NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation: The consolidated financial statements include the accounts of First National Entertainment Corp. (a Colorado corporation) and its subsidiaries, First National Film Corp. - California, Stylus Records, and First National Finance Corp. (collectively referred to as the "Company"). As of June 30, 1997, there were nominal assets and liabilities in the Company's First National Film Corp. - California subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.

The Company's primary business activity, through June 30, 1997, has been the acquisition, distribution, and marketing of high-quality entertainment properties targeted at the family market in film and other media.

First National Finance Corp. is engaged in the business of extending credit primarily to developers and redevelopers of real estate and to producers, inventors, authors, and syndicators of media software and similar entertainment and intellectual properties in the form of short-term, high yield bridge loans (typically in the range of $25,000 to $100,000) (see Notes 12 and 14).

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

Revenue Recognition: Revenues from the exhibition and sale of the Company's film entertainment properties are recorded when earned, based on the Company's rights under various exhibition/distribution agreements. Revenues from theatrical properties are recorded when exhibited, based on a percentage of box office receipts. Revenues from home video producer royalties are recorded based on reported sales and collections by the Company's distributor(s). Revenues from television, merchandising, and other related markets for the Company's film entertainment properties are recorded when the properties are released for sale in these media, subject to acceptance, collectibility, and other criteria.

The Company's revenues for fiscal year 1996 were comprised of producer participation royalties accrued from its former video distribution partner, Republic Pictures, for home video sales of the Company's animated motion picture property Happily Ever After.

(Continued)

7.

FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Cost Recognition: Costs associated with the Company's entertainment properties are generally recognized consistent with associated revenues. Under Statement of Financial Accounting Standards (SFAS) No. 53, "Financial Reporting by Producers and Distributors of Motion Picture Films", the Company amortizes film costs for each period in proportion to the revenue recognized in the current period, relative to management's estimate of the total revenue to be realized from all markets for a given film property over its commercial life. Amortized film costs include acquisition, distribution, print, advertising, marketing, and certain other costs that benefit a property over its entire revenue-producing life. (Certain local advertising, marketing costs, and direct theatrical costs for a property are immediately expensed in the period of theatrical exhibition.)

Management reviews its revenue projections for film properties on a regular basis, which may result in changes of projected film revenues, costs, and rate of cost amortization, which can have a material effect on income for any current and/or future period. Estimated losses from a property, if any, are provided for currently.

Income Taxes: The Company accounts for income taxes using the deferred asset and liability method as required by SFAS No. 109, "Accounting for Income Taxes". Deferred income taxes are provided as temporary differences arise between the basis of asset and liabilities for financial reporting and income tax reporting.

Earnings/(Loss) Per Share: Earnings/(loss) per common share is computed by dividing the net income/(loss) for the period by the weighted average number of common shares outstanding during the period. Since the Company has experienced net operating losses, the outstanding options and warrants to purchase common stock have an anti-dilutive effect. Therefore, options and warrants were not included in the earnings/(loss) per share calculation.

Cash and Cash Equivalents: For purposes of the statement of cash flows, the Company considers all investments with maturities of three months or less, when purchased, to be cash equivalents.

Film Inventory: Film inventory consists of certain capitalized costs for the acquisition, production, and exploitation of entertainment properties. Inventory is stated at the lower of unamortized cost or estimated net realizable value for each property. In accordance with SFAS No. 53, "Financial Reporting by Producers and Distributors of Motion Picture Films", the Company amortizes its film costs using the "individual film forecast method" which requires that cost amortization relate film costs to the estimated total gross revenues from all lifetime sources on an individual film basis. Amortization of film costs begins when a film property is released into its primary market and revenue generation has begun. Unamortized costs remain

(Continued)

8.

FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

as inventory on the balance sheet, with capitalized costs for the property's initial (primary) market recorded as current inventory, and capitalized costs associated with secondary markets recorded as non-current inventory.

Loans Receivable: Loans are stated net of the allowance for loan losses and unearned discount. Interest on loans is included in interest income over the term of the loan based upon the principal balance outstanding. Where serious doubt exists as to the collectibility of a loan, the accrual of interest is discontinued. Loan fees and direct loan origination costs are deferred and amortized over the term of the loan as a yield adjustment.

