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
                   For the fiscal year ended: August 31, 2001

                                       OR

|_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
             For the transition period from _________ to __________

                         Commission file number: 0-18066

                             CHELL GROUP CORPORATION
             (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, Toronto, 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 |_| No |X|

      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. |_|

      Aggregate market value (i.e., last price) of voting stock held by
non-affiliates of the Registrant, as of November 26, 2001 US$5,687,791

      Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of November 26, 2001 9,028,239 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, 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 years were as follows:

                                             August 31
                      ==========================================================
                       2001        2000        1999        1998        1997
                      ==========================================================

At end of period....  Cdn$1.5508  Cdn$1.4715  Cdn$1.4965  Cdn$1.5722  Cdn$1.3885
Average for period .      1.5284      1.4714      1.4949      1.4390      1.3676
High for period ....      1.5825      1.4955      1.5135      1.5770      1.3942
Low for period .....      1.4685      1.4489      1.4760      1.4100      1.3381

On November 26, 2001 the Noon Buying Rate was Cdn$1.6000.

ITEM 1. BUSINESS.

      We were incorporated on May 12, 1986 pursuant to the laws of the State of
New York as "TrioSearch, Inc.". In June 1988, we changed our name to "NTN
Canada, Inc.". In March 1998 we changed our name to Networks North Inc. and in
September 2000, changed our name to Chell Group Corporation. Our head office and
principal place of business is located at 14 Meteor Drive, Toronto, Ontario, M9W
1A4. Our registered office is located at 488 Madison Avenue, New York, New York,
10022.

      Effective October 1, 1996, we, indirectly through NTN Interactive Network
Inc., a Canadian corporation, acquired all of the outstanding stock of Magic
Lantern Communications Ltd., an Ontario corporation, and its subsidiaries. Magic
Lantern currently has two wholly owned subsidiaries, one of which is 1113659
Ontario Ltd., operating as Viewer Services and the other of which is Tutorbuddy
Inc. Magic Lantern and its subsidiaries market and distribute an exclusively
licensed library of educational videos. Tutorbuddy, a development stage project,
will provide


                                       2
<PAGE>

interactive online educational video services offering tutorial assistance.
Magic Lantern also has a 75% ownership of the outstanding stock of Sonoptic
Technologies Inc. Sonoptic operates a digital video facility.

      In August 1997, we acquired certain business assets of Image Media Ltd.
and 802117 Ontario Inc., operating as Pilot Software. In September 1997, we,
indirectly through NTN Interactive Network, acquired 51% of the outstanding
stock of Interlynx Multimedia Inc., an Ontario corporation. In June 1999, we,
indirectly through NTN Interactive Network, acquired the remaining 49% of the
outstanding stock of Interlynx. Interlynx developed and markets PROFIS, an
advanced web-based training software that runs on Windows NT servers. Effective
June 2001, we sold our interest in Interlynx.

      In September 1999, pursuant to an Asset Purchase Agreement we, through our
wholly owned subsidiary 1373224 Ontario Limited, acquired substantially all of
the property and assets (excluding accounts receivable) of GalaVu Entertainment
Inc., an Ontario corporation. We acquired from GalaVu in this transaction the
bulk of their equipment, which consisted of audiovisual entertainment equipment,
including computers, videocassette recorders and transmitters, which are
installed in hotels and other hospitality facilities for the use of guests on a
pay-per basis. Our decision to acquire GalaVu's assets was based upon the
anticipated synergy between the interactive and audiovisual entertainment
services provided by GalaVu and our NTN Interactive Network subsidiary. Our
decision was also based upon our intention to expand our more profitable
interactive entertainment business segment and our belief that such a segment
would provide us with a substantial positive cash flow. We believe that the
acquisition of these assets complements our previously existing line of business
undertaken by NTN Interactive Network.


                                       3
<PAGE>

      The following is an organizational chart of the Corporation: (1)

                                   -----------
                                   CHELL GROUP
                                   CORPORATION
                                   -----------

         -----------------------------------------------------------------------
         |                  |              |              |         |     |
         |                  |              |              |         |  ---------
         |                  |              |              |         |  Chell.com
         |                  |              |              |         |  USA Inc.
         |                  |              |              |         |  ---------
---------------------  ---------------  -----------  -------------- |
Gala Vu Entertainment  NTN Interactive    3484751    Chell Merchant |
    Network, Inc.       Network, Inc.   Canada Inc.   Capital Group |
---------------------  ---------------  -----------  -------------- |
                            |                                       |
                            |                                       |
                            |                                       |
                       --------------                               |
                        Magic Lantern                               |
                       Communications                               |
                            Ltd.                                    |
                       --------------                               |
                           |                                        |
                           |                           -----------  |
                           |                           Engyro Inc.--|
      ----------------------------------------            22% *     |
      |                    |                 |         -----------  |
      |                    |                 |                      |
      |                    |                 |                      |
      |                    |                 |                      |
---------------   ------------------   ---------------              |
Tutorbuddy Inc.        Sonoptic        Viewer Services              |
                  Technologies, Inc.   1113659 Ontario ----------   |
                          75%               Ltd.       cDemo Inc.---|
---------------   ------------------   ---------------   14.3% *
                                                       ----------

(1) All subsidiaries are 100% owned unless otherwise stated.

* Reduced from original purchase percentage due to dilution resulting from
subsequent financings.


                                       4
<PAGE>

The following is a chart detailing our percentage ownership in our subsidiaries
and, where applicable and available, the other entity or entities that have an
equity shareholding in these companies:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Subsidiary                                 Our Percentage Ownership        Other Entities with Equity Shares and   Subsidiary's
                                                                           Percentages                             Revenues as a
                                                                                                                   Percentage of our
                                                                                                                   Total Revenues
------------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>                             <C>                                     <C>
Chell Merchant Capital Group, Inc.         100%                            N.A.                                     0%

------------------------------------------------------------------------------------------------------------------------------------
NTN Interactive Network Inc.               100%                            N.A.                                    38.1%
------------------------------------------------------------------------------------------------------------------------------------
GalaVu Entertainment Network Inc.          100%                            N.A.                                    36.5%
------------------------------------------------------------------------------------------------------------------------------------
Magic Lantern Communications Ltd.          100% (through NTN Interactive   N.A.                                    20.3%
                                           Network, Inc.)
------------------------------------------------------------------------------------------------------------------------------------
Sonoptic Technologies Inc.                 75% (through Magic Lantern)     25% Govt. of                             4.7%
                                                                           New Brunswick
------------------------------------------------------------------------------------------------------------------------------------
1113659 Ontario Ltd., operating as Viewer  100% (through Magic Lantern)    N.A.                                     0%
Services
------------------------------------------------------------------------------------------------------------------------------------
Tutorbuddy Inc.                            100% (through Magic Lantern)    N.A.                                     0.4%
------------------------------------------------------------------------------------------------------------------------------------
3484751 Canada Inc.                        100%                            N.A.                                     0%
------------------------------------------------------------------------------------------------------------------------------------
Chell.com USA Inc.                         100%                            N.A.                                     0%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Investment Companies:   Our Percentage Ownership   Other Entities with Equity             Subsidiary's Revenues as a
                                                   Shareholding and Percentages           Percentage of our Total
                                                                                          Revenues
--------------------------------------------------------------------------------------------------------------------
<S>                     <C>                        <C>                                    <C>
Engyro, Inc.            22.1% **                   Private Venture Capitalists            *
                                                   (60.0%,); Engyro's Management (17.9%)
--------------------------------------------------------------------------------------------------------------------
cDemo Inc.              14.3% **                   Private Venture Capitalists            *
                                                   (22.32%); cDemo's Management and
                                                   Employees (59.82%)
--------------------------------------------------------------------------------------------------------------------
</TABLE>

* Due to our current minority investment in such entities, future revenues, when
and if realized, will not be included in our total revenues.
** Reduced from original purchase percentage due to dilution resulting from
subsequent financings.


                                       5
<PAGE>

Financial Information about Industry Segments: (In Canadian $'s)

      Reference is hereby made to the Business Sector data for the years ended
August 31, 2001, 2000, and 1999 in Exhibit 99.1 below.

      =======================================================================
                                     2001           2000            1999
                                      $              $               $
      =======================================================================

      External revenue
         Entertainment               13,588,788     14,121,764      7,569,929
         Education                    4,616,991      4,971,823      5,192,378
         Merchant Services                   --             --             --
         Corporate                       16,595         13,703         61,384
      =======================================================================
                                     18,222,374     19,107,290     12,823,691
      =======================================================================
      Inter-segment revenue
         Education                      183,329        275,941             --
         Corporate                           --        128,283        223,435
      =======================================================================
                                        183,329        404,224        223,435
      =======================================================================
      Operating profit (loss)
         Entertainment                 (208,371)       515,167        446,681
         Education                   (1,084,531)      (792,665)      (623,400)
         Merchant Services           (5,887,912)            --             --
         Corporate                   (2,113,866)    (1,218,183)      (319,634)
      =======================================================================
                                     (9,294,680)    (1,495,681)      (496,353)
      =======================================================================
      Identifiable assets
         Entertainment                5,459,008      7,009,552      4,725,971
         Education                    3,793,863      3,526,317      4,290,025
         Merchant Services            1,489,711             --             --
         Corporate                      654,823        895,894        837,653
      =======================================================================
                                     11,397,405     11,431,763      9,853,649
      =======================================================================
      Corporate assets
         Entertainment                3,170,363      4,352,448      3,699,785
         Education                     (666,589)       844,142        (22,367)
         Merchant Services               99,754             --             --
         Corporate                    2,141,512        355,590      1,063,713
      =======================================================================
                                      4,745,040      5,552,180      4,741,131
      =======================================================================
      Capital expenditures
         Entertainment                  729,486        842,955        350,836
         Education                      673,976        319,191        250,797
         Merchant Services               50,900             --             --
      =======================================================================
                                      1,430,962      1,162,146        601,633
      =======================================================================
      Depreciation & Amortization
         Entertainment                1,960,652      1,808,715        967,188
         Education                      507,218        408,856        428,377
         Merchant Services              431,967             --             --
         Corporate                      140,570         31,750         33,654
      =======================================================================
                                      3,040,407      2,249,321      1,429,219
      =======================================================================

      We currently conduct our business through ten directly or indirectly owned
subidiaries and three investment companies. The following is a list of such
subsidiaries, and which of our business segments each operates in:


                                       6
<PAGE>

--------------------------------------------------------------------------------
Wholly-owned subsidiaries                              Business Segment
================================================================================
Chell Merchant Capital Group                           Merchant Services
Chell.com USA Inc.                                     Merchant Services
NTN Interactive Network Inc.                           Entertainment
GalaVu Entertainment Network Inc.                      Entertainment
Magic Lantern Communications Ltd.                      Education
Sonoptic Technologies (1)                              Education
1113659 Ontario Ltd., operating as Viewer Services     Education
Tutorbuddy Inc.                                        Education
3484751 Canada Inc.                                    Corporate

Investment Companies                                   Business Segment
--------------------------------------------------------------------------------
Engyro, Inc. (22.1%)                                   Merchant Services
CDemo Inc. (14.3%)                                     Merchant Services
ApplicationStation.com (2) (12.75%)                    Merchant Services
================================================================================

(1)   We own 75% of Sonoptic. The government of New Brunswick owns the remaining
      25%.
(2)   Our acquisition of ApplicationStation is currently pending our
      determination as to whether to proceed with such acquisition and obtaining
      the funds required to do so.

OUR BUSINESS

      We are engaged in the business of providing interactive entertainment
services, electronic/online products and services and merchant capital services.
Our core businesses are interactive entertainment services provided by our NTN
Interactive Network subsidiary and the merchant capital services provided
through our Merchant Capital Group subsidiary. GaluVu is a technology-based
entertainment provider of interactive in-room entertainment systems to hotels
across Canada. Interactive entertainment services also involve, for example
electronic sports trivia games played on computer units installed in bars, pubs
and restaurants. Our Magic Lantern subsidiary and its subsidiaries are involved
in the marketing and distribution of educational video and media resources,
providing interactive online educational video services and the conversion of
analog video to digital video formats and Interlynx designs and develops
web-based training software. Electronic/online products and services involve
providing business software applications and support, as well as educational
tools, over the Internet to registered subscribers. In addition, the business of
merchant capital services involves our investment in and acquisition of
significant but undervalued operating companies or technologies, to which we
then apply management experience, in an effort to appreciate the value of those
companies.

      Our main business strategy is to operate or invest in companies that
represent the latest in technological innovations. We apply our expertise,
industry contacts, and market foresight to these companies in order to create
shareholder value.

NTN Interactive Network Inc.

      Our NTN Interactive Network subsidiary is engaged in the marketing and
distribution of the NTN Entertainment Network services throughout Canada. These
activities are being conducted through an exclusive license covering Canada
granted to NTN Sports Inc., (predecessor to our


                                       7
<PAGE>

NTN Interactive Network subsidiary) by NTN Communications, Inc. of Carlsbad,
California. The license grants our NTN Interactive Network subsidiary the right
to market the products and programs of NTN Communications, Inc. throughout
Canada for a 25-year term ending December 31, 2015. NTN Communications, Inc.
does not have an equity position in us or in our NTN Interactive Network
subsidiary.

      The NTN Entertainment Network

      The NTN Entertainment Network is owned and operated by NTN Communications,
Inc. and uses existing technology to broadcast two-way interactive live events
to subscriber locations. The Network provides digital data broadcast
transmissions, which enable equipment and software at 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, California. More than 3,575 restaurants, lounges, hotels,
and other hospitality sites across North America have subscribed to these
services and installed systems capable of receiving Network broadcasts. These
subscriber systems receive satellite broadcasts containing the Network
interactive programs, such that thousands of patrons at subscriber locations can
interact with the same programs simultaneously. Our NTN Interactive Network
subsidiary markets the Network throughout Canada to the hospitality industry,
installs the systems, and provides technical and marketing support to Network
sites. Over 500 Group Subscribers are located in Canada. Designed to be hardware
independent, the Network may be transmitted through a variety of techniques
including, direct satellite, cable, gateway service, FM sideband, Internet, TV
vertical blanking interval, and telephone. We currently use direct satellite as
the method of transmission.

      Network Programming

      The two-way interactive programming currently featured over the Network
includes a variety of interactive sports and trivia games permitting viewer
interaction and participation for 16 hours each 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 subscriber to
display announcements of promotional prices or other events at its business
location.

      NTN Play-Along Games

      NTN Play-Along Games are played in conjunction with live, televised
events. The prime NTN Play-Along Game is QB1, a game of football strategy.

      NTN Premium Trivia Games

      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 among all participating subscriber locations include the
following: Showdown, a general knowledge game; Sports Trivia Challenge, a game
focused on sports, and Spotlight, a game that quizzes players about the world of
show business and celebrities; Playback, a music news, trivia, song title and


                                       8
<PAGE>

musical topics game; and Sports IQ, a weekly sports trivia game. Half-hour
interactive trivia games comprise the majority of the Network's programming.
Countdown and Wipeout are trivia games designed for fast competitive play among
participants at each subscriber location.

      NTN Interactive Network Market

      Our NTN Interactive Network subsidiary's market remains our largest core
business, considering that network services and pay-per-view television services
marketed to the restaurant and hospitality industries total approximately 36% of
our revenues. Our NTN Interactive Network subsidiary 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.

      Our NTN Interactive Network subsidiary's sales force targets the strongest
hospitality outlets in Canada, including a number of chain accounts. Attractive
rental packages are in place to support our NTN Interactive Network subsidiary's
sales efforts. Our NTN Interactive Network subsidiary 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 end user receives the Subscriber System, including the equipment and
the proprietary software, from our NTN Interactive Network subsidiary. In most
instances, the customer rents the equipment from our NTN Interactive Network
subsidiary. Our NTN Interactive Network subsidiary, in turn, purchases equipment
from several suppliers. Following installation, each end user pays a monthly fee
to our NTN Interactive Network subsidiary for the Network services.

GalaVu Entertainment Network Inc.

      Our GalaVu subsidiary is a technology-based entertainment provider of
interactive in-room entertainment systems to hotels. Our GalaVu subsidiary is
currently installed in over 200 Canadian hotels, primarily small and mid sized.
Our GalaVu subsidiary's interactive system is based on proprietary technology
and provides a wide range of affordable, in-room entertainment packages.
Marketed to guests under the Round-the-Clock Entertainment brand, our GalaVu
subsidiary's suite of products include Hollywood movies on demand, premium
television programming, and other information and entertainment services
designed to enhance the stay of hotel guests while generating revenue for our
GalaVu subsidiary and its hotel partners.


                                       9
<PAGE>

Magic Lantern Group

      Our Magic Lantern subsidiary and its subsidiaries operate in two principal
markets including, (i) the marketing and distribution of educational video and
media resources, and (ii) the conversion of analog video to digital video
formats.

      Our Magic Lantern subsidiary and its subsidiaries market and distribute an
exclusively licensed library of educational video titles to schools, school
boards, and Ministries of Education across Canada and internationally, excluding
the U.S. Our Magic Lantern subsidiary's exclusive distribution rights enable it
to avoid competing for the sale of specific titles, while competing for a share
of the available media-buying budget within each educational jurisdiction.
Several years ago, our Magic Lantern subsidiary began accumulating digital
delivery rights for the titles it distributes, and approximately 65% of all
titles in its library include such rights. Our Management believes that this
extensive library of titles with digital delivery rights will favorably position
our Magic Lantern subsidiary as distribution technologies and delivery systems
migrate to digital formats, a process that is already underway in Canada.

      Tutorbuddy, a development stage project, will provide interactive online
educational video services offering tutorial assistance. Tutorbuddy's web site
will provide home and school access to thousands of video subjects with online
learning support, including interaction with real-time tutor-monitored study
groups, personalized research assistance, resource-monitoring for parents and
teachers and scheduled webcasts on specific topics. Tutorbuddy's technology will
allow students, teachers and parents to search and have immediate access to
indexed video titles relevant to homework, class projects, lesson plans and
educational programs. Tutorbuddy, through its parent Magic Lantern, has access
to a library of educational content which is substantial, representing over 250
producers of content with over 12,000 educational titles in release with digital
rights negotiated to more than half the titles currently in release. Tutorbuddy
enters the education and home learning market through Magic Lantern's strong
Canadian presence where it counts some 9,000 out of the 12,000 Canadian schools
as customers.

      Sonoptic, 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 that have emerged. Sonoptic is also
positioning itself as a 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.


                                       10
<PAGE>

Merchant Capital Group

      Business Strategy

      Our Merchant Capital Group subsidiary is in the business of defining,
building and re-engineering businesses using new economy technologies to
maximize market value. The Merchant Capital Group's continual focus is to
identify upcoming technology trends and create the effective infrastructure
required to build out and support these trends.

      Our Merchant Capital Group subsidiary is helping to define and grow a new
business and computing model known as the Application Service Provider, which we
refer to as the Application Service Provider industry.

      Application Service Provider - Software as a Service

      Application Service Provider is changing the way application software is
distributed. The Application Service Provider concept is based on centrally
hosted computing. Instead of purchasing software applications for installation
on personal computers, companies and individuals subscribe to (i.e. rent) the
applications and then securely access them from any web connection. Application
Service Providers are transforming software from a product to a service that
provides specific functionality for end-users without the problems of
installation, servicing, and upgrading. Most major software corporations have
announced new initiatives in the Application Service Provider market.

      Merchant Capital Group Services:

1.    Fee Based Consulting Services: Our Merchant Capital Group subsidiary
      serves clients by advising them on e-commerce strategy, with particular
      focus on the Application Service Provider industry. Consulting services
      include, but are not limited to, business development activities,
      strategic alliances, and marketing and promotional activities.

2.    Creation of Businesses: Our Merchant Capital Group subsidiary intends to
      create companies to become leaders in areas that we believe will define
      new technological trends. The intent is to fully develop these companies
      and then sell them to established industry players or via public
      offerings.

3.    Corporate Reengineering: Our Merchant Capital Group subsidiary intends to
      target for acquisition undervalued and under-performing corporations and
      apply management expertise, new economy thinking, and new technologies in
      order to boost market value and corporate performance.

4.    Merchant Capital Services: Our Merchant Capital Group subsidiary intends
      to assist clients with raising funds and with merger and acquisition
      activity.


                                       11
<PAGE>

      Merchant Capital Group Strategy

      Our Merchant Capital Group subsidiary follows a three-way model of
defining, creating, and exploiting new trends in technology:

1.    Strategic Development: Our Merchant Capital Group subsidiary continually
      monitors the competitive landscape to determine if there currently exist
      companies to exploit the technological trend. If not, the Merchant Capital
      Group intends to develop in-house companies to exploit the technological
      trend.

