATED CURRENCY FROM
SHARES AMOUNT STOCK PAR VALUE DEFICIT TRANSLATION STOCKHOLDERS
---------- -------- ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994....... 4,520,829 4,521 (10,000) 11,412,454 (33,307,408) (7,521) (57,513)
Issuance of common stock upon
exercise of stock options........ 84,639 85 -- 254,685 -- -- (225,000)
Nonmonetary employee compensation
related to stock options......... -- -- -- 46,875 -- -- --
Dividend-in-kind ($0.10 per Series
A preferred share)............... -- -- -- (564,022) -- -- --
Dividend-in-kind ($0.13 per Series
B preferred share)............... -- -- -- (268,629) -- -- --
Issuance of warrant on
bridge financings................ -- -- -- 1,581,250 -- -- --
Conversion of notes payable to
common stock..................... 67,570 68 -- 329,932 -- -- --
Conversion of preferred stock to
common stock in the Merger....... 2,109,516 2,109 -- 17,553,869 -- -- --
Company common stock deemed issued
in the Merger.................... 1,184,440 1,184 -- 8,905,898 -- -- --
Redemption of Merger
dissenting shares................ -- -- (527,220) -- -- -- --
Merger expenses.................... -- -- -- (1,135,099) -- -- --
Cancellation of treasury stock in
the Merger....................... (13,438) (13) 10,000 (9,987) -- -- --
Accrued interest on notes
receivable from stockholders..... -- -- -- -- -- -- (19,062)
Issuance of common stock in
secondary offering............... 2,350,000 2,350 -- 21,848,166 -- -- --
Purchase of treasury stock......... -- -- (2,988,343) -- -- -- --
Net loss........................... -- -- -- -- (9,769,255) -- --
Foreign currency translation....... -- -- -- -- -- (27,098) --
---------- -------- ----------- ----------- ------------ -------- ---------
BALANCE AT DECEMBER 31, 1995....... 10,303,556 10,304 (3,515,563) 59,955,392 (43,076,663) (34,619) (301,575)

<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY (CAPITAL
DEFICIENCY)
---------------
<S> <C>
BALANCE AT DECEMBER 31, 1994....... (21,965,467)
Issuance of common stock upon
exercise of stock options........ 29,770
Nonmonetary employee compensation
related to stock options......... 46,875
Dividend-in-kind ($0.10 per Series
A preferred share)............... (564,022)
Dividend-in-kind ($0.13 per Series
B preferred share)............... (268,629)
Issuance of warrant on
bridge financings................ 1,581,250
Conversion of notes payable to
common stock..................... 330,000
Conversion of preferred stock to
common stock in the Merger....... 17,555,978
Company common stock deemed issued
in the Merger.................... 8,907,082
Redemption of Merger
dissenting shares................ (527,220)
Merger expenses.................... (1,135,099)
Cancellation of treasury stock in
the Merger....................... --
Accrued interest on notes
receivable from stockholders..... (19,062)
Issuance of common stock in
secondary offering............... 21,850,516
Purchase of treasury stock......... (2,988,343)
Net loss........................... (9,769,255)
Foreign currency translation....... (27,098)
------------
BALANCE AT DECEMBER 31, 1995....... 13,037,276
</TABLE>

26
<PAGE> 27
SOURCE MEDIA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
(CONTINUED)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK CAPITAL IN FOREIGN RECEIVABLE
--------------------- TREASURY EXCESS OF ACCUMULATED CURRENCY FROM
SHARES AMOUNT STOCK PAR VALUE DEFICIT TRANSLATION STOCKHOLDERS
---------- -------- ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock upon
exercise of stock options........ 23,485 23 -- 141,777 -- -- --
Issuance of warrant with First
Tranche Note..................... -- -- -- 745,830 -- -- --
Repayment of notes receivable and
accrued interest from stockholder
through surrender of common
stock............................ -- -- (242,078) -- -- -- 242,078
Other.............................. -- -- -- (27,214) -- -- (50,694)
Net loss........................... -- -- -- -- (13,855,169) -- --
Foreign currency translation....... -- -- -- -- -- 38,356 --
---------- -------- ----------- ----------- ------------ -------- ---------
BALANCE AS OF DECEMBER 31, 1996.... 10,327,041 $ 10,327 $(3,757,641) $60,815,785 $(56,931,832) $ 3,737 $(110,191)
========== ======== =========== =========== ============ ======== =========
Issuance of common stock upon
exercise of stock options........ 219,275 219 (317,486) 1,352,194 -- -- --
Acquisition of remaining minority
interest in ICT.................. 1,389,723 1,390 -- 10,384,280 -- -- --
Issuance of warrants for services
provided......................... -- -- -- 279,571 -- -- --
Issuance of warrants with Aggregate
Tranche Notes.................... -- -- -- 2,823,091 -- -- --
Issuance of warrants associated
with Units....................... -- -- -- 5,529,000 -- -- --
Other.............................. 33,000 33 -- 299,030 -- -- 10,998
Net loss........................... -- -- -- -- (32,381,281) -- --
Preferred stock dividends.......... -- -- -- -- (416,129) -- --
Foreign currency translation....... -- -- -- -- -- (27,497) --
---------- -------- ----------- ----------- ------------ -------- ---------
BALANCE AS OF DECEMBER 31, 1997.... 11,969,039 $ 11,969 $(4,075,127) $81,482,951 $(89,729,242) $(23,760) $(99,193)
========== ======== =========== =========== ============ ======== =========

<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY (CAPITAL
DEFICIENCY)
---------------
<S> <C>
Issuance of common stock upon
exercise of stock options........ 141,800
Issuance of warrant with First
Tranche Note..................... 745,830
Repayment of notes receivable and
accrued interest from stockholder
through surrender of common
stock............................ --
Other.............................. (77,908)
Net loss........................... (13,855,169)
Foreign currency translation....... 38,356
------------
BALANCE AS OF DECEMBER 31, 1996.... $ 30,185
============
Issuance of common stock upon
exercise of stock options........ 1,034,927
Acquisition of remaining minority
interest in ICT.................. 10,385,670
Issuance of warrants for services
provided......................... 279,571
Issuance of warrants with Aggregate
Tranche Notes.................... 2,823,091
Issuance of warrants associated
with Units....................... 5,529,000
Other.............................. 310,061
Net loss........................... (32,381,281)
Preferred stock dividends.......... (416,129)
Foreign currency translation....... (27,497)
------------
BALANCE AS OF DECEMBER 31, 1997.... $(12,432,402)
============
</TABLE>

See accompanying notes.

27
<PAGE> 28
SOURCE MEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31,
1995 1996 1997
------------- ------------- -------------

OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss ($ 9,769,255) ($ 13,855,169) ($32,381,282)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 801,339 906,982 2,313,692
Amortization of intangible assets 1,031,337 1,031,337 4,987,099
Write-off of analog set-top boxes -- -- 1,999,339
Non-cash interest expense -- 589,990 2,969,179
Provision for losses on accounts receivable 108,123 82,269 194,731
Minority interest in net earnings (losses) (252,689) 46,475 (8,970)
Charges related to financing incentives 1,581,250 -- --
Extinguishment of debt -- -- 3,455,551
Warrants issued for services provided -- -- 279,571
Issuance of common stock in litigation settlement -- -- 299,063
Other, net (28,903) (59,453) 269,352
Changes in operating assets and liabilities:
Trade accounts receivable (198,983) 37,892 (2,034,894)
Prepaid expenses and other current assets (193,754) (274,967) 324,196
Deferred expenses 159,168 159,574 (260,868)
Trade accounts payable (263,017) (379,054) 736,942
Accrued interest -- -- 1,893,604
Accrued payroll 69,651 162,192 (270,864)
Other accrued liabilities 502,025 (339,781) (126,118)
Other accrued liabilities to related parties (204,880) -- --
Unearned income (648,722) (748,713) 47,920
------------- ------------- -------------
Net cash used in operating activities (7,307,310) (12,640,426) (15,312,757)

INVESTING ACTIVITIES
Capital expenditures (257,888) (2,678,970) (2,674,729)
Acquisition of equipment and contract rights -- (1,200,000) (1,350,000)
Purchase of short-term investments -- -- (15,615,419)
Interactive Channel Technologies acquisition costs -- (645,984) --
Acquisition of Brite -- -- (35,550,000)
Acquisition of VNN -- -- (9,000,000)
Capitalized acquisition costs -- -- -262,352
Restricted investments -- (611,182) (22,189,313)
Other -- (47,998) --
------------- ------------- -------------
Net cash used in investing activities (257,888) (5,184,134) (86,641,813)

FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt 3,050,000 4,606,163 94,548,351
Net proceeds from issuance of Second Tranche Notes -- -- 13,922,625
Payments on debt (4,050,000) -- (21,986,792)
Net proceeds from issuance of preferred stock and warrants -- -- 18,809,670
Proceeds from issuance of common stock upon exercise
of stock options 29,770 141,800 1,034,927
Payments on capital lease obligations (176,503) (110,825) (89,315)
Proceeds from issuance of common stock in secondary
offering, net of fees and expenses 21,850,516 -- --
Purchase of treasury stock (2,988,343) -- --
Cash acquired in the Merger 8,891,389 -- --
Payment of fees and expenses associated with the Merger (1,135,099) -- --
Redemption of Merger dissenter shares (527,220) -- --
Other -- (27,214) (129,401)
------------- ------------- -------------
Net cash provided by financing activities 24,944,510 4,609,924 106,110,065

Effect of exchange rate changes on cash and cash equivalents (27,099) 38,356 (27,497)
------------- ------------- -------------

Net increase (decrease) in cash and cash equivalents 17,352,213 (13,176,280) 4,127,998
Cash and cash equivalents at beginning of period 127,010 17,479,223 4,302,943
------------- ------------- -------------

Cash and cash equivalents at end of period $ 17,479,223 $ 4,302,943 $ 8,430,941
============= ============= =============

Supplemental disclosures of cash flow information

Cash paid during the period for:
Interest on long-term debt, notes payable and capital leases $ 354,333 $ 24,047 $ 285,671
============= ============= =============
</TABLE>

See accompanying notes.

28
<PAGE> 29
SOURCE MEDIA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1997

1.COMPANY HISTORY AND DESCRIPTION

Source Media, Inc. (Source or the Company), through its wholly-owned
subsidiaries SMI Holdings, Inc. (Holdings), IT Network, Inc. (IT Network), and
Interactive Channel, Inc. (Interactive Channel) provides on-demand information,
services and programming through the telephone and cable television, delivered
over the Company's proprietary digital operating systems to mass market
consumers. IT Network provides of on-demand information through
advertiser-sponsored telephone voice information services advertised in Yellow
Pages and newspapers. Interactive Channel provides on-demand information and
services and can provide Internet access to the cable television industry over
existing cable infrastructure and telephone lines.

Holdings (formerly known as IT Network) was incorporated on July 19, 1988, as
a Colorado corporation and subsequently, on July 23, 1991, reincorporated in
Texas. On June 23, 1995, Holdings merged (the Merger ) into a wholly-owned
subsidiary of HB Communications Acquisition Corp. (HBAC). Pursuant to the
Merger agreement, Holdings' outstanding common stock and preferred stock were
converted into an aggregate 6,696,992 shares of the Company's common stock. In
connection with the Merger, HBAC changed its name to Source Media, Inc. Because
the Merger resulted in Holdings' stockholders having a majority ownership in
Source, the Merger was accounted for as an issuance of Holdings' shares in
exchange for the net assets of Source. In connection with the Merger, Source
paid $527,000 to redeem 50,500 HBAC common shares held by dissenting
stockholders and repaid $4,100,000 of Holdings' debt and related accrued
interest. For accounting and financial reporting purposes, the Company has
reflected in its consolidated financial statements the assets, liabilities, and
equity of Holdings at their historical book values. Accordingly, the results of
operations and financial position of the Company, for periods and dates prior
to the Merger, are the historical results of operations and financial position
of Holdings for such period and dates.

2. SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the Company;
its wholly-owned subsidiaries Holdings, IT Network, Interactive Channel; and
Holdings' wholly-owned Canadian subsidiaries, Interactive Channel Technologies
Inc. (ICT), and 997758 Ontario Inc. (997758). All material intercompany
amounts and transactions have been eliminated. Certain amounts from prior
years have been reclassified to conform with the current year presentation.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.

Minority Interests

Minority interests represent the minority stockholders' proportionate shares
of the equity of 997758 and ICT. At December 31, 1996 and 1997, the Company
owned 100% of the voting Class X shares of 997758, while an individual owned
100% of the Class Y nonvoting shares of 997758, as more fully discussed in Note
8 - Stock Options, Warrants and Employee Stock Purchase Plan. At December 31,
1996, the Company owned approximately 51% of ICT's capital stock, representing
approximately 74% voting control. In January 1997, the Company completed an
arrangement whereby it acquired the remaining shares of ICT, as more fully
discussed in Note 5 - Acquisitions.

Cash and Cash Equivalents

29
<PAGE> 30
The Company classifies all highly liquid investments with original maturities
of three months or less to be cash equivalents. These investments are recorded
at cost, which approximates market.

Monetary Revenue Recognition

IT Network earns monetary revenues through advertising sponsorships and
services provided to certain Regional Bell Operating Companies or their
affiliates or other Yellow Pages publishers (collectively, Directory
Publishers). Monetary revenues relating to Yellow Pages products are recognized
on a straight-line basis over the term of the respective contracts, beginning
at the time of the annual distribution of the applicable local Yellow Pages
directory, or at the applicable contract start date, if later, and continuing
to the end of the term of the respective contracts, which is typically from 3
to 12 months. Monetary revenues relating to non-Yellow Pages products are
recognized as the services are performed.

