UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              Washington D.C. 20549

                                    FORM 10-K

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

                               For the fiscal year ended: August 31, 1997

                                       OR

|_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                         For the transition period from _________ to __________

                         Commission file number: 0-18066

                                NTN CANADA, INC.
             (Exact name of registrant as specified in its charter)

           New York                                               11-2805051
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)

   14 Meteor Drive, Etobicoke, Ontario                            M9W 1A4
(Address of principal executive offices)                        (Zip Code)

Registrant's telephone number, including area code: (416) 675-6666

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 US$0.0467

      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. |x|

      Aggregate market value (i.e., last price) of voting stock held by
non-affiliates of the Registrant, as of November 10, 1997     US$6,708,195

      Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of November 10, 1997 2,535,359 shares of common
stock, par value     US$.0467 per share

                      DOCUMENTS INCORPORATED BY REFERENCE:
                                      NONE
<PAGE>

                                     PART I

                                 EXCHANGE RATES

      The currency amounts in this Annual Report on Form 10-K, including the
financial statements, are, unless otherwise indicated, expressed in Canadian
dollars ("Cdn$"). This Form 10-K contains translations of certain amounts in
Canadian dollars into United States dollars ("US$") based upon the exchange rate
in effect at the end of the period to which the amount relates, or the exchange
rate on the date specified. For such purposes, the exchange rate means the noon
buying rate in New York City for cable transfers in Canadian dollars as
certified for customs purposes by the Federal Reserve Bank of New York (the
"Noon Buying Rate"). These translations should not be construed as
representations that the Canadian dollar amounts actually represent such U.S.
dollar amounts or that Canadian dollars could be converted into U.S. dollars at
the rate indicated or at any other rate. The Noon Buying Rate at the end of each
of the five years ended August 31, 1997, the average of the Noon Buying Rates on
the last day of each month during each of such fiscal years and the high and low
Noon Buying Rate for each of such fiscal year's were as follows:

<TABLE>
<CAPTION>
                                                       August 31,
                           ----------------------------------------------------------------
                              1997          1996          1995         1994         1993
                              ----          ----          ----         ----         ----
<S>                        <C>           <C>           <C>          <C>          <C>    
At end of period.........  Cdn$1.3885    Cdn$1.3685    Cdn$1.3432   Cdn$1.3712   Cdn$1.3208
Average for period.......      1.3676        1.3634        1.3742       1.3573       1.2718
High for period..........      1.3942        1.3815        1.4193       1.3890       1.3208
Low for period...........      1.3381        1.3401        1.3410       1.3095       1.1943
</TABLE>

            On November 19, 1997 the Noon Buying Rate was Cdn$1.3876.

Item 1. Business.

Formation

      NTN Canada, Inc. (the "Company") was originally incorporated under the
laws of the State of New York on May 12, 1986 under the name Triosearch Inc. On
June 9, 1988, Triosearch changed its name to NTN Canada, Inc. The Company
presently conducts its operations through a wholly owned subsidiary, NTN
Interactive Network Inc. ("NTNIN") which is the principal operating company of
the entity. On October 4, 1994, NetStar Enterprises Inc. ("NetStar") (formerly
Labatt Communications Inc.), an integrated broadcasting and communications
enterprise, acquired approximately 35% of the Company's outstanding common stock
for Cdn$4,252,500 (US$3,150,000 on October 4, 1994).

      On October 2, 1996, NTNIN acquired, effective October 1, 1996, all of the
outstanding stock of Magic Lantern Communications Ltd. ("Magic"), pursuant to
which Magic became a wholly-owned subsidiary of NTNIN. Magic conducts its
operations directly and through its wholly owned subsidiaries 745695 Ontario
Ltd. ("Custom Video"), and B.C. Learning Connection ("BCLC"), and its 75%
ownership of the outstanding shares of Sonoptic Technologies Inc. ("Sonoptic").
On October 10, 1996, Magic acquired 50% of the outstanding shares of 1113659
Ontario Ltd. ("Viewer Services"), a joint 


                                       2
<PAGE>

venture operated with International Tele-Film Enterprises Ltd. Reference is
hereby made to the Company's current report on Form 8-K, filed with the
Securities and Exchange Commission on October 17, 1996, for further information
with respect to the Company's acquisition of Magic.

Recent Developments

      Magic entered into an agreement dated August 18, 1997 to acquire certain
of the business assets of Image Media Ltd. and 802117 Ontario Inc., trading as
Pilot Software ("Image Media"). The agreement was completed on August 31, 1997.

      On August 20, 1997, NTNIN signed a licensing agreement, through its
Hospitality Group, with the Canadian Olympic Association, in which the Company
will broadcast a weekly, half-hour interactive game called the Olympic Trivia
Challenge.

      On September 10, 1997 and effective September 1, 1997, NTNIN acquired 51%
of the outstanding stock of Interlynx Multimedia, Inc., a Toronto corporation
("Interlynx"). This acquisition will be accounted for as a purchase in fiscal
1998.

Financial Information About Industry Segments

      Reference is hereby made to the Business Sector Data for the years ended
August 31 1997 and 1996 in Exhibit 23 below.

General Description of Business

      The Company, through NTNIN, currently provides its products and services
through eight business units or subsidiaries. Of these eight, two are considered
to be the traditional core of the Company's business, that is, directly related
to multi-player interactive entertainment programs. The two traditional core
business units are the Hospitality Group and the Corporate Events/Home Market
Group. Five units, collectively referred to as the "Magic Lantern Group," are
(i) NTNIN's wholly-owned subsidiary Magic, which is involved in the marketing
and distribution of Educational video and media resources, (ii) Magic's
wholly-owned subsidiary Custom Video, which is involved in the manufacturing of
videotape copies, (iii) Custom Video's wholly-owned subsidiary BCLC, which is
involved in the marketing and fulfilment services of educational video titles,
(iv) Magic's 75%-owned subsidiary Sonoptic, which is involved in the conversion
of analog video to digital video formats, and (v) Magic's 50%-owned subsidiary
Viewer Services, which is involved in the inbound telemarketing and fulfilment
services for television broadcasters and others. The eighth unit, Interlynx, is
a leader in the design and development of educational and corporate multimedia,
programming for CD-ROMs and web-sites, animation and 3-D rendering.

      The Hospitality Group is engaged in the marketing and distribution of NTN
Entertainment Network services (the "Network") throughout Canada. These
activities are being conducted through an exclusive license covering Canada
granted to the Company by NTN Communications, Inc. of Carlsbad, California
("Communications"). The license grants NTNIN the right to market the products
and programs of Communications throughout Canada for a 25 year term ending
December 31, 2015. Communications does not have an equity position in the
Company or in NTNIN. The former President of Communications (Daniel C. Downs) is
a director of the Company.


                                       3
<PAGE>

      The Network is designed to capitalize on the growing trend for more
leisure activities through two-way interactive television ("IATV")
communications. Programming can be offered 24 hours a day and consists of
two-way interactive games. The Network features a wide variety of sports and
game programs permitting viewer interaction and participation for 16 hours each
day. It is currently available to over 3,100 subscriber sites (each a "Group
Subscriber") across North America which are primarily hotels, restaurants,
taverns, colleges, military bases and other group viewing locations. Over 500
Group Subscribers are located in Canada. Designed to be hardware independent,
the Network can be transmitted through a variety of techniques: direct
satellite, cable, gateway service, FM sideband, Internet, TV vertical blanking
interval, and telephone.

      The Company's revenues have traditionally been primarily derived from the
delivery of Network programming to customer sites, typically by satellite
("broadcast services"), the rental and sale of equipment used in the reception
of broadcast services and on-subscriber-site interactive participation in
broadcasts over the Network, maintenance services, and event programming for
corporate clients. Revenue from broadcast services was Cdn$3,932,912
(US$2,832,489) for the Company's fiscal year ended August 31, 1997 (the "1997
Fiscal Year").

      Over the past two years, revenue from equipment sales has gradually
decreased, while revenue from equipment rental has risen. These changes reflect
the success of the system rental program introduced over two years ago. Revenue
from equipment sales was Cdn$144,748 (US$104,248), while revenue from equipment
rental was Cdn$1,642,305 (US$1,182,791) for the 1997 Fiscal Year.

      Revenues from maintenance services grows in proportion to the number of
Hospitality Network customers, which pay a monthly fee based on the size of
their system. These revenues were Cdn$539,349 (US$388,440) for the 1997 Fiscal
Year.

      The Corporate Events/Home Market Group is engaged in developing and
delivering interactive programs for corporate clients for use at sales and
training meetings, trade shows, and special events. Revenues from the Corporate
Events/Home Market Group's activities for the 1997 Fiscal Year were Cdn$434,965
(US$313,263).

      The Magic Lantern Group is involved in marketing and distributing
Educational video and media resources, the manufacturing of videotape copies,
the marketing and fulfilment services of educational video titles, the
conversion of analog video to digital video formats and the inbound
telemarketing and fulfilment services for television broadcasters and others.
Revenues from the Magic Lantern Group for the 1997 Fiscal Year were $2,816,152
(US$2,028,197).

      The expanding revenue base from Hospitality system clients in the 1997
Fiscal Year was the major contributor to net profit of Cdn$609,387 (US$438,882).

Research and Development

      The Company has not been involved in basic or applied technology research.
The Company's major contribution to the research and development efforts
involving the Network has been to provide market feedback and recommendations to
Communications on product and program developments which would improve marketing
efforts in Canada. There is little, if any, direct expense incurred in this
effort.


                                       4
<PAGE>

      The Corporate Events/Home Market Group has begun business development and
liaison activities which are expected to lead to the development, marketing, and
delivery of interactive programs delivered to the home consumer market via
third-party providers, through the Internet and distribution systems being
developed by telephone and cable companies in Canada.

The NTN Entertainment Network

      The products of Communications include hardware and software which enables
groups of people to interact with programming delivered to television monitors.
More than 3,100 restaurants, lounges, hotels, and other hospitality sites across
North America have installed systems capable of receiving Network broadcasts
("Subscriber Systems"). The Subscriber Systems receive satellite broadcasts
containing the Network interactive programs, such that thousands of patrons at
Group Subscriber locations can interact with the same programs simultaneously.
NTNIN markets the Network throughout Canada to the hospitality industry,
installs the systems, and provides technical and marketing support to Network
sites.

      The Network is owned and operated by Communications, a company based in
Carlsbad, California. The Network uses existing technology to broadcast two-way
interactive live events to Subscriber Systems. The Network provides digital data
broadcast transmissions which enable equipment and software at Group Subscriber
locations to display text and graphics programming and to interpret responses
from Network viewers. All programming is produced at and transmitted from the
NTN Broadcast Center in Carlsbad. This facility is equipped with video,
satellite and communications equipment, and sophisticated multimedia computers.
Communications can provide simultaneous transmission of up to 16 live events for
interactive play and a multitude of interactive games and other programs,
allowing distribution of different programs to customers in different
geographical locations. The Company has no control of such facilities.

      Each Group Subscriber receives a Subscriber System which includes a
satellite dish antenna, a signal decoder, a personal computer with fully
integrated proprietary software, a base station, and multiple hand-held wireless
response units ("Playmakers") used by customers for interactive play.

      The computer in each Subscriber System controls the TV monitor display
based upon instructions delivered to it over the Network. Viewer responses
entered on the Playmakers are ordinarily processed and displayed within the
Subscriber System without any need for communication to the Broadcast Center.
The Subscriber System can communicate with the Broadcast Center, however, via
modem when appropriate commands are sent over the Network, but the comparatively
small amount of data traveling inward from the Subscriber System to the
Broadcast Center makes it possible to operate the Network at minimal expense.

      In addition to tabulating local Playmaker responses and communicating with
the Broadcast Center, the Subscriber System computer can generate local text
inserts at the direction of the Group Subscriber, and can call up computer
generated color graphics displays for various purposes, including advertisements
sold for broadcast on the Network, all as directed by the Broadcast Center.

Network Programming

      The two-way interactive programming currently featured over the Network
includes a variety of 


                                       5
<PAGE>

interactive sports and trivia games. The broadcast schedule includes between 14
and 17 hours of interactive programs per day. All present Network programming is
structured to provide time for national, regional and local advertisements, as
well as for local inserts, which permit each Group Subscriber to display
announcements of promotional prices or other events at its business location.
Communications holds licenses with major sports leagues which enable it to
produce and deliver interactive games played in conjunction with live broadcasts
of sporting events. Licenses are in place with the National Football League,
National Hockey League, Major League Baseball, as well as the Canadian Olympic
Association.

      NTN Play-Along Games are played in conjunction with live, televised
events. The best established of these is QB1, a game of football strategy which
attracts over 30,000 participants each week across the Network. QB1 is designed
to be played simultaneously with the broadcast of a live football game. In a
typical Group Subscriber environment, QB1 players watch the televised football
game and attempt to call the offensive play about to be played on the field. A
QB1 player may enter his or her play selection from among 20 possible plays at
any time up until the snap of the ball by pushing the appropriate keys on his
Playmaker.

      As play unfolds on the field, a description of the play that actually
takes place is transmitted by the Broadcast Center. The computer in the
Subscriber System receives this information and compares it with the QB1
players' selections. Within seconds, it assigns a point value to each player's
selection depending on the accuracy of the player's prediction. A dedicated
local television monitor then displays that score, together with the names and
rankings of the other QB1 players at the Group Subscriber location. The scores
and rankings are updated after each play.

      DiamondBall is an interactive game played simultaneously with the
broadcast of a live baseball game. With the use of the Playmaker, selections are
made before the pitch which allow the player to predict the outcome. Possible
choices include fly balls, ground balls, the direction of hits, walks,
strikeouts and home runs. Points are awarded for correct calls and are tabulated
and posted in the same manner as in QB1.

      PowerPlay is an interactive hockey game. Played simultaneously with a
live, televised hockey game broadcast, the object of PowerPlay is to predict
play opportunities that will result in goals or shots on goal. The game is
divided into six separate scoring segments, with the winner being determined by
the total points scored in all six segments. Participants use their Playmakers
to enter player selections as well as to choose play sequences they believe will
result in either a goal or a shot on goal.

      NTN Fantasy Games are fantasy league games played in conjunction with
sporting events or rotisserie leagues. These include DreamTeam, a baseball
fantasy league which enables subscribers, through interactive television, to
draft actual baseball players and create whole teams; Hoops, a fantasy game in
which players "manage" a professional all-star basketball team; Brackets, a
basketball or hockey tournament prediction game; and Football Challenge, in
which players make a weekly selection of winners of college and professional
football games. Players playing these programs gain points based upon the level
of their players and teams.

      NTN Premium Trivia Games are promotion-oriented weekly game shows that
usually require an hour of participation. Prizes are awarded to the top
finishers. Games include the following:

            Showdown is designed for competition among all participating Group
      Subscriber 


                                       6
<PAGE>

      locations for major prizes. Not only do players compete among themselves
      at each location, but the comparative scores of different locations are
      also displayed to enhance competition. Showdown is broadcast one night
      each week, 52 weeks a year. Each hour-long show includes five separate
      competitive segments.

            Sports Trivia Challenge is currently broadcast on Thursday evenings
      and follows a format similar to Showdown, but focussed on sports. Players
      are invited to play 60 minutes of sports trivia, competing with players in
      other establishments across the Network.

            Spotlight, broadcast on Friday evenings, quizzes players about the
      world of show business and celebrities. This innovative game tests
      players' knowledge of the entertainment world, and polls their opinions on
      current media topics.

            Playback, broadcast on Saturday evenings, challenges players to
      answer questions on music news, trivia, song titles, and topics from a
      variety of musical genders from classical to hip hop.

            Trivial Pursuit Interactive, scheduled on Tuesdays and Fridays, is
      the interactive television version of the popular trivia board game.

            Sports IQ is a weekly sports trivia game featured on Monday
      evenings.

      Half-hour interactive trivia games comprise the majority of the Network's
programming. Countdown and Wipeout are designed for fast competitive play among
participants at each Group Subscriber location. The Network broadcasts Countdown
and Wipeout daily in half-hour segments. To play the game, players must answer a
series of questions using the Playmaker. The faster the questions are answered
correctly, the more points the player receives. After each question, the correct
answer is displayed on the monitors, together with each player's answer and
total score. In addition, the players' rankings are displayed. Each half-hour
segment is separate, so that the display of scores and names is reset before the
next segment begins. Other Network trivia games include:

            Hockey Hall of Fame Trivia is a specialty sports trivia program
      developed by the Company for exclusive distribution in Canada. Similarly,
      Players Raceworld Trivia and 20th Anniversary Toronto Blue Jays Trivia
      were developed by the Company in conjunction with the Players Racing Team
      and the Toronto Blue Jays Baseball Club, respectively. These specialty
      sports trivia game are sponsored and distributed exclusively on the
      Canadian portion of the Network.

            NightSide is a variety show and trivia game dealing with adult
      topics. It is broadcast one night each week, but may be repeated several
      times a week. Played like other Network games, players use Playmakers to
      answer a series of questions which are followed by jokes, quotes and
      interesting information. NightSide focuses more on entertainment than on
      competition and the content of the game is designed to foster discussion
      among players.

            For subscribers who demand a more challenging trivia game, the
      Network offers Brainbusters, in which players are asked trivia questions
      of greater difficulty. Viewer's Revue is a program which features trivia
      questions submitted by Network viewers.


                                       7
<PAGE>

            The Company launched a new interactive trivia game on August 20,
      1997, in which every Wednesday night, between 8:00 PM and 8:30 PM, players
      are asked trivia questions pertaining to the past 100 years of Olympic
      history.

            Other trivia programs include Topix, half hour programs featuring
      new themes each day; Retroactive, featuring pop-culture trivia with 60s,
      70s and 80s content; Football Trivia; and Football Weekend Roundup, a late
      evening football trivia game featured on Mondays.

Hospitality Market

      The Hospitality market remained the Company's largest traditional core
business in the 1997 Fiscal Year. The Company positions the Network to prospects
and clients as a means of attracting patrons (to play the games), retaining
their patronage (as they return to play again), and increasing the length of
time patrons stay in their establishment. As the number of repeat customers and
their length of stay increases, the hospitality establishment has an increased
opportunity to sell additional food and beverage.

      The Hospitality Group sales force targets the most potent Hospitality
outlets in Canada, including a number of chain accounts. Attractive rental
packages are in place to support the Company's sales efforts. The Company
promotes the Network as one of the best and technically advanced forms of
on-premises advertising to this market, offering long term repetitive exposure
to a captive, attentive, and enthusiastic audience.

