UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                              Washington D.C. 20549

                                 Amendment No. 1

                                   FORM 10-K/A

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

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

    14 METEOR DRIVE, TORONTO, ONTARIO                              M9W 1A4
(Address of principal executive offices)                         (Zip Code)

       Registrant's telephone number, including area code: (416) 675-0874

        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
<PAGE>

         DOCUMENTS INCORPORATED BY REFERENCE:        NONE

                                     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:

<TABLE>
<CAPTION>
                                                                   August 31
                                   ---------------------------------------------------------------------------------
                                        2001             2000              1999              1998             1997
                                   ---------------------------------------------------------------------------------
<S>                                <C>               <C>               <C>              <C>               <C>
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
--------------------------------------------------------------------------------------------------------------------
</TABLE>

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

                                       2
<PAGE>

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
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)

                               [GRAPHIC OMITTED]

(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   SUBSIDIARY'S
                                                                       SHARES AND 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                N.A.                         20.3%
                                      Interactive  Network, Inc.)
--------------------------------------------------------------------------------------------------------------------------
Sonoptic Technologies Inc.            75% (through Magic               25% Govt. of                  4.7%
                                      Lantern)                         New Brunswick
--------------------------------------------------------------------------------------------------------------------------
1113659 Ontario Ltd., operating as    100% (through Magic              N.A.                            0%
Viewer Services                       Lantern)
--------------------------------------------------------------------------------------------------------------------------
Tutorbuddy Inc.                       100% (through Magic              N.A.                          0.4%
                                      Lantern)
--------------------------------------------------------------------------------------------------------------------------
3484751 Canada Inc.                   100%                             N.A.                            0%
--------------------------------------------------------------------------------------------------------------------------
Chell.com USA Inc.                    100%                             N.A.                            0%
--------------------------------------------------------------------------------------------------------------------------

<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANIES:                 OUR PERCENTAGE                   OTHER ENTITIES WITH EQUITY   SUBSIDIARY'S
                                      OWNERSHIP                        SHAREHOLDING AND             REVENUES AS A
                                                                       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.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
                                             2001           2000            1999
                                               $              $              $
--------------------------------------------------------------------------------------
<S>                                         <C>            <C>             <C>
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                                 (2,635,280)    (1,218,183)      (319,634)
--------------------------------------------------------------------------------------
                                            (9,816,094)    (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                                    479,330        895,894        837,653
--------------------------------------------------------------------------------------
                                            11,221,912     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                                    650,576        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
--------------------------------------------------------------------------------------
</TABLE>

         We currently  conduct our business  through ten directly or  indirectly
owned  subsidiaries 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.

                                       7
<PAGE>

         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  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

                                       8
<PAGE>

         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
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

                                       9
<PAGE>


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.



                                       10
<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.

                                       11
<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.

                                       12
<PAGE>

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

         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

                                       13
<PAGE>

subsidiary  acquired  certain assets from 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  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

                                       14
<PAGE>

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,  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

                                       15
<PAGE>

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 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

                                       16
<PAGE>

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.
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

                                       17
<PAGE>

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:

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

                                       18
<PAGE>

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
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.

                                       19
<PAGE>

         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 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

                                       20
<PAGE>


               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 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.

None.

                                       21
<PAGE>

                                     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.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
                                               HIGH          LOW          TRADING VOLUME
                                               ----          ---          --------------
                                              (US$)         (US$)
-----------------------------------------------------------------------------------------
<S>                                           <C>            <C>             <C>
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
</TABLE>

         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.

                                       22
<PAGE>

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

         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.

STATEMENT OF OPERATIONS DATA (CANADIAN DOLLARS):

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
                                                           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)              (11,747,639)     (2,323,621)       (971,497)        618,065        609,387
Net income (loss) per share          (1.38)          (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>

                                       23
<PAGE>

BALANCE SHEET DATA (CANADIAN DOLLARS):

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
                                                                 August 31,
                                   2001            2000            1999             1998          1997
---------------------------------------------------------------------------------------------------------
<S>                              <C>           <C>              <C>             <C>            <C>
Total assets                    16,049,510     317,220,211      14,546,003      15,802,359     14,287,602
Long-term obligations            4,582,995       4,436,213       2,216,675       2,840,218      2,185,249
Shareholders' equity             3,433,152       9,383,419      10,792,767      11,033,178      9,488,648
---------------------------------------------------------------------------------------------------------
</TABLE>

                                       24
<PAGE>

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.

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.

                                       25
<PAGE>

         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%.

         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,  a 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.