The Company has entered into agreements with certain Directory Publishers
whereby the Company has agreed to share certain revenues and the Directory
Publisher has agreed to bear certain costs. Under the terms of certain of these
agreements, the Company's sales force sells certain advertising sponsorships
for the Company's interactive telephone programming. In these cases, the
Company recognizes the amount due under the contract, pursuant to sponsorships
sold by the Company's sales personnel, as revenue on a straight-line basis and
recognizes the Directory Publishers' share of the revenue as cost of sales on a
straight-line basis. As the Company typically bills the sponsorship fees before
the end of the contracts, unearned income represents cumulative amounts billed
under monetary contracts in excess of cumulative revenues earned under the same
contracts. Deferred expense represents cumulative fees paid to the Directory
Publishers, under revenue and cost-sharing agreements, in excess of cumulative
expenses recognized under the same contracts. In other agreements, the
Directory Publisher's sales force sells such sponsorships. In these cases, the
Company recognizes as revenues only its share of the contract amount as these
services are provided.

To date, the majority of revenues generated by Interactive Channel have been
associated with trials related to Interactive Channel technology.

Nonmonetary Revenue Recognition

In each of its markets, IT Network has entered into nonmonetary barter
agreements with local television and radio stations. These media sponsors
provide IT Network with advertising time on their stations and update local
news, weather and sports programming in exchange for promotional messages and
print advertisements in the Company's printed Network Guide. Revenues and cost
of sales associated with these nonmonetary barter transactions are included in
the Company's consolidated statements of operations at the estimated fair value
of the on-air advertisements and information content provided to the Company by
media sponsors.

Nonmonetary revenues and cost of sales are recognized on a straight-line
basis over the terms of the respective contracts. The Company was obligated to
provide future services and was entitled to receive future advertising and
information content of $3,507,507 and $2,037,651 at December 31, 1996 and 1997,
respectively.

Property and Equipment

Property and equipment are recorded at cost. Depreciation and amortization,
including the amortization of assets recorded under capital lease obligations
(which is included in depreciation expense), are computed by the straight-line
method over the estimated useful lives of the assets. Computer equipment is
depreciated over a three-year period. Production and other equipment are
depreciated over a five-year period. Furniture and fixtures are depreciated
over a seven-year period.

The Company continually evaluates the propriety of the carrying value of
property and equipment to determine whether current events and circumstances
warrant adjustment to the carrying value of the assets. As a result of this
periodic evaluation and in light of the Company's decision to discontinue its
analog set-top box strategy in favor of a digital set-top box strategy, the
Company recorded a write-down of the remaining net book value of its analog
set-top boxes in the amount of $2.0 million, of which approximately $1.7
million was charged to monetary cost of sales and approximately $327,000 was
charged to selling, general and administrative expenses in 1997.

Intangible Assets

30
<PAGE> 31
Intangible assets are amortized using the straight line method over the
following estimated useful lives: patents - five years; contract rights - three
to seven years; and goodwill - five years.

The carrying value of intangible assets is reviewed for impairment whenever
events or changes in circumstances indicate that there may be impairment. If
the review indicates that any of the intangibles will not be recoverable, as
determined by an analysis of undiscounted cash flows, the intangible asset
will be reduced to its estimated recoverable value.

Advertising Costs

The Company expenses the costs of advertising as incurred. Advertising
expenses were $1,315,286 and $354,357 for the years ended December 31, 1996 and
1997, respectively. Advertising expenses were not material for the year ended
December 31, 1995.

Translation of Foreign Currencies

The financial positions and results of operations of ICT and 997758 are
measured using local currency as the functional currency. Assets and
liabilities of these subsidiaries are translated at the exchange rate in effect
at each year-end. Statement of operations accounts are translated at the
average rate of exchange prevailing during the year. Translation adjustments
arising from the use of differing exchange rates from period to period are
included in the foreign currency translation account in stockholders' equity
(capital deficiency).

Computation of Net Loss Per Common Share

The computation of net loss per common share in each period is based on the
net loss attributable to common stockholders and the weighted average number of
common shares outstanding for each period, after the retroactive adjustment to
reflect shares issued to the former Holdings common stockholders as part of the
Merger and shares issued to the minority interest shareholders of ICT. Stock
options and warrants are not included in the net loss per common share
calculation for each period because they are anti-dilutive. The common stock
held by HBAC stockholders and the common stock issued upon the conversion of
the preferred stock of Holdings are included in the computation from the date
of the Merger. In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" (SFAS No. 128), which the Company adopted in the fourth quarter of 1997.
SFAS No. 128 simplifies the previous standards for computing earnings per share
and requires the disclosure of basic and diluted earnings per share. For all
periods presented, the amounts presented in accordance with SFAS No. 128 do not
differ from amounts previously disclosed due to the anti-dilutive nature of the
stock options and warrants.

Stock Options

The Company accounts for employee and director stock option grants in
accordance with Accounting Principles Board Opinion No. 25, "Accounting For
Stock Issued to Employees" (APB 25) and related Interpretations. Under APB 25,
no compensation expense is recognized for stock option grants to employees and
directors if the exercise price of the Company's stock option grants is at or
above the fair market value of the underlying stock on the date of grant as
more fully described in Note 8 - Stock Options, Warrants, Employee Stock
Purchase Plan and Retirement Plan.

3. COMMITMENTS AND CONTINGENCIES

On December 15, 1993, Marvin Lerch, the former Chief Executive Officer and a
former shareholder of ICT and certain of his relatives, who are also former ICT
shareholders, commenced a legal proceeding in Ontario, Canada in the Ontario
Court (General Division) against the Company and certain executive officers of
the Company and a former director of ICT on the grounds that the defendants took
actions intended to depress the value of ICT to allow the Company to acquire
shares of ICT at a favorable price. The plaintiffs seek, among other things,
orders that certain actions by ICT's board were invalid; a declaration that
ICT's board was incapable of managing its affairs due to conflicts of interest;
an injunction against the Company from voting its ICT shares for three years,
purchase by the defendants of the plaintiffs' ICT shares for Cdn$20 per share
or exchange of the plaintiffs' ICT shares for common shares of the Company of
equal value; and damages in the amount of Cdn$8 million to compensate the
plaintiffs for the reduced value of their ICT shares and damages in the amount
of Cdn$6 million to compensate Mr. Lerch for the loss of certain ICT stock
options. ICT disputes all of the claims, and no trial date has as yet been set.
On January 16, 1997, the plaintiffs amended their statement of claim to assert
a claim for punitive damages in the amounts of Cdn$1 million against the
Company and an aggregate of

31
<PAGE> 32
Cdn$2 million against certain officers of the Company. The statement of claim
was also amended on August 12, 1997 to add ICT as a defendant. Although the
ultimate outcome of this action cannot be determined at this time, management
believes the claims are without merit. In addition, management believes the
ultimate outcome of these actions will not have a material impact on the
consolidated financial condition or results of operations of the Company.

The Company is party to ordinary routine litigation and other claims
incidental to its business, none of which is expected to have a material
adverse effect on the Company's results of operations or financial position.
The costs of defending litigation and other claims are expensed as incurred.

4. SHORT-TERM AND RESTRICTED INVESTMENTS

The Company holds certain short-term investments, which consist of securities
that management has the ability and intent to hold to maturity. These
investments, which mature in 1998, are carried at amortized cost and are
summarized as follows at December 31, 1997:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized
---------------- ----------------
(In thousands) Amortized Cost Gains Losses Fair Value
-------------- -------------- ----- ------ ----------
<S> <C> <C> <C> <C>
U.S. Government agencies $5,450 -- $(2) $5,448
Corporate obligations 10,165 -- (1) 10,164
------- -- ---- -------
Short-term investments $15,615 -- $(3) $15,612
======= == ==== =======
</TABLE>

Fair values were determined based upon quoted market values as of December
31, 1997.

In connection with the October 1997 offering of Senior Secured Notes, as more
fully described in Note 6 - Long Term Debt, the Company placed approximately
$22.6 million of the net proceeds from the offering, representing funds
sufficient, together with interest thereon, to pay the first four interest
payments on the Senior Secured Notes, into an Interest Escrow Account (the
Escrow Account) for the benefit of the holders of the Senior Secured Notes. As
of December 31, 1997, the Escrow Account, including accrued interest, totaled
$22.8 million. Until disbursed in accordance with the Escrow and Disbursement
Agreement relating to the Escrow Account, the Escrow Account is designed to
secure a portion of the Company's obligations under the Senior Secured Notes.
Funds will be disbursed from the Escrow Account only to pay interest on the
Notes and, upon certain repurchases or redemptions of the Senior Secured Notes,
to pay principal of and premium, if any, thereon. Management has the intent and
ability to hold the securities in the Escrow Account to maturity. These
investments are carried at amortized cost and are summarized as follows on
December 31, 1997:

<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized
---------------- ----------------
(In thousands) Amortized Cost Gains Losses Fair Value
-------------- -------------- ----- ------ ----------
<S> <C> <C> <C> <C>
U.S. Government agencies $11,246 $76 -- $11,322
Corporate obligations 11,554 72 -- 11,626
------- ---- -- -------
Restricted investments $22,800 $148 -- $22,948
======= ==== == =======
</TABLE>

Of the amount shown above, $11.7 million will mature in 1998 and $11.1
million will mature in 1999.

5. ACQUISITIONS

In October 1996, the Company acquired certain voice information assets from
The Reuben H. Donnelly Corporation (Donnelly) for an aggregate purchase price
of $750,000. In connection therewith, the Company executed a services agreement
with a three year minimum term under which Donnelly is obligated to pay the
Company a minimum of $3.2 million over the term of the agreement and the
Company is assuming Donnelly's operating responsibilities for its voice
information services business. The Donnelly asset acquisition has been
accounted for as the purchase of equipment and contract rights and the purchase
price was allocated to the assets based on the estimated fair values at the
date of acquisition.

In December 1996, the Company acquired certain voice information servicing
assets from GTE Directories Corporation (GTE) for an aggregate purchase price
of $1,800,000. In connection therewith, the Company executed both sales agency
and services agreements with a three year minimum term under which the parties
have agreed to share revenues and the Company is assuming GTE's operating
responsibilities for its voice information services business. Of the shared
revenues which the Company expects to

32
<PAGE> 33

generate pursuant to the sales agency agreement, the Company has guaranteed GTE
a minimum of approximately $3.7 million over the term of the agreement. If the
Company pays the minimum required amount to GTE in each of the years under the
sales agency agreement, then pursuant to the services agreement, GTE has agreed
to pay the Company a minimum of approximately $1.5 million for services
rendered over the remaining term of the agreement. In 1997, the Company
recognized monetary revenues related to this agreement in the amount of
approximately $2.1 million. The GTE asset acquisition has also been accounted
for as the purchase of equipment and contract rights and the purchase price was
allocated to the assets based on the estimated fair values at the date of
acquisition.

In January 1997, the Company acquired all of the outstanding shares of ICT
held by minority interest shareholders in exchange for 1,390,000 shares of the
Company's common stock, making ICT a wholly-owned subsidiary of the Company.
The Company also issued options to purchase 177,000 shares of the Company's
common stock at exercise prices ranging from $1.43 to $4.96 per share to
certain employees and directors of ICT in exchange for their outstanding
options to purchase ICT common shares, and incurred cash expenses related to
the acquisition of approximately $800,000. The aggregate purchase price for the
acquisition of the ICT minority interest was approximately $11.3 million, and
the acquisition was accounted for by the purchase method of accounting. The
purchase price was allocated to patents, which are being amortized over a five
year period.

On October 30, 1997, the Company acquired certain of the electronic
publishing assets of Brite Voice Systems, Inc. (Brite) for a purchase price
of approximately $35.6 million. The Brite acquisition has been accounted for by
the purchase method of accounting and the purchase price was allocated to
equipment, contract rights and goodwill based on the estimated fair values of
the assets at the date of acquisition.

Also on October 30, 1997, the Company acquired certain of the assets of Voice
News Network, Inc. (VNN), a subsidiary of Tribune Media Services, Inc., a unit
of Tribune Company, for a purchase price of $9.0 million. The VNN acquisition
has been accounted for by the purchase method of accounting and the purchase
price was allocated to equipment, contract rights and goodwill based on the
estimated fair values of the assets at the date of acquisition.

The operating results of Brite and VNN are included in the Company's results
from the date of acquisition. The following represents the unaudited pro forma
results of operations as if the acquisitions of ICT, Brite and VNN had occurred
on January 1, 1996, after giving effect to certain adjustments, including
minority interest in earnings (losses) of consolidated subsidiaries, interest
expense, preferred stock dividends and amortization of intangibles resulting
from the allocation of the purchase price.

<TABLE>
<CAPTION>
Year Ended December 31,
(In thousands, except per share amount) 1996 1997
---- ----
<S> <C> <C>
Total revenues $30,356 $31,637
Operating loss (20,574) (28,789)
Net loss (32,552) (40,778)
Net loss attributable to common stockholders $(35,187) $(43,904)
Net loss per common share $(3.11) $(3.87)
</TABLE>

Pro forma results presented above are not necessarily indicative of what
actually would have occurred if the acquisitions had been consummated as of
January 1, 1996, and are not intended to be a projection of future results or
trends.