2.    Acquisition: Our Merchant Capital Group subsidiary targets appropriate
      companies for acquisition and development.

3.    Research and Development: In addition to the above, our Merchant Capital
      Group subsidiary maintains research and development in an effort to
      discover and help create new technological trends.

      These strategies and services are designed to offer our Merchant Capital
Group subsidiary's clients the following benefits within the marketplace:

1.    Brand and Market Awareness: Our Merchant Capital Group subsidiary's
      activities for clients include extensive public and media relations,
      marketing campaigns, brand development and identity, and promotion. These
      activities are developed in close consultation with clients.

2.    Business Development: Our Merchant Capital Group subsidiary has an
      extensive list of market contacts and is a member of the Application
      Service Provider Industry Consortium, the Personalization Consortium, and
      the Rich Media Consortium. These memberships and established relationships
      allow our Merchant Capital Group subsidiary to assist client activities in
      the sourcing and formulation of strategic alliances, business
      arrangements, joint development programs, and general business
      development.

3.    Additional Financings: Our Merchant Capital Group subsidiary maintains an
      up-to-date database on venture capital activity. This allows our Merchant
      Capital Group subsidiary to identify appropriate venture capitalists that
      would be interested in pursuing financing relationships with client
      companies.

On September 19, 2000, pursuant to a purchase and sale agreement among us, our
Merchant Capital Group subsidiary, Chell.com, and Cameron Chell, we and our
Merchant Capital Group subsidiary acquired certain assets from Chell.com and the
following shares for an aggregate purchase price of US$27,002,086:


                                       12
<PAGE>

      (a)   480,000 shares of cDemo were acquired by us which represents
            approximately 14.3% of cDemo's issued and outstanding stock;

      (b)   875,000 shares of Engyro Inc. were acquired by us which represents
            approximately 34% of Engyro's issued and outstanding stock; and

      (c)   60,000 Common Shares of Chell.com (USA) Inc., a Nevada corporation
            were acquired by us which represents 100% of Chell.com (USA)'s
            outstanding stock.

      (d)   962,500 Common Shares of eSupplies, Inc., which were held in escrow
            as discussed below, were subsequently released.

      Pursuant to the Purchase and Sale Agreement, we acquired the
above-referenced shares for an aggregate purchase price of US$25,234,583. We
also acquired certain assets from Chell.com including office leases, office
equipment and computers, insurance contracts, employment contracts and service
agreements for a price of US$1,767,503. Accordingly the combined aggregate
purchase price for the Chell.com assets, the 480,000 shares of cDemo, the
875,000 shares of Engyro Inc., and the 60,000 Common Shares of Chell.com (USA)
Inc. was US$27,002,086. The sole director and shareholder of Chell.com is
Cameron Chell. Our Merchant Capital Group subsidiary also assumed a liability
owing by Chell.com to Canadian Advantage Limited Partnership II, in the amount
of US$1,767,499 on the condition that Canadian Advantage Limited Partnership II
accept full settlement of such indebtedness by our Merchant Capital Group
subsidiary issuing 451,868 exchangeable shares of our Merchant Capital Group
subsidiary. The aggregate purchase price payable by us under the Purchase and
Sale Agreement of US$27,002,086 was paid by the issuance by us of a total of
5,396,733 of our Common Shares at the deemed price of US$3.91155 per share and
1,506,439 shares of our Merchant Capital Group which were exchangeable for our
Common Shares on a one-for-one basis. The 1,476,398 exchangeable shares of our
Merchant Capital Group that were originally issued for the 962,500 eSupplies
shares had been held in escrow pursuant to an escrow agreement dated October 11,
2000 among Cameron Chell, us and Wolff Leia Huckell, Barristers and Solicitors.
These Merchant Capital Group exchangeable shares were to be released from escrow
after receiving written notice from us that the new course of business being
taken by eSupplies fits with our business model and provides significant value
to us. Since we have subsequently determined that eSupplies' business profile
does not fit with ours, the CMCG Exchangeable Shares have been cancelled and the
962,500 eSupplies shares have been returned to Cameron Chell. Subsequent to the
cancellation of the eSupplies transaction, the aggregate purchase price was
reduced to US$21,227,081.

      Pursuant to an asset purchase agreement dated September 1, 2000, Magic
Lantern acquired the assets and business operations of Richard Wolff
Enterprises, Inc., a company based in Illinois, for a purchase price of $289,590
on a discounted basis. Richard Wolff Enterprises, Inc. is not an entity related
to or affiliated with us. As a result, Magic Lantern has expanded its library of
educational titles and now has access to the international distribution
infrastructure formerly held by Richard Wolff Enterprises. The asset purchase
agreement also contains a purchase price adjustment clause whereby the price may
be adjusted upwards to a maximum of an additional US$100,000 if certain revenue
levels are achieved. Specifically, if gross revenues for the acquired business
exceed US$500,000 for the 12 month period ending August 31, 2001,


                                       13
<PAGE>

Magic Lantern will pay to Richard Wolff Enterprises US$50,000, and if gross
revenues exceed US$600,000 for the second 12 month period ending August 31,
2002, Magic Lantern will pay to Richard Wolff Enterprises an additional
US$50,000. This condition has not currently been met. In addition, the asset
purchase agreement provides that Richard Wolff, President of Richard Wolff
Enterprises, has agreed to act as a consultant to Magic Lantern for a term of 2
years to assist in the transition and growth of the business as it expands
internationally.

      On October 10, 2000, pursuant to a Securities Purchase Agreement dated
October 3, 2000, we completed the issue and sale of a US$3,000,000 convertible
debenture to the VC Advantage Limited Partnership. Cameron Chell is a director
and shareholder of VC Advantage Limited Partnership. The convertible debenture
bears interest at 10% per annum, payable upon conversion, redemption or
maturity. The unpaid principal of the debenture bears interest from the date
that it is actually advanced until paid. Interest is payable in cash or stock at
our option. The convertible debenture is convertible into our Common Shares, at
US$3.00 per share, in amounts specified by VC Advantage Limited Partnership. The
maximum number of our Common Shares that VC Advantage Limited Partnership will
receive is 1,000,000. On November 30, 2000 the convertible debenture was
assigned by VC Advantage Limited Partnership to Canadian Advantage Limited
Partnership II. VC Advantage Limited Partnership assigned this convertible
debenture due to difficulty with certain of its investments, which in turn
inhibited its ability to advance the funds to us as per the terms of the
convertible debenture. Canadian Advantage Limited Partnership II is not an
entity related to or affiliated with us. A total of US$1,700,000 has been
advanced to us as at the date hereof and Canadian Advantage Limited Partnership
II is in default of its obligation to advance the balance of the funds. We also
issued 50,000 warrants for the shares of VC Advantage Limited Partnership. Each
Warrant entitles the holder thereof to acquire one of our Common Shares at
US$3.00 per share at any time prior to October 3, 2004, for an aggregate of
50,000 shares.

Planned Future Activities

Investment Subsidiaries

Engyro

      Engyro is the surviving legal entity resulting from the merger of R Home
Funding Co. Ltd., a Nevada corporation and its wholly owned Delaware subsidiary,
Engyro, Inc. Its headquarters are located in Shelton, Connecticut. We own 22.1%
of the stock of Engyro and the remaining equity of the company is as follows:
Private Venture Capitalists (60.0%,); Engyro's Management (17.9%). Engyro has
started business operations and recently announced that it will provide an
advanced license management and reporting solution for Microsoft(R) Great
Plains(R) Business Solutions' business process outsourcing program.

      Engyro is a financial transaction engine designed to support the high
demands created by rapid growth in the Application Service Provider industry.
Engyro is focusing on providing the critical back end administrative services
for the Application Service Provider industry. Our Management believes that this
will allow integration of the billing, payment, disbursement, and


                                       14
<PAGE>

settlement functions for Application Service Provider companies. Engyro has
custom designed its system to enable simplification of the complex economic
variables of delivery, measurement and payment, with full reconciliation and
posting directly to the accounting systems of all parties in the Application
Service Provider transaction. Engyro intends to strategically deploy its service
offering to give efficient and flexible local service to the Application Service
Providers', Independent Software Vendors and Network Service Providers. Engyro's
platform is flexible enough to allow it to grow into other market areas such as
business-to-business and e-commerce. Engyro is still developing its product and
has not yet received any revenue.

      Engyro's primary market is the Application Service Provider marketplace.
Most Application Service Providers have yet to develop sophisticated and
integrated accounting systems and backroom capabilities, and typically outsource
non-core operations. Engyro proposes to approach potential customers and work
with them to design creative solutions for their billing and payment needs.
Engyro also intends to approach Independent Software Vendors to market Engyro's
ability to enable them to transition to an e-commerce platform to take advantage
of new distribution channels in the Application Service Providers. Engyro
intends to approach Independent Software Vendors and Network Service Providers
and seek to assist them in their provision of Application Service Provider
value-added services to their core offering. Engyro intends to reach its target
market in the following ways:

      (1)   Indirectly by offering Independent Software Vendors a secure method
            to enable Application Service Providers alternative subscription
            software rental-models through the remote Management of the payment
            process; and

      (2)   Through strategic partnerships/marketing relationships with software
            metering/monitoring companies, billing companies, accounting
            software providers, Data Centers, and other components of the
            community of Application Service Provider elements.

cDemo

      cDemo is a start up company that was incorporated in the State of Delaware
in February 2000. The head office is located at 236B Broadway, Chico,
California, 95926 and there is a satellite office located at 114, 1215 - 13th
Street SE, Calgary, Alberta. We own 14.3% of the stock of cDemo and the
remainder of the company's stock is distributed as follows: Private Venture
Capitalists (22.32%); cDemo's Management and Employees (59.82%), none of whom
are affiliated with us. Allan Chell, Cameron Chell's brother, is a Director and
principal shareholder of cDemo and its VP of Strategic Development. cDemo is
developing its products and has not yet received any revenue.

      cDemo plans to position itself as a trusted and unbiased electronic
assessment and listing service. To perform a standardized electronic assessment
and listing, cDemo has researched and developed an assessment methodology that
is capable of "commoditizing" products, and displaying them in a format that is
easy to both read and view. cDemo's unique consortium of technology partners are
producing a technological system that our Management believes will be capable of
tailoring the cDemo electronic assessment to industry and partner requirements.


                                       15
<PAGE>

The assessment software will be loaded into a rugged, handheld tablet. cDemo
plans to use this tablet device to collect and transmit an electronic
demonstration based on an Internet connection to the cDemo backend database.

      cDemo's first target industry is used vehicle sales. In order for the
automotive industry and Internet-based automotive companies to access the
multi-billion dollar used vehicle industry, cDemo intends to provide the
nationwide electronic assessment and listing infrastructure necessary for this
to occur and intends to generate revenue from service providers, trade-ins,
on-site volume assessments, lease returns, advertising, and data mining.

      The cDemo electronic assessment service will include:

      o     An unbiased and detailed 100 plus point assessment.
      o     Multiple digital photographs of the vehicle.
      o     A computer generated assessment report, book value, and rating of
            the vehicle.
      o     A one-stop upload listing service to automotive and classified
            advertisement websites.

      cDemo's third party information will enable consumers to buy, sell,
trade-in, and complete finance, insurance, and extended warranty contracts
online, not all of which is possible today.

      In order to establish the nationwide assessment and listing
infrastructure, cDemo plans to foster business alliances with nationwide quick
lube chains and other service stations; newspapers, photo buy publications, and
Internet based classifieds; automobile finance, insurance and extended warranty
companies; and automotive dot-com businesses. cDemo has no current business
operations and as at the date hereof, cDemo has not entered into any agreement
with third parties and there can be no assurance that cDemo will be able to do
so in the future.

Competition

      The market for merchant capital services, interactive entertainment
services and electronic/online products and services is rapidly evolving and
highly competitive. Although we believe that the diverse segments of the
interactive entertainment and venture capital services markets will provide
opportunities for more than one supplier of products and services similar to
ours, it is possible that a single supplier may dominate one or more market
segments. Competitors include a wide variety of companies and organizations,
including venture capitalists, interactive entertainment providers, Internet
software, content, service and technology companies, telecommunication
companies, cable companies and equipment/technology suppliers.

      Our Merchant Capital Group subsidiary operates in the venture capital
market and competes with several similar organizations. Despite having different
business models and strategic outlooks than our Merchant Capital Group
subsidiary, our Management believes that the following companies represent our
Merchant Capital Group subsidiary's primary competition:


                                       16
<PAGE>

1.    CMGI: Based in Andover, Massachusetts, CMGI creates and manages the most
      diverse network of Internet companies in the world. It is a company
      constructed of various companies in the following industries:
      Advertising/Marketing, Content & Community, E-commerce and Enabling
      Technologies. CMGI's portfolio consists of more than 60 companies, most of
      which are market or segment leaders;

2.    Internet Capital Group: Based in San Francisco, Internet Capital Group,
      which we refer to as ICG, is an Internet holding company actively engaged
      in business-to-business e-commerce through a network of partner companies.
      ICG has a network of over 60 companies. The strategy of the company is to
      integrate its holdings and interests into a collaborative network that
      leverages knowledge and resources; and

3.    Softbank: Based in Tokyo and California, Softbank is perhaps the largest
      Internet market force in the world. Softbank has a global presence and
      powerful global strategic partnerships. The company has established a
      worldwide presence by leveraging strategic alliances with subsidiaries
      such as Softbank Capital Partners (US$1.35 billion), and Softbank
      Technology Group. Softbank has ownership positions in over 120 Internet
      companies.

      Our NTN Interactive Network subsidiary operates in the interactive
entertainment services industry. In 1996, we became aware of a new entertainment
system, Sports Active, attempting to enter the hospitality market. Sports Active
offers only two programs, a football game and a trivia game. While it is
visually entertaining, it requires audio and we believe this is a significant
drawback in the restaurant environment in which it is being marketed. We have
not found this to be a significant competitive entry.

      With the entrance of motion picture, cable and TV companies, competition
in the interactive entertainment and multimedia industries will likely intensify
in the future.

      Our Magic Lantern subsidiary operates in a large and fragmented market.
There are many producers and distributors of educational media resources. These
market participants make up the diverse educational media supply chain. It is
believed that Magic Lantern's extensive library of titles with digital delivery
rights, along with our Magic Lantern subsidiary's established relationships with
Canadian schools, make it one of the dominant players in its market.

      GalaVu's competition includes other interactive in-room entertainment
providers. With the development of new satellite technologies, and the
increasing speed of network connections, GaluVu expects the competition to
develop new services. These new services may include digital programming on
demand, enhanced hotel concierge services, billing presentment and settlement,
and others. GaluVu expects that new technologies will lead to intensifying
competition in the future.

      Engyro's competition includes financial institutions that are pursuing
online settlement, disbursement, and clearing services. While there are numerous
online financial institutions, most are focused on the consumer end of the
market, offering products and services aimed at allowing consumers to complete
banking activities online. In addition, many competitors exist within the


                                       17
<PAGE>

Application Service Provider financial supply chain, each offering a different
set of services that in conjunction allow Application Service Provider services
to be offered. We believe that there is currently no direct competition to
Engyro as no other financial transaction company is focused exclusively on the
Application Service Provider market.

      cDemo's competition includes assessment services, newspaper classified
advertisement and related services, photo buy and sell publications,
Internet-based automobile description and search organizations, and
Internet-based automobile sales organizations. We believe that these
organizations exist within a highly fragmented market each playing a role in the
overall assessment and vehicle transaction process. We believe that cDemo is
unique within the marketplace in that it acts as an independent and unbiased
collector of information that is presented for the benefit of all participants
in the used vehicle marketplace.

Employees

We have 125 employees in the nine operating subsidiaries, consisting of 6
executives, 14 salespersons, 55 persons involved in technical services, 6
involved in graphic development, 6 in marketing, 18 individuals involved in
administration, 11 individuals involved in finance and accounting, 2 individuals
involved in research and development, 5 individuals involved in information
services and 2 individuals involved in investor relations. We believe that our
staff is adequate for our anticipated needs.

ITEM 2. PROPERTIES.

      We own an approximately 25,000 square foot parcel of land, located at 14
Meteor Drive in Toronto, Ontario, on which stands a 12,500 square foot, one
story building. We and our NTN Interactive Subsidiary presently use this
building as our principal place of business.

      We also own an approximately 29,000 square foot parcel of land, located at
10 Meteor Drive in Toronto, Ontario, on which stands a 14,000 square foot, two
story building. Our Magic Lantern Group Subsidiary, its subsidiaries and GalaVu
presently utilize this building as their principal place of business.

      Our Magic Lantern subsidiary owns three office units, comprising an
aggregate 8,000 square feet of office space, in a building at 775 Pacific Road,
Oakville, Ontario. These premises were leased to a third party in 1999. We,
through our subsidiaries, lease 2,342 square feet of office space in Saint John,
New Brunswick for an annual rent of Cdn$35,130, 8,451 square feet of office and
warehousing space in Vancouver, British Columbia for an annual rent of
Cdn$108,939 and 961 square feet of office space in Chicago, Illinois for and
annual rent of US$18,980.

      The property located at 10 Meteor Drive in Toronto, Ontario, as well as
the property located at 775 Pacific Road, Oakville, Ontario, has been financed
through a Matched Fund Term Loan, with the Royal Bank of Canada, dated April 24,
1998. The principal outstanding regarding


                                       18
<PAGE>

these two properties, as at August 31, 2001 was Cdn$1,206,478.

      GalaVu lease 8,619 square feet of office space in a building located at
3790 - 3820 Victoria Park Avenue, North York, Ontario, with the lease expiring
on October 31, 2002 ($77,729 annually). GalaVu is also a guarantor of a lease
dated September 22, 1999 between 15516 Canada Inc. and XON Digital
Communications Limited for a 3,500 square foot premises located in Halifax, Nova
Scotia ($39,130 annually).

      Our Merchant Capital Group subsidiary leases 12,043 square feet of office
space in Suites 301, 500 and 700 in a building located at 630 - 8th Avenue S.W.
Calgary, Alberta. The combined annual rent of the three suites in Cdn$202,087.

      We believe that our facilities and those of our subsidiaries are adequate
for their present requirements.

ITEM 3. LEGAL PROCEEDINGS.

      Set forth below is a description of material pending litigation to which
we are a party.

      1.    On June 18, 1992, Interactive Network Inc. (Interactive) commenced a
            lawsuit against the us, NTN Communications and our NTN subsidiary 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. This action alleges that
            Interactive granted NTN Communications the right to use the
            Interactive Patent, which right Communications then improperly
            licensed to us and our NTN subsidiary. Interactive alleges that the
            license agreement between NTN Communications and our NTN subsidiary
            and us infringes upon the Interactive Patent. The action seeks a
            declaration of the validity of the Interactive Patent, an injunction
            restraining us 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 this action.

      We believe that the licenses granted to us by NTN Communications are valid
and that the patent infringement claims underlying this action will ultimately
be proven to be unfounded. We intend to vigorously defend our position and to
prosecute the Interactive position in the action; however, there can be no
assurance that any or all of these actions will be decided in favour of us. We
believe, 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 our financial position.

      In its Quarterly Report on Form 10-Q, for the quarter ended September 30,
1996, NTN 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


                                       19
<PAGE>

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 NTN Communications Form 10-Q involved litigation in the United States
involving allegations similar to the allegations underlying the actions between
Interactive and us. In the NTN Communication Form 10-Q, NTN Communications also
noted that "no substantive action has been taken in the furtherance of" the
Company Action or Interactive Action.

      2.    Canada Customs and Revenue Agency is currently in discussions with
            us regarding a potential liability with respect to withholding tax
            on certain amounts paid to Communications. An assessment in the
            amount of approximately $600,000 has been made to date by Canada
            Customs and Revenue Agency and we have filed a notice of objection..
            We believe that we have valid defenses with respect to these matters
            and accordingly, no amount has been recorded in these financial
            statements. In the event that such matters are settled in favour of
            Canada Customs and Revenue Agency, the amounts could be material and
            would be recorded in the period in which they become determinable.

      Neither our property nor ourselves are a party or subject to any other
material pending legal proceedings, other than ordinary routine litigation
incidental to our business.

      To our knowledge no other proceedings of a material nature have been or
are contemplated against us.