      Each hospitality end user receives the Subscriber System, including the
equipment and license to the software, from the Company. In most instances, the
customer rents the equipment from the Company. The Company, in turn, purchases
equipment from several suppliers and the Playmaker devices from Communications.
Following installation, each end user pays a monthly fee to the Company for the
broadcast services.

      The Network programming includes advertising, promotional spots (promoting
Network competitions and special events), and public service announcements. Ten
minutes each hour are available for advertising and promotional spots. Each of
the spots are designed to be fifteen seconds in length for a total of 40 spots
per hour. Communications, at the direction of the Company, can insert
advertising messages into its Network programming for any number or combination
of Canadian Group Subscriber locations. In addition, messages can be broadcast
over the entire Network or custom-tailored for any specific location or for
Canada only.

      The advertising sales staff within the Hospitality Group sells advertising
in blocks of two-fifteen second ad spots per hour for a total of fourteen hours
per day. Selected program sponsorships are also sold, in which event the
Company's graphics artists incorporate advertisers' logos and messages within a
program's content. For example, the Player's Raceworld Trivia shows provide 30
minutes of commercial exposure each week for the Player's Racing Team. Such
sponsorships provide advertisers with premium exposure within a sponsored
program.

      Advertising and sponsorship revenues for the 1997 Fiscal Year were
Cdn$246,090 (US$177,234). Canadian Network sponsors also contributed prizes for
Network game winners, with a total retail value in excess of Cdn$150,000
(US$108,030).


                                       8
<PAGE>

Corporate Market

      The Corporate Events/Home Market Group continues to market, develop, and
deliver a variety of corporate training, testing, and entertainment programs to
a blue chip clientele across Canada and abroad. The Company promotes its
products and services to this market through a direct sales staff, as well as
through event agencies whose sales forces sell NTNIN services as part of a full
service offering. These agencies generated a number of events at national sales
meetings and conferences during the 1997 Fiscal Year. Agents which sell or
resell these services do not operate under contract to the Company or NTNIN and
they are compensated, on a commission basis, when payment is received for their
"sales". None of these firms have "exclusive" arrangements with the Company or
NTNIN.

      The marketing focus changed in the 1997 Fiscal Year in order to attract
more extended and repeat corporate events. The Corporate Events/Home Market
Group is targeting vertical markets, including the pharmaceutical, automotive,
banking, and insurance industries. These industries have diversified workforces
spread throughout the country, requiring effective and compelling communications
tools, which Management believes the Company provides.

      The Group also introduced a new product in the 1997 Fiscal Year which
targeted the human resources departments of large corporations. This product
will enable corporate trainers to develop interactive programs and operate the
interactive systems on their own. A monthly license fee will be charged to such
clients and will be set at an affordable rate to attract volume sales.

      The Company has permanent systems installed at several high profile
venues, including one in the exhibit area of the Hockey Hall of Fame in Toronto.
Another system, located in a large kiosk at GM Place in Vancouver, quizzes
passersby about the General Motors products being promoted. These popular
installations support the Company's efforts to put its systems and programs into
interesting, involving and profitable use in a variety of Corporate and Retail
venues.

Home Market

      The Corporate Events/Home Market Group has recently begun preparations to
market programs, similar to those offered on the Network, to the home consumer
market via the Internet and enhanced distribution systems being introduced by
telephone companies and cable system operators. The home market programs are
intended to provide multi-player interactive games through home computers and
televisions with access to third party services such as gateway services,
corporate and commercial World Wide Web sites, and interactive cable systems.

      The Company has recently entered into a contract with AOL Canada which is
intended to lead to providing AOL Canada with a selection of Canadian oriented
interactive game content for use by subscribers of this gateway service. AOL
Canada has approximately 200,000 subscribers.

      The Company has also entered into agreements, together with
Communications, to provide interactive game content for "tsn.ca", the World Wide
Web site of TSN The Sports Network, the leading sports television specialty
service in Canada, Discovery Channel exn.net (Canada) and to provide interactive
game content for Bell Canada's broadband interactive television trials in
London, Ontario and Repentigny, Quebec. Consumer trials are expected to be
launched later in January 1998. The Company is also providing interactive game
content for N.B. Tel's internet service, called VIBE. 


                                       9
<PAGE>

The Company's games are currently being utilized by VIBE subscribers.

      The Company has also entered into an agreement with Videoway
Communications ("Videoway"), a cable service provider in Canada, pursuant to
which the Company is providing a selection of interactive games for use by
Videoway's cable subscribers.

      Communications has considerable experience in providing interactive
entertainment programming to the home market through its affiliation with GTE
MainStreet, America OnLine, GEnie, and others. Communication's sizable catalogue
of interactive games, exclusive licenses for the delivery of major league
interactive sports, over twelve years of continuous development, programming,
and broadcasting of IATV programs leads the Company to believe that both
Communications and the Company are well positioned for the future in this
market.

Sales and Marketing

      The marketing of the Network in Canada is conducted by the Company's
direct sales force and through a regional sublicensee. This sublicensee, in
turn, is expected to market the system to end-users, primarily Group
Subscribers.

      A sublicense agreement exists for the Province of British Columbia. The
sublicensee receives a commission based solely upon its ability to market the
Network within its exclusive territory. During the year ended August 31, 1997,
commissions of Cdn$190,107 (US$136,915) were paid to the British Columbia
sublicensee.

      The sublicensee is responsible for marketing the Network to end-user
establishments in its assigned territory in a manner consistent with the
Company's policies and directives. The sublicense agreement is generally for a
ten-year term and provides for the payment of a one-time sublicense fee and for
the payment of commissions by the Company based upon Company Group Subscriber
revenues derived from the sublicensee's exclusive region. In areas where the
Company does not have an exclusive sublicensee, the Company markets the Network
directly.

      At present, Communications has distribution arrangements with gateway
services, systems which operate in conjunction with home personal computers
through telephone lines. These services currently have in excess of 15,070,000
subscribers worldwide, of which America OnLine (AOL) has approximately 10
million worldwide, and AOL Canada has approximately 200,000 in Canada. As of the
end of the 1997 Fiscal Year, the Company had only one direct agreement or
arrangement with any provider of gateway services. The Company's revenues will
include the Canadian portion of revenues received by Communications from other
gateway services.

Education

      Communications has been active for several years in bringing interactive
systems and services to the education field. Through its subsidiary LearnStar
Corp. ("LearnStar"), Communications developed LearnStar, a system and curriculum
software for distance learning and in-class use. LearnStar's products and
services were introduced to the education market in the United States in early
1995 and has been licensed to approximately 170 schools to date.

      LearnStar's products and services are targeted at schools and teachers who
are seeking an 


                                       10
<PAGE>

educational tool to increase student interest in learning via interactive
competitions in the classroom. The system enables a school to evaluate the
academic proficiency of the students, while creating an enjoyable environment in
which students seem more apt to participate. Using similar technology to that
used by the Network, the LearnStar interactive learning system can conduct
academic competitions, collect data for surveys and provides local, regional and
national testing capabilities. All of these products and services can be
utilized within a single classroom, at one distinct site, or at multiple schools
throughout the country, all with instantaneous feedback.

      The Company has continued to investigate market opportunities for
LearnStar in Canada. Management believes the education market could become a
growth area for the Company in the coming years. Following the acquisition of
the Magic Lantern Group in October 1996, the Company determined that plans for
the introduction of LearnStar in Canada should be developed in concert with
Magic and this process is presently underway. LearnStar has granted to the
Company the exclusive license to market its products and services for
educational applications throughout Canada.

Other Markets

      Communications has created a wholly-owned subsidiary called IWN, Inc.
("IWN") which is developing interactive gaming applications. IWN's initial focus
is on pari-mutuel wagering, with planned expansion into other gaming venues. The
Company intends to periodically review IWN's development with Communications to
clarify how the Company could benefit when interactive gaming begins in Canada.
The Company has not invested any funds in the gaming application development
project, has not evaluated the interactive gaming market in Canada, and has made
no commitments or plans to expand into lotteries, casinos, and pari-mutuel
betting.

Dependency Upon NTN Communications, Inc.

      All programming for the Network is furnished by Communications and is
supplied through independent transmission companies. In addition, Communications
is the Company's sole supplier of selected components of Network subscriber
systems including Playmakers. The Company has no equity interest in
Communications and the long term viability of the Company's Network business is
dependent upon the continued availability of broadcast services originating at
Communications' Broadcast Center. If Communications ceases operations or
terminates broadcast services, the Company believes, but cannot assure, that
services of the nature, quantity, and quality currently provided by
Communications would become available from others. Any interruption in broadcast
services would result in an interruption in those broadcast services normally
delivered to Group Subscriber. Other Company services would continue, including
the availability of interactive programs and games. The Company has not
formulated plans for action which would be taken should Communications cease
operations or alter the availability or terms of continued availability of
broadcast services.

      Accordingly, the Company is substantially dependent upon the continued
existence of Communications. Based upon its Annual Report on Form 10-K for its
fiscal year ended December 31, 1996, Communications reported a net income (loss)
of approximately US$(22,952,000), US$(3,948,000) and US$707,000 for the years
ended December 31, 1996, 1995 and 1994, respectively. According to its latest
Quarterly Report on Forms 10-Q, Communications reported a net loss of
approximately US$9,709,000 for the nine months ended September 30, 1997, and had
shareholders' equity of US$4,344,000 and a working capital deficiency of
US$5,838,000 at September 30, 1997.


                                       11
<PAGE>

Competition

      The Company currently operates in a number of markets. The traditional
core businesses focus on the Hospitality industry, to which the Company markets
the Network as a revenue generating marketing tool; and the broader corporate
market, to which the Company offers its technology and programs as an effective
medium with which to deliver interactive training and testing programs, and as a
compelling information and entertainment medium for corporate events and trade
shows.

      During the 1996 Fiscal Year, the Hospitality Group became aware of a new
entertainment system attempting to enter the Hospitality market. Called Sports
Active, this system offers only two programs, a football game and a trivia game.
The football game, for which players are charged a per game fee, can be played
by only two customers at a time, is based on prerecorded game simulations
between non-professional "generic" football teams, and lasts approximately 30
minutes. The trivia game is a variation of a CD-Rom based game released to the
retail market approximately one year ago. While it is visually entertaining, it
requires audio and the Company believes this is a significant drawback in the
restaurant environment in which it is being marketed. The Company does not
believe this will be a significant competitive entry.

      The Company has not experienced the impact of any direct competition in
its corporate market to date. The Company defines "direct competition" as other
providers of products or services which offer similar features and benefits to
customers. The Company is not aware of other companies marketing interactive
television services of a comparable nature, within its client base or target
groups, in any manner which competes with the Company. NTNIN tries to position
its products and services so they are not directly comparable to any products or
services available elsewhere.

Magic Lantern Group

      The Magic Lantern Group of companies operates in five principal markets.
Magic Lantern Communications Ltd. markets and distributes an exclusively
licensed library of educational video titles to schools, school boards, and
Ministries of Education across Canada. Compared to the total business volumes of
the 28 members of the Canadian Media Producers and Distributors Association of
Canada trade association, it is believed Magic has approximately a 20% share of
the grades K-12 market, making it the dominant player in this, Magic's primary
market. Magic's exclusive distribution rights enable it to not compete for the
sale of specific titles, but for a share of the available media buying budget
within each educational jurisdiction. Several years ago, Magic began
accumulating digital delivery rights for the titles it distributes, and
approximately 75% of all titles in its library include such rights. It is
believed that this extensive library of titles with digital delivery rights will
favorably position Magic as distribution technologies and delivery systems
migrate to digital formats - a process which is already underway in Canada.

      Custom Video provides video dubbing and conversion services, primarily in
the Southern Ontario market. Dozens of competitors exist in this area, and
Custom Video's market share is unknown. Approximately 45-50% of Custom Video's
current business is from Magic and its subsidiary, BCLC. The remainder is from a
growing number of repeat commercial clients which rely on Custom Video to
provide timely delivery of quality duplications at competitive prices, and from
a small amount of walk-in business traffic. In the past twelve months, Custom
Video has upgraded and increased its capacity in order to ensure it satisfies
the steady increase in demand for its services.


                                       12
<PAGE>

      B.C. Learning Connection has traditionally operated under an exclusive
arrangement with the British Columbia Ministry of Education to provide marketing
and fulfilment services for educational videos in the B.C. school system. The
Company is presently negotiating to extend the term of this arrangement.

      Sonoptic Technologies Inc., located in Saint John, New Brunswick, operates
a digital video facility which converts analog video to digital video formats
suitable for distribution through the Internet, as well as through broadband
distribution networks being established by telephone and cable companies in
Canada and elsewhere. This is a relatively new type of business and, while there
are numerous "low-end" service providers entering the market in North America,
there are no clear leaders or dominant players which have emerged. Sonoptic has
been granted preferential supplier status by NBTel, the provincial telephone
company in New Brunswick, for the conversion of video materials which will be
delivered on its broadband network, now being introduced in the province.
Sonoptic is also positioning itself as the premier source for digital video
consulting and conversion services within the key markets which are expected to
emerge in the next two to three years.

      Viewer Services, a new joint venture company 50% owned by Magic, was
created to assume the inbound telemarketing and product fulfilment business
previously operated by TVOntario, the provincial educational television
broadcaster in Ontario. Viewer Services began operations in November 1996 and
focuses on assuming and building the fulfilment services associated with
TVOntario programming. It has expanded its base of broadcast clients and now
provides similar services for VISION TV and the Knowledge Network. In either of
these regards, it has no direct competition.

Interlynx Multimedia

The Company, effective as of September 1, 1997, acquired 51% of the shares of
Interlynx Multimedia, Inc. of Toronto ("Interlynx"). The acquisition was paid
for with a combination of cash and issuance of shares.

Interlynx is a leader in designing and developing educational and corporate
multimedia, programming for CD-ROMs and Web Sites and animation and 3-D
rendering. Their sales are targeted for both local and international markets.
The acquisition is designed to bolster the Company's production capabilities and
assist in the development of high-speed broadband contracts.

Interlynx also owns 60% of Interlynx International, Inc., the marketing and
sales arm of Interlynx responsible for the international distribution of all
CD-ROM products, licensing and partnerships in other countries.

Employees

      The Company has 99 employees in the 8 subsidiaries, consisting of 10
executives, 19 salespersons, 30 persons involved in technical and warehouse
services, 12 involved in graphic development, 12 clerical staff, 7 in marketing
and 9 individuals involved in finance and administration. During the 1997 Fiscal
Year, the Company anticipates hiring an additional 5 persons in various
capacities to assist in the Company's growth and development. Employee
relationships are solid and the Company believes its planned staff to be
adequate for its anticipated needs.


                                       13
<PAGE>

Item 2. Properties.

      In November 1994, the Company acquired an approximately 25,000 square foot
parcel of land in Etobicoke, Ontario, Canada, on which a 12,500 square foot
free-standing, one story building was previously erected. The Company presently
utilizes this building as its principal place of business. The Company owns the
Etobicoke property and building free of any liens, the purchase mortgage for the
property having been paid in full and satisfied on October 2, 1995.

Magic owns three office units, comprising an aggregate 8,000 square feet of
office space, in a building located in Oakville, Ontario, Canada. These
properties, which collectively serve as Magic's principal executive offices, are
pledged as security for a demand instalment loan, from the Royal Bank of Canada,
with an outstanding principal amount of Cdn$641,000 (US$461,649) as of August
31, 1997. Magic and its subsidiaries also lease (or are negotiating leases for)
additional properties as follows:

<TABLE>
<CAPTION>
                                                                  Lease
                                                      Square   Expiration
       Location                   Purpose              Feet       Date              Annual Rent
       --------                   -------              ----       ----              -----------

<S>                                                    <C>      <C>          <C>              <C>
Saint John, New Brunswick    Offices                   2,342    06/30/00     Cdn$35,130       US$25,670
Langley, British Columbia    Offices                   1,048    12/31/97          8,400           6,138
Oakville, Ontario            Offices and warehouse     4,000    12/01/98         15,970          11,742
Vancouver, British Columbia  Offices and warehouse     8,451    08/31/00         78,171          57,119
</TABLE>

Item 3. Legal Proceedings.

      Set forth below is a description of material pending litigation to which
the Company is a party.

            (a) On June 12, 1992, the Company, together with Communications and
      NTNIN, commenced a lawsuit against Interactive Network, Inc.
      ("Interactive") and its president, David Lockton, in the Federal Court of
      Canada, Trial Division, in Montreal, Quebec, under the title NTN
      Communications, Inc., NTN Sports, Inc. and NTN Canada, Inc. v. David
      Lockton and Interactive Network, Inc. (the "Company Action").

            The Company Action seeks a declaration of non-infringement with
      respect to Canadian Patent No. 1,274,903 held by Interactive (the
      "Interactive Patent") and to establish that the Company, Communications
      and NTNIN have properly done business in Canada since the fall of 1986.

            The basis for the Company's claim in the Company Action is that the
      systems used by the Company to produce interactive programming are not
      within the scope of the claims of the Interactive Patent. The Company
      thereafter amended its complaint to include a claim of invalidity of the
      Interactive Patent based upon untrue and materially misleading claims made
      by Interactive in its petition for the Interactive Patent. Except for the
      aforementioned pleadings, no proceedings or discovery have been undertaken
      in the Company Action.

            (b) Subsequent to the commencement of the Company Action, and on
      June 18, 1992, 


                                       14
<PAGE>

      Interactive commenced a lawsuit against the Company, Communications and
      NTNIN in the Federal Court of Canada, Trial Division, Montreal, Quebec,
      under the titled Interactive Network, Inc. v. NTN Communications, Inc.,
      NTN Sports, Inc. and NTN Canada, Inc. (the "Interactive Action"). The
      Interactive Action alleges that Interactive granted Communications the
      right to use the Interactive Patent, which right Communications then
      improperly licensed to the Company and NTNIN. Interactive alleges that the
      license agreement between Communications and the Company and NTNIN
      infringes upon the Interactive Patent. The Interactive Action seeks a
      declaration of the validity of the Interactive Patent, an injunction
      restraining the Company from further infringement, and either damages (in
      an unspecified amount) or an accounting of profits derived from certain
      games used in Canada. Except for the aforementioned pleadings, no
      proceedings or discovery have been undertaken in the Interactive Actions.