6. LONG-TERM DEBT

On April 3, 1996, the Company issued a senior note (the First Tranche Note)
in the principal amount of $5.0 million and a warrant (the First Tranche
Warrant) which entitled the holder thereof to purchase 500,000 shares of the
Company's common stock at a purchase price of $10.21 per share. On September
30, 1996 and March 31, 1997, the Company issued additional senior notes in the
amounts of $326,806 and $350,090, respectively, for the payment of interest on
the First Tranche Note. The First Tranche Note and the additional senior notes
(collectively, the "Aggregate First Tranche Notes") were due on March 31, 2001
and bore interest at the rate of 13% per annum through March 31, 1998 and 12%
thereafter. The estimated fair market value at the date of issuance of the
First Tranche Warrant of $745,830 was credited to capital in excess of par
value and the First Tranche Note was recorded at a corresponding discount. The
discount on the First Tranche Note was being amortized to interest expense
using the effective interest rate method over the stated term of the First
Tranche Note, resulting in an effective interest rate of 16.2%. As of December
31, 1996, the carrying value of the Aggregate First Tranche Notes, which had no
public market, approximated their fair market value, which

33
<PAGE> 34
was estimated using a discounted cash flow analysis.

On April 9, 1997, the Company received cash proceeds of $15.0 million upon
the issuance of additional senior notes (the Second Tranche Notes) in the
principal amount of $15.0 million and warrants (the Second Tranche Warrants)
which entitled the holders thereof to purchase in the aggregate 2,000,000
shares of the Company's common stock at a purchase price of $6.00 per share at
any time until their expiration on March 31, 2004. The estimated fair market
value of the Second Tranche Warrants of $1.7 million at the date of issuance
was credited to capital in excess of par value and the Second Tranche Notes
were recorded at a corresponding discount. The discount on the Second Tranche
Notes was being amortized to interest expense using the effective interest rate
method over the stated terms of the Second Tranche Notes resulting in an
effective interest rate of 15.4%. Additionally, in connection with the issuance
of the Second Tranche Notes and the Second Tranche Warrants, the Aggregate
First Tranche Notes and the First Tranche Warrant were amended and restated to
terms identical to those of the Second Tranche Notes and the Second Tranche
Warrants, respectively. The amended Aggregate First Tranche Notes and the
Second Tranche Notes were due on March 31, 2002 and bore interest at the rate
of either: (i) 12% per annum through March 31, 1999 if paid in cash, or (ii)
13% per annum through March 31, 1999 if paid through the issuance of additional
notes, and 12% thereafter. On September 30, 1997 the interest due was paid
through the issuance of additional notes, with terms identical to those of the
Second Tranche Notes, in the amount of approximately $1.3 million and warrants
to purchase approximately 165,000 shares of common stock in payment of the
interest accrued on the Aggregate First Tranche Notes and the Second Tranche
Notes. The estimated fair market values of the notes and warrants issued in
lieu of a cash interest payment on September 30, 1997 were approximately $1.1
million and $1.1 million, respectively, which were recorded as interest expense
during 1997.

The amendment of the Aggregate First Tranche Notes and First Tranche Warrant
was accounted for as the extinguishment and replacement of the existing senior
notes and the cancellation of the existing warrants and issuance of new
warrants due to the significance of the modification to the terms of the senior
notes and warrants. The extinguishment resulted in a loss of approximately
$315,000, which was included in other (income) expense during the second
quarter of 1997.

In connection with the issuance of the Senior Secured Notes (the Senior
Secured Notes, or the Notes), the Company used $22.2 million of the proceeds
received to pay off the amended Aggregate First Tranche Notes and the Second
Tranche Notes, including accrued interest thereon, and the notes issued on
September 30, 1997 in lieu of a cash interest payment. The early extinguishment
of these notes resulted in a charge to earnings of approximately $3.5 million
related to unamortized discount on the Second Tranche Notes and unamortized
issuance costs which were recorded as an extraordinary item in 1997. The
proceeds were also used in part to complete the Company's acquisitions of
certain assets more fully described in Note 5 - Acquisitions.

On October 30, 1997, the Company issued Senior Secured Notes in the
principal amount of $100 million, which bear interest at the rate of 12% per
annum through November 1, 2004. Interest on the Notes is payable semi-annually
on May 1 and November 1 of each year commencing on May 1, 1998, to holders of
record at the close of business on April 15th or October 15th immediately
preceding the interest payment date. The Company placed approximately $22.6
million of the net proceeds from the offering, representing funds sufficient,
together with interest thereon, to pay the first four interest payments on the
Notes, into the Escrow Account.

The Notes are fully and unconditionally guaranteed, jointly and severally, by
each of the Company's subsidiaries (the Subsidiary Guarantors). The guarantees
are senior obligations of the Subsidiary Guarantors and are secured by
substantially all of the assets of the Subsidiary Guarantors. The guarantees
rank pari passu in right of payment with all existing and future senior
indebtedness of the Subsidiary Guarantors and rank senior in right of payment
to all existing and future subordinated obligations of the Subsidiary
Guarantors. The guarantees may be released upon the occurrence of certain
events. The guarantee executed by IT Network contains a covenant that restricts
payments of dividends on its capital stock to an amount sufficient to cover debt
service on the Notes, redemptions or repurchases of the Notes or the Preferred
Stock, dividends on the Preferred Stock and corporate overhead. The assets of
the parent, Source Media, Inc. consist solely of investments in its subsidiaries
and invested proceeds from the Notes and the Senior PIK Preferred Stock and
related warrants. Financial statements for the Subsidiary Guarantors and Source
are not presented because management has determined that they would not be
material to investors.

Except as described below, the Company may not redeem the Notes prior to
November 1, 2001. On or after such date, the Company may redeem the Notes, in
whole or in part, at any time, at various redemption prices set forth in the
indenture governing the sale of the Notes, together with accrued and unpaid
interest, if any, to the date of redemption. In addition, at any time and from
time to time on or prior to November 1, 2000, the Company may, subject to
certain requirements, redeem up to 35% of the aggregate

The assets of the Subsidiary Guarantors are not restricted as to the
redemption of the Notes or Preferred Stock or payment of the interest or
dividends thereon. Separate financial statements for the parent, Source Media,
Inc., and the Subsidiary Guarantors are not presented as management has
determined that such financial information is not material to investors.

34
<PAGE> 35
principal amount of the Notes with the cash proceeds of one or more equity
offerings at a redemption price equal to 112% of the principal amount to be
redeemed, together with accrued and unpaid interest, if any, to the date of
redemption, provided, that, at least $65 million of the aggregate principal
amount of the Notes remain outstanding immediately after each such redemption.
The Notes are not subject to any sinking fund requirement. Upon the occurrence
of a change in control, the Company will be required to make an offer to
repurchase the Notes at a price equal to 101% of the principal amount thereof,
together with accrued and unpaid interest, if any, to the date of the
repurchase. The indenture contains certain covenants including, but not limited
to, limitations on indebtedness, restricted payments, liens, restrictions on
distributions from restricted subsidiaries, sales of assets and subsidiary
stock, affiliate transactions, issuances of capital stock of restricted
subsidiaries and sale/leaseback transactions. As of December 31, 1997, the
carrying value of the Notes, which had no public market, approximated their
fair market value, which was estimated using a discounted cash flow analysis.

7. SENIOR PIK PREFERRED STOCK

On October 30, 1997, the Company issued 800 units (the Units) for an
aggregate purchase price of $20 million, each Unit consisting of 1,000 shares
of non-voting Senior Preferred Stock (the Preferred Stock) with a liquidation
preference of $25.00 per share and 558.75 warrants (the October 1997 Warrants)
to purchase one share of the Company's common stock at a purchase price of
$0.01 per share. In the aggregate, the October 1997 Warrants represent the
right to purchase 447,000 shares of common stock. In part, the Units were sold
in connection with the Company's acquisitions of certain of the assets more
fully described in Note 5 - Acquisitions.

Dividends on the Preferred Stock are payable quarterly on each February 1,
May 1, August 1 and November 1, commencing February 1, 1998, at a rate of 13
1/2% of the liquidation preference per share. Dividends may be paid, at the
Company's option, on any dividend payment date occurring on or prior to
November 1, 2002 either in cash or by the issuance of additional shares of
Preferred Stock with a liquidation preference equal to the amount of such
dividends; thereafter, dividends will be paid in cash. The certificate of
designations governing the sale of the Units limits the amount of cash
dividends that may be paid on the Preferred Stock. At any time and from time
to time on or prior to November 1, 2000, the Company may, subject to certain
requirements, redeem up to 35% of the aggregate liquidation value of the
Preferred Stock with the cash proceeds of one or more equity offerings at a
redemption price equal to 113.5% of the liquidation preference thereof, plus
accumulated dividends, on the date of redemption. After November 1, 2000 and
prior to November 1, 2002, the Preferred Stock is not redeemable. On or after
November 1, 2002, the Company may redeem the Preferred Stock, in whole or in
part, at any time, at various redemption prices, plus accumulated and unpaid
dividends, to the date of redemption. Upon the occurrence of a change in
control, the Company will be required to make an offer to purchase the
outstanding shares of the Preferred Stock at a price equal to 101% of the
liquidation preference thereof, plus accumulated and unpaid dividends, to the
date of purchase. The Preferred Stock will be subject to mandatory redemption
in whole on November 1, 2007, at a price equal to 100% of the then effective
liquidation preference thereof, plus, without duplication, all accrued and
unpaid dividends to the date of redemption. The certificate of designations
contains certain covenants including, but not limited to, limitations on
indebtedness, restricted payments, affiliate transactions, issuances of capital
stock of restricted subsidiaries and sale/leaseback transactions.

The Preferred Stock ranks senior to all classes of common stock and to each
other class of capital stock or series of preferred stock with respect to
dividend rights and rights on liquidation, winding-up and dissolution of the
Company. The Preferred Stock is non-voting except in certain circumstances.
The Company may not authorize any new class of preferred stock that ranks
senior or pari passu to the Preferred Stock without the approval of the holders
of at least a majority of the shares of Preferred Stock then outstanding,
voting or consenting, as the case may be, as one class, provided, however, that
the Company can issue additional shares of Preferred Stock to satisfy dividend
payments on outstanding shares of Preferred Stock; and provided further,
however, that the Company can issue shares of preferred stock ranking pari
passu with the Preferred Stock if after giving effect thereto, the Consolidated
Coverage Ratio, as defined in the certificate of designations, is greater than
1.7 to 1.0

The estimated fair market value of the October 1997 Warrants, which was
estimated to be approximately $5.5 million, was credited to capital in excess
of par value and the Preferred Stock was recorded at a corresponding discount.
The Preferred Stock was recorded net of $1.2 million of issuance costs and the
discount on the Preferred Stock and are being accreted as additional preferred
stock dividends using the effective dividend rate method over a ten year
period, resulting in an effective dividend rate of 19.7%. As of December 31,
1997, the carrying value of the Units, which had no public market, approximated
their fair value, which was estimated using a discounted cash flow analysis.

35
<PAGE> 36
8. STOCK OPTIONS, WARRANTS, EMPLOYEE STOCK PURCHASE PLAN AND RETIREMENT
PLAN

Stock Options

During 1995, the Company adopted the 1995 Performance Equity Plan (the Equity
Plan). The Equity Plan provides for the grant of options to purchase shares of
the Company's common stock to employees, officers, directors, and consultants
of the Company and its subsidiaries, including Holdings, IT Network and
Interactive Channel. Options granted pursuant to the Equity Plan have a term of
ten years from the date of grant and vest over a five year period. The Equity
Plan, as amended, authorizes the granting of awards (stock options, stock
appreciation rights, restricted stock, deferred stock, stock reload options,
and/or other stock-based awards, as defined), the exercise of which would allow
up to an aggregate of 1,400,000 shares of the Company's common stock to be
acquired.

During 1989, the Company established a qualified incentive employee stock
option plan. Options granted in 1989 and 1990 have a term of ten years from the
date of grant and vested over a three year period. During 1991 and 1993, the
Company established additional qualified incentive employee stock option plans
whereby granted options have a term of ten years from the date of grant and
vest over a five year period. The Company does not intend to grant any
additional options under these plans and, accordingly, all remaining options
available for grant under such plans are assumed to be canceled.

Stock option activity under the employee stock option plans during the years
ended December 31, 1995, 1996, and 1997 was as follows:

<TABLE>
<CAPTION>
OPTION OR WEIGHTED AVERAGE
OPTIONS AVAILABLE SHARES UNDER AGGREGATE EXERCISE PRICE EXERCISE PRICE PER
EMPLOYEE STOCK OPTION ACTIVITY FOR GRANT OPTION PRICE PER SHARE SHARE
- ------------------------------ ----------------- ------------ --------- -------------- ------------------
<S> <C> <C> <C> <C> <C>

Balance at December 31, 1994 201,642 268,746 $4,419,207 $ 0.74-26.79 $16.44
Options authorized 500,000 -- --
Options repriced -- -- (2,449,709)
Options granted (220,586) 220,586 2,247,607 9.77-11.50 10.19
Options exercised -- (84,688) (261,353) 0.74-3.72 3.09
Options canceled 56,035 (56,035) (684,034) 9.77-26.79 12.21
Options assumed canceled (178,092) -- --
--------- -- --
Balance at December 31,1995 358,999 348,609 3,271,718 0.74-11.50 9.39
Options authorized 400,000 -- --
Options granted (775,224) 775,224 7,181,190 8.25-10.50 9.26
Options exercised -- (23,485) (141,796) 0.74-9.77 6.04
Options canceled - 1995 16,225 (16,225) (169,731) 8.25-11.12 10.46
Plan
Options canceled - Other -- (22,379) (217,980) 3.72-9.77 9.74
-- -------- -------- ----------- ----
plans
Balance at December 31,1996 0 1,061,744 9,923,401 0.74-11.50 9.35
Options authorized 500,000 -- --
Options granted (176,000) 176,000 1,280,700 6.41-13.31 7.28
Options exercised -- (90,803) (758,755) 0.74-10.40 8.36
Options canceled - 1995 149,324 (149,324) (1,376,794) 6.41-11.12 9.22
Plan
Options canceled - Other -- (21,910) (204,820) 3.72-9.77 9.35
-- -------- --------- ----------- ----
plans
Balance at December 31,1997 473,324 975,707 $8,863,732 $0.74-$13.31 $9.08
======= ======= ========== ============ =====
</TABLE>

In March 1995 the Board of Directors approved a reduction in the exercise
price of certain of the Company's outstanding employee stock options. In total,
145,783 options with exercise prices of $14.88 and $26.79 per share were
revised to an exercise price of $9.77 per share, which represented the market
price on the date of repricing.