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

                                     PART II

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

      Our common stock, par value $.0467 per share (the "Common Stock"), is
traded in the over-the-counter market and is quoted on the NASDAQ SmallCap
Market ("NASDAQ"), under the symbol "CHEL". Set forth below is the range of high
and low bid prices (US$) for shares of Common Stock for each full quarterly
period within our three most recent fiscal years and our quarter of the current
year. The information reflects inter-dealer prices, without retail mark-ups,
markdowns or commissions and may not necessarily represent actual transactions.


                                       20
<PAGE>

--------------------------------------------------------------------------------
                                           High         Low       Trading Volume
                                          --------------------------------------
                                           (US$)       (US$)
================================================================================
1999 Fiscal Year
     First Quarter                         4.750       1.125         1,385,390
     Second Quarter                        5.375       2.000         4,131,407
     Third Quarter                         3.500       1.375         1,000,982
     Fourth Quarter                        3.000       1.500           874,184
2000 Fiscal Year
     First Quarter                         2.500       1.500           585,270
     Second Quarter                        3.625       1.375         2,109,781
     Third Quarter                         7.875       2.250         3,825,607
     Fourth Quarter                       11.438       3.000         3,323,447
2001 Fiscal Year
     First Quarter                         7.219       3.000           581,689
     Second Quarter                        4.813       1.813           502,712
     Third Quarter                         2.313       0.938         1,811,151
     Fourth Quarter                        1.600       0.870         2,816,087

      On November 26, 2001, the closing price of the Common Shares on NASDAQ was
US$0.6000.

      As of the close of business on November 26, 2001, there were 207 holders
of record of our Common Stock. We believe that there are approximately 1100
beneficial holders of Common Stock.

      As of the close of business on November 26, 2001, the following Common
Shares have been issued by us in the last twelve months:

      1.    The convertible preferred shares were converted, resulting in the
            issuance of 300,000 shares of our common stock.

      2.    5,426,772 commons shares were issued for the asset purchase from
            Cameron Chell and Chell.com Ltd.

      3.    145,000 common shares were issued as payment for consulting fees
            rendered.

      4.    We issued 131,974 common shares in lieu of salary.

      5.    We also issued 36,602 common shares for the settlement of debt.

      Pursuant to our Stock Option Plan, the following issuances of stock were
made in the last twelve months:

                  ------------------------------------------
                                              Number of
                  Month of Issuance     Common Shares Issued
                  ==========================================
                  September 2000                1,150
                  October 2000                  5,100
                  January 2001                 56,500
                  ==========================================


                                       21
<PAGE>

      Since its inception in 1986, we have not paid any cash dividends on our
Common Stock. However, we have, in the past, declared certain stock dividends
and stock splits. We intend to retain earnings, if any, to finance operations
and, therefore, do 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 five
fiscal years ended August 31, 2001. The earnings per share amounts, prior to
1998, have been restated as required to comply with Statement of Financial
Accounting Standards No. 128 Earnings Per Share ("SFAS 128"). For further
discussion of earnings per share and the impact of SFAS 128, see Note 11 to the
consolidated financial statements.

<TABLE>
<CAPTION>
Statement of Operations Data (Canadian Dollars):
--------------------------------------------------------------------------------------------------
                                                       Year Ended August 31,
                                  2001           2000           1999          1998         1997
                                   $              $              $             $            $
==================================================================================================
<S>                           <C>             <C>            <C>           <C>          <C>
Operating revenues             18,222,374     19,107,290     12,823,691    13,404,542   10,351,689
Cost of sales                   6,818,111      7,204,919      4,874,768     5,030,602    3,395,898
Gross profit                   11,404,263     11,902,371      7,948,923     8,373,940    6,955,791
Net income (loss)             (11,226,225)    (2,323,621)      (971,497)      618,065      609,387
Net income (loss) per share         (1.34)         (0.81)         (0.36)         0.24         0.25
Weighted average number of
 Shares outstanding             8,393,589      2,873,042      2,635,050     2,550,805    2,441,992
==================================================================================================
</TABLE>

<TABLE>
<CAPTION>
Balance Sheet Data (Canadian Dollars):
======================================================================================
                                                 August 31,
                          2001         2000         1999         1998         1997
======================================================================================
<S>                     <C>          <C>          <C>          <C>          <C>
Total assets            16,225,003   17,220,211   14,546,003   15,802,359   14,287,602
Long-term obligations    5,943,512    4,436,213    2,216,675    2,840,218    2,185,249
Shareholders' equity     2,248,128    9,383,419   10,792,767   11,033,178    9,488,648
======================================================================================
</TABLE>

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

Introduction

      Our consolidated financial statements included in this document have been
prepared in accordance with accounting principles generally accepted in the U.S.
("U.S. GAAP"). The information contained in this Management's Discussion and
Analysis of Financial Condition and Results of Operations is expressed in
Canadian dollars. The following discussion should be read in conjunction with
the consolidated financial statements, and notes thereto, included in this
document.


                                       22
<PAGE>

Results of Operations

      Year Ended August 31, 2001 Compared to Year Ended August 31, 2000

      Revenues. Revenues from network services for the 2001 Fiscal Year were
$6,300,891, compared to $6,345,552 for our fiscal year ended August 31, 2000
(the "2000 Fiscal Year"), a decrease of $44,661 or 0.7%. The number of
hospitality sites decreased slightly between the 2001 and 2000 fiscal years.

      Revenues from Pay-tv for the 2001 Fiscal Year were $6,651,913, compared to
$6,517,940 for our 2000 Fiscal Year, an increase of $133,973 or 2.1%. The
increase is the result an increase in the buy-rate experienced in the rooms, due
to more "blockbuster" movie titles.

      Revenues from event programming for the 2001 Fiscal Year were $403,993,
compared to $500,168 for the 2000 Fiscal Year, a decrease of $96,175 or 19.2%.
The decrease was due to a decreased number of corporate events hosted, both in
Canada and abroad, in 2001 when compared to the number of events hosted in 2000.

      Revenues from ad sponsorship were $231,991 for the 2001 Fiscal Year,
compared to $675,532 for the 2000 Fiscal Year, a decrease of $443,541 or 65.7%.
The decrease was the result of a decrease in the number and size of corporate
sponsors over the level experienced in the previous period.

      Revenues from video and software sales were $3,113,725 for the 2001 Fiscal
Year, compared to $3,702,801 for the 2000 Fiscal Year, a decrease of $589,076 or
15.9%. Decreased levels of funding by all levels of government have resulted in
tighter budget constraints placed upon educational bodies, and as a result,
sales of educational material have fallen. In addition, the demand for analog or
VHS formats is decreasing, yet the demand for the digital formats has not
increased at the same rate.

      Revenues from video dubbing were $682,870 for the 2001 Fiscal Year
compared to $717,596 for the 2000 Fiscal Year, a decrease of $34,726 or 4.8%.
The decrease can be attributed to stabilization in the local customer base after
our Magic Lantern subsidiary and its subsidiaries' relocation in late fiscal
1998 and the focus towards more internal production, thus resulting in a lesser
push towards external revenue sources.

      Revenues from digital encoding were $820,396 for the 2001 Fiscal Year,
compared to $539,815 for the 2000 Fiscal Year, an increase of $280,581 or 52.0%.
The increase can be attributed to increased demand for digital services and the
increased capacity in the production lab.

      Other revenues were $16,595, compared to $107,886 for the 2000 Fiscal
Year, a decrease of $91,291 or 84.6%.


                                       23
<PAGE>

      As a result of the foregoing, our total revenues in the aggregate were
$18,222,374, compared to $19,107,290 for the 2000 Fiscal Year, a decrease of
$884,916 or 4.6%.

      Cost of Sales. Cost of Sales for network services for the 2001 Fiscal Year
were $2,384,303, compared to $2,160,351 for the 2000 Fiscal Year, an increase of
$223,952 or 10.4%. The number of hospitality sites outstanding in 2001 compared
to the number outstanding in 2000 decreased, however we are billed by NTN
Communications, Inc. in United States dollars and the increase in cost of sales
resulted from a weaker Canadian dollar in the 2001 Fiscal year ($1.5284 for the
2001 Fiscal Year compared to $1.4714 for the 2000 Fiscal Year). As a percentage
of our total revenues, such costs increased to 13.1% for the 2001 Fiscal Year
from 11.3% for the 2000 Fiscal Year.

      Pay-tv costs were $2,937,189 for the 2001 Fiscal Year, compared to
$2,919,417 for the 2000 Fiscal Year, an increase of $17,772 or 0.6%. Even though
revenue increased, we are receiving lower cable costs than experienced in the
2000 Fiscal Year, thus offsetting increased promotion and royalty costs. As a
percentage of our total revenues, such costs increased to 16.1% for the 2001
Fiscal Year from 15.3% for the 2000 Fiscal Year.

      Event programming costs were $255, compared to $23,819 for the 2000 Fiscal
Year, a decrease of $23,564 or 98.9%. The decrease was commensurate with the
decrease in the number of events hosted in event programming revenues and
decreased costs resulting from the events being client run and not performed by
us.

      Advertising sponsorship costs were nil, compared to $93,496 for the 2000
Fiscal Year. The decrease was the result of decreased costs associated with
restructuring of the department.

      Video and software costs in aggregate were $1,249,851, compared to
$1,625,885 for the 2000 Fiscal Year, an decrease of $376,034 or 23.1%. The
decrease corresponds to the decrease in revenue as discussed above. As a
percentage of our total revenues, these costs have fallen to 6.9% in the 2001
Fiscal Year from 8.5% in the 2000 Fiscal Year.

      Video dubbing costs were $244,670, compared to $157,289 for the 2000
Fiscal Year, an increase of $87,381 or 55.6%. The increase can be attributed to
a higher cost of tape and case. As a percentage of our total revenues, these
costs have risen to 1.3% in the 2001 Fiscal Year from 0.8% in the 2000 Fiscal
Year.

      Digital encoding costs were $1,843 for the 2001 Fiscal Year, compared to
$111,657 for the 2000 Fiscal Year, a decrease of $109,814 or 98.3%. The decrease
is the result of digital encoding materials being supplied by customers.

      As a result of the foregoing, our total cost of sales was $6,818,111,
compared to $7,204,919 for the 2000 Fiscal Year, a decrease of $386,808 or 5.4%.
Total gross margins increased to 62.6% in the 2001 Fiscal Year from 62.3% in the
2000 Fiscal Year.


                                       24
<PAGE>

      Expenses. Selling, general and administrative expenses for the 2001 Fiscal
Year were $16,250,171, compared to $10,726,556 for the 2000 Fiscal Year, an
increase of $5,523,615 or 51.5%. The increase was caused by the addition of the
Chell Merchant Capital Group and Chell.com (USA). Chell Merchant Capital Group's
and Chell.com (USA)'s selling, general and administration expenses for the 2001
Fiscal Year were $5,452,378 and $121,715 respectively (There are no comparative
figures for the 2000 Fiscal Year). There were increased consulting, legal and
accounting fees of $298,556, $819,215 and $302,739 respectively. These increased
due to the acquisition and the increased reporting requirements for the
Quarterly reviews. There were also increased operating costs due to the addition
of the two new companies, such as; communications ($202,531), rent and utilities
($117,649), travel ($992,595), office supplies ($100,023). Also there was
increased advertising and promotion ($418,557) and investor and public relations
($492,846) associated with the two new companies. In addition there was an
increase in salaries and benefits of $1,762,128. These staffing levels have been
reduced and these costs should not be incurred in the next fiscal year. As a
whole, Chell Merchant Capital Group and Chell.com (USA) attributed for the
increase in selling, general and administrative expenses, however these costs
have been dramatically decreased and should not occur with our current company
structure in the next fiscal year. As a percentage of the Company's total
revenues, total selling, general and administrative expenses increased to 89.2%
for the 2001 Fiscal Year from 56.1% for the 2000 Fiscal Year.

      Write-off of leaseholds was $355,560 for the 2000 Fiscal Year. Chell
Merchant Capital Group experienced the one-time write-offs.

      Bad debts expense was $171,407, compared to $140,090 for the 2000 Fiscal
Year, an increase of $31,317 or 22.4%. The increase resulted from an increase in
the allowance for doubtful accounts. As a percentage of our total revenues, such
costs increased to 0.9% for the 2001 Fiscal Year from 0.7% for the 2000 Fiscal
Year.

      Interest and bank charges for the 2001 Fiscal Year were $881,398, compared
to $282,085 for the 2000 Fiscal Year, an increase of $599,313 or 212.5%. The
increase was the result of the increased debt levels associated with the
purchase of Richard Wolff Enterprises, and the increased debt for the promissory
note and convertible debenture. As a percentage of our total revenues, such
costs increased to 4.8% for the 2001 Fiscal Year from 1.5% for the 2000 Fiscal
Year.

      Depreciation and amortization for the 2001 Fiscal Year were $3,040,407,
compared to $2,249,321 for the 2000 Fiscal Year, an increase of $791,086 or
35.2%. This increase is the result of depreciation on the capital asset
additions in 2001, and the addition of our Chell Merchant Capital Group
subsidiary ($431,697). As a percentage of our total revenues, such costs
increased to 16.7% for the 2001 Fiscal Year from 11.8% for the 2000 Fiscal Year.

      Net Income/Loss. As a result of all of the above, the Company's net loss
for the 2001 Fiscal Year was $11,226,225 compared to net loss of $2,323,621 for
the 2000 Fiscal Year, a change of $8,902,604. This represents a decrease in net
income as a percentage of total revenues to (61.6%) in the 2000 Fiscal Year from
(12.2%) in the 2000 Fiscal Year.


                                       25
<PAGE>

      Year Ended August 31, 2000 Compared to Year Ended August 31, 1999

      Revenues. Revenues from network services for the 2000 Fiscal Year were
$6,345,552, compared to $6,607,915 for our fiscal year ended August 31, 1999
(the "1999 Fiscal Year"), a decrease of $262,363 or 4.0%. The revenue earned
from playmaker repairs and maintenance performed by us for NTN Communications
during the 2000 Fiscal Year was $57,387 compared to $184,356 for the 1999 Fiscal
Year, a decrease of $126,969. In addition the 1999 Fiscal Year included a one
time sale that resulted in a variance of $134,630. The remaining revenues are
relatively constant between years due to the number of hospitality sites
remaining at the same level between the 2000 and 1999 fiscal years.

      Revenues from Pay-tv for the 2000 Fiscal Year were $6,517,940. There is no
comparative revenue for the 1999 Fiscal Year as the revenue comes from our
GalaVu subsidiary, which was acquired in Fiscal 2000.

      Revenues from event programming for the 2000 Fiscal Year were $500,168,
compared to $527,740 for the 1999 Fiscal Year, a decrease of $27,572 or 5.2%.
The decrease was due to a decreased number of corporate events hosted, both in
Canada and abroad, in 2000 when compared to the number of events hosted in 1999.

      Revenues from ad sponsorship were $675,532 for the 2000 Fiscal Year,
compared to $308,602 for the 1999 Fiscal Year, an increase of $366,930 or
119.0%. The increase was the result of an increase in the number and size of
corporate sponsors over the level experienced in the previous period.

      Revenues from video and software sales were $3,702,801 for the 2000 Fiscal
Year, compared to $4,033,980 for the 1999 Fiscal Year, a decrease of $331,179 or
8.2%. Decreased levels of funding by all levels of government have resulted in
tighter budget constraints placed upon educational bodies, and as a result,
sales of educational material have fallen. In addition, the demand for analog or
VHS formats is decreasing, yet the demand for the digital formats has not
increased at the same rate.

      Revenues from video dubbing were $717,596 for the 2000 Fiscal Year
compared to $691,156 for the 1999 Fiscal Year, an increase of $26,440 or 3.8%.
The increase can be attributed to stabilization in the local customer base after
our Magic Lantern subsidiary and its subsidiaries' relocation in late fiscal
1998.

      Revenues from digital encoding were $539,815 for the 2000 Fiscal Year,
compared to $462,742 for the 1999 Fiscal Year, an increase of $77,073 or 16.7%.
The increase can be attributed to increased demand for digital services and the
increased size in the production lab.

      Other revenues, which consisted primarily of revenue from installation
services, Internet services and interest income, were $107,886, compared to
$191,556 for the 1999 Fiscal Year, a


                                       26
<PAGE>

decrease of $83,670 or 43.7%. Installation services revenue was constant due to
a constant number of sites and interest income was constant due to the
short-term investments remaining at a consistent level. The change in other
revenues arose primarily from Internet services; $2,301 for the 2000 Fiscal Year
compared to $98,959 for the 1999 Fiscal Year, a decrease of $96,658. Internet
services are no longer being provided.

      As a result of the foregoing, our total revenues in the aggregate were
$19,107,290, compared to $12,823,691 for the 1999 Fiscal Year, an increase of
$6,283,599 or 49.0%.

      Cost of Sales. Cost of Sales for network services for the 2000 Fiscal Year
were $2,160,351, compared to $2,353,705 for the 1999 Fiscal Year, a decrease of
$193,354 or 8.2%. The number of hospitality sites outstanding in 2000 compared
to the number outstanding in 1999 was constant, however we are billed by NTN
Communications, Inc. in United States dollars and a $29,850 decrease in cost of
sales resulted from a stronger Canadian dollar in the 2000 Fiscal year ($1.4714
for the 2000 Fiscal Year compared to $1.4949 for the 1999 Fiscal Year). As a
result of the decreased revenue from playmaker repairs, the associated cost of
sales decreased by $82,654. As a percentage of our total revenues, such costs
decreased to 11.3% for the 2000 Fiscal Year from 18.4% for the 1999 Fiscal Year.

      Pay-tv costs were $2,919,417 for the 2000 Fiscal Year. There are no
comparative figures for the 1999 Fiscal Year. The Pay-tv costs as a percentage
of our total revenues were 15.3%.

      Event programming costs were $23,819, compared to $24,650 for the 1999
Fiscal Year, a decrease of $831 or 3.4%. The decrease was commensurate with the
decrease in the number of events hosted in event programming revenues. As a
percentage of our total revenues, such costs decreased to 0.1% for the 2000
Fiscal Year from 0.2% for the 1999 Fiscal Year.

      Advertising sponsorship costs were $93,496, compared to $61,255 for the
1999 Fiscal Year, an increase of $32,241 or 52.6%. The increase was the result
of increased marketing campaigns and its associated costs. As a percentage of
our total revenue such costs remained constant at 0.5% for the 2000 Fiscal Year
compared to the 1999 Fiscal Year.

      Video and software costs in aggregate were $1,625,885, compared to
$1,709,626 for the 1999 Fiscal Year, a decrease of $83,741 or 4.9%. The decrease
corresponds to the decrease in revenue as discussed above. As a percentage of
our total revenues, these costs have fallen to 8.5% in the 2000 Fiscal Year from
13.3% in the 1999 Fiscal Year.

      Video dubbing costs were $157,289, compared to $353,983 for the 1999
Fiscal Year, a decrease of $196,694 or 55.6%. The decrease also can be
attributed to the decrease in customer base and more efficient operations since
the acquisition of Image Media Ltd. As a percentage of our total revenues, these
have fallen to 0.8% in the 2000 Fiscal Year from 2.7% in the 1999 Fiscal Year.


                                       27
<PAGE>

      Digital encoding costs were $111,657 for the 2000 Fiscal Year, compared to
$11,738 for the 1999 Fiscal Year, an increase of $99,919 or 851.2%. The increase
is associated with the increased level of production and costs associated with
the additional production facilities.

      Other costs, were $113,005, compared to $359,811 for the 1999 Fiscal Year,
a decrease of $246,806 or 68.6%. As a percentage of our total revenues, such
costs decreased to 0.6% for the 2000 Fiscal Year from 2.8% for the 1999 Fiscal
Year. The decrease relates primarily to Viewer Services ($222,751), which became
a wholly-owned subsidiary on June 16, 1999.

      As a result of the foregoing, our total cost of sales was $7,204,919,
compared to $4,874,768 for the 1999 Fiscal Year, an increase of $2,330,151 or
47.8%. Total gross margins increased to 62.3% in the 2000 Fiscal Year from 61.9%
in the 1999 Fiscal Year.