Allowance for Loan Losses: An allowance for loan losses has been established to provide for those loans which may not be repaid in their entirety. The allowance is increased by provisions for loan losses charged to expense and decreased by charge-offs, net of recoveries. Although a loan is charged off by management when deemed uncollectible, collection efforts may continue and future recoveries may occur.

The allowance is maintained by management at a level considered adequate to cover losses that are currently anticipated based on past loss experience, general economic conditions, information about specific borrower situations (including their financial position and collateral values) and other factors and estimates which are subject to change over time. Estimating the risk of loss and the amount of loss on any loan is necessarily subjective and ultimate losses may vary from current estimates. These estimates are reviewed periodically and as adjustments become necessary they are reported in earnings in the periods in which they become known.

Property and Equipment: Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 3 to 7 years. Leasehold improvements are amortized over the useful lives of the improvements or the term of the lease, whichever is shorter.

Financial Instruments: The Company's financial instruments consist principally of loans receivable and are carried at amounts which approximate fair value.

(Continued)

9.

FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

New Accounting Standards: On October 23, 1995, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123 encourages, but does not require, the recognition of compensation expense for grants of stock, stock options and other equity instruments to employees based on a fair value method of accounting. Companies are permitted to continue to apply the existing accounting rules contained in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"); however, companies that choose to retain this method of accounting are required to provide expanded disclosures of pro forma net income and earnings per share in the notes to financial statements as if the new fair value method of accounting had been adopted. The provisions of SFAS No. 123 are effective for fiscal years beginning after December 15, 1995. The Company has elected to continue to apply the accounting rules contained in APB 25. No additional disclosure requirements are necessary as there were no options issued for fiscal years subsequent to December 15, 1995.

NOTE 2 - ACCOUNTS RECEIVABLE

On August 16, 1994, the Company received an accounting statement from Republic Pictures (Republic), its former film distributor, that reported video sales and collection results for Happily Ever After through June 30, 1994. This statement reflected a lower producer royalty payment than the Company had anticipated because of certain assumptions used by Republic in the accounting statement that the Company believes were inconsistent with its distribution agreement with Republic. The Company communicated these issues to Republic and conducted a comprehensive third-party special audit of all reported video results. Republic subsequently agreed to revise the August 16, 1994 accounting statement for the number of videos shipped and, on September 26, 1994, delivered payment to the Company for this revised accounting statement, plus interest. However, according to the special auditor's report, Republic owes the Company a producer's bonus of 5% of the first one million units sold, which approximates $256,000, in addition to amounts owed the Company for foreign currency adjustments and excess units held in reserve of $184,000. In 1996, Republic reported units sold of 389,000 units, but because of certain cost assumptions used by Republic in submitting its accounting for these sold units, informed the Company that they have no liability for producer royalty payments. The Company maintains that under the terms of the Distributor Agreement, they are entitled to a specific amount for each unit sold or approximately $1,150,000 for 1996. The Company intends to vigorously pursue collection efforts with respect to these receivables, however, due to the uncertainty of the results of the collection efforts, the Company has charged off all of these outstanding receivables in 1996 and prior years.

(Continued)

10.

FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996

                                                                           1997            1996
                                                                         --------        --------
Unamortized film costs for Happily Ever After allocated
to the secondary market and recorded as a noncurrent asset                $500,000       $2,700,000

Amortization of capitalized film property costs is computed using the individual-film-forecast computation method as promulgated under SFAS No. 53, "Financial Reporting by Producers and Distributors of Motion Picture Films". At June 30, 1996, the Company intended to amortize the remaining unamortized film costs for its Happily Ever After property over the next five years, subject to future market conditions altering this accounting estimate. The Company's computation of net realizable value as of June 30, 1997, has resulted in a significant change in the amount of unamortized costs permitted to be charged to future operations. Accordingly, a charge of $2,200,000 is reflected in the 1997 statement of operations to reflect the writedown of film property costs to their estimated net realizable value.

During fiscal year 1996, the Company evaluated the potential future marketability of its film version of the Nigel Miles-Thomas stage production of Cinderella. Based upon difficulties in securing satisfactory songwriting and financing, as well as the production of competitive properties by major Hollywood studios, the Company has decided to abandon its effort to produce this version of Cinderella. Accordingly, the previously deferred development and preproduction costs, in the amount of $405,987, were charged against 1996 income.