During 1995, the Company adopted the 1995 Nonqualified Stock Option Plan for
Non-Employee Directors (the Directors' Plan). The Directors' Plan provides for
the automatic annual grant to each non-employee director of the Company an
option to purchase 3,000 shares of common stock. Options granted under the
Directors' Plan have an exercise price equal to the fair market value of the
common stock on the date of grant and are exercisable at any time from the date
of grant until the fifth anniversary thereof. The Directors' Plan, as amended
on May 21, 1997, provides for the grant of options to purchase up to 300,000
shares of common stock. Stock option activity under the Directors' Plan during
the years ended December 31, 1995, 1996, and 1997 was as follows:

36
<PAGE> 37
<TABLE>
<CAPTION>
OPTIONS SHARES OPTION OR WEIGHTED AVERAGE
DIRECTORS' PLAN STOCK OPTION AVAILABLE UNDER AGGREGATE EXERCISE EXERCISE PRICE PER
ACTIVITY FOR GRANT OPTION PRICE PRICE PER SHARE SHARE
---------------------------- --------- ------ --------- --------------- ------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 -- -- --
Options authorized 90,000
Options granted (12,000) 12,000 $130,650 $10.89 $10.89
-------- ------ -------- ------ ------
Balance at December 31, 1995 78,000 12,000 130,650 10.89 10.89
Options granted (18,000) 18,000 187,650 10.43 10.43
-------- ------ ------- ----- -----
Balance at December 31, 1996 60,000 30,000 318,300 10.43-10.89 10.61
Options authorized 50,000 -- --
Options granted (15,000) 15,000 88,650 5.91 5.91
-------- ------ ------ ---- ----
Balance at December 31, 1997 95,000 45,000 $406,950 $5.91-$10.89 $9.04
====== ====== ======== ============ =====
</TABLE>

Pursuant to an agreement, each of the 176,958 options for ICT common shares
outstanding at the effective time of the acquisition of the remaining minority
interest of ICT was exchanged for an option (a Replacement Option) to purchase
shares of common stock. During 1997, 104,682 Replacement Options were
exercised at a weighted average exercise price of $4.05. As of December 31,
1997, the Replacement Options represent the right to purchase 72,276 shares of
common stock at a weighted average exercise price of $4.10 per share.

Certain additional information for all outstanding options as of December 31,
1997, is being presented based on a range of exercise prices as follows:
<TABLE>
<CAPTION>
$0.74-$4.96 $6.41- $13.31
----------- -------------
<S> <C> <C>
Number of outstanding options 75,231 972,752
Weighted average exercise price of outstanding options $3.98 $9.11
Weighted average remaining exercise period 7.9 years 8.5 years
Number of options exercisable 75,231 247,221
Weighted average exercise price of options exercisable $3.98 $9.97

</TABLE>

As required by the Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (FAS 123), pro forma information
regarding net loss and loss per share has been determined as if the Company had
accounted for employee and director stock options granted subsequent to
December 31, 1994 under the fair value method provided for under FAS 123. The
fair value for the stock options granted to directors, officers and key
employees of the Company on or after January 1, 1995 was estimated at the date
of the grant using the Black-Scholes option pricing model with the following
weighted-average assumptions:

<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 6.55% 6.39% 6.21%
Expected dividend yield 0.00% 0.00% 0.00%
Expected volatility 30% 30% 30%
Expected lives 4.0 years 4.0 years 4.0 years
</TABLE>

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

The weighted-average fair value of stock options granted during the years
ended December 31, 1995, 1996 and 1997 was $2.85, $2.34 and $2.55,
respectively. For purposes of the pro forma disclosures, the estimated fair
value of stock options granted during 1996 and 1997 has been amortized to
expense over the vesting period. The Company's pro forma information for FAS
123 is as follows (in thousands, except for loss per common share information):

37
<PAGE> 38

<TABLE>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C> <C>
Net loss attributable to common stockholders As reported $10,602 $13,855 $32,797
Pro forma $10,912 $14,411 $33,471

Net loss per common share As reported $1.65 $1.39 $2.89
Pro forma $1.70 $1.45 $2.95

</TABLE>

Because FAS 123 is applicable only to options and stock-based awards granted
subsequent to December 31, 1994, its pro forma effect will not be fully
reflected until 1999.

Warrants

The Company has issued warrants for the purchase of shares of its common
stock from time to time in connection with various financing transactions and
for advisory and consulting services provided to the Company. The majority of
the warrants provide for registration rights. As of December 31, 1997, warrants
for the purchase of common stock of the Company were outstanding as follows:

<TABLE>
<CAPTION>
SHARES ISSUABLE EXERCISE PRICE
UPON EXERCISE PER SHARE EXPIRATION DATE
------------- --------- ---------------
<S> <C> <C>
10,079 $18.60 February 1998
1,034,687 6.00 May 2000
200,000 6.41 May 2000
2,326,500 11.00 June 2000 (1)
83,085 10.80 February 2001
252,676 10.50 December 2002
2,664,917 6.00 March 2004
25,000 11.00 June 2005
68,493 4.38 June 2007
447,000 0.01 November 2007
-------
7,112,437
=========
</TABLE>

(1) Warrants to purchase 451,500 shares will become redeemable by
the Company at a purchase price of $0.01 per warrant upon 20 days notice at
any time in the event the sales price of the Company's common stock is at
least $20.00 per share for 20 consecutive trading days.

During the year ended December 31, 1995, the Company incurred charges related
to financing incentives of $1,581,250 as a result of the issuance of certain of
the above warrants in connection with interim financings.

997758 Class Y Stock Exchange Rights

On September 24, 1992, the Company's subsidiary, 997758, entered into an
agreement with an individual to issue shares of 997758's nonvoting Class Y
shares in exchange for Class A Subordinate Voting Shares and Class B Multiple
Voting Shares of ICT owned by such individual. The individual has the right at
any time through February 14, 2000, to exchange any or all of the Class Y
shares of 997758 for up to an aggregate of 206,376 shares of the Company's
common stock. Each exercise of the exchange rights shall include at least Cdn
$150,000 in value of Class Y shares of 997758 being exchanged for the Company's
common stock.

38
<PAGE> 39
Shares Reserved for Future Issuance

As of December 31, 1997, common shares reserved for future issuance were as
follows:

<TABLE>
<CAPTION>
NUMBER OF
SECURITY RESERVED
-------- --------
SHARES
------
<S> <C>
Warrants . . . . . . . . . . . . 7,112,437
Stock options . . . . . . . . . 1,821,307
Employee stock purchase plan . . 76,207
997758 Class Y Stock exchange rights 206,376
-------
9,216,327
=========
</TABLE>

Employee Stock Purchase Plan and Retirement Plan

During July 1996, the Company's Board of Directors adopted the Employee Stock
Purchase Plan (the Plan), which was approved by the Company's stockholders at
the 1997 annual meeting. Under the Plan, eligible employees may purchase shares
of the Company's common stock at a discount through voluntary monthly payroll
deductions with a maximum contribution being 10% of an eligible employee's
salary, beginning in September 1996. Semi-annually, on June 30 and December 31,
participant account balances are used to purchase shares at the lesser of 85
percent of the fair market value of the common stock on either the first or
last day of the subscription period. In connection with the Plan, the Company
has set aside 100,000 shares of common stock held in treasury. On June 30, 1997
and December 31, 1997, 16,095 shares and 7,698 shares of common stock were
purchased by employees at prices of $7.01 per share and $7.44 per share,
respectively.

The Company sponsors a defined contribution plan covering substantially all
employees; the plan is qualified under Section 401(k) of the Internal Revenue
Code. Under the provisions of the plan, eligible participating employees may
elect to contribute up to the maximum amount of tax deferred contribution
allowed by the Internal Revenue Code.

Anti-Dilution Provisions

Certain of the warrants to purchase common stock contain anti-dilution
provisions whereby the exercise price and the number of shares exercisable
pursuant to the warrants may be adjusted from time to time upon the occurrence
of certain events. In connection with such provisions, warrants to purchase
1,034,687 shares of common stock at a purchase price of $7.44 per share were
adjusted to provide for the purchase of the same number of shares at a
purchase price of $6.00 per share, and warrants to purchase 28,302 shares of
common stock at a purchase price of $10.60 per share were adjusted to provide
for the purchase of 68,498 shares at a purchase price of $4.38 per share upon
the issuance of common stock in connection with the ICT acquisition discussed
in Note 5 - Acquisitions and the amendment to the First Tranche Warrant and
issuance of the Second Tranche Warrants discussed in Note 6 - Long-Term Debt,
respectively.

9.NOTES RECEIVABLE FROM STOCKHOLDERS

On May 20, 1993, the Company loaned $750,000 to the individual holding Class
Y shares of 997758, which note is secured by the individual's holdings in
997758 and bears interest at a rate per annum of 2%, payable quarterly. The
unpaid principal and interest become due on May 20, 2000. The Company recorded
a discount of $292,000 to reflect the difference between the actual interest
rate and a reasonable market rate (10%) and increased goodwill accordingly. The
note and accrued interest, net of the unamortized discount of $137,152 and
$95,437 as of December 31, 1996 and 1997, respectively, are reflected as a
reduction of minority interests in the accompanying consolidated balance sheet.

On June 30, 1993, the Company loaned $50,000 to an officer, director, and
stockholder. This loan bears interest at the rate of 10% per annum, with the
principal amount and accrued interest due and payable on May 31, 1999. Payment
of the note is secured by a pledge of 6,719 shares of common stock. Amounts
outstanding, including accrued interest, are included in stockholders' equity
(capital deficiency) in the accompanying consolidated balance sheets.

39
<PAGE> 40
10. LEASES

The Company leases office space and various office equipment under operating
leases. Rent expense was $508,349, $485,221, and $906,187 for the years ended
December 31, 1995, 1996, and 1997, respectively.

At December 31, 1997, aggregate amounts of future minimum payments under
lease commitments are as follows:

<TABLE>
<S> <C>
Operating Leases
----------------
1998................................................... $663,030
1999................................................... 565,858
2000................................................... 506,751
2001................................................... 208,230
2002................................................... --
Total future minimum lease payments.................... $1,943,869
==========

</TABLE>

11. INCOME TAXES

For the years ended December 31, 1995, 1996 and 1997, the Company had no
provision or benefit for income taxes because the deferred benefit from the
operating losses was offset by an increase in the valuation allowance of $3.2
million, $5.6 million and $4.1 million, respectively. Significant components of
the Company's deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation . . . . . . $(220,134) $(548,386)
Other . . . . . . . . . . . . . . . . . (204,589) (11,156)
-------- -------
Total deferred tax liabilities . . . . (424,723) (559,542)
Deferred tax assets:
Net operating loss carryforwards . . 18,191,157 24,136,650
Investment tax credits . . . . . . 3,304,758 801,712
Unearned income . . . . . . . . . . 1,471,210 1,491,716
Book over tax amortization of intangibles -- 414,831
Reserve for fixed asset impairment . -- 739,763
Accrued expenses . . . . . . . . . . 488,902 61,248
Other . . . . . . . . . . . . . . . 26,886 56,967
------ ------
Total deferred tax assets . . . . . . . 23,482,913 27,702,887
Valuation allowance for deferred tax assets (23,058,190) (27,143,345)
----------- -----------
Net of valuation allowance . . . . . . 424,723 559,542
------- -------
Net deferred tax asset . . . . . . . . $-- $--
=== ===
</TABLE>

At December 31, 1997, the Company had net operating loss carryforwards of
approximately $60.9 million for United States income tax purposes, that expire
in 2003 through 2012, which may be used to reduce future United States taxable
income. The Tax Reform Act of 1986 imposes limitations on the use of net
operating loss carryforwards if certain stock ownership changes occur. As a
result of the Merger, an ownership change occurred that will cause utilization
of the Company's pre-Merger net operating losses to be limited to approximately
$9.0 million in a given year.

At December 31, 1997, ICT had net operating loss carryforwards for Canadian
income tax purposes of approximately Cdn $4.3 million, expiring in 1998 through
2003, which may be used to reduce future Canadian taxable income of ICT. ICT
also has available at December 31, 1997 investment tax credits totaling Cdn
$1.1 million, expiring in 1999 through 2002. At December 31, 1997, ICT had net
operating loss carryforwards for Ontario Provincial income tax purposes of
approximately Cdn $1.1 million, expiring in 2002 through 2003, which may be
used to reduce future Ontario taxable income of ICT.

Certain transactions between ICT and its subsidiaries in March 1997 resulted
in taxable income of approximately $7.0 million in the United States and Canada
and the utilization of net operating losses in both countries in 1997.