      Expenses. Selling, general and administrative expenses for the 2000 Fiscal
Year were $10,726,556, compared to $6,830,575 for the 1999 Fiscal Year, an
increase of $3,895,981 or 57.0%. The increase was caused by the following
factors; firstly, GalaVu's selling, general and administration expenses for the
2000 Fiscal Year were $2,761,254 or 70.9% of the total increase (There are no
comparative figures for the 1999 Fiscal Year); secondly, severance packages
associated with executive restructuring; thirdly, a provision for certain
investments; fourthly, there were increased legal and accounting fees associated
with operations and items pertaining towards the Company's future; fifthly,
there was a one-time compensation charge of $337,779 resulting from the change
in the preferred share conversion rate and finally, costs associated with the
purchase of the remaining 49% of Interlynx. As a percentage of the Company's
total revenues, total selling, general and administrative expenses increased to
56.1% for the 2000 Fiscal Year from 53.3% for the 1999 Fiscal Year.

      Bad debts expense was $140,090, compared to $126,170 for the 1999 Fiscal
Year, an increase of $13,920 or 11.0%. The increase resulted from an increase in
the allowance for doubtful accounts. As a percentage of our total revenues, such
costs decreased to 0.7% for the 2000 Fiscal Year from 1.0% for the 1999 Fiscal
Year.

      Interest and bank charges for the 2000 Fiscal Year were $282,085, compared
to $59,312 for the 1999 Fiscal Year, an increase of $222,773 or 375.6%. The
increase was the result of the increased debt levels associated with the
purchase of our GalaVu subsidiary. Our GalaVu subsidiary had interest charges of
$176,325 or 79.1% of the total increase. As a percentage of our total revenues,
such costs increased to 1.5% for the 2000 Fiscal Year from 0.5% for the 1999
Fiscal Year.

      Depreciation and amortization for the 2000 Fiscal Year were $2,249,321,
compared to $1,429,219 for the 1999 Fiscal Year, an increase of $820,102 or
57.4%. This increase is the result of depreciation on the capital asset
additions in 2000, primarily the addition of our GalaVu subsidiary. Our GalaVu
subsidiary had depreciation and amortization for the 2000 Fiscal Year of
$936,400. As a percentage of our total revenues, such costs increased to 11.8%
for the 2000 Fiscal Year from 11.1% for the 1999 Fiscal Year.


                                       28
<PAGE>

      Income Taxes. There was no provision for income taxes for the 2000 Fiscal
Year, compared to $150,000 for the 1999 Fiscal Year, a decrease of $150,000 or
100%. The provision for taxes is lower in 2000 when compared to the 1999
provision due to no individual operating unit experiencing a taxable income.

      Net Income/Loss. As a result of all of the above, the Company's net loss
for the 2000 Fiscal Year was $2,323,621 compared to net loss $971,497 for the
1999 Fiscal Year, a change of $1,352,124. This represents a decrease in net
income as a percentage of total revenues to (12.2%) in the 1999 Fiscal Year from
(7.6%) in the 1999 Fiscal Year.

Liquidity and Capital Resources

      At August 31, 2001, we had a working capital deficit of $4,432,000 a
decrease of $6,849,551 from working capital of $2,417,551 at August 31, 2000.

      Accounts receivable were $2,308,790 at August 31, 2001, compared to
$3,098,808 at August 31, 2000, a decrease of $790,018. The decrease can be
attributed to a decrease in the advertising and sponsorship sales, event
programming and software revenue and as well as a decrease in the average number
days outstanding in the receivables of Interactive. Property and equipment was
$8,260,282 at August 31, 2001 compared to $7,689,620 at August 31, 2000, an
increase of $570,662. This increase can be attributed to the following: the new
corporate wide financial and accounting package purchased and implemented in the
2001 Fiscal Year for which the approximate cost was $200,000. There was an
increase of approximately $150,000 of digital masters, that are required for the
production of digital media as well as the additional assets associated with the
acquisition of Richard Wolff Enterprises, Inc. Long-term debt was $9,658,997 in
the 2001 Fiscal Year compared to $4,774,672, an increase of $4,884,325. The
increase can be attributed to the $US1,700,000 convertible debenture associated
with the Chell acquisition and the US$1,500,000 promissory note. Accounts
payable were $2,469,663 in the 2001 Fiscal Year compared to $1,379,727 in the
2000 Fiscal Year, an increase of $1,089,936. The increase can be attributed the
increase in accounting and legal fees as a result of additional SEC reporting
and as well as the payables associated with the new entity, CMCG.

      For the 2001 Fiscal Year, we had a net cash outflow of $999,192, versus a
cash outflow of $662,509 for the 2000 Fiscal Year. The net cash inflow for the
1999 Fiscal Year was $1,017,007. The decrease in net cash flow for the 2001
Fiscal Year was primarily due to cash used in investing activities and cash used
in operating activities.

      Cash used in operating activities for the 2001 Fiscal Year was $2,858,451.
The major factors contributing to the cash used in operations for the 2001
Fiscal Year include: net loss with non-cash expenses added back of $5,506,554;
increases in accounts payable and accrued liabilities of $1,072,245, a decrease
in accounts receivable ,short-term investments and other assets of $790,018,
$250,051 and $111,072 respectively. The major factors contributing to the cash
provided from operations for the 2000 Fiscal Year include: net loss with
non-cash expenses added back of $436,555, an increase in accounts payable and
accrued liabilities of $919,707 and a decrease in inventory of $119,616; cash
used in operations were: increases in accounts


                                       29
<PAGE>

receivable, income taxes receivable and an increase in the net assets from
discontinued operations of $614,830, $143,227, $202,799 and $267,046
respectively. Cash provided by operating activities for the 1999 Fiscal Year was
$1,640,659. The major factor contributing to the cash provided by operations
during the 1999 Fiscal Year was net loss with non-cash expenses added back of
$460,230 and a decrease in short-term investments of $1,780,407 reduced by the
use of cash resulting from the increase in prepaid expenses, other receivables
and decrease in accounts payable of $103,356, $153,020 and $304,370
respectively.

      Cash used in investing activities in the 2001 Fiscal Year was $3,070,672.
This amount resulted from the purchase of property and equipment of
$1,537,749,and the deposit on purchase of $1,430,962 Cash used in investing
activities in the 2000 Fiscal Year was $1,162,146. This amount resulted from the
purchase of capital assets totaling $1,162,146. Cash used in investing
activities in the 1999 Fiscal Year was $614,130. This amount was primarily made
up of purchases of capital assets totaling $601,633

      Cash provided by financing in the 2001 Fiscal Year were $4,929,930. The
increase is primarily due to the sale of the convertible debenture and the
bridge financing. Cash provided by financing in the 2000 Fiscal Year was
$235,606 resulting primarily from the $281,134 proceeds of exercised employee
stock options. Cash used in financing activities in the 1999 Fiscal Year totaled
$9,521. This mainly resulted from $48,007 repayment of debt offset by a $38,486
increase in loans payable.

      Our business plan for 2002 contemplates obtaining additional working
capital through refinancings or restructurings of our existing loan agreements,
reducing operating overhead (which has already begun through workforce
consolidation), and the possible sale of some of our existing subsidiaries. Our
management is of the opinion that they will be able to obtain enough working
capital and that together with funds provided by operations, there will be
sufficient working capital for the Company's requirements.

      Inflation

      The rate of inflation has had little impact on our operations or financial
position during the year ended August 31, 2001 and August 31, 2000 and inflation
is not expected to have a significant impact on our operations or financial
position during the 2002 Fiscal Year.

      We pay a number of our suppliers, including our licensor and principal
supplier, NTN Communications, Inc., in US dollars. Therefore, fluctuations in
the value of the Canadian dollar against the US dollar will have an impact on
our gross profit as well as our net income. If the value of the Canadian dollar
falls against the US dollar, our cost of sales will increase thereby reducing
our gross profit and net income. Conversely, if the value of the Canadian dollar
rises against the US dollar, our gross profit and net income will increase.


                                       30
<PAGE>

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks from changes in foreign currency exchange rates
and interest rates. The Company and its wholly-owned subsidiaries are located in
Canada and its functional currency is the Canadian dollar.

Interest rate risks.

We also had various loans outstanding at August 31, 2001 (approximately
$9,659,000), which bear interest at a fixed rate. A hypothetical 10% adverse
change in the interest rate on this debt would negatively affect net income and
cash flow by approximately $40,000.

The company did not use any derivative financial investments to manage this
exposure.

Exchange rate risks.

We are subject to foreign currency exchange rate fluctuations in the Canadian
dollar value of foreign currency-denominated transactions. Based on our average
annual net currency positions in fiscal 2001 and 2000, a 10% adverse change in
average annual foreign currency exchange rates would not have been material to
our consolidated financial statements for the years ended August 31, 2001 or
2000.

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
  Current....................................................            F - 1
  Predecessor................................................            F - 2
Consolidated Balance Sheets..................................            F - 3
Consolidated Statements of Operations........................            F - 4
Consolidated Statements of Shareholders' Equity..............            F - 5
Consolidated Statements of Cash Flows........................            F - 6
Notes to Consolidated Financial Statements...................            F - 7

----------


                                       31
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURES.

      On October 12, 2000, Ernst & Young LLP ("E&Y"), the independent
accountants who were engaged as the principal accountants to audit our financial
statements resigned as our certifying accountants. E&Y's report on our financial
statements as at August 31, 1999 and for the two years then ended contained no
adverse opinion or disclaimer of opinion, and were not qualified or modified as
to uncertainty, audit scope or accounting principles. During the fiscal year
ended August 31, 1999 and during the subsequent interim period preceding E&Y's
resignation we had no disagreement with E&Y on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure. The facts and circumstances that relate to E&Y's resignation, as far
as they are known to us, are as follows:

      E&Y served as our certifying accountants since 1995. E&Y orally informed
us that pursuant to E&Y's internal rules, E&Y would resign as our certifying
accountants since it was unwilling and therefore unable to rely upon the
representations of Mr. Cameron Chell, our President and Chief Executive Officer,
due to the existence of a Settlement Agreement dated November 6, 1998, between
Cameron Chell, and the Alberta Stock Exchange. On April 3, 2000, our board of
directors appointed Mr. Chell as a director and elected him as our Chair; on
April 3, 2000, Chell.com. Ltd., an Alberta corporation wholly-owned by Mr.
Chell, purchased approximately 16% of our issued and outstanding common stock;
and on April 7, 2000, we advised E&Y of the existence of the Settlement
Agreement. Pursuant to this Settlement Agreement with the Alberta Stock
Exchange, Mr. Chell acknowledged the existence of certain facts that occurred
during 1996 and 1997 while Mr. Chell was a registered representative in Alberta,
Canada, licensed by the Alberta Securities Commission, and he agreed to certain
restrictions imposed by the Alberta Stock Exchange and to pay a Cdn$25,000 civil
fine. Specifically, Mr. Chell acknowledged that he had breached certain duties
of supervision, disclosure, and compliance of the Alberta Stock Exchange in
connection with various offers and sales of securities. Those restrictions
included Mr. Chell's loss of Alberta Stock Exchange approval for a five-year
period and enhanced supervision for a three-year period.

      E&Y's unwillingness to rely upon Mr. Cameron Chell's representations were
based upon the existence of the Settlement Agreement with the Alberta Stock
Exchange and not based upon any representations made by Cameron Chell.

      On November 1, 2000, our Board of Directors ratified the engagement of
Lazar, Levine & Felix, LLP as our auditors for the year ending August 31, 2000.
We have authorized E&Y to fully respond to any and all inquiries of Lazar,
Levine & Felix, LLP concerning E&Y's resignation.


                                       32
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

--------------------------------------------------------------------------------
Name                Age   Principal Positions with the Company   Director Since
================================================================================
Cameron Chell        33   Director, President and Chief
                            Executive Officer                         2000
Don Pagnutti         51   Director, Vice President-Finance,
                            Chief Financial Officer                   2000
Adrian P. Towning    57   Director                                    1994
David Bolink         33   Director                                    2000
Gordon Herman        43   Director                                    2000
Robert Stone         58   Director                                    2000
Shelly Singhal       34   Director                                    2001
Mark Truman          47   Secretary                                   N/A

      All of our Directors and Executive Officers were re-elected at our Annual
Shareholders' Meeting held on February 28, 2001 and will hold office until the
next succeeding Annual Meeting of Shareholders or until their successors are
duly elected and qualified.

      Cameron Chell is our Chairman of the Board, President and Chief Executive
Officer and is the Chairman and Chief Executive Officer of Chell.com Ltd. Mr.
Chell is a founder of the Application Service Provider Consortium and FutureLink
Corp.. He served as FutureLink's President, CEO and Chairman from 1997 to 1999.
Mr. Chell is also a Director and Shareholder of VC Advantage Limited, the
general partner of VC Advantage Fund Limited Partnership. Mr. Chell is also the
Chairman of the Board of Directors of Engyro and cDemo. Previously, Mr. Chell
worked in corporate finance in the private sector. Mr. Chell worked as a
stockbroker at McDermid St. Lawrence Securities Ltd. from 1994 to 1997. On
November 6, 1998, Mr. Chell entered into a Settlement Agreement with the Alberta
Stock Exchange to resolve a pending investigation into alleged breaches by Mr.
Chell of Alberta Stock Exchange rules and bylaws. As part of the Settlement
Agreement, (i) Mr. Chell acknowledged that he had breached certain duties of
supervision, disclosure, or compliance in connection with various offers and
sales of securities and (ii) Mr. Chell was prohibited from receiving Alberta
Stock Exchange approval for a five year period, subjected to a Cdn$25,000 fine
and a three year period of enhanced supervision.

      Don Pagnutti was appointed our Vice President, Finance on September 19,
2000. Mr. Pagnutti has been our Chief Financial Officer since September 1998,
and was our Executive Vice President and Chief Operating Officer from September
1997 to September 2000. From 1996 to 1997, he worked for Sullivan Entertainment
Inc., as Executive Vice President and Chief Financial Officer. From 1980 to
1996, he worked for Telemedia Communications Ltd., a large Canadian media
company as Vice President, Radio. Mr. Pagnutti is a Chartered Accountant and has
a Masters Degree in Business Administration and a Bachelor of Commerce Degree
from the University of Toronto.

      Adrian 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, which we refer to as MCC,


                                       33
<PAGE>

from 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.

      David Bolink was a Managing Director of Chell Merchant Capital Group from
September 2000 to January 19, 2001 and served as Chell.com. Ltd.'s first
President from December 1999 to July 2000. Mr. Bolink served as Director of
Business Management of FutureLink Distribution Corp., an application service
provider and a provider of server-based computing services, from May 1998 to
December 1999. Mr. Bolink also served as Business Manager of Edmonton Society
for Christian Education from May 1996 to May 1998. From February 1989 to May
1996, Mr. Bolink served as Asset Manager of Wilson Holdings, a property and
financial management company.

      Gordon Herman was a Senior Managing Director of Chell Merchant Capital
Group from September 2000 to January 19, 2001. Mr. Herman is currently the
Chairman/President of Madison Companies Ltd., a company listed on the Canadian
Venture Exchange Inc., which focuses on acquiring small to medium sized
facilities management companies since 1997. From 1992 to 1998, Mr. Herman was
the President/owner of Harding Hall & Graburne Insurance Inc., a property and
casualty insurance broker. From 1996 to 1998, Mr. Herman was the Vice President,
Western Canada - Acquisitions, at Equisure Financial Network, an insurance
broker network trading on the Toronto Stock Exchange. From 1988 to 1992, Mr.
Herman was the President of General Electric Capital Canada Leasing Inc.,
Canadian Operations (Canadian Subsidiary of General Electric).

      Robert Stone graduated with the degree of Bachelor of Science from the
University of Toronto in 1964. From 1973 until 1997 Mr. Stone served in various
capacities with Cominco Ltd., a company listed on the Toronto Stock Exchange,
and the American Stock Exchange, being the Vice-President, Finance and Chief
Financial Officer of that company from 1980 until 1997. From 1969 until 1973 Mr.
Stone was the Director of Finance of Great Northern Capital Corporation. From
1964 until 1969 Mr. Stone worked with Clarkson Gordon, Chartered Accountants,
receiving his Chartered Accountant designation in 1967. Mr. Stone currently
serves as a director of a number of companies including: Boliden Limited; Golden
Star Resources Ltd.; Mainsborne Communications International Inc.; Manhatten
Minerals Corp.; Mr. Stone is also a former director of Agrium Inc.; Cominco
Ltd.; Global Stone Corporation; Pine Point Mines Ltd.; TVI Pacific Inc.; and
United Bolero Development Corp; Union Bank of Switzerland and West Kootenay
Power & Light Company.

      Mr. Singhal is currently Managing Director of Technology Investment
Banking for SBI E2-Capital (USA) Inc. Previously he was Managing Director of
Technology Investment Banking for BlueStone Capital Securities, Inc., and
Managing Director of Corporate Finance at Roth Capital Partners where he was
head of the E-Commerce Group and Manager of the Roth Capital Partners Bridge
Fund.


                                       34
<PAGE>

      Mark Truman has been our Controller since December of 1994.

ITEM 11.    EXECUTIVE COMPENSATION.

Summary Compensation Table

      The following table sets forth information concerning the compensation
paid or accrued by us during the three years ended August 31, 2001 to the
individual who served as our Chief Financial Officer during the 2001 Fiscal Year
who received total annual salary and bonuses in excess of US$100,000
(Cdn$152,840) during the 2001 Fiscal Year (collectively, the "Named Executive
Officers").

<TABLE>
<CAPTION>
                                                                                Long-term
                                             Annual Compensation              Compensation
                                     ====================================   ================
                                                           Other Annual     Securities Under     All Other
Name and Principal                   Salary(1)   Bonus    Compensation(1)   Options/Granted    Compensation
Position                      Year     (Cdn$)    (Cdn$)        ($)                (#)               ($)
==================================   ====================================   ===============================
<S>                           <C>    <C>           <C>          <C>         <C>                    <C>
Donald Pagnutti (2)           2001   160,000       --           --               --                --
Vice-President, Finance and   2000   156,249       --           --          22,500                 --
Chief Financial Officer
==================================   ====================================   ===============================
</TABLE>

Notes:

      (1)   Perquisites and other personal benefits received in 1998, 1999 and
            2000 did not exceed the lesser of US$50,000 and 10% of the total
            annual salary and bonuses for any of the Named Executive Officers.
      (2)   Mr. Pagnutti's title was changed to Vice President Finance and Chief
            Financial Officer on September 19, 2000.

      During the three year period ended August 31, 2001, we did not grant any
restricted stock awards or stock appreciation rights. Additionally, all of our
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 2001 Fiscal Year, (b) the
percentage the grant represents of the total number of options granted to all
our employees during the 2001 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


                                       35
<PAGE>

from the date of the grant of the subject option to the end of the option term.

<TABLE>
<CAPTION>
                                                                                     Potential Realizable Value at
                                                                                     Assumed Rates of Stock Price
                                                                                     Appreciation for Option Term
                                                                                     =============================
Name                           Number of   Percentage of   Exercise    Expiration           5%       10%
                                Shares     Total Options    Price         Date
                              underlying     Granted to
                               Options      Employees in
                                Granted     Fiscal Year
==================================================================================================================
<S>                               <C>           <C>          <C>          <C>               <C>      <C>
Donald Pagnutti (1)               Nil           Nil          Nil          Nil               Nil      Nil
Vice-President, Finance and
Chief Financial Officer
==================================================================================================================
</TABLE>

Notes:

      (1)   Mr. Pagnutti's title was changed to Vice President Finance and Chief
            Financial Officer on September 19, 2000.

Options Exercised and Remaining Outstanding

      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
2001 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, 2001,
separately identified between those exercisable and those not exercisable, and
(iv) the aggregate value of in-the-money, unexercised options held on August 31,
2001, separately identified between those exercisable and those not exercisable.

<TABLE>
<CAPTION>
                    Securities   Aggregate
                   Acquired on     Value       Unexercised Options at      Value of Unexercised in the Money
                     Exercise     Realized        August 31, 2001             Options at August 31, 2001
                        (#)          ($)                 (#)                              ($)
                   =======================   ===========================   =================================

                                             Exercisable   Unexercisable   Exercisable(1)   Unexercisable(1)
                                             ===========   =============   ==============   ================
<S>                     <C>          <C>        <C>            <C>              <C>               <C>
Donald Pagnutti         Nil          Nil        31,875         20,625           Nil               Nil
</TABLE>

Note:

      (1)   The value of the unexercised "in-the-money" options has been
            determined by subtracting the exercise price of the options from the
            closing Common Share price of US$1.33 on August 31, 2001, and
            multiplying by the number of Common Shares that may be acquired upon
            the exercise of the options. The current exercise price of the
            options is higher than the closing Common Share price of US$1.33,
            therefore the Value of the options is nil.