                                       26
<PAGE>

         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.

         EXPENSES.  Selling,  general and  administrative  expenses for the 2001
Fiscal Year were $16,181,604,  compared to $10,726,556 for the 2000 Fiscal Year,
an increase of $5,455,048  or 50.8%.  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
88.8% 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  $1,471,379,
compared to $282,085  for the 2000 Fiscal  Year,  an increase of  $1,189,294  or
421.6%. The increase was the

                                       27
<PAGE>

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 8.1% 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 $11,747,639 compared to net loss of $2,323,621
for the 2000 Fiscal Year, a change of $9,424,018.  This represents a decrease in
net income as a percentage of total  revenues to (64.5%) in the 2000 Fiscal Year
from (12.2%) in the 2000 Fiscal Year.

         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

                                       28
<PAGE>

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 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.

                                       29
<PAGE>

         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.

         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


                                       30
<PAGE>

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.

         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

                                       31
<PAGE>

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  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
$1,430,962,  and the deposit on purchase of  $1,689,710  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


                                       32
<PAGE>

working capital and that together with funds provided by operations,  there will
be sufficient working capital for the Company's requirements.

                                       33
<PAGE>

         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.

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.

                                       34
<PAGE>

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

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.

                                       35
<PAGE>

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.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
NAME                  AGE   PRINCIPAL POSITIONS WITH THE COMPANY                            DIRECTOR
                                                                                              SINCE
-------------------------------------------------------------------------------------------------------
<S>                   <C>   <C>                                                               <C>
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
</TABLE>

         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


                                       36
<PAGE>

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, 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.

                                       37
<PAGE>

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.

         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

                                       38
<PAGE>

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 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.

                                       39
<PAGE>

<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 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).

<TABLE>
<CAPTION>
   OUTSIDE DIRECTOR'S COMPENSATION SCHEDULE                                               CASH         OPTIONS
                                                                                          (US$)
<S>                                                                                       <C>           <C>
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               2,000
   committee retainer)
6. Board Meeting Attendance Fee                                                           750/mtg.
7. Committee Attendance Fee                                                               500/mtg
</TABLE>

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

                                       40
<PAGE>

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 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.

                                       41
<PAGE>

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
-----------------------------------------------------------------------------------------------------
All directors and executive officers as a group
(7 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.

(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.

                                       42
<PAGE>

(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).

         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

                                       43
<PAGE>

               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.

                                     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:

                                       44
<PAGE>

EXHIBIT
NUMBER                                  TITLE
-------                                 -----

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

                                       45
<PAGE>

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 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.

                                       46
<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 CORPORATION
-------------------------------------------------------------------------------

-------------------------------------------------------------------------------
Date: March 5, 2004                    By:  /s/ Stephen McDermott
-------------------------------------------------------------------------------
                                            Stephen McDermott, Chairman & 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.

<TABLE>
<CAPTION>
                 NAME                                        CAPACITY                                   DATE
                 ----                                        --------                                   ----
<S>                                       <C>                                                <C>

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

/S/ STEPHEN MCDERMOTT                     Director, Chairman and Chief Executive Officer     March 5, 2004
----------------------------------------
Stephen McDermott

/S/ DAVID BOLINK                                             Director                        March 5, 2004
----------------------------------------
David Bolink

----------------------------------------
</TABLE>

                                       47
<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
Except for Note 17, the date of which is February 25, 2004.


                                      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 INC
                           CONSOLIDATED BALANCE SHEETS
                                 AS AT AUGUST 31
                         (Expressed in Canadian dollars)

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
                                                                                2001                  2000
                                                                        (RESTATED - NOTE 17)  (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                                                212,539            202,799
Net assets from discontinued operations (note 13 [a])                             82,558          1,160,934
------------------------------------------------------------------------------------------------------------------
                                                                              16,049,510         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, less current portion (note 8), less discount of                4,523,822          4,377,040
$1,360,517 and 0, respectively
Deferred income taxes payable (note 7)                                            59,173             59,173
------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES                                                             12,616,358          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                                           15,849,971         10,454,669
    Deficit                                                                  (13,020,928)        (1,273,289)
------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY                                                     3,433,152          9,383,419
------------------------------------------------------------------------------------------------------------------
                                                                              16,049,510         17,220,211
------------------------------------------------------------------------------------------------------------------
</TABLE>