40
<PAGE> 41
12. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

The Company performs ongoing credit evaluations of its customers and does not
require collateral. Overall, concentrations of credit risk with respect to
receivables, except for the customers discussed below, are limited because of
the large number of customers in the Company's customer base, the relatively
small dollar amount of individual customer balances and their dispersion across
many different industries and geographic areas. The Company maintains an
allowance for doubtful accounts, which was $62,504 and $153,964 as of December
31, 1996 and 1997, respectively, to reserve for potential credit losses, which
have historically been within management's expectations.

As of December 31, 1996, balances due from Ameritech represented 30% of the
Company's accounts receivable. Additionally, as of December 31, 1996, The
Reuben H. Donnelly Corporation accounted for 38% of accounts receivable
pursuant to its service agreement with the Company, effective in October 1996.
All such receivables have since been collected. As of December 31, 1997,
balances due from BellSouth Advertising & Publishing represented 22% of the
Company's accounts receivable. No other customer represented more than 10% of
the Company's accounts receivable as of December 31, 1996 or 1997.

For the year ended December 31, 1997, a major customer accounted for 11% of
monetary revenues, while another major customer accounted for 10% of monetary
revenues. For the year ended December 31, 1995, a major customer represented
12% of monetary revenues. No other customer accounted for greater than 10% of
monetary revenues for any of the three years ended December 31, 1997.

13. SEGMENT REPORTING

For financial reporting purposes, the Company operates in two business
segments:

IT Network - IT Network provides of on-demand information through
advertiser-sponsored voice information services advertised in over 100 million
Yellow Pages annually and over 24 million newspapers daily.

Interactive Channel - Interactive Channel provides on-demand information and
services and can provide Internet access to the cable television industry over
existing cable infrastructure and telephone lines.

Corporate assets consist primarily of cash and cash equivalents, short-term
investments, restricted investments and deferred debt issuance costs.

The following are operating results and certain other information by
business segment:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Monetary revenues:
IT Network . . . $ 9,339 $ 7,543 $ 12,082
Interactive Channel 3 1,032 305
------- -------- --------
$ 9,342 $ 8,575 $ 12,387
======= ======== ========
Nonmonetary revenues:
IT Network . . . $15,945 $ 9,944 $ 6,044
Interactive Channel -- -- --
------- -------- --------
$15,945 $ 9,944 $ 6,044
======= ======== ========
Total revenues:
IT Network . . . $25,283 $ 17,487 $ 18,126
Interactive Channel 3 1,032 305
------- -------- --------
$25,286 $ 18,519 $ 18,431
======= ======== ========
Operating loss:
IT Network . . . $ (756) $ (301) $ (163)
Interactive Channel (5,819) (10,311) (19,892)
Corporate expenses (1,753) (3,407) (4,435)
------- -------- --------
$(8,328) $(14,019) $(24,490)
======= ======== ========
Identifiable assets:
IT Network . . . $ 4,120 $6,482 $ 51,374
Interactive Channel 2,596 4,166 9,959
Corporate assets 17,479 5,249 52,169
------- -------- --------
$24,195 $ 15,897 $113,502
======= ======== ========
Depreciation and amortization:
IT Network . . . $ 458 $ 361 $ 2,835
Interactive Channel 1,374 1,577 6,465
------- -------- --------
$ 1,832 $ 1,938 $ 9,300
======= ======== ========
</TABLE>

41
<PAGE> 42
<TABLE>

<S> <C> <C> <C>
Capital expenditures:
IT Network . . . $17 $591 $2,838
Interactive Channel 241 2,088 1,944
--- ----- -----
$258 $2,679 $4,782
==== ====== ======
</TABLE>

Foreign net revenues, operating loss, and identifiable assets of all
consolidated foreign subsidiaries located outside the United States and its
territories, and possessions as of and for the years ended December 31, 1995,
1996, and 1997, are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues:
United States . . . . . $ 25,286 $ 17,806 $ 18,386
Canada . . . . . . . . . -- 713 45
Transfers between geographic
areas . . . . . . . . . . . . . . . . 2,423 3,945 3,982
Adjustments and eliminations (2,423) (3,945) (3,982)
------- -------- --------
$25,286 $ 18,519 $ 18,431
======= ======== ========
Operating income (loss):
United States . . . . . $(7,069) $(12,659) $(21,094)
Canada . . . . . . . . . (508) 128 (20)
Adjustments and eliminations (751) (1,488) (3,376)
------- -------- --------
$(8,328) $(14,019) $(24,490)
======= ======== ========
Identifiable assets:
United States . . . . . $21,402 $ 15,029 $103,808
Canada . . . . . . . . . 2,793 868 9,694
------- -------- --------
$24,195 $ 15,897 $113,502
======= ======== ========
</TABLE>

42
<PAGE> 43
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation, as amended (filed as Exhibit 3.1 to the Company's Registration
Statement on Form S-1, as amended (No. 33-97564), and incorporated herein by reference).

3.2 Bylaws (filed as Exhibit 3.2 to HBAC's Registration Statement on Form S-1, as amended (No. 33-62606),
and incorporated herein by reference).

4.1 Form of Common Stock Certificate (filed as Exhibit 4.1 to the Company's Registration Statement on Form
S-1 (No. 33-97564), and incorporated herein by reference).

4.2 Certificate of Designations for Senior PIK Preferred Stock (filed as Exhibit 4.2 to the Company's
current report on Form 8-K dated October 30, 1997, and incorporated herein by reference).

4.3 Indenture dated as of October 30, 1997 between Source Media, Inc. and U.S. Trust Company of Texas, N.A.
(filed as Exhibit 4.1 to the Company's current report on Form 8-K dated October 30, 1997, and
incorporated herein by reference).

4.4 Warrant Agreement dated as of October 30, 1997 between Source Media, Inc. and ChaseMellon Shareholder
Services (filed as Exhibit 4.3 to the Company's current report on Form 8-K dated October 30, 1997, and
incorporated herein by reference).

10.1 Master Agreement between IT Network, Inc. and Pacific Bell Directory, dated December 16, 1992, as
amended (filed as Exhibit 10.18 to HBAC's Registration Statement on Form S-4 (No. 33-90482), and
incorporated herein by reference).

10.2 Master AudioText Agreement between IT Network, Inc. and BellSouth, dated May 1, 1993 (filed as Exhibit
10.22 to HBAC's Registration Statement on Form S-4 (No. 33-90482), and incorporated herein by
reference).

10.3 Sales Agency Agreement by and between US West Marketing Resources Group, Inc. and IT Network, Inc.,
dated July 6, 1995 (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995, and incorporated herein by reference).

10.4 Development and Licensing Agreement dated as of April 1, 1995 between IT Network, Inc., Source Media,
Inc., ICT Inc., Cable Share International Inc., ICT (U.S.) Limited and ICT B.V. (filed as Exhibit 10.22
to the Company's Annual Report on Form 10-K for the Year Ended December 31, 1995, and incorporated
herein by reference).

10.5 Interactive Television License Agreement between IT Network, Inc., ICT (U.S.) Limited and ICT Inc.,
dated June 11, 1992 (filed as Exhibit 10.40 to HBAC's Registration Statement on Form S-4 (No. 33-
90482), and incorporated herein by reference).

10.6 Interactive Channel Distribution Agreement dated November 16, 1995 between IT Network, Inc. and
Cablevision Systems Corporation (filed as Exhibit 99.2 to the Company's Current Report on Form 8-K
filed January 30, 1996, and as amended on March 19, 1996, and incorporated herein by reference).

10.7 Interactive Cable Agreement between IT Network, Inc. and Sammons Communications, Inc., dated June 4,
1993 (filed as Exhibit 10.53 to HBAC's Registration Statement on Form S-4 (No. 33-90482), and
incorporated herein by reference).

10.8 Contribution Agreement between National Research Council Canada and ICT Inc. (filed as Exhibit 10.54 to
</TABLE>

43
<PAGE> 44
<TABLE>
<S> <C>
HBAC's Registration Statement on Form S-4 (No. 33-90482), and
incorporated herein by reference).

10.9 Letter of Understanding between IT Network, Inc. and Pacific Bell Directory dated August 25, 1994
(filed as Exhibit 10.55 to HBAC's Registration Statement on Form S-4 (No. 33-90482), and incorporated
herein by reference).

10.10 Note Agreement dated as of March 28, 1996 between Northstar Advantage High Total Return Fund and the
Company (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the Quarter Ended
March 31, 1996, and incorporated herein by reference).

10.11 Stock Purchase Warrant dated April 13, 1996 between Northstar Advantage High Total Return Fund and the
Company (filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the Quarter Ended
March 31, 1996, and incorporated herein by reference).

10.12 Registration Rights Agreement dated April 3, 1996 between Northstar Advantage High Total Return Fund
and the Company (filed as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the Quarter
Ended March 31, 1996, and incorporated herein by reference).

10.13 Sales Agency Agreement dated May 20, 1996 between The Reuben H. Donnelley Corporation and IT Network,
Inc. (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the Quarter Ended June
30, 1996, and incorporated herein by reference).

10.14 License Agreement dated June 6, 1996 between WinStar New Media Co., Inc. and the Company (filed as
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1996, and
incorporated herein by reference).

10.15 Charter Affiliation Agreement between Century Communications Corporation and the Company (filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K filed April 23, 1996, and incorporated herein
by reference).

10.16 Services Agreement dated October 21, 1996 between The Reuben H. Donnelley Corporation and IT Network,
Inc. (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the Quarter Ended
September 30, 1996, and incorporated herein by reference).

10.17 Arrangement Agreement dated November 13, 1996 between the Company and ICT. (filed as Exhibit 10.18 to
the Company's Registration Statement on Form S-1 (No. 33-16883), subsequently withdrawn, and
incorporated herein by reference).

10.18 Form of Plan of Arrangement. (filed as Exhibit 10.19 to the Company's Registration Statement on Form S-
1 (No. 33-16883), subsequently withdrawn, and incorporated herein by reference).

10.19 Stock Purchase Warrant dated as of April 9, 1996 between the Company and Northstar (filed as Exhibit
10.29 to the Company's Annual Report on Form 10-K for the Year Ended December 31, 1996, and
incorporated by reference herein).

10.20 Amended and Restated Stock Purchase Warrant dated as of April 9, 1997 between the Company and Northstar
(filed as Exhibit 10.30 to the Company's Annual Report on Form 10-K for the Year Ended December 31,
1996, and incorporated by reference herein).

10.21 Stock Purchase Warrant dated as of April 9, 1997 between the Company and Zeneca (filed as Exhibit 10.31
to the Company's Annual Report on Form 10-K for the Year Ended December 31, 1996, and incorporated by
reference herein).

10.22 Stock Purchase Warrant dated as of April 9, 1997 between the Company and Delaware (filed as Exhibit
10.32 to the Company's Annual Report on Form 10-K for the Year Ended December 31, 1996, and
incorporated by reference herein.)
</TABLE>

44
<PAGE> 45
<TABLE>
<S> <C>
10.23 Stock Purchase Warrant dated as of April 9, 1997 between the Company and ICI (filed as Exhibit 10.33 to
the Company's Annual Report on Form 10-K for the Year Ended December 31, 1996, and incorporated by
reference herein).

10.24 Stock Purchase Warrant dated as of April 9, 1997 between the Company and McConnell (filed as Exhibit
10.34 to the Company's Annual Report on Form 10-K for the Year Ended December 31, 1996, and
incorporated by reference herein).

10.25 Amended and Restated Registration Rights Agreement dated as of April 9, 1997 among the Company and
Northstar, Zeneca, McConnell, ICI and Delaware (filed as Exhibit 10.35 to the Company's Annual Report
on Form 10-K for the Year Ended December 31, 1996, and incorporated by reference herein).

10.26 Management Lock-Up and Voting Agreement dated as of April 9, 1997 among each of the persons named on
Schedule I thereto, the Company and Northstar, Zeneca, McConnell, ICI and Delaware (filed as Exhibit
10.40 to the Company's Annual Report on Form 10-K for the Year Ended December 31, 1996, and
incorporated by reference herein).

10.27 Asset Purchase Agreement dated September 23, 1997 between IT Network, Inc. and Brite Voice Systems,
Inc. (filed as Exhibit 2.1 to the Company's current report on Form 8-K dated October 30, 1997, and
incorporated by reference herein).

10.28 Amendment dated October 7, 1997 between IT Network, Inc. and Brite Voice Systems, Inc. to Asset
Purchase Agreement dated September 23, 1997 between IT Network, Inc. and Brite Voice Systems, Inc.
(filed as Exhibit 2.2 to the Company's current report on Form 8-K dated October 30, 1997, and
incorporated by reference herein).

10.29 Asset Purchase Agreement dated September 30, 1997 between Source Media, Inc. and Voice News Network,
Inc. (filed as Exhibit 2.3 to the Company's current report on Form 8-K dated October 30, 1997, and
incorporated by reference herein).

10.30 Preferred Stock Registration Rights Agreement dated October 30, 1997 between Source Media, Inc. and
Natwest Capital Markets Limited and Prudential Securities Incorporated (filed as Exhibit 10.2 to the
Company's current report on Form 8-K dated October 30, 1997, and incorporated by reference herein).

10.31 Exchange and Registration Rights Agreement for Senior Secured Notes dated September 30, 1997 between
Source Media, Inc. and Natwest Capital Markets Limited and Prudential Securities Incorporated (filed as
Exhibit 10.1 to the Company's current report on Form 8-K dated October 30, 1997, and incorporated by
reference herein).

10.32 Form of Guarantee for domestic subsidiaries (filed as Exhibit 10.29 to the Company's Registration
Statement on Form S-4 (No. 333-42017), and incorporated by reference herein).