Compensation of Directors

      Prior to September 8, 2000, each director, not otherwise our full time
employee, was eligible to receive $500 for each meeting of the Board of
Directors or committee thereof which they attended, along with the reimbursement
of their reasonable expenses incurred on our behalf. In addition, each director,
not otherwise our full time was eligible to receive 1,500 stock options
annually.

      As of December 11, 2000, the Board of Directors formally adopted a
standard arrangement pursuant to which only our outside directors are
compensated for their services in


                                       36
<PAGE>

their capacity as directors. This compensation arrangement is retroactive to
September 19, 2000 (the date of the closing of the Agreement of Purchase and
Sale between Networks North Inc., Networks North Acquisition Corp., Chell.com
Ltd. and Cameron Chell).

      Outside Director's Compensation Schedule                   Cash    Options
                                                                 (US$)
1.    Directorship Acceptance Options (one time grant with a
      3 year vesting schedule)                                            45,000
2.    Annual Retainer-Chairman                                   20,000   10,000
3.    Annual Retainer-Director                                    6,000
4.    Annual Retainer-Committee Member (over and above
      directorship retainer)                                      3,000
5.    Annual Retainer-Committee Chair (over and above
      directorship retainer and committee retainer)               2,000
6.    Board Meeting Attendance Fee                               750/mtg.
7.    Committee Attendance Fee                                   500/mtg

Employment Contracts with Named Executive Officers

      In November 1999, we renewed Donald Pagnutti's employment agreement
originally dated August 15, 1997, pursuant to which Mr. Pagnutti serves as our
Executive Vice President, Chief Financial Officer and Chief Operating Officer.
Effective September 19, 2000, Mr. Pagnutti's title was changed to Vice
President, Finance and Chief Financial Officer. The agreement provides for an
initial base compensation of $160,000 with annual reviews, together with
automobile expenses of $9,000. In addition to the fixed remuneration, we shall
pay Mr. Pagnutti a bonus at the end of each year of the term in the event that
during the said year our actual net income before taxes as audited using the
generally accepted accounting principles applied on a basis consistent with
those previous years, equaled or exceeded our projected net income before taxes
as determined by our Board of Directors at the commencement of the said year.
The agreement further provided that we grant to Mr. Pagnutti options to purchase
a minimum of 15,000 of our Common Shares.

      On September 19, 2000, we entered into an employment agreement with
Cameron Chell, pursuant to which Mr. Chell serves as our President and Chief
Executive Officer. The agreement provides for an initial base compensation of
$360,000, together with automobile expenses of $8,400. In addition to the fixed
remuneration, we shall provide Mr. Chell with the services of an Executive
Assistant on an ongoing basis and an Accountant for a reasonable period of time
to allow for the completion of outstanding accounting work related to existing
companies in which Mr. Chell is involved. It was the understanding of the
parties that this agreement was to be replaced by a definitive employment
agreement before October 10, 2000, however, such agreement has not been entered
into at this time. Since the signing of this agreement, Mr. Chell has eliminated
both his salary and automobile allowance in an effort to reduce our cash
requirements. These were eliminated with the understanding that the compensation
of Mr. Chell will be mutually agreed upon between the parties.

      We do not have any other employment agreements in effect with any other
executive


                                       37
<PAGE>

employee.

Compensation Committee Interlocks and Insider Participation

      Our Audit and Compensation Committees currently consist of Robert Stone
and Adrian P. Towning. Messrs. Stone and Towning are not our officers or
employees, and have not served in such capacities in the past. None of our
executive officers 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 November 30, 2001, of the Common Stock by each
person who is known us to be the beneficial owner of more than five (5%) percent
of the Common Stock, our directors and Named Executive Officers, and all
directors and executive officers as a group.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
                                                  Amount and Nature of   Percent of
Name and Address(1)                               Beneficial Ownership    Class (2)
===================================================================================
<S>                                                          <C>              <C>
Chell.com Ltd. (3)                                           5,325,048        59.0%
Cameron Chell (Director, President and Chief
   Executive Officer(4)                                      5,326,648        59.0%
Canadian Advantage Limited Partnership II                    1,238,535        13.7%
Gordon Herman (Director)(5)                                    332,236         3.7%
David Bolink (Director)(6)                                     311,411         3.4%
Don Pagnutti (Vice-President - Finance and
   Chief Financial Officer)(7)                                  33,750         0.4%
Adrian Towning (Director)(8)                                    25,125         1.9%
Robert Stone (Director)(9)                                      15,000         0.1%
Shelly Singhal                                                       0           0%
All directors and executive officers as a group
   (6 persons) (10)                                          5,395,523        59.8%
===================================================================================
</TABLE>

      (1)   Unless otherwise stated, the address of our directors and executive
            officers is c/o Chell Group Corporation, 14 Meteor Drive, Toronto,
            Ontario, Canada M9W 1A4.

      (2)   Unless otherwise indicated, we believe 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 that 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.

      (3)   Cameron Chell is the sole director and shareholder of Chell.com Ltd.


                                       38
<PAGE>

      (4)   Includes 5,325,048 Common Shares held by Chell.com Ltd.

      (5)   Represents the vested portion of an option in Chell.com Ltd. held by
            Mr. Herman, for the purchase of our common shares, which are owned
            by Chell.com Ltd.

      (6)   Represents the vested portion of an option in Chell.com Ltd. held by
            Mr. Bolink, for the purchase of our common shares, which are owned
            by Chell.com Ltd.

      (7)   Represents options, which have vested and are available for
            exercise.

      (8)   Includes 3,000 of our common shares and 19,125 options, which have
            vested and are available for exercise.

      (9)   Represents options, which have vested and are available for
            exercise.

      (10)  This percentage of stock ownership by directors and executive
            officers was calculated as a percentage of our total outstanding
            common stock, which was 9,028,239 at November 26, 2001.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

      Set forth below is a description of certain transactions between us and
our directors, executive officers, beneficial owners of five percent or more of
the outstanding Common Stock, or members of the immediate family of any of the
foregoing persons, as well as certain business relationships between the us and
our directors, which occurred or existed during the 2001 Fiscal Year and
subsequent thereto. Our management believes that the transactions described in
this section were made on terms no less favorable than those which could have
been obtained from third parties.

      a)    Cameron Chell is Chairman of the Board and a director in each of
            Engyro and cDemo. Chell.com., a wholly owned subsidiary of Cameron
            Chell, holds 120,000 warrants to purchase common shares of cDemo at
            $5.00 per share and 85,000 warrants to purchase Class A Voting
            Shares of eSupplies at $7.00 per share and 500,000 options at $7.00.
            Chell.com holds 200,000 options to purchase shares of Engyro for
            $5.00 and warrants for 97,500 shares at $5.00.

      b)    Gordon Herman is interim President of cDemo, a consultant to
            eSupplies and receives compensation therefore. He holds an option in
            Chell.com to acquire 498,354 shares of our company, which are held
            by Chell.com, at a price of $1.00 (which may be adjusted up or
            downward based on certain contingencies).

      c)    David Bolink, Engyro's Vice-President of Business Development and is
            a consultant to eSupplies and receives compensation therefore. He
            holds an option in Chell.com to acquire 467,121 shares of our
            shares, which are held by Chell.com, at a price of $1.00 (which may
            be adjusted up or downward based on certain contingencies).


                                       39
<PAGE>

      d)    Consulting Agreement between Chell.com and Buyersangel.com Inc. (now
            known as cDemo, Inc.) dated January 21, 2000 that was assigned to us
            as part of the purchase of Chell.com assets effective August 31,
            2000, whereby we provide consulting services to cDemo for a period
            of 12 months for a fee of US$720,000. Cameron Chell is the Chairman
            of the Board of cDemo. Mr. Herman is a director.

      e)    Consulting Agreement between Chell.com and R Home Funding Company
            Ltd. (now known as Engyro, Inc.) dated January 17, 2000 that was
            assigned to us as part of the purchase of Chell.com assets effective
            August 31, 2000 whereby we provide consulting services to Engyro for
            a period of 14 months, ending on January 15, 2001, for a fee of
            US$720,000. Cameron Chell is the Chairman of the Board of Engyro.

      f)    Consulting Agreement between Mainsborne Communications International
            Inc. and us dated September 1, 2000 whereby we provide consulting
            services for a term of 1 year for a fee of US$25,000 per month. Mr.
            Stone is a director of Mainsborne Communications International Inc.

      g)    License Agreement between us, Cameron Chell, and Chell Merchant
            Capital Group dated August 31, 2000 whereby Mr. Chell grants us and
            Chell Merchant Capital Group the right to use the trademarks
            "Chell.com", "Chell Merchant Capital Group" and "Chell Corporation"
            in exchange for the fee of $1.00 per year.

      h)    Securities Purchase Agreement with VC Advantage Fund ("VC") on
            October 3, 2000, for up to US$3,000,000 loan to us. VC received a
            Convertible Debenture, which is convertible into our Common, based
            upon an agreed conversion price of $3.00 per share. As of November
            30, 2000, VC had assigned its rights in this Agreement to Canadian
            Advantage Limited Partnership ("CALP II") and a total of
            US$1,700,000 has been advanced to the Company. The US$1,700,000
            advance is convertible into 566,667 Common shares. Cameron Chell is
            a Director and shareholder of VC Advantage Limited, the general
            partner of VC. Pursuant to the assignment of this agreement to CALP
            II, this is no longer a related transaction as Mr. Chell has no
            interests in CALP II.


                                       40
<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:

      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 following 8-K's have been filed since the Company's last 10-Q:

      none

(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:

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.+


                                       41
<PAGE>

      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. +
     10.15  Asset Purchase Agreement, dated September 10, 1999, by and between
            1373224 Ontario Limited, Networks North Inc. and Arthur Andersen
            Inc., to acquire the property and assets of GalaVu Entertainment
            Inc., from the person appointed by the court of competent
            jurisdiction as the receiver or receiver and manager of the
            property, assets and undertaking of GalaVu. +
     10.16  Promissory Note, dated September 10, 1999, by and between 1373224
            Ontario Limited, as Debtor, and the Holder, as Creditor. +
     10.17  General Security Agreement, dated September 10, 1999, by and between
            1373224 Ontario Limited, to acquire the property and assets of
            GalaVu Entertainment Inc., from the person appointed by the court of
            competent jurisdiction as the receiver or receiver and manager of
            the property, assets and undertaking of GalaVu. +
     10.18  Securities Pledge Agreement, dated September 10, 1999, by and
            between 1373224 Ontario Limited to acquire the property and assets
            of GalaVu Entertainment Inc., from the person appointed by the court
            of competent jurisdiction as the receiver or receiver and manager of
            the property, assets and undertaking of GalaVu. +
     10.19  Certificate to the Escrow Agent certifying that the conditions of
            Closing have been satisfied or waived. +
     10.20  Certificate to the Escrow Agent certifying that the conditions of
            Closing have not been satisfied or waived. +
     10.21  Occupancy and Indemnity Agreement, dated September 10, 1999, by and
            between 1373224 Ontario Limited to acquire the property and assets
            of GalaVu Entertainment Inc., from the person appointed by the court
            of competent jurisdiction as the receiver or receiver and manager of
            the property, assets and undertaking of GalaVu. +
     10.22  Order of the Ontario Superior Court of Justice, dated September,
            1999, approving the transaction contemplated herein, and vesting in
            the Purchaser the right, title and interest of GalaVu and the
            Receiver, if any, in and to the Purchased Assets, free and clear of
            the right, title and interest of any other person other than
            Permitted Encumbrances. +
     10.23  Bill of Sale, dated September 13, 1999, by and between 1373224
            Ontario Limited to acquire the property and assets of GalaVu
            Entertainment Inc., from the person appointed by the court of
            competent jurisdiction as the receiver or receiver and


                                       42
<PAGE>

            manager of the property, assets and undertaking of GalaVu. +
     10.24  Covenant of Networks North Inc., dated September 13, 1999, to allot
            and issue and pay to the Bank in writing 100,000 common shares of
            NETN.
     10.25  Agreement of Purchase and Sale dated August 4, 2000 by and among
            Networks North Inc., Networks North Acquisition Corp., Chell.com
            Ltd. and Cameron Chell. +
     10.26  Valuation of Chell.com Ltd. and investments as of May 31, 2000 by
            Stanford Keene.
        22  +
        23  List of Subsidiaries
        27  Business Sector Date

+     Incorporated by reference. See Exhibit Index.


                                       43
<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.

                                          CHELL GROUP CORPORAITON


Date: November 28, 2001               By: /s/ Cameron Chell
                                          --------------------------------------
                                          Cameron Chell, President & CEO

            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.

     Name                           Capacity                         Date
     ----                           --------                         ----


/s/ Cameron Chell            Director, President and
----------------------       Chief Executive Officer           November 28, 2001
Cameron Chell

                        Director, Vice President-Finance,
/s/ Don Pagnutti             Chief Financial Officer           November 28, 2001
----------------------
Don Pagnutti


/s/ Shelly Singhal                   Director                  November 28, 2001
----------------------
Shelly Singhal


/s/ David Bolink                     Director                  November 28, 2001
----------------------
David Bolink


/s/ Gordon Herman                    Director                  November 28, 2001
----------------------
Gordon Herman


/s/ Adrian P. Towning                Director                  November 28, 2001
----------------------
Adrian P. Towning


/s/ Robert Stone                     Director                  November 28, 2001
----------------------
Robert Stone


                                       44
<PAGE>

                           INDEPENDENT AUDITORS REPORT

The Board of Directors
Chell Group Corporation
Toronto, Ontario

We have audited the accompanying consolidated balance sheets of Chell Group
Corporation and subsidiaries as of August 31, 2001 and 2000 and the related
consolidated statements of operations and shareholders' equity and cash flows
for each of the two years in the period ended August 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

      In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Chell Group
Corporation and subsidiaries as of August 31, 2001 and 2000, and the results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.


                                          /S/ LAZAR LEVINE & FELIX LLP
                                          --------------------------------------

New York, New York
November 16, 2001


                                      F-1
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of
Chell Group Corporation

      We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Chell Group Corporation and subsidiaries
for the year ended August 31, 1999. 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 audit.

      We conducted our audit 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 audit provides a reasonable basis
for our opinion.

      In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash flows
of Chell Group Corporation and subsidiaries for the year ended August 31, 1999
in conformity with accounting principles generally accepted in the United
States.


                                          /S/ Ernst & Young LLP
                                          --------------------------------------
Toronto, Canada                           Chartered Accountants
November 12, 1999


                                      F-2
<PAGE>

                             CHELL GROUP CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                                 AS AT AUGUST 31
                         (Expressed in Canadian dollars)

<TABLE>
<CAPTION>
===============================================================================================
                                                                 2001              2000
                                                                            Restated - note 17)
                                                                  $                 $
===============================================================================================
<S>                                                          <C>                    <C>
ASSETS
Current
Cash and cash equivalents                                        356,421             1,355,613
Short-term investments (note 4)                                   19,676               269,727
Accounts receivable, trade - net of allowance for doubtful
            accounts of $227,000; [2000 - $178,000]            2,308,790             3,098,808
Other receivables (note 16)                                       84,814               216,990
Income taxes receivable                                          155,204               143,227
Inventory                                                        105,590               206,216
Prepaid expenses                                                 570,868               527,549
-----------------------------------------------------------------------------------------------
Total current assets                                           3,601,363             5,818,130
===============================================================================================
Property and equipment, net (notes 6 & 8)                      8,260,282             7,689,620
Licenses, net of accumulated amortization                        247,321               250,248
Goodwill, net of accumulated amortization                      1,795,737             1,938,480
Notes receivable (note 5)                                        160,000               160,000
Deposit on purchase (note 14)                                  1,689,710                    --
Other assets, net of amortization                                388,032               202,799
Net assets from discontinued operations (note 13 [a])             82,558             1,160,934
-----------------------------------------------------------------------------------------------
                                                              16,225,003            17,220,211
===============================================================================================

LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable - trade (note 16)                             2,469,663             1,379,727
Accrued liabilities                                            1,789,042             1,623,220
Current portion of long-term debt (note 8)                     3,774,658               397,632
-----------------------------------------------------------------------------------------------
Total current liabilities                                      8,033,363             3,400,579
===============================================================================================
Long-term debt, net of current portion(note 8)                 5,884,339             4,377,040
Deferred income taxes payable (note 7)                            59,173                59,173
-----------------------------------------------------------------------------------------------
Total liabilities                                             13,976,875             7,836,792
===============================================================================================
Commitments and Contingent liabilities (notes 9 & 12)
Shareholders' equity
Share capital (note 10)
    0 Preferred shares [2000 - 900,000]                               --                10,917
    9,028,239 common shares [2000 - 2,925,141]                   604,109               191,122
    Capital in excess of par value                            14,143,533            10,454,669
    Deficit                                                  (12,499,514)           (1,273,289)
-----------------------------------------------------------------------------------------------
Total shareholders' equity                                     2,248,128             9,383,419
===============================================================================================
                                                              16,225,003            17,220,211
===============================================================================================
</TABLE>

The accompanying notes are an integral part of these statements


                                      F-3
<PAGE>

                             CHELL GROUP CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                          FOR THE YEARS ENDED AUGUST 31
                         [Expressed in Canadian dollars]

<TABLE>
<CAPTION>
                                                                           2001             2000             1999
                                                                                        (Restated -
                                                                                         Note 17 )
---------------------------------------------------------------------------------------------------------------------
                                                                            $                $                $
---------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>               <C>              <C>
REVENUE
Network services                                                         6,300,891        6,345,552        6,607,915
Pay-tv                                                                   6,651,913        6,517,940               --
Event programming                                                          403,993          500,168          527,740
Advertising sponsorship                                                    231,991          675,532          308,602
Video and software sales                                                 3,113,725        3,702,801        4,033,980
Video dubbing                                                              682,870          717,596          691,156
Digital encoding                                                           820,396          539,815          462,742
Other                                                                       16,595          107,886          191,556
---------------------------------------------------------------------------------------------------------------------
                                                                        18,222,374       19,107,290       12,823,691
---------------------------------------------------------------------------------------------------------------------

COST OF SALES
Network services [note 9]                                                2,384,303        2,160,351        2,353,705
Pay-tv                                                                   2,937,189        2,919,417               --
Event programming                                                              255           23,819           24,650
Advertising sponsorship                                                         --           93,496           61,255
Video and software sales                                                 1,249,851        1,625,885        1,709,626
Video dubbing                                                              244,670          157,289          353,983
Digital encoding                                                             1,843          111,657           11,738
Other                                                                           --          113,005          359,811
---------------------------------------------------------------------------------------------------------------------
                                                                         6,818,111        7,204,919        4,874,768
---------------------------------------------------------------------------------------------------------------------

EXPENSES
Selling, general and administrative                                     16,250,171       10,726,556        6,830,575
Write-off of leaseholds                                                    355,560               --               --
Bad debts                                                                  171,407          140,090          126,170
Interest and bank charges                                                  881,398          282,085           59,312
Depreciation and amortization                                            3,040,407        2,249,321        1,429,219
---------------------------------------------------------------------------------------------------------------------
                                                                        20,698,943       13,398,052        8,445,276
---------------------------------------------------------------------------------------------------------------------
Loss before the undernoted items                                        (9,294,680)      (1,495,681)        (496,353)
Loss on sale of subsidiary [note 10]                                            --               --         (130,000)
Loss from equity investment in Engyro [note 18]                           (301,100)              --               --
Income  from investment in Viewer Services [note13[b]]                          --               --           28,576
Minority interest                                                          (27,061)          29,476            3,537
Provision for income taxes [note 7]                                             --               --         (150,000)
---------------------------------------------------------------------------------------------------------------------
Loss from continuing operations                                         (9,622,841)      (1,466,205)        (744,240)
Loss from discontinued operations (net of income tax) [note 13[a]]      (1,603,384)        (857,416)        (227,257)
---------------------------------------------------------------------------------------------------------------------
Net loss and comprehensive loss for the year                           (11,226,225)      (2,323,621)        (971,497)
=====================================================================================================================

Earnings (loss) per share [note 11]

Basic                                                                       $(1.34)          $(0.81)          $(0.36)
Diluted                                                                     $(1.34)          $(0.81)          $(0.36)
=====================================================================================================================
</TABLE>

The accompanying notes are an integral part of these statements


                                      F-4
<PAGE>

                             CHELL GROUP CORPORATION
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
               FOR THE YEARS ENDED AUGUST 31, 2001, 2000 AND 1999
                         (Expressed in Canadian dollars)