      Management believes that the licenses granted to the Company by
Communications are valid and that the patent infringement claims underlying the
Interactive Action will ultimately be proven to be unfounded. The Company
intends to vigorously defend its position in the Interactive Action and to
prosecute its position in the Company Action; however, there can be no assurance
that any or all of these actions will be decided in favor of the Company. The
Company believes, based in part upon the advice of outside, independent counsel,
that the costs of defending and prosecuting these actions will not have a
material adverse effect upon the Company's financial position.

      In its Quarterly Report on Form 10-Q, for the quarter ended September 30,
1996, Communications stated that "[w]ith the courts [sic] assistance,
[Communications] and [Interactive] have been able to reach a resolution of all
pending disputes in the United States and have agreed to private arbitration
regarding any future licensing, copyright or infringement issues which may arise
between the parties." The disputes referred to in the Communications Form 10-Q
involved litigation in the United States involving allegations similar to the
allegations underlying the Company Action and Interactive Action. In the
Communication Form 10-Q, Communications also noted that "no substantive action
has been taken in the furtherance of" the Company Action or Interactive Action.

      The Company and its property are not a party or subject to any other
material pending legal proceedings, other than ordinary routine litigation
incidental to its business.

      To the knowledge of the Company no proceedings of a material nature have
been or are contemplated against the Company.

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

      The Company did not submit any matters to a vote of its security holders
during the quarter ended August 31, 1997.


                                       15
<PAGE>

                                     PART II

Item 5. Market Price for the Registrant's Common Equity and Related Stockholder
Matters.

Market Information

      The common stock of the Company, par value $.0467 per share (the "Common
Stock"), is traded in the over-the-counter market and is quoted on the Nasdaq
SmallCap Market ("Nasdaq"), under the symbol "NTNC." Set forth below is the
range of high and low bid prices for shares of Common Stock for each full
quarterly period within the Company's two most recent fiscal years, as derived
from reports furnished by the National Association of Securities Dealers, Inc.,
as adjusted to give retroactive effect to the Company's three-for-two (3:2)
stock split made effective August 15, 1996. The information reflects
inter-dealer prices, without retail mark-ups, mark-downs or commissions and may
not necessarily represent actual transactions.

                                                        Bid Prices
                                             --------------------------------
Quarters Ended                                    High                   Low
--------------                                    ----                   ---

November 30, 1995........................    US$4-5/12                  3-1/4
February 29, 1996........................       5-1/12                 3-1/12
May 31, 1996.............................        6-1/2                 4-7/12
August 31, 1996..........................        7-1/8                  4-1/4

November 30, 1996........................            8                  4-7/8
February 28, 1997........................        5-1/4                  3-7/8
May 31, 1997.............................        4-5/8                  2-7/8
August 31, 1997..........................        6-5/8                 3-7/16

Holders

      As of the close of business on August 31, 1997, there were 379 holders of
record of Common Stock. The Company believes that there are approximately 600
beneficial holders of Common Stock.

Dividends

      Since its inception in 1987, the Company has not paid any cash dividends
on its Common Stock. However, the Company has, in the past, declared certain
stock dividends and stock splits. The Company intends to retain earnings, if
any, to finance operations and, therefore, does not expect to declare or pay any
cash dividends on the Common Stock in the foreseeable future.

Item 6. Selected Financial Data.

      The following table sets forth a summary of selected financial information
regarding the Company and its subsidiaries, consolidated, for each of the 


                                       16
<PAGE>

five fiscal years ended August 31, 1997. For the convenience of the reader, the
selected financial information is also given in U.S. dollars, converted at the
Noon Buying Rate in effect at the end of the period to which the amount relates.
(For applicable Noon Buying Rates, see "Exchange Rates" preceding Item 1 above.)
In the 1997 Fiscal Year, depreciation expense has been reclassified and is no
longer included in cost of sales. Previous years' comparatives have been
restated to be consistent.

Statement of Operations Data (Canadian Dollars):

<TABLE>
<CAPTION>
                                                               Year Ended August 31,
                                -----------------------------------------------------------------------------------
                                     1997               1996             1995            1994              1993
                                     ----               ----             ----            ----              ----
<S>                             <C>                <C>              <C>             <C>               <C>       
Operating revenues...........   Cdn$10,351,689     Cdn$6,318,251    Cdn$4,559,382   Cdn$3,147,980     Cdn$2,770,479
Cost of sales................        3,395,898         2,223,916        1,701,629       1,244,462         1,268,250
Gross profit.................        6,955,791         4,094,335        2,857,753       1,903,518         1,502,229
Net income...................          609,387           541,059          357,535          75,694            55,811
Net income per share.........              .23               .23              .17             .05               .07
Weighted average number of
 shares outstanding..........        2,694,734         2,392,548        2,146,226       1,517,348           779,097
--------------------------------------------------------------------------------------------------------------------
</TABLE>

Balance Sheet Data (Canadian Dollars):

<TABLE>
<CAPTION>
                                                                    August 31,
                                -----------------------------------------------------------------------------------
                                     1997               1996             1995            1994              1993
                                     ----               ----             ----            ----              ----
<S>                             <C>                <C>              <C>             <C>               <C>       
Total assets.................   Cdn$14,287,602     Cdn$9,883,093    Cdn$8,352,670   Cdn$3,575,115     Cdn$3,043,832
Long-term obligations........        2,185,249              -0 -              -0-            -0 -            18,804
Shareholders' equity.........        9,488,648         8,877,434        7,536,411       2,338,277         2,148,719

Statement of Operations Data  (United States Dollars):
</TABLE>

<TABLE>
<CAPTION>
                                                               Year Ended August 31,
                                -----------------------------------------------------------------------------------
                                     1997               1996             1995            1994              1993
                                     ----               ----             ----            ----              ----
<S>                             <C>                <C>              <C>             <C>               <C>       
Operating revenues...........   US$7,455,304       US$4,616,917     US$3,394,418    US$2,295,785      US$2,097,576
Cost of sales................      2,445,731          1,830,963        1,266,847         907,571           960,214
Gross profit.................      5,009,573          2,785,954        2,127,571       1,388,214         1,137,363
Net income...................        438,882            395,366          266,182          55,203            42,255
Net income per share.........            .16                .17              .12             .04               .05
Weighted average number of                    
 shares outstanding..........      2,694,734          2,392,548        2,146,226       1,517,348           779,097
</TABLE>

Balance Sheet Data (United States Dollars):

<TABLE>
<CAPTION>
                                                                    August 31,
                                -----------------------------------------------------------------------------------
                                     1997               1996             1995            1994              1993
                                     ----               ----             ----            ----              ----
<S>                             <C>                <C>              <C>             <C>               <C>       
Total assets.................    US$10,289,955     US$7,221,844     US$6,218,486     US$2,607,289      US$2,304,537
Long-term obligations........        1,573,820              -0-              -0-              -0-            14,237
Shareholders' equity.........        6,833,740        6,486,981        5,610,788        1,705,278         1,626,831
--------------------------------------------------------------------------------------------------------------------
</TABLE>

               No cash dividends have been declared for any of the
                         fiscal years presented above.


                                       17
<PAGE>

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.

Introduction

      The financial statements of the Company and the information contained in
this Management's Discussion and Analysis of Financial Condition and Results of
Operations are expressed in Canadian dollars. For the convenience of the reader,
in this Management's Discussion and Analysis, certain financial amounts are also
given in U.S. dollars, converted at the Noon Buying Rate in effect at the end of
the period to which the amount relates, or the exchange rate on the date
specified herein. (For applicable Noon Buying Rates, see "Exchange Rates"
preceding Item 1 above.) As the Noon Buying Rate fluctuates daily, financial
comparisons between periods expressed in U.S. dollars do not accurately reflect
the true difference in the Company's financial position or results of operations
between periods. Accordingly, the comparisons between periods presented below,
both in dollar amounts and as percentages from prior periods, are expressed in
Canadian dollars only.

Results of Operations

Year Ended August 31, 1997 Compared to Year Ended August 31, 1996

      Revenues. Revenues from program content services for the 1997 Fiscal Year
were Cdn$3,932,912 (US$2,832,490), compared to Cdn$3,520,814 (US$2,572,754) for
the Company's fiscal year ended August 31, 1996 (the "1996 Fiscal Year"), an
increase of Cdn$412,098 or 11.7%. This increase is primarily the result of an
increase in the average number of sites outstanding in 1997 when compared to the
average number of sites outstanding in 1996.

      Revenues from equipment rental were Cdn$1,642,305 (US$1,182,791), compared
to Cdn$959,153 (US$700,879) for the 1996 Fiscal Year, an increase of Cdn$683,152
or 71.2%. This increase is primarily the result of an increase in the average
number of rental systems outstanding in 1997 when compared to the average number
of rental systems outstanding in 1996. Revenues from event programming for the
1997 Fiscal Year were Cdn$434,965 (US$313,263), compared to Cdn$409,722
(US$299,395) for the 1996 Fiscal Year, an increase of Cdn$25,243 or 6.2%. This
increase is due primarily to increased initiatives in this area in 1997.

      Revenues from maintenance services were Cdn$539,349 (US$388,440) for the
1997 Fiscal Year, compared to Cdn$476,533 (US$348,216) for the 1996 Fiscal Year,
an increase of Cdn$62,816 or 13.2%. This increase is primarily the result of an
increase in the average number of systems and rental Playmakers outstanding in
1997 when compared to the average number outstanding in 1996.

      Revenues from equipment sales, which were Cdn$144,748 (US$104,248),
remained relatively constant when compared to Cdn$148,330 (US$108,389) for the
1996 Fiscal Year, a decrease of Cdn$3,582 or 2.4%. This decrease is reflective
of the Company's initiatives in introducing a rental equipment program over 2
years ago.

      Revenues from ad sponsorship were Cdn$246,090 (US$177,234) for the 1997
Fiscal Year, compared to Cdn$198,989 (US$145,407) for the 1996 Fiscal Year, an
increase of Cdn$47,101 or 23.7%. This increase is primarily the result of
increased initiatives in this area.

      Revenues from video sales and video dubbing, as earned by the Magic
Lantern Group, were 


                                       18
<PAGE>

Cdn$2,277,768 (US$1,640,452) and Cdn$399,082 (US$287,420) respectively, for the
1997 Fiscal Year, the first year of ownership by the Company.

      Other revenues, as earned by NTNIN and NTN Canada Inc., which consist
primarily of revenue from internet services and interest income, were
Cdn$595,168 (US$428,641), compared to Cdn$604,710 (US$441,878) for the 1996
Fiscal Year, a decrease of Cdn$9,542 or 1.6%. Other revenues, as earned by the
Magic Lantern Group, consist primarily of revenue from video conversion
services. Revenues in this area were Cdn$139,302 (US$100,326) for the 1997
Fiscal Year, the first year of ownership by the Company.

      As a result of the foregoing, the Company's total revenues were
Cdn$10,351,689 (US$7,455,304), compared to Cdn$6,318,251 (US$4,616,917) for the
1996 Fiscal Year, an increase of Cdn$4,033,438 or 63.8%. Excluding total
revenues from the Magic Lantern Group of Cdn$2,816,152 (US$2,028,197), revenues
were Cdn$7,535,537 (US$5,427,106) for the 1997 Fiscal Year, compared to revenues
of Cdn$6,318,251 (US$4,616,917) from the 1996 Fiscal Year, an increase of
Cdn$1,217,286 or 19.3%.

      Cost of Sales. Commissions for the 1997 Fiscal Year were Cdn$1,757,922
(US$1,266,058), compared to Cdn$1,549,729 (US$1,132,429) for the 1996 Fiscal
Year, an increase of Cdn$208,193 or 13.4%. This increase is primarily the result
of an increase in the average number of sites outstanding in 1997 compared to
the average number outstanding in 1996. Since the amount the Company is billed
by Communications is a direct function of the number of sites, an increase in
the number of average sites outstanding in 1997 would result in higher
commissions payable to Communications in 1997, than the level experienced in
1996. As a percentage of the Company's total revenues, such costs decreased to
17.0% for the 1997 Fiscal Year from 24.5% for the 1996 Fiscal Year. This
decrease is primarily the result of an increase in sales which are not
commissionable, including sales made by the Company's direct sales force who do
not receive commission, and revenues from the Magic Lantern Group for the year.

      Equipment costs were Cdn$258,701 (US$186,317), compared to Cdn$298,243
(US$217,934) for the 1996 Fiscal Year, a decrease of Cdn$39,542 or 13.2%. As a
percentage of the Company's total revenues, such costs decreased to 2.5% for the
1997 Fiscal Year from 4.7% for the 1996 Fiscal Year. This decrease, both in
total amount and as a percentage of total revenue, is primarily the result of a
decreased level of equipment sales, in 1997 when compared to the level of
equipment sales in 1996, resulting from the continued success of the rental
program.

      Video and video dubbing costs, originating from the Magic Lantern Group,
were Cdn$797,636 (US$574,459) and Cdn$212,072 (US$152,735), for the 1997 Fiscal
Year. As a percentage of the Company's total revenues, these costs were 7.7% and
2.0%.

      Other costs, originating from activities of NTNIN, were Cdn$359,886
(US$259,190), compared to Cdn$375,944 (US$274,712) for the 1996 Fiscal Year, a
decrease of Cdn$16,058 or 4.3%. As a percentage of the Company's total revenues,
such costs decreased to 3.5% for the 1997 Fiscal Year from 6.0% for the 1996
Fiscal Year. Other costs, originating from the activities of the Magic Lantern
Group, were Cdn$9,681 (US$6,972) for the 1997 Fiscal Year, which were 0.1% of
the Company's total revenues.

      As a result of the foregoing, the Company's total cost of sales was
Cdn$3,395,898 


                                       19
<PAGE>

(US$2,445,731), compared to Cdn$2,223,916 (US$1,625,076) for the 1996 Fiscal
Year, an increase of Cdn$1,171,982 or 52.7%. Excluding the Magic Lantern Group's
cost of sales of Cdn$1,019,389 (US$734,166), cost of sales were Cdn$2,376,509
(US$1,711,566) in the 1997 Fiscal Year, compared to Cdn$2,223,916 (US$1,625,076)
in the prior year, an increase of $152,593 or 6.9%. Total gross margins improved
to 67.2% in the 1997 Fiscal Year from 64.8% in the 1996 Fiscal Year, and
excluding the Magic Lantern Group, the gross margin improved to 68.5% in the
1997 Fiscal Year.

      Expenses. Selling, general and administrative expenses for the 1997 Fiscal
Year were Cdn$4,786,519 (US$3,447,259), compared to Cdn$2,642,853 (US$1,931,204)
for the 1996 Fiscal Year, an increase of Cdn$2,143,666 or 81.1%. These expenses
for the 1997 Fiscal Year, excluding those of the Magic Lantern Group of
Cdn$1,394,541 (US$1,004,351), totaled Cdn$3,391,978 (US$2,442,908), compared to
Cdn$2,642,853 (US$1,931,204) for the 1996 Fiscal Year, an increase of
Cdn$749,125 or 28.3%. As a percentage of the Company's total revenues, total
selling, general and administrative expenses increased to 46.2% for the 1997
Fiscal Year from 41.8% for the 1996 Fiscal Year. This increase in percentage is
primarily the result of the addition of staff and rising salaries in 1997, when
compared to 1996.

      Bad debts expense was Cdn$48,284 (US$34,774), compared to Cdn$54,990
(US$40,183) for the 1996 Fiscal Year, a decrease of Cdn$6,706 or 12.2%. As a
percentage of the Company's total revenues, such costs decreased to 0.5% for the
1997 Fiscal Year from 0.9% for the 1996 Fiscal Year. This decrease is primarily
the result of an overall improvement in the management of the Company's accounts
receivable.

      Interest and bank charges for the 1997 Fiscal Year were Cdn$109,834
(US$79,103), compared to Cdn$8,657 (US$6,326) for the 1996 Fiscal Year, an
increase of Cdn$101,177 or 1168.7%. As a percentage of the Company's total
revenues, such costs increased to 1.1% for the 1997 Fiscal Year from 0.1% for
the 1996 Fiscal Year. This increase is the result of the increased debt load
assumed upon the Magic Lantern Group Acquisition.

      Depreciation and amortization for the 1997 Fiscal Year were Cdn$952,145
(US$685,736), compared to Cdn$383,776 (US$280,436) for the 1996 Fiscal Year, an
increase of Cdn$568,369 or 148.1%. As a percentage of the Company's total
revenues, such costs increased to 9.2% for the 1997 Fiscal Year from 6.1% for
the 1996 Fiscal Year. This increase is the result of both depreciation on the
increased amount of rental equipment in the field, attributable to an increased
number of average rental sites outstanding in 1997, and amortization of goodwill
associated with the purchase of the Magic Lantern Group.

      Income Taxes. Provision for income taxes was Cdn$433,900 (US$312,495) for
the 1997 Fiscal Year, compared to Cdn$463,000 (US$338,327) for the 1996 Fiscal
Year, a decrease of Cdn$29,100 or 6.3%. The provision for taxes is lower in 1997
when compared to the 1996 provision due to a lower level of taxable income
experienced in 1997.

      Net Income. As a result of all of the above, the Company's net income for
the 1997 Fiscal Year was Cdn$609,387 (US$438,882), compared to Cdn$541,059
(US$395,366) for the 1996 Fiscal Year, an increase of Cdn$68,328 or 12.6%. This
represents a decrease in net income as a percentage of total revenues to 5.9% in
the 1997 Fiscal Year from 8.6% in the 1996 Fiscal Year.


                                       20
<PAGE>

Year Ended August 31, 1996 Compared to Year Ended August 31, 1995

      Revenues. Revenues from program content services for the 1996 Fiscal Year
were Cdn$3,520,814 (US$2,572,754), compared to Cdn$2,772,319 (US$2,063,966) for
the Company's fiscal year ended August 31, 1995 (the "1995 Fiscal Year"), an
increase of Cdn$748,495 or 27%. This increase was primarily the result of a net
increase of 100 Network locations during the year.

      Revenues from equipment rental were Cdn$959,153 (US$700,879), compared to
Cdn$517,950 (US$385,609) for the 1995 Fiscal Year, an increase of Cdn$441,203 or
85.2%. This increase was primarily the result of an increase in the number of
rental systems and an increase in the number of Playmakers per system installed
in Group Subscriber locations.