10.33 Form of Guarantee for foreign subsidiaries (filed as Exhibit 10.30 to the Company's Registration
Statement on Form S-4 (No. 333-42017), and incorporated by reference herein).

10.34* 1995 Performance Equity Plan, as amended and restated effective as of April 28, 1997.

10.35* 1995 Nonqualified Stock Option Plan for Non-employee Directors (filed as Exhibit 10.32 to Source
Media's Registration Statement on Form S-1 (No. 33-90482), and incorporated by reference herein).

21 Subsidiaries.

23 Consent of Ernst & Young LLP.

27.1 Financial Data Schedule.
</TABLE>

45
<PAGE> 46

- --------------------------
* Management contract or compensatory plan

<PAGE> 1
EXHIBIT 10.34

SOURCE MEDIA, INC.

1995 PERFORMANCE EQUITY PLAN
AS AMENDED AND RESTATED
EFFECTIVE AS OF APRIL 29, 1997

SECTION 1. PURPOSE; DEFINITIONS.

1.1 Purpose. The purpose of the Source Media, Inc. ("Company")
1995 Performance Equity Plan, as amended and restated ("Plan"), is to enable
the Company to offer to the key employees, officers, directors and consultants
of the Company and its Subsidiaries whose past, present and/or potential
contributions to the Company and its Subsidiaries have been, are or will be
important to the success of the Company and its Subsidiaries, an opportunity to
acquire a proprietary interest in the Company. The various types of long-term
incentive awards which may be provided under the Plan will enable the Company
to respond to changes in compensation practices, tax laws, accounting
regulations and the size and diversity of its businesses.

1.2 Definitions. For purposes of the Plan, the following terms
shall be defined as set forth below:

"Agreement" means the agreement between the Company
and the Holder setting forth the terms and conditions of an award under the
Plan.

"Award" means an award of Stock under the Plan.

"Board" means the Board of Directors of the Company.

"Code" means the Internal Revenue Code of 1986, as
amended from time to time, and any successor thereto and the regulations
promulgated thereunder.

"Committee" means the Compensation Committee of the
Board or any other committee of the Board, which the Board may designate to
administer the Plan or any portion thereof. If no Committee is so designated,
then all references in this Plan to "Committee" shall mean the Board.

"Common Stock" means the Common Stock of the Company,
par value $.001 per share.

"Company" means Source Media, Inc., a Delaware
corporation.

"Deferred Stock" means Stock to be received, under an
award made pursuant to Section 9 below, at the end of a specified deferral
period.

"Disability" means incapacity by illness or other
disability from performing usual employment obligations for a period in excess
of 240 days (whether or not consecutive) or 120 days consecutively, as the case
may be, during any twelve month period.

"Effective Date" means the date set forth in Section
12.

"Fair Market Value", unless otherwise required by any
applicable provision of the Code or any regulations issued thereunder, means,
as of any given date: (i) if the Common Stock is listed on a national
securities exchange or quoted on the Nasdaq National Market or Nasdaq SmallCap
Market, the last sale price of the Common Stock in the principal trading market
for the Common Stock on the date of grant of an award hereunder, as reported by
the exchange or Nasdaq, as the case may be; (ii) if the Common Stock is not
listed on a national securities exchange or quoted on the Nasdaq National
Market or Nasdaq SmallCap Market, but is traded in the over-the-counter market,
the closing bid price for the Common Stock on the date of grant of an award
hereunder for which such quotations are reported by the National Quotation
Bureau, Incorporated or similar publisher of such quotations; and (iii) if the
fair market value of the Common Stock cannot be determined pursuant to clause
(i) or (ii) above, such price as the Committee shall determine, in good faith.
<PAGE> 2
"Holder" means a person who has received an award
under the Plan.

"Incentive Stock Option" means any Stock Option
intended to be and designated as an "incentive stock option" within the meaning
of Section 422 of the Code.

"Non-Qualified Stock Option" means any Stock Option
that is not an Incentive Stock Option.

"Other Stock-Based Award" means an award under
Section 10 below that is valued in whole or in part by reference to, or is
otherwise based upon, Stock.

"Parent" means any present or future parent
corporation of the Company, as such term is defined in Section 424(e) of the
Code.

"Plan" means the Source Media, Inc. 1995 Performance
Equity Plan, as amended and restated and as hereinafter amended from time to
time.

"Restricted Stock" means Stock, received under an
award made pursuant to Section 8 below, that is subject to restrictions under
said Section 8.

"Rule 16b-3" means Rule 16b-3 of the General Rules
and Regulations under the Exchange Act, as in effect from time to time.

"SAR Value" means the excess of the Fair Market Value
of one share of Common Stock over the exercise price per share specified in a
related Stock Option in the case of a Stock Appreciation Right granted in
tandem with a Stock Option and the Stock Appreciation Right price per share in
the case of a Stock Appreciation Right awarded on a free standing basis, in
each case multiplied by the number of shares in respect of which the Stock
Appreciation Right shall be exercised, on the date of exercise.

"Stock" means the Common Stock of the Company, par
value $.001 per share.

"Stock Appreciation Right" means the right, pursuant
to an award granted under Section 7 hereof, to recover an amount equal to the
SAR Value.

"Stock Option" or "Option" means any option to
purchase shares of Stock which is granted pursuant to the Plan.

"Stock Reload Option" means any option granted under
Section 6.3 as a result of the payment of the exercise price of a Stock Option
and/or the withholding tax related thereto in the form of Stock owned by the
Holder or the withholding of Stock by the Company.

"Subsidiary" means any present or future subsidiary
corporation of the Company, as such term is defined in Section 424(f) of the
Code.

"Tandem Stock Appreciation Right" means a Stock
Appreciation Right granted in tandem with all or part of any Stock Option
granted under the Plan.

SECTION 2. ADMINISTRATION.

2.1 Committee Membership. The Plan shall be administered by a
Committee. Committee members shall serve for such term as the Board may in each
case determine, and shall be subject to removal at any time by the Board. It
is the intent of the Board that the Plan qualify under Rule 16b-3 promulgated
under the Securities Exchange Act of 1934 ("Exchange Act"). To that end,
unless otherwise determined by the Board, each Committee member shall be a
"disinterested person" (i.e., a director who has not, during the one year prior
to service as an administrator

2
<PAGE> 3
of the Plan, or during such service, received a grant or award of equity
securities of the Company pursuant to the Plan or any other plan of the Company
or any of its affiliates). The membership of the Committee shall at all times
be comprised of persons so as not to adversely affect the compliance of the
Plan with the requirements of Rule 16b-3 under the Exchange Act or with the
requirements of any other applicable law, rule or regulation.

2.2 Powers of Committee. The Committee shall have full authority,
subject to Section 4 hereof, to award, pursuant to the terms of the Plan: (i)
Stock Options, (ii) Stock Appreciation Rights, (iii) Restricted Stock, (iv)
Deferred Stock, (v) Stock Reload Options and/or (vi) Other Stock-Based Awards.
For purposes of illustration and not of limitation, the Committee shall have
the authority (subject to the express provisions of this Plan):

(a) to select the key employees, officers, directors and
consultants of the Company or any Subsidiary to whom Stock Options, Stock
Appreciation Rights, Restricted Stock, Deferred Stock, Reload Stock Options
and/or Other Stock-Based Awards may from time to time be awarded hereunder;

(b) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award granted hereunder
(including, but not limited to, number of shares, share price, any restrictions
or limitations, and any vesting, exchange, surrender, cancellation,
acceleration, termination, exercise or forfeiture provisions, as the Committee
shall determine);

(c) to determine any specified performance goals or such
other factors or criteria which need to be attained for the vesting of an award
granted hereunder;

(d) to determine the terms and conditions under which
awards granted hereunder are to operate on a tandem basis and/or in conjunction
with or apart from other equity awarded under this Plan and cash awards made by
the Company or any Subsidiary outside of this Plan;

(e) to permit a Holder to elect to defer a payment under
the Plan under such rules and procedures as the Committee may establish,
including the crediting of interest on deferred amounts denominated in cash and
of dividend equivalents on deferred amounts denominated in Stock;

(f) to determine the extent and circumstances under which
Stock and other amounts payable with respect to an award hereunder shall be
deferred which may be either automatic or at the election of the Holder; and

(g) to substitute (i) new Stock Options for previously
granted Stock Options, which previously granted Stock Options have higher
option exercise prices and/or contain other less favorable terms, and (ii) new
awards of any other type for previously granted awards of the same type, which
previously granted awards are upon less favorable terms.

2.3 Interpretation of Plan.

(a) Committee Authority. Subject to Sections 4.2 (b) and
11 hereof, the Committee shall have the authority to adopt, alter and repeal
such administrative rules, guidelines and practices governing the Plan as it
shall, from time to time, deem advisable, to interpret the terms and provisions
of the Plan and any award issued under the Plan (and to determine the form and
substance of all Agreements relating thereto), and to otherwise supervise the
administration of the Plan. Subject to Section 11 hereof, all decisions made
by the Committee pursuant to the provisions of the Plan shall be made in the
Committee's sole discretion and shall be final and binding upon all persons,
including the Company, its Subsidiaries and Holders. Determinations by the
Committee under the Plan relating to the form, amount and terms and conditions
of awards need not be uniform, and may be made selectively among persons who
receive or are eligible to receive awards under the Plan, whether or not such
persons are similarly situated.

(b) Incentive Stock Options. Anything in the Plan to the
contrary notwithstanding, no term or provision of the Plan relating to
Incentive Stock Options (including but limited to Stock Reload Options or
Tandem Stock Appreciation Rights granted in conjunction with an Incentive Stock
Option) or any Agreement providing for

3
<PAGE> 4
Incentive Stock Options shall be interpreted, amended or altered, nor shall any
discretion or authority granted under the Plan be so exercised, so as to
disqualify the Plan under Section 422 of the Code, or, without the consent of
the Holder(s) affected, to disqualify any Incentive Stock Option under such
Section 422.

SECTION 3. STOCK SUBJECT TO PLAN

3.1 Number of Shares. The total number of shares of Common Stock
reserved and available for distribution under the Plan shall be one million
four hundred thousand (1,400,000) shares. Shares of Stock under the Plan may
consist, in whole or in part, of authorized and unissued shares or treasury
shares. If any shares of Stock that have been granted pursuant to a Stock
Option cease to be subject to a Stock Option, or if any shares of Stock that
are subject to any Stock Appreciation Right, Restricted Stock, Deferred Stock
award, Reload Stock Option or Other Stock-Based Award granted hereunder are
forfeited or any such award otherwise terminates without a payment being made
to the Holder in the form of Stock, such shares shall again be available for
distribution in connection with future grants and awards under the Plan. Only
net shares issued upon a stock-for-stock exercise (including stock used for
withholding taxes) shall be counted against the number of shares available
under the Plan.

3.2 Adjustment Upon Changes in Capitalization, Etc. In the event
of any merger, reorganization, consolidation, recapitalization, dividend (other
than a cash dividend), stock split, reverse stock split, or other change in
corporate structure affecting the Stock, such substitution or adjustment shall
be made in the aggregate number of shares reserved for issuance under the Plan,
in the number and exercise price of shares subject to outstanding Options, in
the number of shares and Stock Appreciation Right price relating to Stock
Appreciation Rights, and in the number of shares subject to, and in the related
terms of, other outstanding awards (including but not limited to awards of
Restricted Stock, Deferred Stock, Reload Stock Options and Other Stock-Based
Awards) granted under the Plan as may be determined to be appropriate by the
Committee in order to prevent dilution or enlargement of rights, provided that
the number of shares subject to any award shall always be a whole number.

SECTION 4. ELIGIBILITY.

4.1 General. Awards may be made or granted to key employees,
officers, directors and consultants of the Company or any of its Subsidiaries
who are deemed to have rendered or to be able to render significant services to
the Company or its Subsidiaries and who are deemed to have contributed or to
have the potential to contribute to the success of the Company or any of its
Subsidiaries. No Incentive Stock Option shall be granted to any person who is
not an employee of the Company or a Subsidiary at the time of grant.

4.2 Awards and Grants.

(a) The granting of Stock Options and Awards under the Plan
shall be determined by a Committee of two or more directors of the Company, of
which all members shall be disinterested persons, as described in Section 2.1
hereof. No grants or awards will be made to any person whose eligibility under
the Plan would adversely affect the compliance of the Plan with the
requirements of Rule 16b-3.

(b) This Section 4.2 shall not be amended more than once
every six months, other than to comport with any changes in the Code or the
Employment Retirement Income Security Act, or the rules and regulations
promulgated thereunder.

SECTION 5. GENERAL TERMS AND CONDITIONS.

5.1 General. With respect to the award or grant of any (i) Stock
Options, (ii) Stock Appreciation Rights, (iii) Restricted Stock, (iv) Deferred
Stock, (v) Stock Reload Options and/or (vi) Other Stock-Based Awards, the
following terms and conditions shall apply:

(a) Six-Month Holding Period. Any equity security granted
pursuant to the Plan must be held for six months from the date of grant or, in
the case of an option, at least six months elapse from the date of acquisition

4
<PAGE> 5
of the option to the date of disposition of the option (other than upon
exercise or conversion) or its underlying equity security; and

(b) Transferability:

(i) Incentive Stock Options: Any Stock Option issued
pursuant to and intended to be an Incentive Stock Option under the Plan shall
not be transferable by the Holder other than by will or the laws of descent and
distribution.