<TABLE>
<CAPTION>
                                                                                      Capital in       Accumulated         Total
                                                                                      excess of     retained earnings  Shareholders'
                                          Preferred Shares           Common shares    par value        (deficit)           Equity
                                        --------------------------------------------
                                         Shares     Amount       Shares    Amount
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>         <C>        <C>         <C>        <C>             <C>              <C>
Balance, August 31, 1998                 900,000     10,917    2,625,170   162,484     8,837,948        2,021,829       11,033,178
 Payment for services rendered                --         --        5,500       387        26,557               --           26,944
 Interlynx acquisition (note 13[a])           --         --       27,778     1,920        93,171               --           95,091
 Conversion of promissory notes               --         --       98,193     6,844       602,207               --          609,051
 Net loss                                     --         --           --        --            --         (971,497)        (971,497)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, August 31, 1999                 900,000     10,917    2,756,641   171,635     9,559,883        1,050,332       10,792,767
 GalaVu acquisition (note 13[e])              --         --      100,000     6,897       288,463               --          295,360
 Change in preferred share conversion
   rate                                       --         --           --     7,887       329,892               --          337,779
 Exercise of 68,500 stock options             --         --       68,500     4,703       276,431               --          281,134
 Net loss                                     --         --           --        --            --       (2,323,621)      (2,323,621)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, August 31, 2000                 900,000     10,917    2,925,141   191,122    10,454,669       (1,273,289)       9,383,419
 Purchase of assets and shares
   (note 13[f])                               --         --    5,426,772   372,923     2,229,291               --        2,602,214
 Issued in lieu of salary                     --         --      131,974     9,484       315,577               --          325,061
 Settlement of debt                           --         --       36,602     2,694       109,085               --          111,779
 Preferred shares converted             (900,000)   (10,917)     300,000    13,065            (9)              --            2,139
 Warrants                                     --         --           --        --       370,065               --          370,065
 Consulting services rendered                 --         --      145,000    10,405       456,218               --          466,623
 Exercise of 62,750 stock options             --         --       62,750     4,416       208,637               --          213,053
 Net loss                                     --         --           --        --            --      (11,226,225)     (11,226,225)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, August 31, 2001                      --         --    9,028,239   604,109    14,143,533      (12,499,514)      (2,248,128)
===================================================================================================================================
</TABLE>

The accompanying notes are an integral part of these statements


                                      F-5
<PAGE>

                             CHELL GROUP CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                          FOR THE YEARS ENDED AUGUST 31
                         (Expressed in Canadian dollars)

<TABLE>
<CAPTION>
==============================================================================================================================
                                                                                      2001             2000            1999
                                                                                              (Restated - Note 17)
                                                                                       $                $               $
==============================================================================================================================
<S>                                                                               <C>              <C>              <C>
OPERATING ACTIVITIES
Net loss for the year                                                             (11,226,225)     (2,323,621)       (971,497)
Adjustments to reconcile net loss to net cash
     Provided by (used in) operating activities:
     Compensation costs related to the change in the conversion rate of
       preferred shares                                                                    --         337,779              --
     Depreciation and amortization                                                  3,040,407       2,249,321       1,429,219
     Accretion of interest on non-interest bearing promissory notes                   183,513         173,076          31,084
     Loss from investment in Viewer Services                                               --              --         (28,576)
     Write-off of leasehold improvements                                              355,560              --              --
     Services rendered for shares                                                     659,359              --              --
     Warrants issued                                                                  174,084              --              --
     Write-off of prepaids arising from Chell asset purchase                          367,235              --              --
     Write-off of assets arising from discontinued operations                         939,513              --              --
Changes in assets and liabilities:
     Decrease (increase) in short-term investments                                    250,051          (7,801)      1,780,407
     Decrease (increase) in accounts receivable, trade                                790,018        (614,830)         (8,275)
     Decrease (increase) in income taxes receivable                                   (11,977)       (143,227)             --
     Decrease in inventory                                                            100,626          54,652          47,220
     Decrease (increase) in prepaid expenses                                           98,779         119,616        (103,356)
     Decrease (increase) in other accounts receivable                                 133,580         (30,796)       (153,020)
     Decrease (increase) in other assets                                              111,072        (202,799)             --
     Decrease (increase) in assets from discontinued operations                       103,710        (267,046)        (78,177)
     Increase (decrease)in accounts payable and accrued liabilities                 1,072,245         919,707        (304,370)
------------------------------------------------------------------------------------------------------------------------------
Cash (used in) provided by operating activities                                    (2,858,450)        264,031       1,640,659
------------------------------------------------------------------------------------------------------------------------------

INVESTING ACTIVITIES
Purchase of property and equipment                                                  1,430,962      (1,162,146)       (601,633)
Proceeds from disposal of property and equipment                                           --              --          23,557
Proceeds from sale of Interlynx [Note 3(a)]                                            50,000              --              --
Investment in Viewer Services                                                              --              --         (36,054)
Increase in deposit on purchase                                                    (1,689,710)             --              --
------------------------------------------------------------------------------------------------------------------------------
Cash used in investing activities                                                  (3,070,670)     (1,162,146)       (614,130)
------------------------------------------------------------------------------------------------------------------------------

FINANCING ACTIVITIES
Increase in notes and loans payable                                                 4,941,147          21,908          38,485
Repayment of notes and loans payable                                                  (37,460)        (67,436)        (48,007)
Proceeds from exercise of options                                                      26,243         281,134              --
------------------------------------------------------------------------------------------------------------------------------
Cash (used in) provided by financing activities                                     4,929,930         235,606          (9,522)
------------------------------------------------------------------------------------------------------------------------------

Net (decrease) increase in cash and cash equivalents during the period               (999,192)       (662,509)      1,017,007
Cash and cash equivalents, beginning of period                                      1,355,613       2,018,122       1,001,115
------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period                                              356,421       1,355,613       2,018,122
==============================================================================================================================

Income taxes paid                                                                      98,491          59,956         265,771
Interest paid                                                                         146,781         121,579          67,356
</TABLE>

      2001 Fiscal Year - Non cash items arose from the purchase of Chell.com
assets during the 2001 Fiscal Year. They are $1,936,272 of property & equipment,
$107,589 of goodwill, $45,044 of prepaids, $1,404 in other accounts receivable
and in addition shares were issued (Note 13f). Other assets of $174,084 arose
from the issue of warrants, shares were issued for consulting fees and salaries
in the amount of $659,359 ,shares were issued for a debt payment on the GalaVu
purchase in the amount of $115,165, write-off of leaseholds of $355,560 and
write-off of prepaids from Chell


                                      F-6
<PAGE>

purchase of $367,235.

      2000 Fiscal Year - Non cash items arose from the purchase of GalaVu
Entertainment Network Inc. during the 2000 Fiscal Year. They are: $3,300,000 of
long-term debt, and the associated unamortized discount of ($637,302), accretion
of interest of $173,076 in accrued liabilities; assumption of liabilities of
$529,440, $337,779 one-time compensation charge arising from the change in the
preferred share conversion rate and the issuance of shares amounting to
$295,360.

The accompanying notes are an integral part of these statement

1. DESCRIPTION OF BUSINESS AND OPERATIONS

Chell Group Corporation [the "Company"] was incorporated under the laws of the
State of New York on May 12, 1986. The Company is the holding company for NTN
Interactive Network Inc. ["Interactive"], GalaVu Entertainment Network Inc.
["GalaVu"] and Chell Merchant Capital Group ["CMCG"], all of which are
wholly-owned operating companies. The Company also owns all of the outstanding
stock of 3484751 Canada Inc., a corporation the Company established and
incorporated under the Canada Business Corporations Act on April 20, 1998.
Interactive owns all of the outstanding stock of Magic Lantern Communications
Ltd. ["Magic"]. Magic and its subsidiaries are involved in the marketing and
distribution of educational video and media resources. 3484751 Canada Inc. was
incorporated for the sole purpose of owning a property, purchased in 1998, on
behalf of the Company, which provides Magic and GalaVu with operating
facilities.

CMCG is incorporated under the Ontario Business Corporations Act and is a
technology buyout/operating company applying private equity principles and
capital market expertise to consolidate earnings and strategically grow the
solid, but undervalued public and private companies it acquires. CMCG's
acquisitions are strategically designed to support its long-term vision of the
technology market.

Interactive is incorporated under the Canada Business Corporations Act and has
signed a license agreement [the "NTNC license"] with NTN Communications, Inc.,
an unrelated Delaware company, for exclusive representation of their interactive
communications for all industry sectors in Canada. This interactive
entertainment network allows viewers to participate actively with a variety of
television programs, trivia and sports games. Present subscribers to the
Company's networks are hotels, restaurants, bars and university clubs. Each
subscriber either purchases the system hardware directly 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.

GalaVu is incorporated under the Ontario Business Corporations Act and is a
technology-based entertainment provider of interactive in-room entertainment
systems for small and mid-sized hotels. GalaVu's interactive system is based
upon proprietary technology and provides a suite of products including movies on
demand, premium television programming and other information and entertainment
services.

The Company's primary market to date has been Canada.

As shown in the financial statements, the Company incurred a net loss from
continuing operations of $9,622,841 during the year ended August 31, 2001 and,
as of that date, had a working capital deficiency of $4,432,000. The Company's
business plans for 2002 contemplates obtaining additional working capital
through refinancings or restructurings of its existing loan agreements, reducing
operating overhead (which has already begun through workforce consolidation),
and the possible sale of some of its existing subsidiaries. Management is of the
opinion that they will be able to obtain enough working capital and that,
together with funds provided by operations, there will be sufficient working
capital for the Company's requirements in the future.


                                      F-7
<PAGE>

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, 2001, NTN Communications, Inc. had shareholders'
equity of $1,142,000 and a working capital deficit of $3,098,000 according to
its unaudited balance sheet included in its quarterly report. NTN
Communications, Inc. has reported a quarterly net loss for September 2001 of
$732,000, a quarterly net loss for June 2001 of $949,000 and a quarterly net
loss for March 2001 of $1,578,000. It reported a net loss for the year ended
December 31, 2000 of $9,589,000. All such amounts are quoted in U. S. dollars
[note 9].

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. They
are expressed in Canadian dollars which is the currency of the 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, its
wholly-owned subsidiaries Interactive, Magic, GalaVu, 3484751 Canada Inc.,
Interlynx, CMCG and Chell.com USA Inc. Magic conducts its operations directly
and through its wholly-owned subsidiaries, 1113659 Ontario Ltd. ["Viewer
Services"] and Tutorbuddy Inc. ["Tutorbuddy"], and its 75% ownership of Sonoptic
Technologies Inc. ["STI"]. Effective June 16, 1999, Magic acquired an additional
50% of the shares of Viewer Services, thereby making Viewer Services a
wholly-owned subsidiary of Magic. On September 10, 1997, effective September 1,
1997, Interactive acquired 51% of the outstanding shares of Interlynx. On June
1, 1999, Interactive acquired the remaining 49% of the outstanding shares of
Interlynx. Effective June 30th 2001, the Company signed an agreement to sell
Interlynx, a wholly-owned subsidiary of NTN for $50,000 and a promissory note of
$45,000. The Company's financial statements have been restated to reflect
Interlynx as a discontinued operation for all periods presented. The Company
uses the equity method for investments in which it owns less than 51%.

The 25% minority interest liability in STI has been reflected at zero due to
operating losses.

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]   Any gains and losses on foreign currency transactions are recorded in
      operations as incurred.


                                      F-8
<PAGE>

Revenues

Revenue from network 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 Pay-tv is recognized at the time of viewing. Revenue from event
programming is recognized upon completion of the contract.

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

Revenue from video sales and video dubbing is recognized upon shipment.

Software sales are recognized in accordance with the American Institute of
Certified Public Accountants Statement of Position (SOP) 97-2, "Software Revenue
Recognition." Pursuant to SOP 97-2, software sales are recognized on sales
contracts when all of the following conditions are met: a signed contract is
obtained, delivery has occurred, the total sales price is fixed and
determinable, collectibility is probable, and any uncertainties with regard to
customer acceptance are insignificant. For those contracts that include a
combination of software and services, sales are allocated among the different
elements based on company-specific evidence of fair value of each element. Sales
allocated to software are recognized as the above criteria are met. Sales
allocated to services are recognized as services are performed and accepted by
the customer or, for maintenance agreements, ratably over the life of the
related contract.

Cash and cash equivalents

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

Short-term investments

Investments at August 31, 2001 and 2000 consist of debt securities and
marketable equity securities. 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
(loss) for the year. The fair value of these securities represents 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%. Automobiles are depreciated on a straight-line basis over 3
years, buildings 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 carrying value. The Company assumes there is an
impairment if the carrying amount is greater than the expected net future cash
flows. The amount of


                                      F-9
<PAGE>

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.

Software development costs

The Company capitalizes the costs of software development when technological
feasibility of the computer software product is established. Capitalization of
software ceases when the product is available for release to customers.
Capitalized costs are amortized on the basis of products sold.

Licenses and goodwill

Licenses are stated at cost less accumulated amortization. Amortization for the
NTNC license is provided over a 25-year period using the straight-line basis to
December 31, 2015. Accumulated amortization amounted to $137,512 [2000-
$125,010].

On August 28, 1998, the Company entered into an agreement [the "Players
license"] for $78,401 [U.S.$50,000] with Players Network Inc. ["Players"],
whereby the Company was appointed by Players as the exclusive Canadian
distributor of its products. The Company was also granted the irrevocable
option, by Players, to purchase from treasury up to 50,000 common shares in the
capital stock of Players, at a purchase price of $1.75 per share (U.S.). This
option expired on August 28, 2000 and was not exercised. The agreement provided
the Company the right to terminate the agreement for the 30-day period
immediately following the end of the first year of the term of the agreement. In
the event the agreement is so terminated, the Company would receive, from
treasury, 50,000 common shares in the capital stock of Players. The agreement
was not terminated. Amortization of this license is provided over a 10-year
period using the straight-line basis to 2009. Accumulated amortization amounted
to $23,539 [2000 - $15,693].

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 that generated the goodwill. Accumulated
amortization amounted to $831,944 [2000 - $691,120], net of amounts included in
discontinued operations.

On an ongoing basis, management reviews the valuation and amortization of the
licenses 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 expected net future cash
flows. 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. (See "Recent Pronouncements" below)

Other assets

Other assets are stated at cost net of amortization. Amortization is provided
using a straight-line basis over the estimated life of the assets.

Income taxes

The Company accounts for deferred income tax assets and liabilities based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in accordance with SFAS No. 109. [see note
7].

Earnings per share

Basic earnings per share are computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period excluding contingent shares issued in accordance with


                                      F-10
<PAGE>

SFAS No. 128. Diluted earnings per share are calculated in accordance with the
treasury stock method and are based on the weighted average number of common
shares and dilutive common share equivalents outstanding.

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"]. [see
"Recent Pronouncements" below and note 10[c]].

Recent pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued Statements
of Financial Accounting Standards, No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, the pooling of interests method of
accounting for business combinations is no longer allowed and goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be amortized over their
useful lives.

In March 2000, FASB issued Interpretation No. 44 (FIN 44), "Accounting for
Certain Transactions involving Stock Compensation, an Interpretation of APB
Opinion No. 25." FIN 44 clarifies the application of APB No. 25 for certain
issues, including the definition of an employee, the treatment of the
acceleration of stock options and the accounting treatment for options assumed
in business combinations. FIN 44 became effective on July 1, 2000, but is
applicable for certain transactions dating back to December 1998. The adoption
of FIN 44 did not have a material impact on the Company's financial position or
results of operations.

In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." (SAB No. 101). SAB No. 101 expresses the views of the SEC staff in
applying generally accepted accounting principles to certain revenue recognition
issues. The Company has adopted the provisions of SAB No. 101 in the first
quarter of fiscal 2001 and its adoption had no material impact on its financial
position or its results of operations.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities."(SFAS No. 133). SFAS No. 133, as amended by
SFAS No. 138, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities.
SFAS No. 133 requires the recognition of all derivatives as either assets or
liabilities in the statement of financial position and the measurement of those
instruments at fair value. The Company was required to adopt this standard in
the first quarter of fiscal year 2001 pursuant to SFAS No. 137 (issued in June
1999), which delayed the adoption of SFAS No. 133 until that time. The Company's
adoption of SFAS No. 133 did not have a material impact on the its financial
position or its results of operations.

4. SHORT-TERM INVESTMENTS

Short-term investments consist of the following:

                                                      2001          2000
                                                       $             $
      ---------------------------------------------------------------------
      Shares                                          19,676            --
      Money market funds                                  --       166,175
      Debt securities
         U.S. treasury securities                         --       103,552
      ---------------------------------------------------------------------
                                                      19,676       269,727
      =====================================================================


                                      F-11
<PAGE>

5. NOTE RECEIVABLE

The details of the note receivable are as follows:

                                                      2001          2000
                                                       $             $
      ---------------------------------------------------------------------
      Long-term
      Connolly-Daw Holdings Inc.                     160,000       160,000
      ---------------------------------------------------------------------
                                                     160,000       160,000
      =====================================================================

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 year. The President and Secretary of
Connolly-Daw are the Controller and Chief Executive Officer of Magic. The bank's
prime rate was 5.75% at August 31, 2001 [2000 - 7.5%].

6. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                             2001                                        2000
                           =======================================     =======================================
                                         Accumulated     Net book                    Accumulated     Net book
                              Cost       depreciation      value          Cost       depreciation      value
                               $              $             $              $              $             $
--------------------------------------------------------------------------------------------------------------
<S>                        <C>            <C>            <C>           <C>            <C>           <C>
Land                          785,500            --        785,500        785,500            --       785,500
Buildings                   1,480,401       260,489      1,219,912      1,480,401       227,505     1,252,896
Rental Equipment            3,911,487     3,574,523        336,964      3,880,304     2,886,104       994,200
Equipment                   6,233,095     2,663,991      3,569,104      5,357,321     1,585,572     3,771,749
Software                      810,166       301,571        508,595        591,253       151,069       440,184
Automobiles                    13,383        12,559            824         13,383         8,829         4,554
Computer Equipment          1,088,304       474,908        613,396        370,084       246,661       123,423
Masters and Libraries         937,056       467,547        469,509        545,949       281,560       264,389
Leasehold improvements      1,020,353       263,875        756,478        113,301        60,576        52,725
--------------------------------------------------------------------------------------------------------------
                           16,279,745     8,019,463      8,260,282     13,137,496     5,447,876     7,689,620
==============================================================================================================
</TABLE>

During the year, depreciation of property and equipment was $2,667,248 [2000 -
$2,035,985; 1999 - $1,212,038].

7. INCOME TAXES AND DEFERRED INCOME TAXES

The provision for income taxes consists of the following:

                                            2001        2000        1999
                                             $           $           $
      ---------------------------------------------------------------------
      Current
         Federal                                --          --      98,000
         Provincial                             --          --      52,000
      ---------------------------------------------------------------------
                                                --          --     150,000
      =====================================================================

The difference between the provision for income taxes and the amount computed by
applying the combined basic federal and provincial income tax rate of 42.1%
[2000 - 43.9%; 1999 - 44.6%] to income before income taxes is as set out below:


                                      F-12
<PAGE>

<TABLE>
<CAPTION>
                                                            2001          2000          1999
      Taxes on continuing operations                         $             $             $
      ------------------------------------------------------------------------------------------
<S>                                                      <C>             <C>           <C>
      Statutory rate applied to pre-tax loss             (4,051,216)     (509,125)     (285,001)
      Benefit of current year's losses not recognized     3,734,669       405,563       344,782
      Expenses not deductible for tax purposes              316,547       117,745       167,333
      Non-taxable accounting income                              --            --       (42,482)
      Other                                                      --       (14,183)      (34,632)
      ------------------------------------------------------------------------------------------
                                                                 --            --       150,000
      ==========================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                            2001          2000          1999
      Taxes on discontinued operations                       $             $             $
      ------------------------------------------------------------------------------------------
<S>                                                       <C>            <C>           <C>
      Statutory rate applied to loss from discontinued
        operations                                         (675,025)     (376,406)     (101,357)
      Loss of subsidiary sold during the year              (539,922)           --            --
      Capital loss on sale of subsidiary                  1,064,133            --            --
      Benefit of current year's losses not recognized       150,814       376,406       101,357
      ------------------------------------------------------------------------------------------
                                                                 --            --            --
      ==========================================================================================
</TABLE>

As at August 31, 2001, the Company's deferred tax assets primarily relating to
the benefit of realizing losses available for carry forward and the timing
difference of the write-off of property and equipment, net of a valuation
allowance of $5,600,000, were nil (2000 - nil after a valuation allowance of
$1,600,000).