      Revenues from event programming for the 1996 Fiscal Year were Cdn$409,722
(US$299,395), compared to Cdn$373,477 (US$278,050) for the 1995 Fiscal Year, an
increase of Cdn$36,245 or 9.7%. This increase was primarily the result of sales
efforts leading to a greater number of higher revenue-producing events.

      Revenues from maintenance services were Cdn$476,533 (US$348,216), compared
to Cdn$381,008 (US$283,657) for the 1995 Fiscal Year, an increase of Cdn$95,525
or 25.1%. This increase was primarily the result of an increase in the number of
systems and rental Playmakers installed in Group Subscriber locations.

      Revenues from equipment sales were Cdn$148,330 (US$108,389), compared to
Cdn$215,152 (US$160,179) for the 1995 Fiscal Year, a decrease of Cdn$66,822 or
31.1%. This decrease was primarily the result of a majority of Group Subscribers
preferring the system rental program which was begun two years earlier, as
evidenced by the increase in revenues from equipment rental.

      Ad sponsorship revenues increased to Cdn$198,989 (US$145,407) in Fiscal
Year 1996 from Cdn$18,414 (US$13,709) in the prior year, an increase of
Cdn$180,575 or 980.6%. this increase was primarily due to increased advertising
and sponsorship revenues from a larger number of advertisers.

      Other revenues, consisting primarily of interest income and revenues from
internet services, were Cdn$604,710 (US$441,878), compared to Cdn$281,062
(US$209,248) for the 1995 Fiscal Year, an increase of Cdn$323,648 or 115.2%.
This increase is primarily the result of increased revenues from internet
services, which were new in 1996.

      As a result of the foregoing, the Company's total revenues were
Cdn$6,318,251 (US$4,616,917), compared to Cdn$4,559,382 (US$3,394,418) for the
1995 Fiscal Year, an increase of Cdn$1,758,869 or 38.6%.

      Cost of Sales. Commissions for the 1996 Fiscal Year were Cdn$1,549,729
(US$1,132,429), compared to Cdn$1,340,196 (US$997,764) for the 1995 Fiscal Year,
an increase of Cdn$209,533 or 15.6%. As a percentage of the Company's total
revenues, such costs decreased to 24.5% for the 1996 Fiscal Year from 29.4% for
the 1995 Fiscal Year. This decrease is primarily the result of an increase in
sales which are not commissionable, including sales made by the Company's direct
sales force who do not receive commission.

      Equipment costs were Cdn$298,243 (US$217,934), compared to Cdn$198,344
(US$147,665) 


                                       21
<PAGE>

for the 1995 Fiscal Year, an increase of Cdn$99,899 or 50.4%. As a percentage of
the Company's total revenues, such costs increased to 4.7% for the 1996 Fiscal
Year from 4.4% for the 1995 Fiscal Year. This increase, both in total amount and
as a percentage of total revenue, is primarily the result of increased
refurbishing costs related to equipment at Group Subscriber locations.

      Other costs were Cdn$375,944 (US$274,712), compared to Cdn$163,089
(US$121,418) for the 1995 Fiscal Year, an increase of Cdn$212,855 or 130.5%. As
a percentage of the Company's total revenues, such costs increased to 6.0% for
the 1996 Fiscal Year from 3.6% for the 1995 Fiscal Year. This increase is
primarily the result of costs associated with advertising and sponsorships and
event programming which were new in the 1996 Fiscal Year.

      As a result of the foregoing, the Company's total costs of sales were
Cdn$2,223,916 (US$1,625,076), compared to Cdn$1,701,629 (US$1,266,847) for the
1995 Fiscal Year, an increase of Cdn$522,287 or 30.7%, and total gross margins
improved to 64.8% in the 1996 Fiscal Year from 62.7% in the 1995 Fiscal Year.

      Expenses. Selling, general and administrative expenses for the 1996 Fiscal
Year were Cdn$2,642,853 (US$1,931,204), compared to Cdn$2,043,369 (US$1,521,269)
for the 1995 Fiscal Year, an increase of Cdn$599,484 or 29.3%. As a percentage
of the Company's total revenues, such expenses decreased to 41.8% for the 1996
Fiscal Year from 44.8% for the 1995 Fiscal Year. This decrease in percentage is
primarily the result of improved utilization of staff and resources, as well as
the Company's existing physical premises having the capacity to serve it without
additional cost as revenues increased.

      Bad debts expense was Cdn$54,990 (US$40,183), compared to Cdn$57,653
(US$42,922) for the 1995 Fiscal Year, a decrease of Cdn$2,663 or 4.6%. As a
percentage of the Company's total revenues, such costs decreased to 0.9% for the
1996 Fiscal Year from 1.3% for the 1995 Fiscal Year. This decrease is primarily
the result of an overall improvement in the management of the Company's accounts
receivable.

      Interest and bank charges for the 1996 Fiscal Year were Cdn$8,657
(US$6,326), compared to Cdn$28,311 (US$21,077) for the 1995 Fiscal Year, an
decrease of Cdn$19,654 or 69.4%. As a percentage of the Company's total
revenues, such costs decreased to 0.14% for the 1996 Fiscal Year from 0.62% for
the 1995 Fiscal Year. This decrease is primarily the result of the full payment
of a mortgage on the Company's building in October 1995.

      Depreciation and amortization for the 1996 Fiscal Year were Cdn$383,776
(US$280,436), compared to Cdn$231,785 (US$172,562) for the 1995 Fiscal Year, an
increase of Cdn$151,991 or 65.6%. As a percentage of the Company's total
revenues, such costs increased to 6.1% for the 1996 Fiscal Year from 5.1% for
the 1995 Fiscal Year.

      Income Taxes. Provision for income taxes were Cdn$463,000 (US$338,327) for
the 1996 Fiscal Year, compared to Cdn$139,100 (US$103,559) for the 1995 Fiscal
Year, an increase of Cdn$323,900 or 232.9%. The provision for taxes is higher in
1996 when compared to the 1995 provision due to a higher level of taxable income
experienced in 1996.

      Net Income. As a result of all of the above, the Company's net income for
the 1996 Fiscal Year was Cdn$541,059 (US$395,366), compared to Cdn$357,535
(US$266,182) for the 1995 Fiscal Year, an increase of Cdn$183,524 or 51.3%. This
represents an increase in net income as a percentage of total 


                                       22
<PAGE>

revenues to 8.6% in the 1996 Fiscal Year from 7.8% in the 1995 Fiscal Year.

Liquidity and Capital Resources

      At August 31, 1997, the Company had working capital of Cdn$3,499,862
(US$2,520,606), a decrease of Cdn$2,586,294 from working capital of
Cdn$6,086,156 (US$4,447,319) at August 31, 1996. This decrease is primarily due
to the increased debt load assumed on the acquisition of the Magic Lantern
Group.

      For the 1997 Fiscal Year, the Company had a net increase in cash flow of
Cdn$643,908 (US$463,744), an increase from its net decrease in cash flow of
Cdn$1,320,251 (US$964,743) for the 1996 Fiscal Year. Net positive cash flow for
the 1995 Fiscal Year was Cdn$1,486,036 (US$1,106,340). The increase in net cash
flow for the 1997 Fiscal Year was primarily due to cash provided from
operations.

      Cash provided by operating activities for the 1997 Fiscal Year was
Cdn$3,814,770 (US$2,747,404), an increase of Cdn$4,168,913 from cash used by
operating activities for the 1996 Fiscal Year. The major factors contributing to
this increase from the 1996 Fiscal Year include: an increase in net income
before depreciation and amortization of Cdn$636,697 (US$458,550); a decrease in
short-term investments of Cdn$1,872,137 (US$1,348,316); a decrease in inventory
of Cdn$180,134 (US$129,733), due to an increased level of inventory converted to
rental equipment during the year; a decrease in prepaid expenses of Cdn$253,487
(US$182,562); and increases in accounts payable and accrued liabilities and
income taxes payable of Cdn$92,744 (US$66,794) and Cdn$108,197 (US$77,924)
respectively, due mainly to expanding operations, higher debt load, and higher
effective tax rates in 1997, respectively. These sources of operating cash were
mitigated by the use of cash resulting from the increase in accounts receivable
of Cdn$286,008 (US$205,983), which resulted from increased sales levels in 1997.
Cash used by operations for the 1996 Fiscal Year decreased by Cdn$1,626,179 from
the cash used in operations in the 1995 Fiscal Year, primarily due to an
increase in net income before depreciation and amortization of Cdn$335,515
(US$245,170), as well as increases in accounts payable and accrued liabilities
of Cdn$251,329 (US$183,653) resulting from growth in the Company's operations.
Income taxes payable increased Cdn$162,294 (US$118,593) from the prior year as a
result of increased taxable income. These sources of operating cash were offset
by the use of cash in increasing short-term investments by Cdn$1,525,770
(US$1,114,921). Also, inventory increased by Cdn$75,915 (US$55,473), as required
to service the increase in Group Subscriber locations, prepaid expenses
increased by Cdn$11,732 (US$8,573), and accounts receivable increased by
Cdn$99,184 (US$72,476) in the 1996 Fiscal Year, primarily due to increased sales
levels.

      Cash used in investing activities in both the 1997 Fiscal Year and 1996
Fiscal Year was Cdn$3,092,057 (US$2,226,905) and Cdn$1,521,849 (US$1,112,056),
respectively. Cash used in the 1997 Fiscal Year was greater than in the prior
fiscal year primarily due to the Company's purchase of the Magic Lantern Group
totaling Cdn$1,644,497 (US$1,184,369), the investment in Viewer Services of
Cdn$38,305 (US$27,587) by Magic and the purchase of certain of the business
assets and the resulting goodwill of Image Media by Magic for Cdn$590,000
(US$424,919). The above uses of cash were somewhat offset by the decrease in
notes receivable in the 1997 Fiscal Year of Cdn$221,510 (US$159,532).

      Cash used in financing activities in the 1997 Fiscal Year was Cdn$78,805
(US$56,755) which decreased by Cdn$634,546 from the amount provided by financing
activities of Cdn$555,741 


                                       23
<PAGE>

(US$406,095) in the 1996 Fiscal Year. This decrease was primarily due to the
fact that in the 1996 Fiscal Year, the Company received net proceeds of
Cdn$799,964 (US$584,555) on the issuance of 385,386 shares of its Common Stock
compared to only Cdn$1,827 (US$1,316) of net proceeds received on 375 shares
issued in the 1997 Fiscal Year.

      The Company believes that its working capital position provides the
required liquidity on both a short and long term basis and that its will not
require external financing for its operating activities during the 1998 Fiscal
Year, as based upon the Company's present plans for the 1998 Fiscal Year.
However, any changes in such plans may require the Company to seek outside
financing. No arrangements are presently in place for outside financing should
the need arise.

Inflation

      The rate of inflation has had little impact on the Company's operations or
financial position during the three fiscal years ended August 31, 1997, and
inflation is not expected to have a significant impact on the Company's
operations or financial position during the 1998 Fiscal Year.

      The Company pays a number of its suppliers, including its licensor and
principal supplier, Communications, in US dollars. Therefore, fluctuations in
the value of the Canadian dollar against the US dollar will have an impact on
gross profit as well as the net income of the Company. If the value of the
Canadian dollar falls against the US dollar, the cost of sales of the Company
will increase thereby reducing the Company's gross profit and net income.
Conversely, if the value of the Canadian dollar rises against the US dollar,
gross profit and net income will increase.

Item 8. Financial Statements and Supplementary Data.

      Set forth below is a list of the consolidated financial statements of the
Company being furnished in this Annual Report on Form 10-K pursuant to the
instructions to Item 8 to Form 10-K and their respective locations herein.

Financial Statement                                                    Location*
-------------------                                                    --------

Report of Independent Auditors........................................  F - 1
Consolidated Balance Sheets...........................................  F - 2
Consolidated Statements of Operations and Retained Earnings (Deficit).  F - 3
Consolidated Statements of Cash Flows.................................  F - 4
Notes to Consolidated Financial Statements............................  F - 5

----------
*     Page F-1 follows page 38 to this Annual Report on Form 10-K.

Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures.

None.


                                       24
<PAGE>

                                    PART III

Item 10. Directors and Executive Officers of the Registrant.

                                                                        Director
Name                 Age    Principal Positions with the Company          Since
----                 ---    ------------------------------------          -----

Peter Rona            51   President, Chief Executive Officer,            1987
                           Principal Financial and Accounting 
                           Officer and Chairman of the Board 
                           of Directors of the Company 
                           
Douglas R. Connolly   44   President of Magic Lantern Communications      1996
                           Ltd.; Director of the Company
Daniel C. Downs       58   Director of the Company                        1993
James R. Newell       40   Director of the Company                        1994
James Thompson        55   Director of the Company                        1997
Dale G. Smith         48   Director of the Company                        1993
Adrian P. Towning     53   Director of the Company                        1994
Mark Truman           42   Acting Secretary of the Company                N/A

      Peter Rona has been the President, Chief Executive Officer, Principal
Financial and Accounting Officer and a director of the Company since September
1, 1987. He has been President of NTN Interactive Network, Inc. (formerly, NTN
Sports, Inc. until 1993) from 1985 to 1991 and February 1993 to present. Mr.
Rona has also been the President, sole director and sole shareholder of Anor
Management, Ltd., a personal holding company since 1987.

      Douglas Connolly has been the President and a director of Magic Lantern
Communications Ltd. (and its predecessor corporation) since 1985. On October 2,
1996, the Company acquired all of the outstanding stock of Magic. Mr. Connolly
also has been President, director and a principal shareholder of Connolly-Daw
Holdings Inc. (since 1987) and 1199846 Ontario Ltd. (since September 1996), two
personal holding companies.

      Daniel C. Downs has been Executive Vice-President (1983 to April 1994),
Chief Operating Officer (1983 to October 1996), President (April 1994 to March
1997) and a Director (1985 to June 1997) of NTN Communications, Inc., a
developer and distributor of interactive programs. Under a License Agreement,
dated March 23, 1990 (the "License Agreement"), between Communications and
NTNIN, the Company, through NTNIN, holds the exclusive license to market the
products and programs of Communications throughout Canada through December 31,
2015. Mr. Downs was an independent marketing consultant from 1981 to 1983,
during which time he also worked on the development of the interactive game QB1.
From 1979 to 1981, he served as Executive Vice-President and General Manager of
Hollywood Park Race Course. From 1974 to 1979, he served as Executive and
General Manager for the Southern California Racing Association at Los Alamitos
Race Course.

      James R. Newell is the Senior Vice President of Finance and Chief
Financial Officer (October 1993 to present) of NetStar Communications Inc.
(formerly, Labatt Communications Inc.), a company 


                                       25
<PAGE>

involved in broadcast operations. Mr. Newell was the Assistant Treasurer (1986
to 1987), Treasurer (1987 to 1989) and Vice President of Finance and Chief
Financial Officer (1989 to October 1993) of Gandalf Technologies Inc., a
manufacturer of data communications products. He was an auditor with KPMG
(formerly, Peat Marwick Mitchell), an international firm of chartered
accountants from 1980 to 1986. Mr. Newell is currently a director of The
Discovery Channel (since March 1995).

      James Thompson is the President (since January 1997) of Netstar
Communications, Inc. (formerly Labatt Communications, Inc.), President (since
June 1994) of TSN The Sports Network ("TSN"), a cable network providing sports,
news and entertainment programming throughout Canada and an affiliate of
Netstar. Mr. Thompson also served as General Manager (July 1988 to January
1997), Vice-President (July 1988 to June 1994), Vice-President of Programming
(January 1986 to July 1988) and Program Director (July 1985 to January 1986) of
TSN. Prior to joining TSN, Mr. Thompson was employed for over twenty years by
the Canadian Broadcasting Corporation, serving in positions of increasing
responsibility up to the level of Executive Producer.

      Dale G. Smith has been an officer and part owner of Montebello Farms Inc.,
the world's second largest breeders of Straight Egyptian Arabian Horses, since
1990. From 1988 to 1990, he was the President of Oden Capital Corporation, a
privately owned venture capital company. From 1969 to 1988, he was a member of
Deloitte & Touche, chartered accountants, having been elected a partner in 1980.

      Adrian P. Towning is a private, independent investor in several companies
involved in the communications industry. As a result of his investments, he has
served as a director of some of these companies, including Medical
Communications Corporation ("MCC") (1994 to July 1996). On May 14, 1996, MCC
filed a petition under Chapter 7 of the United States Bankruptcy Code and the
Bankruptcy Court appointed a Trustee of MCC on July 11, 1996. On July 16, 1996,
MCC was dissolved. From 1983 to 1989, he established and managed Anglo-
Massachusetts Investments Incorporated, with offices in Boston and London, which
was involved in providing financial advice to Europeans.

      Mark Truman has been the Controller of the Company since December of 1994.

      Pursuant to a Designation Agreement, dated as of October 4, 1994, among
the Company, NTNIN and NetStar, the Company has granted NetStar the right to
designate one-third (1/3) of the members of the Company's Board of Directors so
long as NetStar is the owner of at least 20% and not greater than 50% of the
outstanding Common Stock. Should NetStar's ownership be at least 10% and less
than 20% of the outstanding Common Stock, NetStar would be entitled to designate
one-sixth (1/6) of the members of the Company's Board. Further, should NetStar's
ownership exceed 50% of the outstanding Common Stock, NetStar shall be entitled
to designate one-half (1/2) of the members of the Company's Board. In accordance
with the terms of the Designation Agreement, James R. Newell and James Thompson
have been designated by NetStar as directors of the Company.

Item 11. Executive Compensation.

Summary Compensation Table

      The following table sets forth information concerning the compensation
paid or accrued by the Company during the three years ended August 31, 1997 to
those individuals who served as Chief 


                                       26
<PAGE>

Executive Officer of the Company during the 1997 Fiscal Year and all other
executive officers of the Company or any of its subsidiaries at August 31, 1997
who received total annual salary and bonuses in excess of $100,000 during the
1997 Fiscal Year (collectively, the "Named Executive Officers").