                                                                              1997             1996
                                                                              ----             ----

Office equipment                                                           $    14,350     $    12,610
Furniture and fixtures                                                           3,377           1,575
Capital leases                                                                       -          41,994
                                                                           -----------     -----------
                                                                                17,727          56,179
Less accumulated depreciation                                                    5,120          14,115
                                                                           -----------     -----------

     Net property and equipment                                            $    12,607     $    42,064
                                                                           ===========     ===========

(Continued)

11.

FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996

NOTE 5 - NOTES PAYABLE TO SHAREHOLDERS

The notes payable to shareholders are payable on demand, bear interest at 10% per annum, and are collateralized by substantially all of the Company's assets.

NOTE 6 - MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY

The minority interest in consolidated subsidiary includes shares of $1 par value, variable rate, cumulative, preferred stock issued by First National Finance Corp. At June 30, 1997, 3,500,000 shares had been issued at approximately $.80 a share. The liquidation preference of these shares is $3,500,000.

NOTE 7 - INCOME TAXES

The Company had cumulative net operating loss carryforwards of approximately $23.4 million at June 30, 1997, for federal tax reporting purposes. The net operating loss carryforwards expire in varying amounts beginning in the year 2000.

Due to changes in the Company's ownership, the annual utilization of the net operating loss carryforwards arising prior to the ownership changes may be limited. Generally, the amount of those carryforwards available for annual utilization is based on the value of the Company at the time of the ownership change, multiplied by a rate specified by the Internal Revenue Service.

Significant components of deferred tax assets and liabilities at June 30, 1997 and 1996, are as follows:

                                                                            1997             1996
                                                                            ----             ----
Deferred tax assets
     Net operating loss carryforwards                                 $    7,950,000    $    7,000,000
     Reserves and allowances                                                 100,000           375,000
                                                                      --------------    --------------
                                                                           8,050,000         7,375,000
Valuation allowance                                                        8,050,000         7,375,000
                                                                      --------------    --------------

     Net deferred taxes                                               $            -    $            -
                                                                      ==============    ==============

(Continued)

12.

FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996

NOTE 7 - INCOME TAXES (Continued)

A valuation allowance has been established by the Company due to the uncertainties of the realization of deferred tax assets based on the Company's prior history of tax losses. The valuation allowance increased approximately $675,000 in 1997 due to the increase in net deferred tax assets. Management will continue to re-evaluate the appropriateness of the valuation allowance in future years.

There were no income tax payments in the years ended 1997 and 1996.

NOTE 8 - SHAREHOLDERS' EQUITY

Preferred Stock: The Company has authorized the issuance of 10,000,000 shares of $.0001 par value preferred stock. At June 30, 1997, the Company had not issued any preferred shares.

Common Stock: In 1996, the Company issued 4,365 shares for employee compensation, contractual services, and professional fees valued at $3,667.

In the second quarter of 1996, the Company initiated an equity restructuring program in which the Company issued 1,260,000 shares of its common stock (par value $.005) along with warrants to purchase an additional 1,260,000 shares of its common stock (par value $.005) at $1/share. Total proceeds from the offering amounted to $830,000. On October 6, 1996, the Company's Board of Directors approved and issued an Extension and Optional New Pricing Offer to the holders of these warrants. These 1,260,000 warrants originally entitled the holders to purchase an additional share each of the Company's common stock at a price of $1 through an expiration date of December 15, 1997. The Extension and Optional New Pricing Offer allows an extension at the same price until December 31, 1998, for no additional consideration or an extension until December 31, 1999, at a share price of $.15 for additional consideration of $.05 per warrant or an extension until December 31, 2000, at a share price of $.05 for additional consideration of $.10 per warrant. During the year ended June 30, 1997, warrants for 800,000 shares were extended to December 31, 1999, and warrants for 200,000 shares were extended to December 31, 2000. Additional paid-in capital of $60,000 was received from these transactions.