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.
During 1999, $152,000 of these losses were applied to reduce taxable income. In
2000 and 2001 Magic did not have taxable income.

Accordingly, when realized, the tax benefit of the unrecognized loss
carryforwards will be applied to reduce goodwill related to the acquisitions of
Magic. The goodwill related to Magic was reduced by $51,687 as a result of
utilizing pre-acquisition losses during 1999.

At August 31, 2001, the Company and certain subsidiaries have non-capital loss
carryforwards of approximately $12,000,000 that can be carried forward against
future taxable income and capital losses of approximately $2,500,000 that can be
carried forward indefinitely against capital gains realized in future years. The
non-capital losses begin to expire in 2002.


                                      F-13
<PAGE>

8. LOANS AND NOTES PAYABLE

Loans and notes payable consists of the following:

<TABLE>
<CAPTION>
                                                              2001        2000
                                                               $           $
      ----------------------------------------------------------------------------
<S>                                                         <C>         <C>
      Loans Payable
      Provincial Holdings Ltd. ["PHL"] [i]                    750,000     750,000
      Province of New Brunswick ["PNB"] [ii]                       --      19,381
      Atlantic Canada Opportunities Agency ["ACOA"] [iii]      27,700      36,930
      ACOA [iv]                                                32,985      38,485
      ACOA [v]                                                 18,608      21,908
      Royal Bank of Canada [vi]                             1,206,478   1,243,151
      ----------------------------------------------------------------------------
                                                            2,035,771   2,109,855
      ----------------------------------------------------------------------------

      Notes Payable
      Richard Wolfe                                            69,778          --
      Debenture & Note Payable [vii & viii]                 4,890,750          --
      Promissory notes - GalaVu [note 13[e]]                2,662,698   2,662,698
      ----------------------------------------------------------------------------
                                                            7,623,226   2,662,698
      ----------------------------------------------------------------------------
      Liens notes                                                  --       2,119
      ----------------------------------------------------------------------------
                                                            9,658,997   4,774,672
      ============================================================================
</TABLE>

[i] In June 1995, PHL advanced $750,000 to STI. This loan is collateralized by a
demand promissory note signed by STI and bears interest at 6% per annum,
compounded annually, commencing October 1995. Interest was forgiven by PHL for
the period from October 1, 1995 to September 30, 2000. The carrying value of the
loan approximates its fair value. Subsequent to September 2000, the loan bears
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 9[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.

[ii] In June 1995, PNB advanced $100,000 to STI. The loan was subject to a loan
agreement dated May 25, 1995 and was secured by a demand promissory note which
bears interest at 9.7% per annum, calculated half-yearly, not in advance.
Subject to a forgiveness agreement outlined below, the principal plus interest
was 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 whole or in part, the amount dependent upon
STI's number of full-time employees during the 1997 calendar year. The loan was
fully forgiven during the year ended August 31, 2001.

[iii] ACOA advanced this unsecured non-interest bearing loan to STI in April
1995. The loan is repayable in five equal quarterly installments of $7,040
commencing May 1, 2000 and one final installment of $1,730. The fair value of
the loan approximates its carrying value.

[iv] ACOA advanced this unsecured non-interest bearing loan to STI in May 1999.
The loan can be increased to a maximum of $108,356. The balance drawn on this
loan at August 31, 2001 is $32,985. Commencing on October 1, 2000, the loan was
repayable as follows: six consecutive monthly installments of $500, followed by;
six consecutive monthly installments of $1,000, followed by; six consecutive
monthly installments of $1,500, followed


                                      F-14
<PAGE>

by; six consecutive monthly installments of $2,000, followed by; three
consecutive monthly installments of $2,500, followed by; one final installment
of $985.

The fair value of the loan approximates its carrying value.

[v] ACOA advanced this unsecured non-interest bearing loan to STI in September
2000. The loan can be increased to a maximum of $23,038. The balance drawn on
this loan at August 31, 2001 is $18,608. If the loan is increased to the
maximum, the loan would be repayable in seventy-nine equal consecutive, monthly
installments of $275, followed by one final installment of $183. The fair value
of the loan approximates its carrying value.

[vi] In April 1998, the Royal Bank of Canada made available a Matched Fund Term
Loan in the amount of $1,319,000 in order to finance the purchase of 10 Meteor
Drive, including leaseholds, and to refinance the demand installment loan on 775
Pacific Road, a property owned by Magic. Borrowings are repayable by blended
monthly payments of principal and interest based on a 20-year amortization
period with the balance due and payable at the end of the 5-year term on April
27, 2003. The interest rate in effect for the first 5-year term of the loan is
6.98%. The fair value of the loan approximates its carrying value.

      The loan is collateralized 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, a collateral first mortgage in the amount of
$490,000 covering the property at 10 Meteor Drive, and a general security
agreement covering all the assets of Interactive, other than real property.

[vii] On January 15, 2001, the Company received US$1,500,000 in return for a
promissory note. The note bears interest at 2% per month and US$1,000,000 of the
principal and accrued interest is due and payable on December 5, 2001. The
remaining balance will be paid in seven monthly payments of $100,000 commencing
January 15th, 2001 with a final payment of $8,750 due on August 5, 2002.

[viii] On October 3, 2000, the Company closed the sale of a US$3,000,000
Convertible 10% Debenture to the VC Advantage Limited Partnership ("VCALP"). As
at August 31, 2001, US$1,700,000 has been advanced. This unsecured convertible
debenture is due three years from issue. The Convertible Debenture bears
interest at 10% per annum, payable upon conversion, redemption or maturity. The
unpaid principal of the debenture bears interest from the date that it is
actually advanced until paid. Interest is payable in cash or stock at our
option. The Convertible Debenture is convertible into common stock, at US$3.00
per share, in amounts specified by the VCALP. The maximum number of common
shares VCALP will receive is one million. On the close date, the Company also
issued 50,000 warrants to purchase 50,000 common shares at US$3.00 per share to
VCALP. The warrants have a term of four years. On November 30, 2000 the
convertible debenture was assigned by VCALP to CALP II Limited Partnership.

Approximate future annual principal payments for long-term debt, exclusive of
the above lien notes, are as follows:

                                                  $
                        --------------------------------
                        2002                  3,774,658
                        2003                  2,615,493
                        2004                  3,243,653
                        2005                      8,800
                        2006                      8,800
                        2007 and thereafter       7,593
                        --------------------------------
                                              9,658,997
                        ================================


                                      F-15
<PAGE>

9. COMMITMENTS

[a]   Commissions expense to NTN Communications, Inc.

      Pursuant to an agreement dated March 23, 1990, Interactive pays
commissions to NTN Communications, Inc. when the related revenues are earned at
the rate of U.S. $2,205 per year per subscriber. 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 this agreement were $1,865,674 [2000 -
$1,822,684; 1999 - $2,011,202].

[b]   Commissions expense - other

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

[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                $
                          -----------------------------
                          2002                  19,915
                          2003                   4,794
                          2004                   9,189
                          2005                      --
                          2006                      --
                          2007 and thereafter       --
                          -----------------------------
                                                33,898
                          =============================


                                      F-16
<PAGE>

                        Office Equipment          $
                        --------------------------------
                        2002                    150,578
                        2003                     76,327
                        2004                     54,197
                        2005                         --
                        2006                         --
                        2007 and thereafter
                        --------------------------------
                                                281,102
                        ================================

                        Premises                  $
                        --------------------------------
                        2002                    493,190
                        2003                    380,564
                        2004                    380,564
                        2005                     71,086
                        2006                         --
                        2007 and thereafter          --
                        --------------------------------
                                              1,325,404
                        ================================

Operating lease expenses were $570,616 for 2001, $382,610 for 2000, and $201,366
for 1999.

[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 [i] the purchase price per
share [$0.04], or [ii] 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. There
has been no repayment on the loan as at August 31, 2001.

As at August 31, 2001, the value of the shares, if redeemed, totaled a nominal
amount.

[e]   Standby letters of credit

GalaVu has a $100,000 standby letter of credit in favour of one of its
suppliers. Any amounts drawn on this facility are charged to our bank account.
These facilities have not been used in 2001, 2000 or 1999.

[f]   Employment agreements

The Company and certain subsidiaries have entered into employment agreements
with certain executive management employees with terms of between one and two
years. These agreements expire in fiscal 2002. The remaining commitment for 2002
is approximately $208,000.

On September 19, 2000, the Company entered into an employment agreement with
Cameron Chell, pursuant to which Mr. Chell serves as the Company's President and
Chief Executive Officer. The agreement provides for an initial base compensation
of $360,000, together with automobile expenses of $8,400. In addition to the
fixed remuneration, the Company shall provide Mr. Chell with the services of an
Executive Assistant on an ongoing basis and an Accountant for a reasonable
period of time to allow for the completion of outstanding accounting work
related to existing companies in which Mr. Chell is involved. It was the
understanding of the parties that this agreement was to be replaced by a
definitive employment agreement before October 10, 2000, however, such


                                      F-17
<PAGE>

agreement has not been entered into at this time. Since the signing of this
agreement, Mr. Chell has eliminated both his salary and automobile allowance in
an effort to reduce our cash requirements. These were eliminated with the
understanding that the compensation of Mr. Chell will be mutually agreed upon
between the parties.

10. SHARE CAPITAL

[a]   Authorized shares

The Company's authorized share capital comprises 50,000,000 common shares
(increased from 20,000,000 shares on February 28, 2001),with a par value of
$0.063 [U.S. $0.0467] per share and 1,500,000 non-cumulative preferred shares
with a par value of $0.012 [U.S. $0.010] per share. The preferred shares are
voting and convertible, such that 3 preferred shares are exchangeable for 1
common share, at the option of the holders. The conversion rate in 1999 was such
that 4.67 preferred shares were exchanged for 1 common share, at the option of
the holders.

[b]   Issued and outstanding shares

As at August 31, 2001, there were no preferred shares outstanding [2000 -
900,000 aggregating - $10,917] . On March 30, 2001, these 900,000 preferred
shares were converted to 300,000 common shares.

Common shares issued and outstanding for accounting purposes are as follows:

<TABLE>
<CAPTION>
                                                    Common shares          Capital in
                                              -------------------------      excess
                                                 Number        Amount     of par value      Total
                                                   #             $             $              $
=====================================================================================================
<S>                                             <C>             <C>        <C>            <C>
Balance as at August 31, 1998                   2,625,170       162,484     8,837,948      9,000,432
Payment for services rendered                       5,500           387        26,557         26,944
Interlynx acquisition [note 13[a]]                 27,778         1,920        93,171         95,091
Conversion of promissory notes [i]                 98,193         6,844       602,207        609,051
-----------------------------------------------------------------------------------------------------
Balance as at August 31, 1999                   2,756,641       171,635     9,559,883      9,731,518
GalaVu acquisition [note 13 [e]]                  100,000         6,897       288,463        295,360
Exercise of 68,500 stock options                   68,500         4,703       276,431        281,134
Change in preferred shares conversion rate             --         7,887       329,892        337,779
-----------------------------------------------------------------------------------------------------
Balance as at August 31, 2000                   2,925,141       191,122    10,454,669     10,645,791
Purchase of assets and shares from Chel.com
  Ltd. and Cameron Chell  [note 13[f]]          5,426,772       372,923     2,229,291      2,602,214
Issued in lieu of salary                          131,974         9,484       315,577        325,061
Settlement of debt                                 36,602         2,694       109,085        111,779
Preferred shares converted                        300,000        13,065            (9)        13,056
Warrants                                               --            --       370,065        370,065
Consulting fees rendered                          145,000        10,405       456,218        466,623
Exercise of 62,750 stock options                   62,750         4,416       208,637        213,053
-----------------------------------------------------------------------------------------------------
Balance as at August 31, 2001                   9,028,239       604,109    14,143,533     14,747,642
=====================================================================================================
</TABLE>

[i] The consideration for the acquisition of Magic [note 13[c]] included
promissory notes with a maturity value of $1,250,000. Under the terms of the
purchase agreement, the Company elected to issue common shares as payment
against $560,000 of these notes during fiscal 1998. In fiscal 1999, the Company
elected to issue shares to pay the remaining $609,051 outstanding on the
promissory notes.

[c]   Long-Term Incentive Plan

The Company has adopted a Long-Term Incentive Plan [the "Plan"] designed to
compensate key employees of our 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 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.


                                      F-18
<PAGE>

The option exercise price is the closing trading price of the stock on the day
prior to the grant date. The options vest over a four-year period from the grant
date, at the rate of 25% per year. Options granted prior to August 31, 1998 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 expire five years after the grant date. The
Plan also provides that selected key employees may receive 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 20% of the outstanding
common stock, on a fully diluted basis on the date of the grant, excluding
outstanding options may be issued under the plan.

The following is a summary of outstanding stock options:

                                                Weighted average        Total
                                                 exercise price
                                                     U.S. $               #
================================================================================
Balance as at August 31, 1998                                           460,000
Issued                                                2.30              285,000
Forfeited                                             2.41              (18,500)
Expired                                               2.33               (7,500)
--------------------------------------------------------------------------------
Balance as at August 31, 1999                                           719,000
Issued                                                9.42              772,000
Exercised                                             2.79              (68,500)
Expired                                               2.92             (125,500)
--------------------------------------------------------------------------------
Balance as at August 31, 2000                                         1,297,000
Issued                                                4.33               94,500
Exercised                                             2.68              (62,750)
Expired                                               2.40               (3,750)
--------------------------------------------------------------------------------
Balance as at August 31, 2001                                         1,325,000
================================================================================

Exercise price                  Expiry date                               Total
U.S. $                                                                        #
================================================================================
3.00                            November 20, 2001                        47,000
3.00                            November 25, 2001 [I]                    56,750
3.00                            April 8, 2002 [I]                         1,500
3.00                            November 17, 2002 [I]                   115,500
3.00                            November 20, 2002                        15,000
2.00                            November 23, 2003                       141,250
3.50                            February 25, 2004                         1,500
3.00                            June 11, 2004 [note 13[a]]               80,000
2.00                            October 14, 2004                         75,000
1.81                            November 23, 2004                        30,000
4.375                           April 3, 2005                            25,000
9.75                            August 11, 2005                         642,000
9.75                            November 1, 2005                         23,000
3.50                            December 6, 2005                         71,500
--------------------------------------------------------------------------------
Balance as at August 31, 2000                                         1,325,000
================================================================================

[i] Repriced options - At a meeting of the Company's Board of Directors on July
10, 1998, the Board determined that it was in the best interests of the Company
to offer the holders of options, pursuant to the Company's Long-Term Incentive
Plan, a reduction in the exercise price of outstanding options to $3.00 per
share if the option holders agreed not to exercise such options for at least six
months after the repricing. Option holders were given the choice of keeping
their existing option pricing in lieu of agreeing not to exercise such options
for six months. All option holders chose to receive repriced options. The
repriced option exercise amount is the closing trading price of the Company's
stock on July 9, 1998.

The number of stock options that are exercisable at August 31, 2001 is 761,163
[2000 - 363,666].

The weighted average fair value of options granted during 2001 was U.S.
$1.17[2000 - U.S $5.51].


                                      F-19
<PAGE>

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 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 we 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
valuation model with the following weighted average assumptions for 2001, 2000
and 1999: risk-free interest rate of 5.39% [2000 - 5.84%; 1999 - 5.32%];
dividend yield of 0% [2000 - 0%; 1999 - 0%]; volatility factor of 0.707 [2000 -
0.848; 1999 - 0.819]; and a weighted average expected life of the options of 3
years [2000 - 4 years; 1999 - 4 years].

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that 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
our stock options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.

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

                                     2001            2000             1999
================================================================================
                                      $               $                $
Pro forma net loss                (12,479,430)     (2,518,310)      (1,399,105)
================================================================================

Pro forma loss per share
Basic                                   (1.49)          (0.88)           (0.53)
Diluted                                 (1.49)          (0.88)           (0.53)
================================================================================


                                      F-20
<PAGE>

11. EARNINGS (LOSS) PER SHARE

Earnings (loss) per share were calculated in accordance with Statement of
Financial Accounting Standards No. 128. The following table sets forth the
computation of basic and diluted earnings (loss) per share for the years ended
August 31:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
                                                      2001            2000            1999
                                                       $               $               $
===============================================================================================
<S>                                               <C>              <C>               <C>
Numerator
Net income (loss) [numerator for basic earnings
  (loss) per share]                               $(11,226,225)    $(2,323,621)      $(971,497)
Accretion of interest on non-interest bearing         $183,513        $173,076         $31,084
  convertible promissory notes (anti-dilutive)
Numerator for diluted earnings (loss) per share   $(11,042,712)    $(2,150,545)      $(940,413)

Denominator
For basic weighted average number of shares          8,393,589       2,873,042       2,635,050

Effect of dilutive securities
Convertible preferred shares                                --              --              --
Convertible promissory notes                                --              --              --
Employee stock options                                      --              --              --

Denominator for diluted earnings (loss) per
  share - adjusted weighted average
  number of shares and assumed conversions           8,393,589       2,873,042       2,635,050

Basic loss per share                                    $(1.34)         $(0.81)         $(0.36)
Diluted loss per share                                  $(1.34)         $(0.81)         $(0.36)
===============================================================================================
</TABLE>

During the year ended August 31, 2001, 900,000 preferred shares convertible to
300,000 common shares were exercised and are no longer outstanding. In addition,
options to purchase 1,325,000 common shares were outstanding. These securities
were not included in the diluted loss per share calculation because the effect
would be anti-dilutive.

At August 31, 2000, 900,000 preferred shares convertible to 300,000 common
shares were outstanding. In addition, options to purchase 1,297,000 common
shares were outstanding. These securities were not included in the diluted loss
per share calculation because the effect would be anti-dilutive.

At August 31, 1999, 900,000 preferred shares convertible to 192,857 common
shares were outstanding. In addition, options to purchase 719,000 common shares
were outstanding. These securities were not included in the diluted loss per
share calculation because the effect would be anti-dilutive.

12. CONTINGENT LIABILITIES

On June 12, 1992, the Company filed a lawsuit against an unrelated company,
Interactive Network Inc. of Mountainview, California, U.S.A. and its president.
The suit seeks a non-infringement declaration with respect to a Canadian patent.
This action was discontinued on September 9, 1998.

On June 18, 1992, Interactive Network Inc., a third party, instituted
proceedings against Communications, NTN Interactive Network Inc. and the Company
in the Federal Court of Canada and in the California Supreme Court


                                      F-21
<PAGE>

claiming patent infringement. It is the opinion of our Company's management and
counsel, that this patent infringement claim will be successfully defended.

Canada Customs and Revenue Agency is currently in discussions with the Company
regarding a potential liability with respect to withholding tax on certain
amounts paid to Communications. An assessment of approximately $600,000 has been
made to date by Canada Customs and Revenue Agency and the Company has filed a
notice of objection. Management and counsel believe that it has valid defenses
with respect to these matters and, accordingly, no amount has been recorded in
these consolidated financial statements. In the event that such matters are
settled in favour of Canada Customs and Revenue Agency, the amounts could be
material and would be recorded in the period in which they became determinable.

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 management no other proceedings of a material
nature have been or are contemplated against the Company.

13. BUSINESS ACQUISITIONS/DISPOSITIONS

[a]   Interlynx Multimedia Inc.

Effective September 1, 1997, the Company acquired 51% of Interlynx and its
subsidiary for a purchase price of $622,000. The purchase price was satisfied by
$357,000 in cash and the issue of 55,209 shares with a value of $4.80 per share.
The acquisition was recorded using the purchase method of accounting and,
accordingly, the purchase price has been allocated as set out below:

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

                  Goodwill                         1,136,029
                  Net liabilities assumed           (491,028)
                  Acquisition costs capitalized      (23,001)
                  -------------------------------------------
                  Purchase price                     622,000
                  ===========================================

The excess of cost over net tangible assets (net of liabilities) acquired of
$1,136,029 was allocated to goodwill, which is being amortized over twenty
years.

The Company's 51% share of the operating results of Interlynx are included in
our consolidated statements of operations and retained earnings from the date of
acquisition.