<TABLE>
<CAPTION>
                                                                                              Long-Term
                                                                                             Compensation
                                                                                             ------------
                                                      Annual Compensation                       Awards
                                              ------------------------------------------     ------------
                                                                                              Securities
                                 Year Ended                                 Other Annual      Underlying
  Name and Principal Position    August 31,     Salary         Bonus        Compensation       Options
  ---------------------------    ----------     ------         -----        ------------       -------
<S>                                 <C>       <C>            <C>                <C>             <C>   
Peter Rona, President and           1997      US$119,103     US$34,030          $-0-            25,000
Chief Executive Officer             1996         115,090        10,961         3,483            37,500
                                    1995         111,674        11,167           -0-            75,000
</TABLE>

      During the three year period ended August 31, 1994, the Company did not
grant any restricted stock awards or stock appreciation rights, nor did the
Company have any long-term incentive plan. Additionally, all of the Company's
group life, health, hospitalization, medical reimbursement or relocation plans,
if any, do not discriminate in scope, terms or operation, in favor of the Named
Executive Officers and are generally available to all salaried employees.
Further, no Named Executive Officer received, in any of the periods specified in
the Summary Compensation Table, perquisites and other personal benefits,
securities or property in an aggregate amount in excess of the lesser of $50,000
or 10% of the total salary and bonus reported for the Named Executive Officer in
the fiscal year in which such benefits were received, and no single type of
perquisite or other personal benefits exceeded 25% of the total perquisites and
other benefits reported for the Named Executive Officer in the applicable fiscal
year.

Option Grants Table

      The following table sets forth (a) the number of shares underlying options
granted to each Named Executive Officer during the 1997 Fiscal Year, (b) the
percentage the grant represents of the total number of options granted to all
Company employees during the 1997 Fiscal Year, (c) the per share exercise price
of each option, (d) the expiration date of each option, and (e) the potential
realized value of each option based on: (i) the assumption of a five (5%)
percent annualized compounded appreciation of the market price of the Common
Stock from the date of the grant of the subject option to the end of the option
term, and (ii) the assumption of a ten (10%) percent annualized compounded
appreciation of the market price of the Common Stock from the date of the grant
of the subject option to the end of the option term.

<TABLE>
<CAPTION>
                                 Percentage of                              Potential Realizable Value at
                                 Total Options                              Assumed Rates of Stock Price
             Number of Shares     Granted to                                Appreciation for Option Term
                Underlying       Employees in    Exercise     Expiration    ------------------------------
Name          Options Granted     Fiscal Year     Price          Date            5%              10%
----          ---------------     -----------     -----          ----            --              ---
<S>               <C>                <C>           <C>         <C>              <C>             <C>    
Peter Rona        25,000             30.0%       US$4.875      11/25/01       US$33,672       US$74,406
</TABLE>

Options Exercised and Remaining Outstanding


                                       27
<PAGE>

      Set forth in the table below is information, with respect to each of the
Named Executive Officers, as to the (a) number of shares acquired during the
1997 Fiscal Year upon each exercise of options granted to such individuals, (b)
the aggregate value realized upon each such exercise (i.e., the difference
between the market value of the shares at exercise and their exercise price),
(iii) the total number of unexercised options held on August 31, 1997,
separately identified between those exercisable and those not exercisable, and
(iv) the aggregate value of in-the-money, unexercised options held on August 31,
1997, separately identified between those exercisable and those not exercisable.

<TABLE>
<CAPTION>
                                                                                 Value of Unexercised
                                            Number of Unexercised Options      In-the-Money Options at
                 Shares                          At August 31, 1997                August 31, 1997
              Acquired on                   -----------------------------    ----------------------------
Name            Exercise    Value Realized  Exercisable    Unexercisable     Exercisable    Unexercisable
----            --------    --------------  -----------    -------------     -----------    -------------
<S>                  <C>           <C>        <C>                <C>            <C>               <C>
Peter Rona          -0-           -0-         167,500           -0-           US$162,600         -0-
</TABLE>

Director's Remuneration

      Each director not otherwise a full time employee of the Company is
eligible to receive Cdn$500 for each meeting of the Board of Directors or
committee thereof which they attend, along with the reimbursement of their
reasonable expenses incurred on the Company's behalf. The NetStar designees on
the Company's Board have declined such compensation in the 1997 Fiscal Year and
in previous fiscal years.

      On April 7, 1997, the following directors were awarded five-year options
to purchase 1,500 shares of Common Stock each, at $3.875 per share: Daniel C.
Downs, Dale G. Smith and Adrian P. Towning.

Employment Contracts with Named Executive Officers

      As of September 1, 1997, NTNIN extended by two years its employment
agreement (the "Rona Employment Agreement") with Peter Rona, its President and
Chief Executive Officer, originally dated as of September 1, 1994. Mr. Rona is
also the President, Chief Executive Officer, Chief Financial and Accounting
Officer and Chairman of the Board of Directors of the Company. NTNIN's
obligations under the Rona Employment Agreement have been guaranteed by the
Company. Mr. Rona does not receive any compensation from the Company other than
pursuant to the Rona Employment Agreement.

      The Rona Employment Agreement provides for an initial base compensation of
Cdn$165,375 with annual increases to be subject to review by the Board of
Directors, but in no event less than the proportional increase in the Consumer
Price Index as published by Statistics Canada, plus a bonus equal to a
percentage of the annual base compensation paid to Mr. Rona determined by
reference to the excess of NTNIN's actual net income before taxes over specified
amounts set forth in the Rona Employment Agreement. The Rona Employment
Agreement further provides for the granting to Mr. Rona of stock options at the
discretion of the Board of Directors. The Board awarded Mr. Rona stock options
to purchase 25,000 shares of Common Stock as of November 26, 1996. In all other
respects, the basic provisions of the Rona Employment Agreement remains the
same.


                                       28
<PAGE>

      Magic has entered into two separate Employment Agreements, each dated
October 1, 1996, with Douglas Connolly and Wendy Connolly. These Employment
Agreements each have two year terms commencing on September 1, 1997 and
terminating on August 31, 1999, and pursuant to which Mr. and Ms. Connolly shall
receive annual base salaries of Cdn$125,000 (US$90,025 at August 31, 1997) and
Cdn$70,000 (US$50,414), respectively, together with automotive expenses of
Cdn$12,000 (US$8,624) and Cdn$8,400 (US$6,050), respectively. There is a
provision in each Employment Agreement for a cost-of-living adjustment to their
base salaries for the second year of the term. In addition, under their
respective Employment Agreements, Mr. and Ms. Connolly shall each be entitled to
a bonus, not to exceed Cdn$50,000 (US$36,010) and Cdn$28,000(US$20,166),
respectively (subject to a cost-of living adjustment for the second year of
their respective terms), to be based upon the actual net income before taxes, if
any, of Magic during each year of the terms of the Employment Agreements. The D.
Connolly Employment Agreement further provides for Mr. Connolly to serve as
President and Chief Operating Officer of Magic during its term.

      NTNIN has entered into an Employment Agreement, dated August 15, 1997,
with Don Pagnutti. This employment agreement has a two-year term, commencing on
September 15, 1997 and terminating on September 14, 1999, with a revolving term
to be reviewed annually at the anniversary of the commencement date. The
agreement provides for an initial base compensation of $Cdn137,500 with annual
reviews, together with automobile expenses of Cdn$9,000 plus a bonus equal to a
percentage of the annual base compensation paid to Mr. Pagnutti determined by
reference to the excess of NTNIN's actual net income before taxes over specified
amounts set forth in the agreement. This agreement further provides for the
granting to Mr. Pagnutti of stock options at the discretion of the Board of
Directors. This agreement also provides for Mr. Pagnutti to serve as Executive
Vice President and Chief Operating Officer of NTNIN during its term.

      Neither the Company or NTNIN has any other employment agreement in effect
with any other executive employee.

Compensation Committee Interlocks and Insider Participation

      The Company's Audit and Compensation Committee currently consists of James
Newell and Dale G. Smith. Neither Messrs. Newell or Smith are officers or
employees of the Company, and have not served in such capacities in the past. No
executive officer of the Company served as a director or member of the
compensation committee (or group performing similar functions) of another
entity, one of whose executive officers served on the Audit and Compensation
Committee or as a director of the Company.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

      Set forth in the table below is information concerning the ownership, as
of the close of business on August 31, 1997, of the Common Stock by each person
who is known to the Company to be the beneficial owner of more than five (5%)
percent of the Common Stock, the Company's directors and Named Executive
Officers, and all directors and executive officers as a group.


                                       29
<PAGE>

                                             Amount and Nature of     Percent of
Name and Address                             Beneficial Ownership      Class (1)
----------------                             --------------------      ---------

NetStar Enterprises Inc. (2)..............         1,578,091  (3)         51.0%
James R. Newell (4).......................         1,578,091  (5)         51.0
James Thompson (4)........................         1,578,091  (5)         51.0
Peter Rona (6)............................           360,357  (7)         12.9
Anor Management Ltd. (8)..................           192,857  (8)          7.3
Douglas Connolly..........................            38,158  (9)          0.1
Adrian P. Towning.........................             5,250 (10)          0.0
Daniel C. Downs...........................               750 (10)          0.0
Dale G. Smith.............................               750 (10)          0.0

All directors and executive officers as a 
     group (7 persons)....................         1,983,356 (11)        57.8%

(1)   Unless otherwise indicated, the Company believes that all persons named in
      the table have sole voting and investment power with respect to all shares
      of Common Stock beneficially owned by them. A person is deemed to be the
      beneficial owner of securities which may be acquired by such person within
      60 days from the date on which beneficial ownership is to be determined,
      upon the exercise of options, warrants or convertible securities. Each
      beneficial owner's percentage ownership is determined by assuming that
      options, warrants and convertible securities that are held by such person
      (but not those held by any other person) and which are exercisable within
      such 60 day period, have been exercised.

(2)   The address for NetStar Enterprises Inc. (formerly, Labatt Communications
      Inc.) ("NetStar") is 2225 Sheppard Avenue East - Suite 100, North York,
      Ontario, Canada M2J 5C2.

(3)   Includes (a) 925,787 shares held of record by NetStar and (b) 651,914
      shares (subject to adjustment) issuable upon exercise of an option (the
      "NetStar Option") granted pursuant to a Stock Purchase Agreement, dated as
      of October 4, 1994 (the "NetStar Agreement"), between the Company and
      NetStar. The NetStar Agreement also grants NetStar the right (the "NetStar
      Ownership Maintenance Right"), exercisable in the event the Company seeks
      to issue additional shares of Common Stock or any options, warrants,
      shares of preferred stock or other rights entitling the holder thereof to
      acquire Common Stock, to purchase from the Company such additional shares
      of Common Stock so as to permit NetStar to maintain the its then
      percentage ownership of outstanding Common Stock. The NetStar Option
      expires on April 4, 1998. The NetStar Ownership Maintenance Right is
      exercisable as long as NetStar owns any shares of Common Stock.

(4)   The address for Messrs. Newell and Thompson is c/o NetStar Communications
      Inc., 2225 Sheppard Avenue East - Suite 100, North York, Ontario, Canada
      M2J 5C2.

(5)   Includes the 1,578,091 shares of Common Stock beneficially owned by
      NetStar, of which Mr. Newell is Senor Vice President of Finance and Chief
      Financial Officer and Mr. Thompson is President and Chief Operating
      Officer.

(6)   The address for Mr. Rona is c/o NTN Canada, Inc., 14 Meteor Drive,
      Etobicoke, Ontario, 


                                       30
<PAGE>

      Canada M9W 1A4.

(7)   Includes (a) 192,857 shares of Common Stock issuable upon conversion of
      the 900,000 shares of Convertible Preferred Stock held of record by Anor
      Management, Ltd. ("Anor") and (b) 167,500 shares issuable upon exercise of
      options granted to Mr. Rona which are currently exercisable. Mr. Rona is
      the President, sole director and sole shareholder of Anor.

(8)   The address for Anor is c/o Peter Rona, NTN Canada, Inc., 14 Meteor Drive,
      Etobicoke, Ontario, Canada M9W 1A4. Includes 192,857 shares of Common
      Stock issuable upon conversion of the 900,000 shares of Convertible
      Preferred Stock held of record by Anor. The 900,000 shares of Convertible
      Preferred Stock have the equivalent voting power to 192,857 shares of
      Common Stock.

(9)   Represents the first payment of stock in lieu of cash based upon two
      promissory notes controlled by Mr. Connolly. The stock certificate
      representing the 38,158 shares of Common Stock are beneficially owned by
      1199846 Ontario, Ltd., of which Mr. Connolly is the President. The
      remaining stock payments due under the promissory notes are not due within
      the next 60 days.

(10)  Includes 750 shares of common stock issuable upon exercise of options,
      which vested on 4/29/97, granted to each of Messrs. Towning, Downs and
      Smith. Does not include an additional 750 shares of Common Stock issuable
      upon exercise of options granted to each of Messrs. Towning, Downs and
      Smith, which are not exercisable within the next 60 days.

(11)  Includes 968,521 shares issuable upon conversion of the Convertible
      Preferred Stock and the exercise of the options and rights referred to in
      notes (5) and (7) above.

Item 13. Certain Relationships and Related Transactions.

      Set forth below is a description of certain transactions between the
Company and its directors, executive officers, beneficial owners of five percent
or more of the outstanding Common Stock, or member of the immediate family of
any of the foregoing persons, as well as certain business relationships between
the Company and its directors, which occurred or existed during the 1997 Fiscal
Year.

            (a) During the 1997 Fiscal Year, both pursuant to the License
      Agreement and otherwise, the Company paid Communications an aggregate
      Cdn$1,757,922 (US$1,266,058) as commissions. Under the License Agreement,
      the Company, through NTNIN, holds the exclusive license to market the
      products and programs of Communications throughout Canada through December
      31. 2015. Daniel C. Downs, a director of the Company, is a former
      President, Chief Operating Officer of Communications.

            (b) On October 2, 1996, pursuant to a Stock Purchase Agreement,
      dated October 1, 1996 (the "Magic Lantern Purchase Agreement"), the
      Company, through NTNIN, acquired all of the outstanding stock of Magic. As
      consideration for the purchase of such stock the Company delivered
      Cdn$200,000 (US$146,800 on October 1, 1996) and a Non-Negotiable
      Promissory Note (the "Connolly-Daw Note") in the principal amount of
      Cdn$703,133 


                                       31
<PAGE>

      (US$516,099) to Connolly-Daw Holdings Inc.("Connolly-Daw") and a
      Non-Negotiable Promissory Note (the "1199846 Note") in the principal
      amount of Cdn$546,867 (US$401,400) to 1199846 Ontario Ltd ("1199846"). The
      Connolly Note requires principal payments of Cdn$78,133 (US$57,350),
      Cdn$312,500 (US$229,375) and Cdn$312,500 (US$229,375) on August 31, 1998,
      1999, and 2000, respectively. In lieu of such cash payments, the Company
      has the option to tender payment to Connolly-Daw, and Connolly-Daw has the
      option to demand payment, in the form of 12,276, 49,097 and 49,096 shares
      of Common Stock (collectively, the "Connolly-Daw Shares"), respectively.
      The 1199846 Note requires principal payments of Cdn$312,500 (US$229,375)
      and Cdn$234,367 (US$172,025) on August 31, 1997 and 1998, respectively. In
      lieu of such cash payments, the Company has the option to tender payment
      to 1199846, and 1199846 has the option to demand payment, in the form of
      49,097 and 36,821 shares of Common Stock (collectively, the "1199846
      Shares"), respectively. Also pursuant to the Magic Lantern Purchase
      Agreement, Connolly-Daw, NTNIN and the Company entered into an Option
      Agreement, dated October 1, 1996, and 1199846, NTNIN and the Company
      entered into an Option Agreement, dated October 1, 1996 (together, the
      "Option Agreements"). Under the terms of the Option Agreements, in the
      event that either Magic or Mr. Connolly chooses not to extend the term of
      the D. Connolly Employment Agreement beyond its initial term expiring on
      August 31, 1999, on or after September 1, 1999 and on or before September
      30, 1999, Connolly-Daw and 1199846 shall each have the right to cause the
      Company to purchase any of the Connolly-Daw Shares or 1199846 Shares, as
      the case may be, then held by Connolly-Daw or 1199846 at a price equal to
      90% of the market value (as defined in the Option Agreements) of such
      shares (Connolly-Daw having been granted the right in this event to cause
      acceleration of the September 1, 2000 payment under the Connolly-Daw Note
      to August 31, 1999) and the Company shall have the right to cause the
      Connolly-Daw and 1199846 to sell to the Company any of the Connolly-Daw
      Shares or 1199846 Shares, as the case may be, then held by Connolly-Daw or
      1199846 at a price equal to 110% of the market value (as defined in the
      Option Agreements) of such shares (Connolly-Daw having been granted the
      right in this event to cause acceleration of the September 1, 2000 payment
      under the Connolly-Daw Note to August 31, 1999). Douglas Connolly, a
      director of the Company and President of Magic, is the President and a
      principal shareholder of both Connolly-Daw and 1199846.

            On September 5, 1997, the Company issued 38,158 shares of the Common
      Stock of the Company and Cdn$65,000 to 1199846 in lieu of the August 31,
      1997 payment pursuant to the 1199846 Note.

            (c) At the time of the Company's acquisition of Magic, Connolly-Daw
      was indebted to Magic in the amount of Cdn$160,000 (US$117,440 on October
      1, 1996). This indebtedness is represented by a Promissory Note, dated
      October 1, 1996 (the "Magic Lantern Note"), in the principal amount of
      such indebtedness. The Magic Lantern Note is due on demand and bears
      interest, at a specified bank prime rate, payable monthly.

            (d) The Company purchased 51% of the outstanding shares of Interlynx
      Multimedia, Inc. effective September 1, 1997. Cross reference is made to
      Item 1, page 16 in this Form 10-K for further information on Interlynx
      Multimedia, Inc.


                                       32
<PAGE>

                                     PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

      (a) The following financial statements and supplementary financial
information are filed as part of this Annual Report on Form 10-K:

Financial Documents                                               Location*
-------------------                                               --------

1.  Financial Statements of the Company
    Report of Independent Auditors........................          F - 1
    Consolidated Balance Sheets...........................          F - 2
    Consolidated Statements of Operations.................          F - 3
    Consolidated Statement of Cash Flows..................          F - 4
    Notes to Consolidated Financial Statements............          F - 5

----------
*     Page F-1 follows page 38 to this Annual Report on Form 10-K.

      There are no financial statement schedules either applicable or required
to be filed by the Company in this Annual Report on Form 10-K pursuant to the
instructions to Item 14 of Form 10-K.


      (b) The Company did not file any Current Reports on Form 8-K during its
fourth fiscal quarter ended August 31, 1997.