(ii) Non-Qualified Stock Options: Any Stock Option
issued pursuant to the Plan which is not intended to qualify as an Incentive
Stock Option, shall not be transferable by the Holder other than by will or the
laws of descent and distribution; provided, however, should Rule 16b-3 so
permit, such Stock Option may also be transferred, for no consideration, by the
Holder to the following transferees ("Transferee"):

(A) a member of the Holder's immediate
family. For purposes of this section, "immediate
family" shall include only brothers and sisters
(whether by the whole or half blood) spouse, parents,
and natural or adopted siblings,

(B) a trust for the benefit of members of the
Holder's immediate family, or

if the Transferee shall agree to be subject to the same restrictions and
conditions as relate to the Holder pursuant to the Plan.

(c) Change in Control. In the event of a Change in
Control (as defined below), all options to the extent not then currently
exercisable shall become immediately exercisable in full.

As used in this Plan, a "Change in Control" shall be
deemed to occur (i) when the Company acquires actual knowledge that any person,
as such term is used in the Exchange Act, including Section 14(d)(2) thereof,
(other than (a) any employee benefit plan established or maintained by the
Company or any of its Subsidiaries, and (b) any person who is deemed to be the
beneficial owner of any securities of the Company to which any person in clause
(a) above is and remains a beneficial owner, including, without limitation, any
person that is a member of a group (as defined in said Section 14(d)(2) of the
Exchange Act) in which any person defined in clause (a) above is also a member)
is or becomes the beneficial owner (as defined in Rule 13d-3 of the Exchange
Act), directly or indirectly, of securities of the Company representing 25% or
more of the combined voting power of the Company's then outstanding securities,
(ii) upon the first purchase of the Company's Common Stock pursuant to a tender
or exchange offer (other than a tender or exchange offer made by the Company or
an employee benefit plan established or maintained by the Company or any of its
subsidiaries), (iii) upon the approval by the Company's stockholders of (A) a
merger or consolidation of the Company with or into another corporation (other
than a merger or consolidation in which the Company is the surviving
corporation and which does not result in any capital reorganization or
reclassification or other change in the Company's then outstanding shares of
Common Stock), (B) a sale or disposition of all or substantially all of the
Company's assets or (C) a plan of liquidation or dissolution of the Company, or
(iv) if during any period of two (2) consecutive years, individuals who at the
beginning of such period constitute the Board of Directors of the Company cease
for any reason to constitute at least two-thirds thereof, unless the election
or nomination for the election by the Company's stockholders of each new
director was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of the period.

SECTION 6. STOCK OPTIONS.

6.1. Grant and Exercise. Stock Options granted under the Plan may
be of two types: (i) Incentive Stock Options and (ii) Non-Qualified Stock
Options. Any Stock Option granted under the Plan shall contain such terms, not
inconsistent with this Plan, or with respect to Incentive Stock Options, the
Code, as the Committee may from time

5
<PAGE> 6
to time approve. The Committee shall have the authority to grant Incentive
Stock Options, Non-Qualified Stock Options, or both types of Stock Options and
may be granted alone or in addition to other awards granted under the Plan. To
the extent that any Stock Option intended to qualify as an Incentive Stock
Option does not so qualify, it shall constitute a separate Non-Qualified Stock
Option. An Incentive Stock Option may only be granted within the ten year
period commencing from the Effective Date and may only be exercised within ten
years of the date of grant (or five years in the case of an Incentive Stock
Option granted to an optionee ("10% Stockholder") who, at the time of grant,
owns Stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company or a Parent or Subsidiary.

6.2. Terms and Conditions. Stock Options granted under the Plan
shall be subject to the following terms and conditions:

(a) Exercise Price. The exercise price per share of
Stock purchasable under a Stock Option shall be determined by the Committee at
the time of grant and may be less than 100% of the Fair Market Value of the
Stock as defined above; provided, however, that the exercise price of an
Incentive Stock Option shall not be less than 100% of the Fair Market Value of
the Stock (110%, in the case of a 10% Stockholder).

(b) Option Term. Subject to the limitations in Section
6.1, the term of each Stock Option shall be fixed by the Committee.

(c) Exercisability. Subject to Section 5.1 (a)
hereinabove, Stock Options shall be exercisable at such time or times and
subject to such terms and conditions as shall be determined by the Committee.
If the Committee provides, in its discretion, that any Stock Option is
exercisable only in installments, i.e., that it vests over time, the Committee
may waive such installment exercise provisions at any time at or after the time
of grant in whole or in part, based upon such factors as the Committee shall
determine.

(d) Method of Exercise. Subject to whatever installment,
exercise and waiting period provisions are applicable in a particular case,
Stock Options may be exercised in whole or in part at any time during the term
of the Option, by giving written notice of exercise to the Company specifying
the number of shares of Stock to be purchased. Such notice shall be
accompanied by payment in full of the purchase price, which shall be in cash
or, unless otherwise provided in the Agreement, in shares of Stock (including
Restricted Stock and other contingent awards under this Plan) or, partly in
cash and partly in such Stock, or such other means which the Committee
determines are consistent with the Plan's purpose and applicable law. Cash
payments shall be made by wire transfer, certified or bank check or personal
check, in each case payable to the order of the Company; provided, however,
that the Company shall not be required to deliver certificates for shares of
Stock with respect to which an Option is exercised until the Company has
confirmed the receipt of good and available funds in payment of the purchase
price thereof. Payments in the form of Stock shall be valued at the Fair Market
Value of a share of Stock on the date prior to the date of exercise. Such
payments shall be made by delivery of stock certificates in negotiable form
which are effective to transfer good and valid title thereto to the Company,
free of any liens or encumbrances. Subject to the terms of the Agreement, the
Committee may, in its sole discretion, at the request of the Holder, deliver
upon the exercise of a Non-Qualified Stock Option a combination of shares of
Deferred Stock and Common Stock; provided that, notwithstanding the provisions
of Section 9 of the Plan, such Deferred Stock shall be fully vested and not
subject to forfeiture. A Holder shall have none of the rights of a stockholder
with respect to the shares subject to the Option until such shares shall be
transferred to the Holder upon the exercise of the Option.

(e) Termination by Reason of Death. If a Holder's
employment by the Company or a Subsidiary terminates by reason of death, any
Stock Option held by such Holder, unless otherwise determined by the Committee
at the time of grant and set forth in the Agreement, shall be fully vested and
may thereafter be exercised by the legal representative of the estate or by the
legatee of the Holder under the will of the Holder, for a period of one year
(or such other greater or lesser period as the Committee may specify at grant)
from the date of such death or until the expiration of the stated term of such
Stock Option, whichever period is the shorter.

(f) Termination by Reason of Disability. If a Holder's
employment by the Company or any Subsidiary terminates by reason of Disability,
any Stock Option held by such Holder, unless otherwise determined

6
<PAGE> 7
by the Committee at the time of grant and set forth in the Agreement, shall be
fully vested and may thereafter be exercised by the Holder for a period of one
year (or such other greater or lesser period as the Committee may specify at
the time of grant) from the date of such termination of employment or until the
expiration of the stated term of such Stock Option, whichever period is the
shorter.

(g) Other Termination. Subject to the provisions of
Section 13.3 below and unless otherwise determined by the Committee at the time
of grant and set forth in the Agreement, if a Holder is an employee of the
Company or a Subsidiary at the time of grant and if such Holder's employment by
the Company or any Subsidiary terminates for any reason other than death or
Disability, the Stock Option shall thereupon automatically terminate, except
that if the Holder's employment is terminated by the Company or a Subsidiary
without cause or due to retirement from active employment with the Company or
any Subsidiary on or after age 65, then the portion of such Stock Option which
has vested on the date of termination of employment may be exercised for the
lesser of three months after termination of employment or the balance of such
Stock Option's term.

(h) Additional Incentive Stock Option Limitation. In the
case of an Incentive Stock Option, the amount of aggregate Fair Market Value of
Stock (determined at the time of grant of the Option) with respect to which
Incentive Stock Options are exercisable for the first time by a Holder during
any calendar year (under all such plans of the Company and its Parent and
Subsidiaries) shall not exceed $100,000.

(i) Buyout and Settlement Provisions. The Committee may
at any time offer to buy out a Stock Option previously granted, based upon such
terms and conditions as the Committee shall establish and communicate to the
Holder at the time that such offer is made.

(j) Stock Option Agreement. Each grant of a Stock Option
shall be confirmed by, and shall be subject to the terms of, the Agreement
executed by the Company and the Holder.

6.3. Stock Reload Option. The Committee may also grant to the
Holder (concurrently with the grant of an Incentive Stock Option and at or
after the time of grant in the case of a Non-Qualified Stock Option) a Stock
Reload Option up to the amount of shares of Stock held by the Holder for at
least six months and used to pay all or part of the exercise price of an Option
and, if any, withheld by the Company as payment for withholding taxes. Such
Stock Reload Option shall have an exercise price of the Fair Market Value as of
the date of the Stock Reload Option grant. Unless the Committee determines
otherwise, a Stock Reload Option may be exercised commencing one year after it
is granted and shall expire on the date of expiration of the Option to which
the Stock Reload Option is related.

SECTION 7. STOCK APPRECIATION RIGHTS.

7.1. Grant and Exercise. Stock Appreciation Rights may be granted
in tandem with (i.e., Tandem Stock Appreciation Right) or in conjunction with
all or part of any Stock Option granted under the Plan or may be granted on a
free-standing basis. In the case of a Non-Qualified Stock Option, a Tandem
Stock Appreciation Right may be granted either at or after the time of the
grant of such Non-Qualified Stock Option. In the case of an Incentive Stock
Option, a Tandem Stock Appreciation Right may be granted only at the time of
the grant of such Incentive Stock Option.

7.2. Terms and Conditions. Stock Appreciation Rights shall be
subject to the following terms and conditions:

(a) Exercisability. Tandem Stock Appreciation Rights
shall be exercisable only at such time or times and to the extent that the
Stock Options to which they relate shall be exercisable in accordance with the
provisions of Section 6 hereof and this Section 7 and may be subject to the
Code with respect to related Incentive Stock Options and such additional
limitations on exercisability as shall be determined by the Committee and set
forth in the Agreement. Other Stock Appreciation Rights shall be exercisable at
such time or times and subject to such terms and conditions as shall be
determined by the Committee and set forth in the Agreement.

7
<PAGE> 8
(b) Termination. A Tandem Stock Appreciation Right shall
terminate and shall no longer be exercisable upon the termination or exercise
of the related Stock Option, except that, unless otherwise determined by the
Committee at the time of grant, a Tandem Stock Appreciation Right granted with
respect to less than the full number of shares covered by a related Stock
Option shall not be reduced until after the number of shares remaining under
the related Stock Option equals the number of shares covered by the Tandem
Stock Appreciation Right.

(c) Method of Exercise. A Tandem Stock Appreciation
Right may be exercised by a Holder by surrendering the applicable portion of
the related Stock Option. Upon such exercise and surrender, the Holder shall be
entitled to receive such amount in the form determined pursuant to Section
7.2(d) below. Stock Options which have been so surrendered, in whole or in
part, shall no longer be exercisable to the extent the related Tandem Stock
Appreciation Rights have been exercised.

(d) Receipt of SAR Value. Upon the exercise of a Stock
Appreciation Right, a Holder shall be entitled to receive up to, but not more
than, an amount in cash and/or shares of Stock equal to the SAR Value with the
Committee having the right to determine the form of payment.

(e) Shares Affected Upon Plan. Upon the exercise of a
Tandem Stock Appreciation Right, the Stock Option or part thereof to which such
Tandem Stock Appreciation Right is related shall be deemed to have been
exercised for the purpose of the limitation set forth in Section 3 hereof on
the number of shares of Common Stock to be issued under the Plan, but only to
the extent of the number of shares, if any, issued under the Tandem Stock
Appreciation Right at the time of exercise based upon the SAR Value.

SECTION 8. RESTRICTED STOCK.

8.1. Grant. Shares of Restricted Stock may be awarded either alone
or in addition to other awards granted under the Plan. The Committee shall
determine the eligible persons to whom, and the time or times at which, grants
of Restricted Stock will be awarded, the number of shares to be awarded, the
price (if any) to be paid by the Holder, the time or times within which such
awards may be subject to forfeiture ("Restriction Period"), the vesting
schedule and rights to acceleration thereof, and all other terms and conditions
of the awards.

8.2. Terms and Conditions. Each Restricted Stock award shall be
subject to the following terms and conditions:

(a) Certificates. Restricted Stock, when issued, will be
represented by a stock certificate or certificates registered in the name of
the Holder to whom such Restricted Stock shall have been awarded. During the
Restriction Period, certificates representing the Restricted Stock and any
securities constituting Retained Distributions (as defined below) shall bear a
legend to the effect that ownership of the Restricted Stock (and such Retained
Distributions), and the enjoyment of all rights appurtenant thereto, are
subject to the restrictions, terms and conditions provided in the Plan and the
Agreement. Such certificates shall be deposited by the Holder with the Company,
together with stock powers or other instruments of assignment, each endorsed in
blank, which will permit transfer to the Company of all or any portion of the
Restricted Stock and any securities constituting Retained Distributions that
shall be forfeited or that shall not become vested in accordance with the Plan
and the Agreement.