Effective June 1, 1999 the Company acquired the remaining 49% of Interlynx. The
consideration for the purchase included the issuance of 27,778 common shares of
the Company's stock and the issuance of options to purchase 80,000 common shares
of our stock at a strike price of U.S. $3.00. These options were issued out of
the existing employee stock option plan [note 10[c]]. In addition to the
employee stock option plan conditions, entitlement to these options is subject
to the achievement of annual operating profit levels [profit before income taxes
and minority interest] for the three fiscal years ending August 31, 2000, August
31, 2001 and August 31, 2002. At the end of the fiscal year ending August 31,
2000 if annual operating profits are at least $332,000, 26,666 of the options
will be deemed earned. If annual operating profits for the year ending August
31, 2001 are at least $558,000, an additional 26,667 of the options will be
deemed earned. This level of operating profit was not achieved during fiscal
2001 or 2000.

The June 1, 1999 acquisition was recorded using the purchase method of
accounting and, accordingly, the purchase price has been allocated as set out
below:


                                      F-22
<PAGE>

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

                            Goodwill         95,091
                            ------------------------
                            Purchase price   95,091
                            ========================

The excess of cost over tangible assets acquired of $95,091 was allocated to
goodwill, which is being amortized over twenty years.

The Company's additional 49% share of the operating results of Interlynx are
included in its consolidated statements of operations and retained earnings from
the date of acquisition.

During fiscal 2001, the Company sold Interlynx for cash consideration of $50,000
and a $45,000 promissory note receivable.

The results of Interlynx have been classified as discontinued operations in the
accompanying financial statements for all years presented.

Summarized operating results of discontinued operations are as follows:

<TABLE>
<CAPTION>
                                                                    Year Ended
                                                                    August 31,
                                                       2001            2000            1999
                                                     ---------       ---------       ---------
<S>                                                  <C>             <C>             <C>
Sales                                                $ 313,555       $ 586,756       $ 596,951
Loss before income taxes                              (665,673)       (857,416)       (227,257)
Income tax expense                                          --              --              --
Net (loss) from discontinued operations, net of
  tax                                                 (665,673)       (857,416)       (227,257)
(Loss) on disposal of discontinued operations,
  net of tax                                         $(937,711)      $      --       $      --
</TABLE>

[b]   1113659 Ontario Ltd.

Effective June 16, 1999, the Company acquired through its wholly-owned
subsidiary, Magic, an additional 50% of the shares of Viewer Services, thereby
making Viewer Services a wholly-owned subsidiary of Magic. This acquisition was
recorded using the purchase method of accounting for a consideration of $1 and
the assumption of net liabilities of approximately $144,000. Since the Company
had decided not to continue with this business, the net assets originally
recorded were expensed.

[c]   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 calculated on a discounted
basis. Magic is a Canadian corporation that 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 liabilities assumed           (575,126)
                  Acquisition costs capitalized      (91,182)
                  -------------------------------------------
                  Purchase price                   1,553,315
                  ===========================================

The excess of cost over tangible assets acquired of $2,219,623 was allocated to
goodwill, which is being 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 us to issue the common shares as described. The balance due
of $78,133 on August 31, 1998 was satisfied by the issuance of 12,276 common
shares. The balances due on August 31, 1999 and 2000 were satisfied by the
issuance on August 31, 1999 of 49,097 and 49,096 shares respectively [note
10[b]], thereby fully extinguishing the first promissory note. The fair value of
this promissory note at August 31, 1998 approximated its carrying value.


                                      F-23
<PAGE>

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 payment of $65,000 and
the issuance of 38,158 common shares satisfied the balance due of $312,500 on
August 31, 1997 on September 5, 1997. The balance due of $234,367 on August 31,
1998 was satisfied by the issuance of 36,821 common shares [note 10[b]]. The
fair value of this promissory note approximates its carrying value.

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

[d]   Image Media Ltd. and Pilot Software

Effective August 18, 1997, the Company acquired certain of the business assets
of Image Media Ltd. and 802117 Ontario Inc., operating as Pilot Software, for
cash of $590,000. This acquisition was recorded using the purchase method of
accounting and, accordingly, the purchase price has been allocated as follows:

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

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

The goodwill arising from this acquisition is amortized over 10 years.

[e]   GalaVu Entertainment Network Inc.

On September 13, 1999, pursuant to an Asset Purchase Agreement dated as of the
10th day of September, 1999, the Company, through its wholly-owned subsidiary,
GalaVu, acquired, effective as of September 13th, 1999, substantially all of the
property and assets [excluding accounts receivable] of GalaVu Entertainment Inc.
The purchase price was satisfied by the issuance of 100,000 common shares of the
Company's stock and the issuance of a promissory note [the "Note"]. The Note is
secured by a general security interest in all of GalaVu's present and
after-acquired assets. The Note shall be payable in cash or in common shares of
the Company's stock annually, for the term consisting of each of the next five
fiscal years in an amount equal to 50% of the earnings before interest, taxes,
depreciation and amortization of GalaVu for the immediately preceding annual
period. Pursuant to the provisions of the Note, the minimum amount to be
received by the holder of the Note is as follows: fiscal 2001 - $300,000, fiscal
2002 - $500,000, fiscal 2003 - $750,000, fiscal 2004 - $875,000 and fiscal 2005
- $875,000.

The present value of the Note, discounted at the Company's average borrowing
rate (6.5%) amounted to $2,662,698. The fair value of the Note at August 31,
2001 approximated its carrying value. The interest accretion on the discounted
note amounted to $173,076 during fiscal 2001. This acquisition was recorded
using the purchase method of accounting and accordingly the purchase price has
been allocated as follows:

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

                    Property and equipment       3,487,498
                    Assumption of liabilities     (529,440)
                    ---------------------------------------
                    Purchase price               2,958,058
                    =======================================


                                      F-24
<PAGE>

      For the year ended August 31, 2001, GalaVu's gross revenue and loss before
taxes were as follows:

                       Gross Revenue          $6,517,940
                       Loss before taxes       ($441,636)
                       Per share data:
                        Basic loss                 (0.15)
                        Diluted                    (0.15)

[f]   Purchase of assets and shares from Chel.com Ltd. and Cameron Chell

On September 19, 2000, pursuant to an Agreement of Purchase and Sale dated as of
August 4, 2000, the Company and its subsidiary Chell Merchant Capital Group
acquired, certain assets from Chell.com Ltd. ("Chell.com") and the following
shares for an aggregate purchase price of US$27,002,086:

      (a)   480,000 shares of cDemo were acquired by the Company which
            represents approximately 14.3% of cDemo's issued and outstanding
            stock;

      (b)   875,000 shares of Engyro Inc. were acquired by the Company which
            represents approximately 34% of Engyro's issued and outstanding
            stock; and

      (c)   60,000 Common Shares of Chell.com (USA) Inc., a Nevada corporation
            were acquired by the Company which represents 100% of Chell.com
            (USA)'s outstanding stock.

      (d)   962,500 Common Shares of eSupplies, Inc., which were held in escrow
            as discussed below, were subsequently released.

      Pursuant to the Purchase and Sale Agreement, the Company acquired the
above-referenced shares for an aggregate purchase price of US$25,234,583. The
Company also acquired certain assets from Chell.com including office leases,
office equipment and computers, insurance contracts, employment contracts and
service agreements for a price of US$1,767,503. Accordingly the combined
aggregate purchase price for the Chell.com assets, the 480,000 shares of cDemo,
the 875,000 shares of Engyro Inc., and the 60,000 Common Shares of Chell.com
(USA) Inc. was US$27,002,086. The sole director and shareholder of Chell.com is
Cameron Chell. Chell Merchant Capital Group also assumed a liability owing by
Chell.com to Canadian Advantage Limited Partnership II, in the amount of
US$1,767,499 on the condition that Canadian Advantage Limited Partnership II
accept full settlement of such indebtedness by Chell Merchant Capital Group
issuing 451,868 exchangeable shares. The aggregate purchase price payable by the
Company under the Purchase and Sale Agreement of US$27,002,086 was paid by the
Company issuing a total of 5,396,733 Common Shares at the deemed price of
US$3.91155 per share and 1,506,439 shares of CMCG which were exchangeable for
the Company's Common Shares on a one-for-one basis. The 1,476,398 exchangeable
shares of CMCG that were originally issued for the 962,500 eSupplies shares had
been held in escrow pursuant to an escrow agreement dated October 11, 2000 among
Cameron Chell, the Company and Wolff Leia Huckell, Barristers and Solicitors.
These CMCG exchangeable shares were to be released from escrow after receiving
written notice from the Company that the new course of business being taken by
eSupplies fit with the Company's business model and provided significant value
to the Company. Since the Company has subsequently determined that eSupplies'
business profile does not fit with the Company's business profile, the CMCG
exchangeable shares have been cancelled and the 962,500 eSupplies shares have
been returned to Cameron Chell. Subsequent to the cancellation of the eSupplies
transaction, the aggregate purchase price was reduced to US$21,227,081.

This acquisition was not reflected in the financial statements for the year
ended August 31, 2000 since shareholder approval to ratify the above purchase
transaction was not voted on and approved until September 8, 2000. As a result
of the above, Cameron Chell and Chell.com now own approximately 59% of the
Company's outstanding common stock, that is the Company has in effect been
acquired in a reverse acquisition.

This acquisition of the Company by Cameron Chell and Chell.com and the
acquisition by the Company of the equity interests, as described in the first
paragraph, are reflected at historical cost in the Company's separate financial
statements.


                                      F-25
<PAGE>

The Company has reflected the minority equity investments using the equity
method of accounting (see note 18).

[g] Purchase of Richard Wolff Enterprises, Inc. assets

Pursuant to an asset purchase agreement dated September 1, 2000, Magic acquired
the assets and business operations of Richard Wolff Enterprises, Inc. ("RWE"), a
company based in Illinois, for a purchase price of $289,590 calculated on a
discounted basis. As a result, Magic has expanded its library of educational
titles and now has access to the international distribution infrastructure
formerly held by RWE. The acquisition was accounted for using the purchase
method of accounting and accordingly, the purchase price has been allocated to
property and equipment. The purchase price was satisfied by $154,825 in cash and
the issuance of four promissory notes with maturity values aggregating $147,350.
These promissory notes mature over a period of two years. The fair values of
these promissory notes approximate their carrying value.

The asset purchase agreement also contains a purchase price adjustment clause
whereby the price may be adjusted upwards to a maximum of an additional
US$100,000 if certain revenue levels are achieved. Specifically, if gross
revenues for the acquired business exceed US$500,000 for the 12 month period
ending August 31, 2001, Magic will pay to RWE US$50,000, and if gross revenues
exceed US$600,000 for the second 12 month period ending August 31, 2002, Magic
will pay to RWE an additional US$50,000. This condition has not currently been
met.

The operating results related to the acquisition are included in the Company's
consolidated statements of operations and retained earnings from the date of
acquisition. Pro-forma information has not been provided for the prior year
because it is not material.

Note 14. Deposit on purchase of Applicationstation.com, Inc. shares

      On November 22, 2000, the Company entered into an agreement with Chell.com
Ltd. to participate in the purchase of a 51% interest in the shares of
ApplicationStation.com, Inc. The Company has provided a deposit of $1,689,710 to
Chell.com Ltd. for its 25% share of the 51% interest in the shares of
ApplicationStation.com, Inc. In the event that closing of the transaction does
not occur and the deposit on purchase is not returned, Chell.com Ltd. has
pledged 550,000 shares of Chell Merchant Capital Group as security for such
amount. Should the purchase be completed, the Company's investment will be
reflected using the equity method of accounting.


                                      F-26
<PAGE>

15. SEGMENTED INFORMATION

The Company operates in the entertainment, education and merchant services
industries. Corporate relates to costs that are not associated with a specific
industry segment, but are required for the operations of the company. Business
segment information for the years ended August 31, 2001, 2000 and 1999 are as
follows:

================================================================================
                                     2001            2000             1999
                                      $               $                $
================================================================================

External revenue
   Entertainment                     13,588,788      14,121,764       7,569,929
   Education                          4,616,991       4,971,823       5,192,378
   Merchant Service                          --              --              --
   Corporate                             16,595          13,703          61,384
--------------------------------------------------------------------------------
                                     18,222,374      19,107,290      12,823,691
--------------------------------------------------------------------------------
Inter-segment revenue
   Education                            183,329         275,941              --
   Corporate                                 --         128,283         223,435
--------------------------------------------------------------------------------
                                        183,329         404,224         223,435
--------------------------------------------------------------------------------
Operating profit (loss)
   Entertainment                       (208,371)        515,167         446,681
   Education                         (1,084,531)       (792,665)       (623,400)
   Merchant Service                  (5,887,912)             --              --
   Corporate                         (2,113,866)     (1,218,183)       (319,634)
--------------------------------------------------------------------------------
                                     (9,294,680)     (1,495,681)       (496,353)
--------------------------------------------------------------------------------
Identifiable assets
   Entertainment                      5,459,008       7,009,552       4,725,971
   Education                          3,793,863       3,526,317       4,290,025
   Merchant Service                   1,489,711              --              --
   Corporate                            654,823         895,894         837,653
--------------------------------------------------------------------------------
                                     11,397,405      11,431,763       9,853,649
--------------------------------------------------------------------------------
Corporate assets
   Entertainment                      3,170,363       4,352,448       3,699,785
   Education                           (666,589)        844,142         (22,367)
   Merchant Service                      99,754              --              --
   Corporate                          2,141,512         355,590       1,063,713
--------------------------------------------------------------------------------
                                      4,745,040       5,552,180       4,741,131
--------------------------------------------------------------------------------
Capital expenditures
   Entertainment                        729,486         842,955         350,836
   Education                            690,576         319,191         250,797
   Merchant Service                      50,900              --              --
--------------------------------------------------------------------------------
                                      1,430,962       1,162,146         601,633
--------------------------------------------------------------------------------
Depreciation & Amortization
   Entertainment                      1,960,652       1,808,715         967,188
   Education                            507,218         408,856         428,377
   Merchant Service                     431,967              --              --
   Corporate                            140,570          31,750          33,654
--------------------------------------------------------------------------------
                                      3,040,407       2,249,321       1,429,219
--------------------------------------------------------------------------------

Operating profit (loss) is equal to profit (loss) before income taxes and
minority interest, and includes deductions for items such as interest and
depreciation and amortization. Identifiable assets by industry are those assets
used in our operations in each industry. Corporate assets are principally cash
and cash equivalents, short-term investments and intangible assets. Net assets
from discontinued operations are not included in the schedule.

Our business segments all operate primarily in Canada.

The 2000 and 1999 comparative segmented information has been reclassified from
statements previously presented to conform with the presentation of the 2001
segmented information.


                                      F-27
<PAGE>

16. RELATED PARTY TRANSACTIONS

Included in other receivables is approximately $25,086 [2000 - $155,000] of
amounts due from employees and shareholders. The amounts are non-interest
bearing and are due on demand. Included in accounts payable is $210,611 owing to
Cameron Chell. This balance is non-interest bearing.

17. RESTATED FINANCIAL STATEMENTS

      On April 4th, 2000, the ratio at which preferred shares could be converted
to common shares was changed from 4.67 to 1 to 3 to 1. The resulting change from
192,857 to 300,000 common shares upon conversion resulted in a one-time
compensation charge of $337,779. In order to reflect this change, the fiscal
2000 financial statements have been restated.

      The following table presents the impact of the restatement.

    -----------------------------------------------------------------------
                                               As Previously   As Restated
                                                 Reported
    =======================================================================
    Year ended August 31, 2000
      Balance sheet:
        Share Capital
          Common shares                             183,235        191,122
          Capital in excess of par value         10,124,777     10,454,669
          Deficit                                  (935,510)    (1,273,289)

      Statement of operations:
        Selling, general and admin               10,726,556     11,064,335
        Net loss                                 (1,985,842)    (2,323,621)
    =======================================================================

18. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED SUBSIDIARIES:

Investments in unconsolidated subsidiaries purchased during the year ended
August 31, 2001 and other investees in which the Company has a 20% to 50%
interest or otherwise exercise significant influence are carried at cost,
adjusted for the Company's proportionate share of their undistributed earnings
or losses.

Investments carried at equity consist of the following at August 31, 2001:

                                        Percent
                                          Owned
            cDemo Inc.                    14.3%
            Engyro Inc.                   22.1%

At August 31, 2001, the Company's proportionate share of undistributed losses
exceeded its investment and advances by $301,100. Accordingly, the Company's
investment has been reduced to zero and $301,100 has been recorded as an expense
in the statement of operations.


                                      F-28
<PAGE>

19. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS

The 2000 and 1999 comparative consolidated financial statements have been
reclassified from statements previously presented to conform to the presentation
of the 2001 consolidated financial statements.


                                      F-29
<PAGE>

                             CHELL GROUP CORPORATION
                                    FORM 10-K
                                November 30, 2001

                                  EXHIBIT INDEX

Exhibit
Number      Description of Exhibit                                Location
------      ----------------------                                --------

  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


                                       68
<PAGE>

 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
 10.15      Asset Purchase Agreement, dated September 10,
            1999, by and between 1373224 Ontario Limited,
            Networks North Inc. and Arthur Andersen Inc., to
            acquire the property and assets of GalaVu
            Entertainment Inc., from the person appointed by
            the court of competent jurisdiction as the
            receiver or receiver and manager of the
            property, assets and undertaking of GalaVu. ..........+5, Exh. 10.15
 10.16      Promissory Note, dated September 10, 1999, by
            and between 1373224 Ontario Limited, as Debtor,
            and the Holder, as Creditor. .........................+5, Exh. 10.16
 10.17      General Security Agreement, dated September 10,
            1999, by and between 1373224 Ontario Limited, to
            acquire the property and assets of GalaVu
            Entertainment Inc., from the person appointed by
            the court of competent jurisdiction as the
            receiver or receiver and manager of the
            property, assets and undertaking of GalaVu. ..........+5, Exh. 10.17
 10.18      Securities Pledge Agreement, dated September 10,
            1999, by and between 1373224 Ontario Limited to
            acquire the property and assets of GalaVu
            Entertainment Inc., from the person appointed by
            the court of competent jurisdiction as the
            receiver or receiver and manager of the
            property, assets and undertaking of GalaVu. ..........+5, Exh. 10.18
 10.19      Certificate to the Escrow Agent certifying that
            the conditions of Closing have been satisfied or
            waived ...............................................+5, Exh. 10.19
 10.20      Certificate to the Escrow Agent certifying that
            the conditions of Closing have not been
            satisfied or waived ..................................+5, Exh. 10.20
 10.21      Occupancy and Indemnity Agreement, dated
            September 10, 1999, by and between 1373224
            Ontario Limited to acquire the property and
            assets of GalaVu Entertainment Inc., from the
            person appointed by the court of competent
            jurisdiction as the receiver or receiver and
            manager of the property, assets and undertaking
            of GalaVu. ...........................................+5, Exh. 10.21
 10.22      Order of the Ontario Superior Court of Justice,
            dated September, 1999, approving the transaction
            contemplated herein, and vesting in the
            Purchaser the right, title and interest of
            GalaVu and the Receiver, if any, in and to the
            Purchased Assets, free and clear of the right,
            title and interest of any other person other
            than Permitted Encumbrances. .........................+5, Exh. 10.22
 10.23      Bill of Sale, dated September 13, 1999, by and
            between 1373224 Ontario Limited to acquire the
            property and assets of GalaVu Entertainment
            Inc., from the person appointed by the court of
            competent jurisdiction as the receiver or
            receiver and manager of the property, assets and
            undertaking of GalaVu. ...............................+5, Exh. 10.23
 10.24      Covenant of Networks North Inc. for valuable
            consideration to


                                       69
<PAGE>

            allot and issue and pay to the Receiver 100,000
            common shares in accordance with the Purchase
            Agreement date September 10, 1999, between
            1373224 Ontario Limited and the Receiver. ............+5, Exh. 10.24
 10.25      Agreement of Purchase and Sale dated August 4,
            2000 by and among Networks North Inc., Networks
            North Acquisition Corp., Chell.com Ltd. and
            Cameron Chell ...........................................+6, Exh. A.
 10.26      Valuation of Chell.com Ltd. as of May 31, 2000
            by Stanford Keene .......................................+6, Exh. B.
 22         List of Subsidiaries .........................................p. 110

-------

+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 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.
+5    All Exhibits so indicated are incorporated herein by reference to the
      exhibit listed above in the Company's 8-K (Date of Report: September 13,
      1997) (File No. 0-18066), filed on December 16, 1996.
+6    All Exhibits so indicated are incorporated herein by reference to the
      exhibit number listed above in the Definitive Proxy Statement on Form 14A
      of the Registrant (File No. 000-18066), filed with the Securities and
      Exchange Commission on August 8, 2000.
++    Filed electronically pursuant to Item 401 of Regulation S-T.


                                       70