      (c) The following list sets forth the applicable exhibits (numbered in
accordance with Item 601 of Regulation S-K) required to be filed with this
Annual Report on Form 10-K:

                                       33
<PAGE>

Exhibit
Number                                  Title
------                                  -----

    2.1     Stock Purchase Agreement, dated October 1, 1996, among Connolly-Daw
            Holdings Inc., 1199846 Ontario Ltd., Douglas Connolly, Wendy
            Connolly and NTN Interactive Network Inc., minus Schedules thereto.+
    3.1     Certificate of Incorporation, as amended to date.
    3.2     By-Laws, as amended to date.
    4.1     Specimen Stock Certificate.
    10.1    License Agreement, dated March 23, 1990, between NTN Communications,
            Inc. and NTN Interactive Network Inc.+
    10.2    Stock Purchase Agreement, dated as of October 4, 1994, between NTN
            Canada and NetStar Enterprises Inc. (formerly, Labatt Communications
            Inc.).+
    10.3    Option, dated as of October 4, 1994, registered in the name of
            NetStar Enterprises Inc. (formerly, Labatt Communications Inc).+
    10.4    Designation Agreement, dated as of October 4, 1994, among NTN
            Canada, Inc., NTN Interactive Network Inc. and NetStar Enterprises
            Inc. (formerly Labatt Communications Inc.).+
    10.5    Registration Rights Agreement, dated as of October 4, 1994, between
            NTN Canada and NetStar Enterprises Inc. (formerly, Labatt
            Communications Inc.).+
    10.6    Promissory Note of NTN Interactive Network Inc. registered in the
            name of Connolly-Daw Holdings, Inc.+
    10.7    Promissory Note of NTN Interactive Network Inc., registered in the 
            name of 1199846 Ontario Ltd.+ 
    10.8    Option Agreement, dated October 1, 1996, among Connolly-Daw Holdings
            Inc., NTN Interactive Network Inc. and NTN Canada, Inc.+
    10.9    Option Agreement, dated October 1, 1996, among 1199846 Ontario Ltd.,
            NTN Interactive Network Inc. and NTN Canada, Inc.+
    10.10   Registration Rights Agreement, dated October 1, 1996, among NTN
            Canada, Inc., Connolly-Daw Holdings Inc. and 1199846 Ontario Ltd.+
    10.11   Employment Agreement, dated as of August 31, 1994, between NTN
            Interactive Network Inc. and Peter Rona. +
    10.12   Management Agreement, dated October 1, 1996, between Magic Lantern
            Communications Ltd. and Connolly-Daw Holdings Inc. +
    10.13   Employment Agreement, dated October 1, 1996, between Magic Lantern
            Communications Ltd. and Douglas Connolly. +
    10.14   Employment Agreement, dated October 1, 1996, between Magic Lantern
            Communications Ltd. and Wendy Connolly. +
       22   List of Subsidiaries.
       23   Business Sector Data
       27   Financial Data Schedule.

+ Incorporated by reference.  See Exhibit Index.


                                       34
<PAGE>

                                   SIGNATURES

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

                                                 NTN CANADA, INC.


Date: November 27, 1997                By:        /s/ Peter Rona
                                           -------------------------------------
                                                Peter Rona, President

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

         Signature                         Capacity                  Date
         ---------                         --------                  ----

      /s/ Peter Rona      President, Chief Executive Officer,  November 27, 1997
                          Principal Financial and Accounting
                          Officer, Chairman of the Board and
                          Director
-------------------------
        Peter Rona


   /s/ Douglas Connolly                    Director            November 27, 1997
-------------------------
     Douglas Connolly


    /s/ Daniel C. Downs                    Director            November 27, 1997
-------------------------
      Daniel C. Downs


     /s/ James Newell                      Director            November 27, 1997
-------------------------
       James Newell


    /s/ James Thompson                     Director            November 27, 1997
-------------------------
      James Thompson


     /s/ Dale G. Smith                     Director            November 27, 1997
-------------------------
       Dale G. Smith


   /s/ Adrian P. Towning                   Director            November 27, 1997
-------------------------
     Adrian P. Towning


                                       35
<PAGE>

 2.1        Stock Purchase Agreement, dated October 1, 1996, among Connolly-Daw
            Holdings Inc., 1199846 Ontario Ltd., Douglas Connolly, Wendy
            Connolly and NTN Interactive Network Inc., minus Schedules thereto
            +1, Exh. 10.1
 3.1        Articles of Incorporation, as amended to date..................p. 59
 3.2        By-Laws, as amended to date....................................p. 62
 4.1        Specimen Stock Certificate.....................................p. 71
10.1        License Agreement, dated March 23, 1990, between NTN 
            Communications, Inc. and NTN Interactive Network Inc. .+2, Exh. 10.9
10.2        Stock Purchase Agreement, dated as of October 4, 1994,
            between NTN Canada and NetStar Enterprises Inc. (formerly, 
            Labatt Communications Inc.) ..............................+3, Exh. A
10.3        Option, dated as of October 4, 1994, registered in the name 
            of NetStar Enterprises Inc. (formerly, Labatt Communications 
            Inc) .....................................................+3, Exh. B
10.4        Designation Agreement, dated as of October 4, 1994, among NTN
            Canada, Inc., NTN Interactive Network Inc. and NetStar 
            Enterprises Inc. (formerly Labatt Communications Inc.)....+3, Exh. C
10.5        Registration Rights Agreement, dated as of October 4, 1994,
            between NTN Canada and NetStar Enterprises Inc. (formerly, 
            Labatt Communications Inc.) ..............................+3, Exh. D

10.6        Promissory Note of NTN Interactive Network Inc. registered 
            in the name of Connolly-Daw Holdings, Inc..............+1, Exh. 10.2

10.7        Promissory Note of NTN Interactive Network Inc., registered 
            in the name of 1199846 Ontario Ltd. ...................+1, Exh. 10.3

10.8        Option Agreement, dated October 1, 1996, among Connolly-Daw 
            Holdings Inc., NTN Interactive Network Inc. and NTN Canada, 
            Inc. ..................................................+1, Exh. 10.5

10.9        Option Agreement, dated October 1, 1996, among 1199846 
            Ontario Ltd., NTN Interactive Network Inc. and NTN Canada, 
            Inc. ..................................................+1, Exh. 10.6

10.10       Registration Rights Agreement, dated October 1, 1996, among 
            NTN Canada, Inc., Connolly-Daw Holdings Inc. and 1199846 
            Ontario Ltd. ..........................................+1, Exh. 10.4

10.11       Employment Agreement, dated as of August 31, 1994, between 
            NTN Interactive Network Inc. and Peter Rona...........+4, Exh. 10.11

10.12       Management Agreement, dated October 1, 1996, between Magic 
            Lantern Communications Ltd. and Connolly-Daw Holdings 
            Inc. .................................................+4, Exh. 10.12

10.13       Employment Agreement, dated October 1, 1996, between Magic
            Lantern Communications Ltd. and Douglas Connolly .....+4, Exh. 10.13

10.14       Employment Agreement, dated October 1, 1996, between 
            Magic Lantern Communications Ltd. and Wendy Connolly .+4, Exh. 10.14

22          List of Subsidiaries..........................................p. 110

23          Business Sector Data..........................................p. 111

27          Financial Data Schedule...........................................++

--------

+1    All Exhibits so indicated are incorporated herein by reference to the
      exhibit listed above in the Company's Current Report on Form 8-K (Date of
      Report: October 2, 1996) (File No. 0-18066), filed on October 17, 1996.
+2    All Exhibits so indicated are incorporated herein by reference to the
      exhibit listed above in the Annual Report on Form 10-K of NTN
      Communications, Inc., for its fiscal year ended 


                                       36
<PAGE>

      December 31, 1990) (File No. 2-91761-C), filed on April 1, 1991.
+3    All Exhibits so indicated are incorporated herein by reference to the
      exhibit listed above in the Company's Current Report on Form 8-K (Date of
      Report: October 4, 1994) (File No. 0-18066), filed on October 18, 1994.

+4    All Exhibits so indicated are incorporated herein by reference to the
      exhibit listed above in the Company's Annual Report on Form 10-K (Date of
      Report: November 27, 1996) (File No. 0-18066), filed on December 16, 1996.

++    Filed electronically pursuant to Item 401 of Regulation S-T.


                                       37
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of
NTN Canada Inc.

We have audited the accompanying consolidated balance sheets of NTN Canada Inc.
as at August 31, 1997 and 1996 and the related consolidated statements of
operations and retained earnings (deficit) and cash flows for each of the years
in the three-year period ended August 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 did not audit
the consolidated financial statements of Magic Lantern Communications Ltd., a
wholly-owned subsidiary, acquired in 1997, which statements reflect total assets
constituting 27% in 1997, and total revenues constituting 29% in 1997 of the
related consolidated totals. Those financial statements were audited by other
auditors whose report has been furnished to us and, our opinion, insofar as it
relates to data included for Magic Lantern Communications Ltd., is based solely
on the report of other auditors.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 and the report of other auditors
provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of NTN Canada Inc. at August 31, 1997 and
1996 and the consolidated results of its operations and its cash flows for each
of the years in the three-year period ended August 31, 1997 in conformity with
accounting principles generally accepted in the United States.


                                       /s/ Ernst & Young LLP

Thornhill, Canada,
October 31, 1997.                                          Chartered Accountants

                                       F-1
<PAGE>

NTN Canada Inc.

                           CONSOLIDATED BALANCE SHEETS
                         [Expressed in Canadian dollars]
As at August 31

                                                          1997          1996
                                                           $             $
-------------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents                               2,421,797     1,777,889
Short-term investments [note 4]                         1,705,014     3,577,151
Accounts receivable - trade [net of allowance for
   doubtful accounts of $51,000; 1996 - $39,000]        1,547,395       563,601
Note receivable [note 5]                                       --       350,000
Inventory                                                 624,828       631,171
Prepaid expenses                                          419,843       162,003
--------------------------------------------------------------------------------
Total current assets                                    6,718,877     7,061,815
--------------------------------------------------------------------------------
Investment in Viewer Services                               5,758            --
Property and equipment, net [note 6]                    4,754,173     2,447,937
License, net of accumulated amortization                  225,046       237,549
Goodwill, net of accumulated amortization               2,273,748       135,792
--------------------------------------------------------------------------------
Notes receivable [note 5]                                 310,000            --
--------------------------------------------------------------------------------
                                                       14,287,602     9,883,093
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Bank indebtedness [note 7]                                641,000            --
Accounts payable - trade                                1,165,434       574,590
Accrued liabilities                                       455,110       141,061
Income taxes payable [note 8]                             352,161       260,008
Current portion of long-term debt [note 9]                605,310            --
--------------------------------------------------------------------------------
Total current liabilities                               3,219,015       975,659
--------------------------------------------------------------------------------
Long-term debt [note 9]                                 2,126,076            --
Less current portion                                     (605,310)           --
--------------------------------------------------------------------------------
                                                        1,520,766            --
--------------------------------------------------------------------------------
Deferred income taxes [note 8]                             59,173        30,000
--------------------------------------------------------------------------------
Total liabilities                                       4,798,954     1,005,659
--------------------------------------------------------------------------------
Commitments and contingent liability [notes 10 and 14]
Shareholders' equity
Share capital [note 11]
   950,000 preferred shares                                11,523        11,523
   2,441,992 common shares [1996 - 2,441,617]             150,211       150,187
   Capital in excess of par value                       7,923,150     7,921,347
Retained earnings                                       1,403,764       794,377
--------------------------------------------------------------------------------
Total shareholders' equity                              9,488,648     8,877,434
--------------------------------------------------------------------------------
                                                       14,287,602     9,883,093
================================================================================

See accompanying notes


On behalf of the Board:
                                    Director                Director


                                       F-2
<PAGE>

NTN Canada Inc.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                         AND RETAINED EARNINGS (DEFICIT)
                         [Expressed in Canadian dollars]

Years ended August 31

<TABLE>
<CAPTION>
                                                       1997        1996        1995
                                                        $           $           $
--------------------------------------------------------------------------------------
<S>                                                 <C>          <C>         <C>      
REVENUE
Program content services                             3,932,912   3,520,814   2,772,319
Equipment rental                                     1,642,305     959,153     517,950
Event programming                                      434,965     409,722     373,477
Maintenance                                            539,349     476,533     381,008
Equipment sales                                        144,748     148,330     215,152
Ad sponsorship                                         246,090     198,989      18,414
Video sales                                          2,277,768          --          --
Video dubbing                                          399,082          --          --
Other                                                  734,470     604,710     281,062
--------------------------------------------------------------------------------------
                                                    10,351,689   6,318,251   4,559,382
--------------------------------------------------------------------------------------

COST OF SALES [does not include depreciation]
Equipment                                              258,701     298,243     198,344
Commissions [note 10]                                1,757,922   1,549,729   1,340,196
Video                                                  797,636          --          --
Video dubbing                                          212,072          --          --
Other                                                  369,567     375,944     163,089
--------------------------------------------------------------------------------------
                                                     3,395,898   2,223,916   1,701,629
--------------------------------------------------------------------------------------

EXPENSES
Selling, general and administrative                  4,786,519   2,642,853   2,043,369
Bad debts                                               48,284      54,990      57,653
--------------------------------------------------------------------------------------
                                                     4,834,803   2,697,843   2,101,022
--------------------------------------------------------------------------------------
Income before interest, depreciation and
  amortization, income taxes, loss from investment
  and minority interest                              2,120,988   1,396,492     756,731
Interest and bank charges                              109,834       8,657      28,311
Loss from investment in Viewer Services                 32,547          --          --
Depreciation and amortization                          952,145     383,776     231,785
--------------------------------------------------------------------------------------
Income before income taxes and minority interest     1,026,462   1,004,059     496,635
Provision for income taxes [note 8]                    433,900     463,000     139,100
--------------------------------------------------------------------------------------
Income before minority interest                        592,562     541,059     357,535
Minority interest                                       16,825          --          --
--------------------------------------------------------------------------------------
Net income for the year                                609,387     541,059     357,535

Retained earnings (deficit), beginning of year         794,377     253,318    (104,217)
--------------------------------------------------------------------------------------
Retained earnings, end of year                       1,403,764     794,377     253,318
======================================================================================

Earnings per share [note 13]
Primary                                             $     0.23  $     0.23  $     0.17
Fully diluted                                       $     0.21  $     0.22          --
======================================================================================
</TABLE>

See accompanying notes


                                       F-3
<PAGE>

NTN Canada Inc.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                         [Expressed in Canadian dollars]

Years ended August 31

<TABLE>
<CAPTION>
                                                         1997         1996         1995
                                                          $            $            $
------------------------------------------------------------------------------------------
<S>                                                    <C>           <C>        <C>        
OPERATING ACTIVITIES
Net income for the year                                  609,387      541,059      357,535
Adjustments to reconcile net income to net
   cash provided by (used in) operating activities
   Depreciation and amortization                         952,145      383,776      231,785
   Deferred income taxes                                      --       20,000        2,100
   Loss from investment in Viewer Services                32,547           --           --
Changes in assets and liabilities
   Decrease (increase) in short-term investments       1,872,137   (1,525,770)  (2,051,381)
   Increase in accounts receivable                      (286,008)     (99,184)    (136,856)
   Decrease (increase) in inventory                      180,134      (75,915)      34,318
   Decrease (increase) in prepaid expenses               253,487      (11,732)    (100,921)
   Increase (decrease) in accounts payable and
     accrued liabilities                                  92,744      251,329     (389,667)
   Increase in income taxes payable                      108,197      162,294       72,765
------------------------------------------------------------------------------------------
Cash provided by (used in) operating activities        3,814,770     (354,143)  (1,980,322)
------------------------------------------------------------------------------------------

INVESTING ACTIVITIES
Purchase of property and equipment                    (1,040,765)  (1,171,849)  (1,291,247)
Acquisition of Magic Lantern Communications
  Ltd. [note 15]                                      (1,644,497)          --           --
Decrease (increase) in notes receivable [note 5]         221,510     (350,000)          --
Investment in Viewer Services                            (38,305)          --           --
Image Media Ltd. [note 15[c]]                           (590,000)          --           --
Deposit                                                       --           --       22,783
------------------------------------------------------------------------------------------
Cash used in investing activities                     (3,092,057)  (1,521,849)  (1,268,464)
------------------------------------------------------------------------------------------

FINANCING ACTIVITIES
Bank indebtedness                                       (270,489)          --     (350,000)
Notes and loans payable                                  189,857           --           --
Mortgage payable                                              --     (244,223)     244,223
Proceeds from sale of common shares, net of
  issuing costs                                               --           --    4,252,500
Proceeds from exercise of options and warrants             1,827      799,964      588,099
------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities          (78,805)     555,741    4,734,822
------------------------------------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents
    during the year                                      643,908   (1,320,251)   1,486,036
Cash and cash equivalents, beginning of year           1,777,889    3,098,140    1,612,104
------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year                 2,421,797    1,777,889    3,098,140
==========================================================================================

Income taxes paid                                        343,608      277,334       81,764
==========================================================================================

Promissory notes issued in connection with
  acquisition of Magic                                 1,250,000           --           --
==========================================================================================
</TABLE>

See accompanying notes


                                       F-4
<PAGE>

1.    DESCRIPTION OF BUSINESS

NTN Canada Inc. [the "Company"] was incorporated originally under the name
Triosearch Inc. under the laws of the State of New York on May 12, 1986. On June
9, 1988, the Company changed its name to NTN Canada Inc. The Company is the
holding company for NTN Interactive Network Inc. ["Interactive"] which is a
wholly-owned operating company.

Interactive is incorporated under the Canada Business Corporations Act and has
signed with NTN Communications, Inc., an unrelated Delaware company, an
agreement for exclusive representation of their interactive communications for
all industry sectors in Canada. This interactive entertainment network allows
viewers to participate actively in a variety of television programs, videotext
services, trivia games, etc. Present subscribers to the Company's networks are
hotels, restaurants, bars and university clubs. In addition, there are
subscribers through a number of gateway services.

Each subscriber either purchases the system hardware directly or leases it, or
rents the system from Interactive. Interactive purchases the subscriber system
from NTN Communications, Inc. and various other suppliers. Following the
installation, each subscriber pays a monthly fee to Interactive for the program
content and maintenance services, which range from $650 to $750. The monthly
fees for rental systems range from approximately $255 to $290.