(b) Rights of Holder. Restricted Stock shall constitute
issued and outstanding shares of Common Stock for all corporate purposes. The
Holder will have the right to vote such Restricted Stock, to receive and retain
all regular cash dividends and other cash equivalent distributions as the Board
may in its sole discretion designate, pay or distribute on such Restricted
Stock and to exercise all other rights, powers and privileges of a holder of
Common Stock with respect to such Restricted Stock, with the exceptions that
(i) the Holder will not be entitled to delivery of the stock certificate or
certificates representing such Restricted Stock until the Restriction Period
shall have expired and unless all other vesting requirements with respect
thereto shall have been fulfilled; (ii) the Company will retain custody of the
stock certificate or certificates representing the Restricted Stock during the
Restriction Period; (iii) other than regular cash dividends and other cash
equivalent distributions as the Board may in its sole discretion designate, pay
or distribute, the Company will retain custody of all distributions ("Retained
Distributions") made or declared with respect to the Restricted Stock (and such
Retained Distributions will be subject to the same

8
<PAGE> 9
restrictions, terms and conditions as are applicable to the Restricted Stock)
until such time, if ever, as the Restricted Stock with respect to which such
Retained Distributions shall have been made, paid or declared shall have become
vested and with respect to which the Restriction Period shall have expired;
(iv) a breach of any of the restrictions, terms or conditions contained in this
Plan or the Agreement or otherwise established by the Committee with respect to
any Restricted Stock or Retained Distributions will cause a forfeiture of such
Restricted Stock and any Retained Distributions with respect thereto.

(c) Vesting; Forfeiture. Upon the expiration of the
Restriction Period with respect to each award of Restricted Stock and the
satisfaction of any other applicable restrictions, terms and conditions (i) all
or part of such Restricted Stock shall become vested in accordance with the
terms of the Agreement, and (ii) any Retained Distributions with respect to
such Restricted Stock shall become vested to the extent that the Restricted
Stock related thereto shall have become vested. Any such Restricted Stock and
Retained Distributions that do not vest shall be forfeited to the Company and
the Holder shall not thereafter have any rights with respect to such Restricted
Stock and Retained Distributions that shall have been so forfeited.

SECTION 9. DEFERRED STOCK.

9.1. Grant. Shares of Deferred Stock may be awarded either alone
or in addition to other awards granted under the Plan. The Committee shall
determine the eligible persons to whom and the time or times at which grants of
Deferred Stock shall be awarded, the number of shares of Deferred Stock to be
awarded to any person, the duration of the period ("Deferral Period") during
which, and the conditions under which receipt of the shares will be deferred,
and all the other terms and conditions of the awards.

9.2. Terms and Conditions. Each Deferred Stock award shall be
subject to the following terms and conditions:

(a) Certificates. At the expiration of the Deferral
Period (or the Additional Deferral Period referred to in Section 9.2(c) below,
where applicable), share certificates shall be delivered to the Holder, or his
legal representative, representing the number equal to the shares covered by
the Deferred Stock award.

(b) Vesting; Forfeiture. Upon the expiration of the
Deferral Period (or the Additional Deferral Period, where applicable) with
respect to each award of Deferred Stock and the satisfaction of any other
applicable limitations, terms or conditions, such Deferred Stock shall become
vested in accordance with the terms of the Agreement. Any Deferred Stock that
does not vest shall be forfeited to the Company and the Holder shall not
thereafter have any rights with respect to such Deferred Stock that has been so
forfeited.

(c) Additional Deferral Period. A Holder may request to,
and the Committee may at any time, defer the receipt of an award (or an
installment of an award) for an additional specified period or until a
specified event ("Additional Deferral Period"). Subject to any exceptions
adopted by the Committee, such request must generally be made at least one year
prior to expiration of the Deferral Period for such Deferred Stock award (or
such installment).

SECTION 10. OTHER STOCK-BASED AWARDS.

10.1. Grant and Exercise. Other Stock-Based Awards may be awarded,
subject to limitations under applicable law, that are denominated or payable
in, valued in whole or in part by reference to, or otherwise based on, or
related to, shares of Common Stock, as deemed by the Committee to be consistent
with the purposes of the Plan, including, without limitation, purchase rights,
shares of Common Stock awarded which are not subject to any restrictions or
conditions, convertible or exchangeable debentures, or other rights convertible
into shares of Common Stock and awards valued by reference to the value of
securities of or the performance of specified Subsidiaries. Other Stock-Based
Awards may be awarded either alone or in addition to or in tandem with any
other awards under this Plan or any other plan of the Company.

9
<PAGE> 10
10.2. Eligibility For Other Stock-Based Awards. The Committee shall
determine the eligible persons to whom and the time or times at which grants of
such Other Stock-Based Awards shall be made, the number of shares of Common
Stock to be awarded pursuant to such awards, and all other terms and conditions
of the awards.

10.3. Terms and Conditions. Each Other Stock-Based Award shall be
subject to such terms and conditions as may be determined by the Committee.

SECTION 11. AMENDMENT AND TERMINATION.

The Board may at any time, and from time to time, amend, alter,
suspend or discontinue any of the provisions of the Plan, but no amendment,
alteration, suspension or discontinuance shall be made which would impair the
rights of a Holder under any Agreement theretofore entered into hereunder,
without his consent.

SECTION 12. TERM OF PLAN.

12.1 Effective Date. The Plan, as amended and restated, shall be
effective as of April 28, 1997 ("Effective Date"), subject to the approval of
the Plan by the stockholders of the Company within one year after the Effective
Date. Any awards granted under the Plan after the Effective Date and prior to
such approval shall be effective when made (unless otherwise specified by the
Committee at the time of grant), but shall be conditioned upon, and subject to,
such approval of the Plan by the Company's stockholders and no awards shall
vest or otherwise become free of restrictions prior to such approval.

12.2 Termination Date. Unless terminated by the Board, this Plan
shall continue to remain effective until such time no further awards may be
granted and all awards granted under the Plan are no longer outstanding.
Notwithstanding the foregoing, grants of Incentive Stock Options may only be
made during the ten year period following the Effective Date.

SECTION 13. GENERAL PROVISIONS.

13.1 Written Agreements. Each award granted under the Plan shall
be confirmed by, and shall be subject to, the terms of the Agreement executed
by the Company and the Holder. The Committee may terminate any award made
under the Plan if the Agreement relating thereto is not executed and returned
to the Company within 60 days after the Agreement has been delivered to the
Holder for his or her execution.

13.2 Unfunded Status of Plan. The Plan is intended to constitute
an "unfunded" plan for incentive and deferred compensation and the Company
shall not be required to segregate any assets in respect of the Plan. With
respect to any payments not yet made to a Holder by the Company, nothing
contained herein shall give any such Holder any rights that are greater than
those of a general creditor of the Company.

13.3 Employees.

(a) Engaging in Competition With the Company. In the
event an employee Holder terminates his employment with the Company or a
Subsidiary for any reason whatsoever, and within eighteen (18) months after the
date thereof accepts employment with any competitor of, or otherwise engages in
competition with, the Company or any Subsidiary, the Committee, in its sole
discretion, may require such Holder to return to the Company the economic value
of any award which was realized or obtained (measured at the date of exercise,
vesting or payment) by such Holder at any time during the period beginning on
that date which is six months prior to the date of such Holder's termination of
employment with the Company or a Subsidiary.

(b) Termination for Cause. The Committee may, in the
event a Holder is terminated by the Company or a Subsidiary for cause, annul
any award granted under this Plan to such Holder and, in such event, the
Committee, in its sole discretion, may require such Holder to return to the
Company the economic value of any award which was realized or obtained
(measured at the date of exercise, vesting or payment) by such Holder at any
time

10
<PAGE> 11
during the period beginning on that date which is six months prior to the date
of such Holder's termination of employment with the Company or a Subsidiary.

(c) No Right of Employment. Nothing contained in the
Plan or in any award hereunder shall be deemed to confer upon any Holder of the
Company or any Subsidiary any right to continued employment with the Company or
any Subsidiary, nor shall it interfere in any way with the right of the Company
or any Subsidiary to terminate the employment of any of its employees or agents
at any time.

13.4 Investment Representations. The Committee may require each
person acquiring shares of Stock pursuant to a Stock Option or other award
under the Plan to represent to and agree with the Company in writing that the
Holder is acquiring the shares for investment without a view to distribution
thereof, or to take any other action which may be required in order to comply
with any applicable state securities laws or regulations.

13.5 Indemnification. No member of the Board or the Committee,
nor any officer or employee of the Company acting on behalf of the Board or the
Committee, shall be personally liable for any action, determination or
interpretation taken or made with respect to the Plan, and all members of the
Board or the Committee and all officers or employees of the Company acting on
their behalf shall, to the extent permitted by law, be fully indemnified and
protected by the Company in respect of any such action, determination or
interpretation.

13.6 Additional Incentive Arrangements. Nothing contained in the
Plan shall prevent the Board from adopting such other or additional incentive
arrangements as it may deem desirable, including, but not limited to, the
granting of Stock Options and the awarding of stock and cash otherwise than
under the Plan; and such arrangements may be either generally applicable or
applicable only in specific cases.

13.7 Withholding Taxes. Not later than the date as of which an
amount first becomes includible in the gross income of the Holder for Federal
income tax purposes with respect to any option or other award under the Plan,
the Holder shall pay to the Company, or make arrangements satisfactory to the
Committee regarding the payment of, any Federal, state and local taxes of any
kind required by law to be withheld or paid with respect to such amount. If
permitted by the Committee, tax withholding or payment obligations may be
settled with Common Stock, including Common Stock that is part of the award
that gives rise to the withholding requirement. The obligations of the Company
under the Plan shall be conditional upon such payment or arrangements and the
Company or the Holder's employer (if not the Company) shall, to the extent
permitted by law, have the right to deduct any such taxes from any payment of
any kind otherwise due to the Holder from the Company or any Subsidiary.

13.8 Governing Law. The Plan and all awards made and actions taken
thereunder shall be governed by and construed in accordance with the laws of
the State of Texas (without regard to choice of law provisions).

13.9 Other Benefit Plans. Any award granted under the Plan shall
not be deemed compensation for purposes of computing benefits under any
retirement plan of the Company or any Subsidiary and shall not affect any
benefits under any other benefit plan now or subsequently in effect under which
the availability or amount of benefits is related to the level of compensation
(unless required by specific reference in any such other plan to awards under
this Plan).

13.10 Compliance with Rule 16b-3. With respect to persons subject
to Section 16 of the Exchange Act, transactions under this Plan are intended to
comply with all applicable conditions of Rule 16b-3 or its successors under the
Exchange Act. To the extent any provision of the Plan or action by the
Committee fails to so comply, it shall be deemed null and void, to the extent
permitted by law and deemed advisable by the Committee.

13.11 Non-Transferability. Except as otherwise expressly provided
in the Plan, no right or benefit under the Plan may be alienated, sold,
assigned, hypothecated, pledged, exchanged, transferred, encumbered or charged,
and any attempt to alienate, sell, assign, hypothecate, pledge, exchange,
transfer, encumber or charge the same shall be void.

11
<PAGE> 12
13.12 Applicable Laws. The obligations of the Company with respect
to all Stock Options and awards under the Plan shall be subject to (i) all
applicable laws, rules and regulations and such approvals by any governmental
agencies as may be required, including, without limitation, the effectiveness
of a registration statement under the Securities Act of 1933, as amended, and
(ii) the rules and regulations of any securities exchange on which the Stock
may be listed.

13.13 Conflicts. If any of the terms or provisions of the Plan
conflict with the requirements of (with respect to Incentive Stock Options)
Section 422 of the Code, then such terms or provisions shall be deemed
inoperative to the extent they so conflict with the requirements of said
Section 422 of the Code. Additionally, if this Plan does not contain any
provision required to be included herein under Section 422 of the Code, such
provision shall be deemed to be incorporated herein with the same force and
effect as if such provision had been set out at length herein.

13.14 Non-Registered Stock. The shares of Stock being distributed
under this Plan have not been registered under the Securities Act of 1933, as
amended ("1933 Act"), or any applicable state or foreign securities laws and
the Company has no obligation to any Holder to register the Stock or to assist
the Holder in obtaining an exemption from the various registration
requirements, or to list the Stock on a national securities exchange.

<PAGE> 1
EXHIBIT 21

SUBSIDIARIES

<TABLE>
<CAPTION>
Name Jurisdiction
- ---- of Organization
---------------
<S> <C>
SMI Holdings, Inc. Texas
IT Network, Inc. Delaware
Interactive Channel, Inc. Delaware
Interactive Channel Technologies Inc. Ontario,
Canada 997758 Ontario Inc. Ontario, Canada
Cable Share International Inc. Barbados
Cableshare B.V. Netherlands
Cableshare (U.S.) Limited Illinois
1229501 Ontario Inc. Ontario, Canada
</TABLE>

<PAGE> 1
EXHIBIT 23

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statements
pertaining to the 1989, 1991, and 1993 stock option plans, (Form S-8 No.
33-00142), (Form S-8 No. 33-00144), Employee Stock Purchase Plan (Form S-8 No.
333-30197), 1995 Nonqualified Stock Option Plan for Non-Employee Directors and
certain nonqualified stock options (Form S-8 No. 333-31439), Senior PIK
Preferred Stock (Form S-4 No. 333-42017), and Senior Secured Notes (Form S-4 No.
333-42037) of our report dated February 13, 1998, with respect to the
consolidated financial statements of Source Media, Inc. included in the Annual
Report (Form 10-K) for the year ended December 31, 1997.

/s/ ERNST & YOUNG LLP

Dallas, Texas
March 30, 1998

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 113,502,026
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
13,696,799
<COMMON> 11,969
<OTHER-SE> (12,444,371)
<TOTAL-LIABILITY-AND-EQUITY> 113,502,026
<SALES> 0
<TOTAL-REVENUES> 18,431,318
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (28,925,731)
<DISCONTINUED> 0
<EXTRAORDINARY> 3,455,551
<CHANGES> 0
<NET-INCOME> (32,797,411)
<EPS-PRIMARY> (2.89)
<EPS-DILUTED> (2.89)

</TABLE>