Rentrak, Inc. of Portland, Oregon is a large distributor of video cassettes on a pay per view basis nationally. On December 22, 1995, the Company and Rentrak entered into a ten-year agreement whereby Rentrak purchased 357,143 shares of common stock for $200,000. Rentrak has also agreed to acquire an additional $10,000 of common stock for each new non-Rentrak video store acquired by the Company.

On December 28, 1995, the Company issued 4,000,000 shares of common stock as part of the settlement of a class action lawsuit (see Note 10 - Settlement of Legal Matters).

(Continued)

13.

FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996

NOTE 8 - SHAREHOLDERS' EQUITY (Continued)

Stock Options: On May 21, 1993, shareholders approved an incentive stock plan which reserved 3,500,000 shares of the Company's common stock for issuance under the 1993 Incentive Stock Option Plan ("ISO") and the 1993 Non-Qualified Stock Option Plan ("NQSO") (collectively referred to as the "1993 Plan"). The 1993 Plan provides incentives to officers, directors, employees, consultants, and advisors in the form of stock options, subject to certain restrictions. The Company's Board of Directors determines the granting of options under the 1993 Plan, including the exercise period, contingencies, vesting periods, and employee qualifications. Options to be issued under the ISO are intended to qualify as "incentive stock options" under Section 422 of the 1986 Internal Revenue Code (the "Code"), as amended. Options granted under the NQSO are subject to fewer restrictions than the ISO and are considered "Non-Statutory Stock Options" as defined in the Code. As of June 30, 1997, 25,000 options had been issued under the 1993 Plan. The 25,000 options were issued in August 1993 at the exercise price of $1.53 per share. All of the outstanding options were exercisable at June 30, 1997. No options were exercised during the fiscal years ended June 30, 1997 and 1996.

On May 10, 1995, the Company hired Stephen J. Denari as President and Director and promoted Eugene E. Denari, Jr. (father of Stephen) to the position of Senior Vice President and Director. On June 28, 1995, Eugene Denari, Jr. replaced Milton Verret as Chief Executive Officer. On June 26, 1995, the Board approved a stock option grant for 800,000 and 500,000 shares of the Company's common stock at an option price of $.40 per share (the then current market value) to Stephen Denari and Eugene Denari, Jr., respectively. These options may be exercised in accordance with a vesting schedule which extends over a five-quarter period. One-fifth of the options are exercisable each quarter beginning July 1, 1995, until July 1, 1996, at which time all options are vested and exercisable. During fiscal year 1996, Eugene Denari resigned from the Company and its Board; as a part of his resignation settlement, the stock option grant covering 500,000 shares previously granted was entirely canceled. No options were exercised during the fiscal year ended June 30, 1997 and 1996.

Employee Stock Purchase Plan: The Company implemented an Employee Stock Purchase Plan in 1994 which permits substantially all employees to acquire Company common stock. Participating employees may acquire stock at the end of each six-month period (June 30 and December 31 of each year) at a purchase price of 85% of the lower of fair market value at the beginning or end of the period. Employees may designate up to 10% of their base compensation for the purchase of stock under this plan. There are no charges to income in connection with this plan.

(Continued)

14.

FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996

NOTE 9 - STYLUS RECORDS

In April 1994, the Company acquired a majority ownership in Stylus Records, a Delaware Corporation, for 160,000 shares of common stock and the assumption of $105,000 in liabilities. The Founders' Agreement calls for the Company to guarantee certain stock values for 60,000 of these issued shares relative to their market price as of March 31, 1996. The Company has the option to issue additional shares to the extent of any difference between the market price and the guarantee price. The shares issued for this acquisition, including the price guarantees, were valued at $375,000. The Company maintains an 80% ownership in Stylus, with its investment partners Lewin & Rosenthal and Frontline Records maintaining 15% and 5% ownership interests, respectively. The purchase method of accounting was used to record this acquisition. The initial investment included $300,000 of goodwill and $252,078 of organizational costs. At June 30, 1996, the Company evaluated the underlying value of goodwill and the appropriateness of amortizing this asset over future periods. Based upon this evaluation, the Company determined that the original basis for carrying goodwill had diminished and therefore there is no basis for carrying this asset forward to future years. Accordingly, the unamortized balance of $225,000 was charged against 1996 income. Similarly, the Company charged off the unamortized amount of organization costs as of June 30, 1997.