On October 2, 1996, Interactive acquired, effective October 1, 1996, all of the
outstanding stock of Magic Lantern Communications Ltd. ["Magic"], pursuant to
which Magic became a wholly-owned subsidiary of Interactive [note 15]. Magic,
which is involved in the marketing and distribution of educational video and
media resources, conducts its operations directly and through its wholly-owned
subsidiaries, 745695 Ontario Ltd. ["Custom Video"] and B.C. Learning Connection
["BCLC"], and its 75% ownership of Sonoptic Technologies Inc. ["STI"]. On
October 10, 1996, Magic acquired 50% of the outstanding shares of 1113659
Ontario Ltd. ["Viewer Services"], a joint venture operated with International
Tele-Film Enterprises Ltd. [note 15[b]].

2.    ECONOMIC DEPENDENCE

Interactive is dependent upon NTN Communications, Inc. as its sole supplier for
the transmission of program content to the Company's subscribers. In the event
that NTN Communications, Inc., which operates under the going-concern
assumption, terminates the transmission of program content, the Company
believes, but cannot assure, that such services are likely to be continued by
others. As of September 30, 1997, NTN Communications, Inc. had shareholders'
equity of $4,344,000 and a working capital deficiency of $5,838,000 according to
its unaudited balance sheet included in its quarterly report. NTN
Communications, Inc. has reported a quarterly net loss for September 1997 of
$1,134,000, a quarterly net loss for June 1997 of $2,228,000 and a quarterly net
loss for March 1997 of $6,347,000. It reported a net loss for the year ended
December 31, 1996 of $22,952,000. All such amounts are quoted in U. S. dollars
[notes 10 and 12].

3.    SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

These consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. These
consolidated financial statements have been expressed in Canadian dollars which
is the currency of the country in which Interactive is incorporated and is the
currency of its primary economic environment in which operations are conducted.

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 revenue and expenses during the reporting period. Actual
results could differ from those estimates.

Basis of consolidation

These consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Interactive and Magic. Viewer Services, the joint
venture in which Magic has a 50% interest, has been recorded as an equity
investment. 


                                       1
<PAGE>

There are no differences between the carrying amount of the investment and the
underlying equity in the net assets of Viewer Services. All significant
intercompany transactions have been eliminated.

Foreign exchange translation

U.S. dollar accounts in these consolidated financial statements are translated
into Canadian dollars on the following bases:

[a]   The assets and liabilities denominated in foreign currencies are
      translated at the exchange rate in effect at the consolidated balance
      sheet dates.

[b]   Revenue and expenses are translated at a rate approximating the rates of
      exchange prevailing on the dates of the transactions.

[c]   Gains and losses on translation of foreign currencies are included in
      operations.

Revenues

Revenue from the sale of program content services is recognized on a monthly
basis beginning when the systems are installed on the purchasers' premises. The
payment terms are on a monthly basis.

Revenue from equipment rentals and maintenance is recognized on a monthly basis
over the term of the contract.

Revenue from event programming is recognized upon completion of the contract.

Revenue from equipment sales is recognized upon the installation of the
equipment.

Revenue from video sales is recognized upon delivery of the goods sold.

Revenue from video dubbing is recognized upon shipment of the video tapes.

Revenue from advertising sponsorship is recognized on a monthly basis over the
term of the contract.

Cash and cash equivalents

Cash and cash equivalents include cash, term deposits and government securities
which mature in less than three months from the date of issue. The carrying
value of term deposits and government securities approximates their fair values.

Short-term investments

Investments at August 31, 1997 and 1996 consist of money market funds, debt
securities and marketable equity securities. The Company has adopted the
provisions of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" ["SFAS 115"]. Pursuant to
the provisions of SFAS 115, the Company has classified its portfolio as
"trading". Trading securities are bought and held principally for the purpose of
selling them in the near term and are recorded at fair value. Unrealized gains
and losses on trading securities are included in the determination of net
income. The fair value of these securities represent current quoted market offer
prices.

Inventory

Inventory consists of finished goods held for sale or rent, which are valued at
the lower of cost, using the first-in, first-out method, and net realizable
value.

Property and equipment

Property and equipment are stated at cost less accumulated depreciation.
Equipment is depreciated using a declining balance rate of 20%. Computer
equipment as well as masters and libraries are depreciated using a declining
balance rate of 30%. 


                                       2
<PAGE>

Automobiles are depreciated on a straight-line basis over 3 years, buildings and
additions on a straight-line basis over 25 years, software on a straight-line
basis over 3 years and rental equipment and leasehold improvements both on a
straight-line basis over 5 years.

On an ongoing basis, management reviews the valuation and depreciation of
property and equipment, taking into consideration any events and circumstances
which might have impaired the fair value. The Company assumes there is an
impairment if the carrying amount is greater than the recoverable amount. The
amount of impairment, if any, is measured based on projected discounted future
cash flows, using a discount rate that reflects the Company's average cost of
funds.

License and goodwill

The license is stated at cost less accumulated amortization. Amortization is
provided over a 24-year period using the straight-line basis to 2016.
Accumulated amortization amounted to $87,503 [1996 - $75,001].

Goodwill is stated at cost less accumulated amortization. Amortization is
provided using the straight-line basis over a period varying from 10 to 20
years, depending on the transaction which generated the goodwill. Accumulated
amortization amounted to $269,628 [1996 - $142,960].

On an ongoing basis, management reviews the valuation and amortization of the
license and goodwill, taking into consideration any events and circumstances
which might have impaired the fair value. The Company assumes there is an
impairment if the carrying amount is greater than the recoverable amount. The
amount of impairment, if any, is measured based on projected discounted future
cash flows, using a discount rate that reflects the Company's average cost of
funds.

Income taxes

The Company accounts for deferred income tax liabilities and assets based on the
difference between the financial statement and the tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.

Employee stock options

The Company accounts for its stock option plans and its employee stock purchase
plan in accordance with the provisions of the Accounting Principles Board's
Opinion No. 25, "Accounting For Stock Issued to Employees" ["APB 25"].

Recent pronouncements

The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 130, "Comprehensive Income" ["SFAS 130"], and No. 131
"Disclosures about Segments of an Enterprise and Related Information" ["SFAS
131"]. SFAS 130 and SFAS 131 will be effective for the Company's August 31, 1999
year end. The Company has not determined the impact, if any, of these
pronouncements on its consolidated financial statements


                                       3
<PAGE>

4. SHORT-TERM INVESTMENTS

Short-term investments consist of the following:

                                               1997               1996
                                                 $                  $
--------------------------------------------------------------------------

Money market funds                             236,668          1,182,328
--------------------------------------------------------------------------
Debt securities
   U.S. treasury securities                    574,645            402,823
   Corporate debt securities                   879,026          2,129,849
--------------------------------------------------------------------------
Total debt securities                        1,453,671          2,532,672
--------------------------------------------------------------------------
Margin account                                  34,030           (137,849)
Unrealized loss on margin account              (19,355)                --
--------------------------------------------------------------------------
Net margin account                              14,675                  --
--------------------------------------------------------------------------
                                             1,705,014          3,577,151
==========================================================================

All investments are held in United States dollars except for $1,992,860 of
corporate debt securities held in Canadian dollars in 1996.

At August 31, 1997, the Company held ten September 1997 Canadian dollar futures
contracts as a hedge on the U.S. dollar denominated short-term investments. Each
contract represents the right to purchase $100,000 Canadian at an exchange rate
of 0.7334 and therefore short-term investments of US$733,400 were hedged at
August 31, 1997. The unrealized loss on this hedge was $19,355 at August 31,
1997.


                                       4
<PAGE>

5. NOTES RECEIVABLE AND SUBSEQUENT EVENT

Notes receivable consist of the following:

                                               1997                1996
                                                $                   $
-------------------------------------------------------------------------

Current
Magic Lantern Communications Ltd.                  --            350,000
=========================================================================

Long-term
Connolly-Daw Holdings Inc. [note 15[c]]       160,000                 --
Interlynx Multimedia Inc.                     150,000                 --
-------------------------------------------------------------------------
                                              310,000                 --
=========================================================================

The note receivable from Magic was eliminated upon consolidation resulting from
the acquisition of Magic in 1997 [note 15[a]].

The unsecured note receivable from Connolly-Daw Holdings Inc. ["Connolly-Daw"]
bears interest at the bank's prime rate, calculated and payable monthly, not in
advance. The note is payable on demand, however, the Company does not intend to
call the note within the next fiscal period. The President and Secretary of
Connolly-Daw are the Controller and Chief Executive Officer of Magic.

The note receivable from Interlynx Multimedia Inc. ["Interlynx"] is due June 30,
1999. The note bears interest at 6.5% per annum, calculated and payable monthly,
not in advance.

The note was made available to Interlynx as part of an arrangement concluded
September 10, 1997, whereunder the Company acquired 51% of Interlynx and its
subsidiary for a purchase price of $622,000 effective September 1, 1997. The
purchase price was satisfied by $357,000 in cash and the issue of 55,209 shares
with a value of $4.80.

The acquisition will be accounted for as a purchase in fiscal 1998. The
allocation of the purchase price has not been determined.


                                       5
<PAGE>

6.    PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                           1997                                 1996
                           -----------------------------------    --------------------------------
                                                         Net                                 Net
                                       Accumulated      book                 Accumulated    book
                             Cost     depreciation      value        Cost   depreciation    value
                               $            $             $            $          $           $
-------------------------------------------------------------------------------------------------
<S>                        <C>          <C>          <C>          <C>         <C>       <C>      
Land                         520,500           --      520,500      238,500        --     238,500
Buildings                  1,069,828       67,012    1,002,816      355,371    24,634     330,737
Rental equipment           2,662,200      826,940    1,835,260    1,978,263   365,931   1,612,332
Equipment                  1,088,875      220,728      868,147      316,592   130,218     186,374
Software                      54,948       24,185       30,763       53,249     5,916      47,333
Automobiles                   51,173       24,777       26,396       41,364     8,703      32,661
Computer equipment           284,694       73,534      211,160           --        --          --
Masters and libraries        268,729       63,509      205,220           --        --          --
Leasehold improvements        55,433        1,522       53,911           --        --          --
-------------------------------------------------------------------------------------------------
                           6,056,380    1,302,207    4,754,173    2,983,339   535,402   2,447,937
=================================================================================================
</TABLE>

During the year, depreciation of property and equipment was $782,568 [1996 -
$344,908; 1995 - $192,916].

7.    BANK INDEBTEDNESS

Bank indebtedness consists of two demand loans as follows:

[a]   The Company has a demand operating loan facility with a maximum amount of
      $500,000 bearing interest at the bank's prime rate. The Company has not
      used this facility. The Bank's prime rate was 4.75% at August 31, 1997.

[b]   The Company also has a demand instalment loan which was initially
      established to acquire Magic's land and building and is due on demand from
      the Royal Bank of Canada. The debt bears interest at the bank's prime rate
      plus 0.5% [5.25% at August 31, 1997] and is repayable in monthly principal
      amounts of $1,500 plus interest. The weighted average interest rate for
      fiscal 1997 was 5.07%. Fair value of the demand instalment loan
      approximates carrying value of $641,000.

Bank indebtedness is secured by a fixed debenture of $1,000,000, hypothecated to
Magic's land and buildings, a guarantee and postponement of claim of $650,000
signed by Magic and a general security agreement covering all the assets of
Interactive other than real property.

8.    INCOME TAXES AND DEFERRED INCOME TAXES

The provision for income taxes consists of the following:

                             1997             1996               1995
                               $                $                  $
-------------------------------------------------------------------------

Current
   Federal                   282,000          216,800             89,259
   Provincial                151,900          116,800             47,741
   Foreign                        --          109,400                 --
-------------------------------------------------------------------------
                             433,900          443,000            137,000
-------------------------------------------------------------------------
Deferred
   Federal                        --           13,000              1,400
   Provincial                     --            7,000                700
-------------------------------------------------------------------------
                                  --           20,000              2,100
-------------------------------------------------------------------------


                                       6
<PAGE>

                             433,900          463,000            139,100
========================================================================

The difference between the provision for income taxes and the amount computed by
applying the combined basic federal and provincial income tax rate of 44.6%
[1996 - 44.6%; 1995 - 44.48%] to income before income taxes is as set out below:

<TABLE>
<CAPTION>
                                                       1997        1996        1995
                                                         $           $           $
-------------------------------------------------------------------------------------
<S>                                                   <C>         <C>         <C>    
Statutory rate applied to pre-tax income              472,318     448,011     220,903
Benefit of prior year's losses not previously
recognized                                            (87,086)    (11,632)    (83,680)
Expenses not deductible for tax purposes               44,735       6,802       6,604
Other                                                   3,933      19,819      (4,727)
-------------------------------------------------------------------------------------
                                                      433,900     463,000     139,100
=====================================================================================

Deferred income taxes result substantially from timing differences related to
fixed assets. Goodwill resulting from the purchase of Magic is not deductible
for tax purposes.

At October 1, 1996, Magic and its subsidiaries had aggregate operating losses of
$676,000. The purchase price of Magic has not been allocated to the operating
losses since a valuation allowance has been charged against the entire amount.

9. LONG-TERM DEBT

Long-term debt consists of the following:

                                                             1997        1996
                                                              $           $
-------------------------------------------------------------------------------

Loans payable
Provincial Holdings Ltd. ["PHL"] [i]                        750,000         --
Less unamortized discount                                   (43,980)        --
-------------------------------------------------------------------------------
                                                            706,020         --
Business Development Bank of Canada [ii]                    144,000         --
Province of New Brunswick ["PNB"] [iii]                      52,381         --
Atlantic Canada Opportunities Agency ["ACOA"] [iv]           51,010         --
-------------------------------------------------------------------------------
                                                            953,411         --
-------------------------------------------------------------------------------

Notes payable
Promissory notes - unsecured principal amount [note 15]   1,250,000         --
Less unamortized discount                                  (146,685)        --
-------------------------------------------------------------------------------
                                                          1,103,315         --
Lien notes [v]                                               69,350         --
-------------------------------------------------------------------------------
                                                          1,172,665         --
-------------------------------------------------------------------------------
                                                          2,126,076         --
===============================================================================
</TABLE>

[i]   In June 1995, PHL advanced $750,000 to STI. This loan is secured by a
      demand promissory note signed by STI and bears interest at 6% per annum,
      compounded annually, commencing October 1995. Interest has been forgiven
      by PHL for the period from October 1, 1995 to September 30, 1998. The loan
      has been discounted to $706,020 at August 31, 1997 to reflect the
      interest-free period from September 1, 1997 to September 30, 1998. The
      carrying value of the loan approximates its fair value. Subsequent to
      September 1998, the loan will bear interest at 6.75% compounded annually.

The loan is subject to an agreement dated March 15, 1995 which, inter alia,
      provides for repayment in full of principal plus interest at the earlier
      of [a] the commencement of redemption of shares pursuant to a redemption
      agreement [note 10[d]] or [b] September 30, 2002 subject to any extension
      agreed to, or [c] on any breach of STI's obligations under the loan
      agreement or any other agreement with PHL.


                                       7
<PAGE>

[ii]  The Business Development Bank of Canada's loan bears interest at 9.75% and
      is repayable in monthly principal amounts of $4,000 plus interest. The
      interest rate is fixed until March 2000. The loan is secured by a charge
      over the assets of the Company. It is subject to priority and
      subordination agreements between the Company, the Business Development
      Bank of Canada and the Royal Bank of Canada [note 7]. The fair value of
      this loan at August 31, 1997 is $152,304.

[iii] In June 1995, PNB advanced $100,000 to STI. The loan is subject to a loan
      agreement dated May 25, 1995 and is secured by a demand promissory note
      which bears interest at 9.7% per annum, calculated half period, not in
      advance. Subject to a forgiveness agreement outlined below, the principal
      plus interest is repayable at the earlier of [a] January 31, 1998 or
      earlier at the option of STI or [b] any breach of STI's obligations under
      the loan agreement.

A forgiveness agreement dated May 24, 1995 provides that the principal plus
      interest may be forgiven in part or in whole, the amount dependent upon
      STI's number of full time employees the 1997 calendar year. An amount of
      $47,619 is included as forgiven in these consolidated financial
      statements, being a proportionate amount for the period from January to
      August 1997. No interest has been accrued on the balance of the advance as
      it is likely that future forgiveness will exceed any interest to be paid.
      The recorded loan approximates the fair value of the debt at August 31,
      1997.

[iv]  ACOA advanced this unsecured non-interest bearing loan to STI in April
      1995. The loan is repayable in fifteen equal quarterly instalments
      commencing April 2000. Fair value of the advance approximates carrying
      value.

[v]   The lien notes are secured by charges against certain capital assets held
      by Magic and are repayable in monthly blended payments of principal and
      interest. Interest rates on the lien notes vary between 13% and 15%. The
      carrying value of the lien notes approximates the fair value of the debt
      at August 31, 1997. Approximate annual principal payments required
      pursuant to these obligations are as follows:

                                                                        $
      ---------------------------------------------------------------------

      1998                                                           38,058
      1999                                                           22,209
      2000                                                           24,328
      ---------------------------------------------------------------------
                                                                     84,595
      Less deferred interest                                         15,245
      ---------------------------------------------------------------------
                                                                     69,350
      =====================================================================
 
      Approximate annual principal payments for long-term debt, exclusive of the
above lien notes, are as follows:

                                                                       $
      ---------------------------------------------------------------------

      1998                                                          673,000
      1999                                                          360,500
      2000                                                          367,301
      2001                                                           13,603
      2002 and thereafter                                           763,603
      =====================================================================

10.   COMMITMENTS

[a]   Commissions expense to NTN Communications, Inc.

      Commissions paid to NTN Communications, Inc. are recognized when the
      related revenues are earned at the rate of U.S. $2,100 per year per
      subscriber [note 12].

[b]   Commissions expense

      Commissions expense to sub-licensees is recognized when the related
      revenues are earned and are calculated as follows:


                                       8
<PAGE>

      [i]   30% of all fees received by Interactive under any Commercial User
            Agreement as then in effect if such agreement is executed through
            the efforts of the sub-licensee where the establishment subject to
            the Commercial User Agreement is located within the territory during
            the first term of any such agreement;

      [ii]  10% of all net fees received by Interactive from National
            Advertisers [sponsors] based on the number of Commercial User
            locations within the territory; and

      [iii] 5% of all net fees received by Interactive under any Residential
            User Agreement within the territory, which may only be solicited by
            Interactive directly.