NOTE 10 - SETTLEMENT OF LEGAL MATTERS

On June 27, 1995, the Securities and Exchange Commission Division of Enforcement filed a complaint against the Company, its former CEO, and several of its former officers and employees. The suit was the result of an informal investigation which commenced in fiscal year 1994 and alleged, among other things, that between the fall of 1992 and June 1993, First National and certain individual members then in management disseminated materially false and misleading information to the public regarding projections of revenue that the Company would earn from the release of the animated film Happily Ever After.

The Company entered into an agreement with the SEC to settle the suit on June 27, 1995. As part of the settlement, Milton J. Verret agreed to resign as the Company's Chief Executive Officer, Chief Financial Officer, and Chairman of the Board and is prohibited from attempting to influence First National's management or shareholders in the nomination of directors or other corporate matters during the pendency of the litigation against him. In addition, Mr. Verret agreed to vote his First National Entertainment Corp. common stock in proportion to the votes cast by the Company's other shareholders. As a result of the SEC investigation which began in November 1994, Jeffrey Schwaber resigned as President (even though he was not implicated by the SEC) and Rick D. Busby and Michael Swingler resigned as officers and directors. On May 10, 1995, the Company hired Stephen J. Denari as President and Director and promoted Eugene E. Denari, Jr. (father of Stephen) to the position of Senior Vice President and Director, and on June 27, 1995, Eugene E. Denari, Jr. replaced Mr. Verret as Chief Executive Officer, who resigned as an officer and director.

(Continued)

15.

FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996

NOTE 10 - SETTLEMENT OF LEGAL MATTERS (Continued)

Pursuant to the terms of the settlement, the Company, without admitting or denying the allegations of the complaint, consented to the entry by the court of a final judgment of permanent injunction against it for the securities law violations alleged in the complaint. The Company also agreed to cooperate with the SEC in connection with any discovery request made by the SEC in its ongoing litigation against the individual defendants.

Class Action Lawsuit: The Company and its former executive officers and directors were defendants in a class action lawsuit which commenced in the United States District Court for the Eastern District of Pennsylvania. The action was commenced on July 8, 1993, certified as a class action on September 8, 1994, and alleged fraud and various violations of securities laws in connection with the Company's public disclosures during the period preceding and through the theatrical release of the film Happily Ever After. The Company's motion for a change of venue from Philadelphia to the Western District of Texas was granted on January 31, 1995. The class incorporates all persons who acquired the Company's common stock between March 9, 1993, and June 2, 1993, inclusive. On June 30, 1995, a second shareholder lawsuit was filed in the United States District Court for the Western District of Texas (seeking to be certified as a class action) covering the same facts as the previous shareholder suit. On December 28, 1995, the Company settled the first suit for $50,000 in cash and 4,000,000 shares of common stock, valued at $.50 per share. These amounts, plus legal costs, have been recorded in the 1996 statement of operations as settlement of litigation. The second class action lawsuit filed on June 30, 1995, was dismissed by the plaintiffs based on the settlement of the previous suit.

NOTE 11 - COMMITMENTS AND CONTINGENCIES

The Company received notice from the Screen Actors Guild that supplemental residuals of 4.5% of the first $1,000,000 and 5.4% of all remaining gross producer receipts are due them. The Company's entertainment counsel is researching the matter to determine if the Company has a liability related to this matter. As of June 30, 1997, there has been no determination of liability and the Company believes that if any residuals are due, they are the responsibility of Lou Scheimer and Filmation (the original producer of the film) or its successor in interest.

Contingent Liabilities Against Future Revenues: The Company has agreed to pay compensation to various parties based on gross revenues from the film Happily Ever After as follows:

Mr. Lou Scheimer, creator and original owner of Happily Ever After:

Home Video           -   Forty cents ($.40) for each video cassette
                         unit sold, up to two million units;
                         thereafter, twenty-five cents ($.25) for each
                         additional home video unit sold in excess of
                         two million units;

Video Disc           -   15% of producer's gross;

Merchandising        -   45% of gross revenue received by the Company
                         after deductions of licensing commissions
                         and fees.

(Continued)

16.

FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996