All commission payments are made to sub-licensees no later than the 15th of
      the month immediately following the month in which user fees and sponsor
      fees, from which said commissions are earned, are received and collected
      by Interactive.

[c]   Lease commitments

      The future minimum annual lease payments under operating leases are as
follows:

      Vehicles                                                         $
      ---------------------------------------------------------------------

      1998                                                           24,587
      1999                                                           18,678
      ---------------------------------------------------------------------
                                                                     43,265
      =====================================================================

      Office equipment                                                 $
      ---------------------------------------------------------------------

      1998                                                           19,000
      1999                                                            9,000
      2000                                                            3,000
      ---------------------------------------------------------------------
                                                                     31,000
      =====================================================================

      Premises                                                         $
      ---------------------------------------------------------------------

      1998                                                          125,000
      1999                                                          117,000
      2000                                                          107,000
      ---------------------------------------------------------------------
                                                                    349,000
      =====================================================================

      Operating lease expenses were $82,525 for 1997, $17,808 for 1996, and
$26,629 for 1995.


                                       9
<PAGE>

[d]   Redemption of shares of subsidiary

      STI, a subsidiary, has entered into a redemption agreement dated March 15,
      1995 with its minority shareholder [25% of common shares held], PHL.
      Shares held by PHL may be redeemed by STI in minimum numbers of five after
      December 31, 1997 provided STI has repaid all indebtedness to PHL and PNB,
      or the PNB indebtedness has been forgiven, and must be redeemed in full on
      or before September 20, 2002.

      The redemption price is calculated at the higher of [a] the purchase price
      per share [$0.04], or [b] the purchase price per share plus the increase
      per share in retained earnings of the corporation to the date of
      redemption, calculated by adding back to the retained earnings, the pro
      rata share applicable to the number of shares being redeemed, of all
      interest paid or accrued on the loan by PHL and to the corporation in the
      amount of $750,000 and deducting therefrom the interest actually paid, pro
      rata to the number of shares being redeemed.

      As at August 31, 1997, the value of the shares, if redeemed, totalled a
      nominal amount.

11.   SHARE CAPITAL AND WARRANTS

[a]   Authorized shares

      The Company's authorized share capital comprises 20,000,000 common shares
      with a par value of $0.062 [U.S. $0.0467] per share and 1,500,000
      preferred shares with a par value of $0.014 [U.S. $0.010] per share. The
      preferred shares are voting and convertible, such that 4.67 preferred
      shares are exchanged for 1 common share, at the option of the holders.

[b]   Issued and outstanding shares

      As at August 31, 1997, 1996 and 1995, 950,000 preferred shares with a
      paid-up amount of $11,523 were issued and outstanding.

      Effective August 15, 1996, the Company elected a three for two common
      shares stock split. This share split has been applied retroactively to all
      common share data presented in these consolidated financial statements.
      Common shares issued and outstanding for accounting purposes are as
      follows:


                                       10
<PAGE>

<TABLE>
<CAPTION>
                                            Common shares       
                                       ----------------------   Capital in excess
                                         Number        Amount     of par value       Total
                                           #             $             $               $
--------------------------------------------------------------------------------------------
<S>                                    <C>            <C>           <C>            <C>      
Issued and outstanding as at
  August 31, 1994                      1,049,244       62,062       2,368,909      2,430,971
Issue of common shares through
  private placement [ii]                 790,901       49,789       4,202,711      4,252,500
Exercise of 144,000 warrants [i]         216,000       13,722         574,377        588,099
--------------------------------------------------------------------------------------------
Balance as at August 31, 1995          2,056,145      125,573       7,145,997      7,271,570
Issue of common shares through
  private placement [ii]                 134,886        8,615          (8,615)            --
Exercise of 167,000 warrants [i]         250,500       15,999         783,965        799,964
--------------------------------------------------------------------------------------------
Balance as at August 31, 1996          2,441,617      150,187       7,921,347      8,071,534
Exercise of 375 stock options                375           24           1,803          1,827
--------------------------------------------------------------------------------------------
Balance as at August 31, 1997          2,441,992      150,211       7,923,150      8,073,361
============================================================================================
</TABLE>

[i]   In July 1993, 167,000 common shares and two separate warrant options were
      issued by a private placement for $646,802 [U.S. $501,000] [note 11 [c]].

[ii]  On October 4, 1994, NetStar Communications, Inc. ["NetStar"], formerly
      Labatt Communications Inc., acquired a 35% equity interest [674,594 common
      shares] in the Company for U.S. $3,150,000. Additional common shares were
      issued to NetStar as follows:

                                                                     $
      -------------------------------------------------------------------

      August 31, 1995                                             116,307
      March 31, 1996                                               22,617
      August 31, 1996                                             112,269
      ===================================================================

      These shares were issued in order to maintain NetStar's 35% equity
      position as the result of pre-existing warrants being exercised. NetStar
      also has the option, which expires April 1, 1998, to increase its equity
      interest to 51% at the then prevailing market price.


                                       11
<PAGE>

[c]   Number of outstanding warrants

      Pursuant to a private offering in July 1993, the Company issued 167,000
      "A" and 167,000 "B" warrants. All of the "A" warrants were exercised prior
      to August 31, 1995. All of the "B" warrants were exercised prior to July
      30, 1996.

[d]   Long-Term Incentive Plan

      The Company has adopted a Long-Term Incentive Plan [the "Plan"] designed
      to compensate key employees of the Company for the performance of their
      corporate responsibilities. The benefits to employees under the Plan are
      dependent upon improvement in market value of the Company's common shares.
      The Plan offers selected key employees the opportunity to purchase common
      shares through the exercise of a non-qualified stock option. An option
      entitles the employee to purchase common shares from the Company at a
      price determined on the date the option is granted. The option price on
      the grant date is the average trading price of the stock over the five
      days prior to the grant date. The options vest over a two-year period from
      the grant date, 50% after one year and 50% at the end of the second year.
      The options must expire five years after the grant date. The Plan also
      provides that selected key employees may retrieve common shares as an
      award of Restricted Stock. Restricted Stock consists of common shares that
      are awarded subject to certain conditions, such as continued employment
      with the Company or an affiliate for a specified period. Up to 525,000
      common shares may be issued under the Plan.


                                       12
<PAGE>

      The following is a summary of outstanding stock options:

<TABLE>
<CAPTION>
                                                  Exercise price       Expiry date            Total
                                                     U.S. $                                     #
-----------------------------------------------------------------------------------------------------
<S>                                                 <C>              <C>                     <C>    
Issued and outstanding as at August 31, 1994                                                  58,929
Issued during year ended August 31, 1995
                                                    U.S.$5.33        October 5, 1999          75,000
                                                    U.S.$5.33        November 23, 1999        37,500
                                                    U.S.$4.33        April 4, 2000            15,000
-----------------------------------------------------------------------------------------------------
Balance as at August 31, 1995                                                                186,429
Issued during the year ended August 31, 1996 
                                                    3.50             November 20, 2000       111,750
                                                    4.67             April 29, 2001            4,500
Expired during the year ended August 31, 1996
-----------------------------------------------------------------------------------------------------
                                                    5.83             March 1996              (21,429)
Balance as at August 31, 1996                                                                281,250
Issued during the year ended August 31, 1997 
                                                    4.875            November 25, 2001        81,000
                                                    3.875            April 7, 2002             4,500
Forfeited during the year ended August 31, 1997
                                                    3.50             November 20, 2000        (3,375)
Exercised during the year ended August 31, 1997  
                                                    3.50             November 20, 2000          (375)
-----------------------------------------------------------------------------------------------------
Balance as at August 31, 1997                                                                363,000
=====================================================================================================
</TABLE>

Of the 363,000 outstanding stock options, 253,500 [1996 - 176,250] restricted
common shares are issuable upon the exercise of the stock options outstanding in
the above table. Non-restricted common shares are issuable for the remaining
options outstanding.

The fair value of options granted during 1997 was U.S. $2.56 [1996 - U.S.$1.34].

The Company accounts for its stock option plans and its employee stock purchase
plan in accordance with the provisions of APB 25. Accordingly, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense has been
recognized in the consolidated financial statements for these plans.

Pro forma information regarding net income and earnings per share is required by
FAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1997
and 1996: risk-free interest rate of 3.0%; dividend yield of 0%; volatility
factor of 0.522; and a weighted-average expected life of the options of 3 years.

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 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.


                                       13
<PAGE>

     The Company's pro forma net income and earnings per share follows:

                                                1997               1996
                                                  $                  $
      -------------------------------------------------------------------

      Pro forma net income                     428,657            459,463
      ===================================================================

      Pro forma earnings per share
      Primary                                     0.16               0.19
      Diluted                                     0.15               0.19
      ===================================================================

      The pro forma net income reflects only options granted in 1997 and 1996.
      Therefore, the full impact of calculating compensation expense for options
      under FAS 123 is not reflected in the pro forma net income since
      compensation expense is reflected over the option vesting periods and
      compensation expense for options granted prior to September 1, 1995 is not
      considered.

12.   AGREEMENTS WITH NTN COMMUNICATIONS, INC.

Pursuant to an agreement dated March 23, 1990 and in consideration for the
services granted to it, Interactive pays to NTN Communications, Inc. the amount
of U.S. $2,100 per year per User Agreement executed by Interactive for every
year of each User Agreement. Interactive also pays NTN Communications, Inc. a
royalty fee equal to 25% of the net revenues as defined in the agreement derived
from all services except for certain hospitality and Special Projects that
existed at March 23, 1990; a royalty fee equal to the Production Quotation
submitted by NTN Communications, Inc. plus 10% of the gross profit of Special
Projects [special broadcasts for a non-continuous selective event]; and a
one-time royalty fee equal to NTN Communications, Inc.'s production costs for
any new programming developed by Interactive to be added to the existing
programming schedule. The agreement expires on December 31, 2015.

Total amounts expensed in the year under these agreements were $1,757,718 [1996
- $1,339,263; 1995 - $1,082,634].

13.   EARNINGS PER SHARE

Earnings per share were calculated based upon the weighted average number of
common and equivalent shares and giving effect to the conversion of the
preferred shares and settlement of the two promissory notes [note 15[a]] as
follows:

                               1997             1996               1995
--------------------------------------------------------------------------
                                 #                #                 #
--------------------------------------------------------------------------

Primary                      2,694,734        2,392,548          2,146,226
Fully diluted                2,895,200        2,455,282                 --
==========================================================================

14.   CONTINGENT LIABILITY

On June 12, 1992, the Company filed a lawsuit against Interactive Network Inc.
of Mountainview, California, U.S.A. and its president. The suit seeks a
non-infringement with respect to a Canadian patent.

On June 18, 1992, Interactive Network Inc. instituted proceedings against NTN
Communications, Inc., NTN Interactive Network Inc. and the Company in the
Federal Court of Canada and in the California Supreme Court claiming patent
infringement. It is the opinion of the Company's management and its legal
representatives that this patent infringement claim will be successfully
defended.


                                       14
<PAGE>

15.   BUSINESS ACQUISITIONS

[a]   Magic Lantern Communications Ltd.

      Effective October 1, 1996, the Company acquired 100% of Magic and its
      subsidiaries for a purchase price of $1,553,315 on a discounted basis.
      Magic is a Canadian corporation which distributes educational videos and
      provides related services. The acquisition was recorded using the purchase
      method of accounting and, accordingly, the purchase price has been
      allocated as set out below:

                                                                          $
      --------------------------------------------------------------------------

      Goodwill                                                        2,219,623
      Net assets purchased                                             (575,126)
      Acquisition costs capitalized                                     (91,182)
      --------------------------------------------------------------------------
      Purchase price on a discounted basis                            1,553,315
      ==========================================================================

      The excess cost over tangible assets acquired of $2,219,623 was allocated
      to goodwill and will be amortized over twenty years.

      The purchase price was satisfied by $450,000 in cash and the issue of two
      non-interest bearing promissory notes with a maturity value of $1,250,000.
      The first promissory note of $703,133 is repayable by cash payments of
      $78,133 on August 31, 1998, $312,500 on August 31, 1999 and $312,500 on
      August 31, 2000. Notwithstanding the foregoing, the Company has the right
      to elect up until June 30, 1998 to issue common shares in lieu of the
      aforesaid payments as follows: 12,276 shares on August 31, 1998, 49,097
      shares on August 31, 1999 and 49,096 shares on August 31, 2000. Should the
      Company not elect to deliver common shares, the noteholder has the right,
      exercisable between July 1, 1998 and July 31, 1998, to require the Company
      to issue the common shares as described.

      The August 31, 1999 and 2000 payments may be accelerated at the option of
      the noteholder if certain arrangements pursuant to an employment agreement
      with a shareholder of the noteholder [the "employee"] do not extend beyond
      September 1, 1998.

      The second promissory note of $546,867 is payable by cash payments of
      $312,500 on August 31, 1997 and $234,367 on August 31, 1998.
      Notwithstanding the foregoing, the Company has the right to elect up until
      June 30, 1997 to issue common shares in lieu of the aforesaid payments as
      follows: 49,097 shares on August 31, 1997 and 36,821 shares on August 31,
      1998. The August 31, 1997 balance due of $312,500 was satisfied by the
      payment of $65,000 and the issuance of 38,158 common shares on September
      5, 1997. Should the Company not elect to deliver common shares, the
      noteholder has the right, exercisable between July 1, 1997 and July 31,
      1997 to require the Company to issue the common shares as described.

      Also pursuant to the share purchase agreement, the Company and noteholders
      have entered into separate option agreements which provide for the
      repurchase of the shares received by the noteholders under the terms of
      the notes, should the term of employment of the employee not be extended
      beyond August 31, 1999. The repurchase price will be 90% of the average
      closing price of the common shares during the 20 days prior to the
      exercise of a put option by the noteholders should the Company not wish to
      extend the term of employment. The repurchase price will be 110% of the
      average closing price of the common shares during the 20 days prior to the
      exercise of a call option by the Company should the employee not wish to
      extend the term of employment.

      The operating results of Magic are included in the Company's consolidated
      financial statements of operations and retained earnings (deficit) from
      the date of acquisition.

      The following unaudited pro forma information for the acquisition of Magic
      has been prepared as if this acquisition had occurred on September 1,
      1995. The information is based on historical results of the separate
      companies and may not necessarily be indicative of the results that could
      have been achieved or of results which may occur in the future. The pro
      forma information includes the expense for amortization of goodwill
      resulting from this transaction but does not reflect any synergies or
      operating cost reductions that may be achieved from the combined
      operations.


                                       15
<PAGE>

                                                               Fiscal year ended
                                                                August 31, 1996
                                                                       $
      --------------------------------------------------------------------------

      Revenue                                                      8,974,616
      Income before amortization of goodwill                          97,633
      Loss after amortization of goodwill                            (12,076)
      Loss per share - fully diluted                                   (0.01)
      ==========================================================================

[b]   Viewer Services

      Effective October 10, 1996, Magic acquired 500 of the 1000 shares of
      Viewer Services. This joint venture is operated with International
      Tele-Film Enterprises Ltd. The interest in the joint venture has been
      recognized in the consolidated financial statements using the equity
      method of accounting.

[c]   Image Media and Pilot Software

      Magic also entered into an agreement dated August 18, 1997 to acquire
      certain of the business assets of Image Media Ltd. and 802117 Ontario
      Inc., trading as Pilot Software. The agreement was completed on August 31,
      1997. The total consideration, including transaction costs, amounted to
      $590,000 and has been allocated as follows:

                                                                        $
      ----------------------------------------------------------------------

      Equipment                                                      481,000
      Goodwill                                                        45,000
      Inventory                                                       37,000
      Sundry receivable                                               27,000
      ----------------------------------------------------------------------
                                                                     590,000
      ======================================================================

16.   SEGMENTED INFORMATION

The Company operates in the interactive television entertainment and educational
video distribution industries. Business segment information for the year ended
August 31, 1997 is as follows:

                                 Interactive        Educational
                                 television            video
                                entertainment      distribution        Total
                                      $                  $               $
--------------------------------------------------------------------------------

Total revenue                      7,535,537         2,816,152      10,351,689
Operating income                     863,750           162,712       1,026,462
Identifiable assets                3,893,824         3,452,415       7,346,239
Corporate assets                   7,438,330          (496,967)      6,941,363
Capital expenditures                 866,981           654,784       1,521,765
Depreciation and amortization        703,075           249,070         952,145
Loss from equity investment               --           (32,547)        (32,547)
================================================================================

Total revenue by industry segments is net of intersegment sales, which were
immaterial. Operating income is equal to income before income taxes and minority
interest, and includes deductions for items such as interest and depreciation.
Identifiable assets by industry are those assets used in the Company's
operations in each industry. Corporate assets are principally cash and cash
equivalents, short-term investments and intangibles. The Company has a 50%
interest in Viewer Services, whose operations are vertically integrated with the
Company's operations in the educational video distribution segment. This
investment is being accounted for on the equity basis. Equity in the net loss of
Viewer Service was $32,547, while investment in the net assets of Viewer
Services was $5,758.


                                       16
<PAGE>

Comparatives for previous years have not been presented due to the fact that
1997 was the first year that the educational video distribution segment was part
of the Company's operations.

17.   COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS

The 1996 and 1995 comparative consolidated financial statements have been
reclassified from statements previously presented to conform to the presentation
of the 1997 consolidated financial statements.

18.   RELATED PARTY TRANSACTIONS

During the year, the Company had sales of $157,500 [1996 - $168,000] to and
purchases of $100,000 [1996 - nil] from corporations controlled by a
shareholder.


                                       17
<PAGE>

                                AUDITORS' REPORT

To the Shareholder of
Magic Lantern Communications Ltd.


We have audited the consolidated balance sheet of Magic Lantern Communications
Ltd. as at August 31, 1997 and the statements of income and deficit and changes
in financial position for the eleven month period then ended. These consolidated
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance 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.

In our opinion, except for the fact that comparative figures have not been
presented, as outlined in Note 15, these consolidated financial statements
present fairly, in all material respects, the financial position of the company
as at August 31, 1997 and the results of its operations and the changes in its
financial position for the eleven month period then ended in accordance with
generally accepted accounting principles.



                                       /s/ Harendorf, Lebane, Moss

                                       HARENDORF, LEBANE, MOSS
October 22nd, 1997                     Chartered Accountants
Toronto, Canada



                                       18