The accompanying notes are an integral part of these statements

                                      F-3
<PAGE>

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

<TABLE>
<CAPTION>
                                                                    2001            2000          1999
                                                                 (RESTATED -      (Restated
                                                                  NOTE 17)       - 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                               16,181,604     10,726,556      6,830,575
Write-off of leaseholds                                              355,560             --             --
Bad debts                                                            171,407        140,090        126,170
Interest and bank charges                                          1,471,379        282,085         59,312
Depreciation and amortization                                      3,040,407      2,249,321      1,429,219
------------------------------------------------------------------------------------------------------------
                                                                  21,220,357     13,398,052      8,445,276
------------------------------------------------------------------------------------------------------------
LOSS BEFORE THE UNDERNOTED ITEMS                                  (9,816,094)    (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                                  (10,144,255)    (1,466,205)      (744,240)
Loss from discontinued operations (net of income tax) [NOTE       (1,603,384)      (857,416)      (227,257)
13[A]]
------------------------------------------------------------------------------------------------------------
NET LOSS AND COMPREHENSIVE LOSS FOR THE YEAR                     (11,747,639)    (2,323,621)      (971,497)
------------------------------------------------------------------------------------------------------------

EARNINGS (LOSS) PER SHARE [NOTE 11]

Basic                                                                 $(1.38)        $(0.81)        $(0.36)
Diluted                                                               $(1.38)        $(0.81)        $(0.36)
------------------------------------------------------------------------------------------------------------
</TABLE>

The accompanying notes are an integral part of these statements

                                      F-4
<PAGE>

                           CHELL GROUP CORPORATION INC
                 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 par    retained    Shareholders'
                                               Preferred Shares         Common shares         value        earnings       Equity
                                            --------------------------------------------                   (deficit)
                                               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                                          --        --           --          --       117,359            --        117,359
 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
Beneficial conversion on Debt                      --        --           --          --     1,959,144            --      1,959,144
 Net loss (restated - Note 17)                     --        --           --          --            --   (11,747,639)   (11,747,639)
------------------------------------------------------------------------------------------------------------------------------------
Balance, August 31, 2001
(restated Note 17)                                 --        --    9,028,239     604,109    15,849,971   (13,020,928)     3,433,152
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The accompanying notes are an integral part of these statements

                                      F-5
<PAGE>

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

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
                                                                            2001                2000              1999
                                                                   (RESTATED - NOTE 17) (RESTATED - NOTE 17)

                                                                            $                   $                   $
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>                   <C>                  <C>
OPERATING ACTIVITIES
Net loss for the year                                                 (11,747,639)          (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
     Amortization of discount                                             589,628                   --                 --
     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                                   42,859             (202,799)                --
     Decrease (increase) in assets from discontinued operations           103,710             (267,046)           (78,177)
     Increase (decrease)in accounts payable and accrued liabilities     1,418,167              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 13[a]]                               50,000                   --                 --
Investment in Viewer Services                                                  --                   --            (36,054)
Increase in deposit on purchase                                        (1,689,710)                  --                 --
----------------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES                                      (3,070,672)          (1,162,146)          (614,130)
----------------------------------------------------------------------------------------------------------------------------

FINANCING ACTIVITIES
Increase in notes and loans payable                                     5,006,134               21,908             38,485
Repayment of notes and loans payable                                     (102,447)             (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          (999,192)            (662,509)         1,017,007
PERIOD
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>

                                      F-6
<PAGE>

         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 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

                                      F-7
<PAGE>

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.

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

                                      F-8
<PAGE>

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.

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.

                                      F-9
<PAGE>

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  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.

                                      F-10
<PAGE>

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 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.

                                      F-11
<PAGE>

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
================================================================================

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].

                                      F-12
<PAGE>

7. INCOME TAXES AND DEFERRED INCOME TAXES

The provision for income taxes consists of the following:

<TABLE>
                                                     2001       2000      1999
                                                       $          $        $
--------------------------------------------------------------------------------
<S>                                                   <C>       <C>     <C>
Current
   FEDERAL                                            --         --      98,000
   PROVINCIAL                                         --         --      52,000
--------------------------------------------------------------------------------
                                                      --         --     150,000
================================================================================
</TABLE>

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:

<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
===================================================================================================

<CAPTION>

                                                                  2001         2000         1999
Taxes on discontinued operations                                   $             $            $
---------------------------------------------------------------------------------------------------
<S>                                                           <C>            <C>          <C>
STATUTORY RATE APPLIED TO LOSS FROM DISCONTINUED                (675,025)    (376,406)    (101,357)
OPERATIONS
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

                                      F-13
<PAGE>

$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-14
<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, LESS DISCOUNT OF          3,530,233             --
 1,360,517 AND 0, RESPECTIVELY.]
 Promissory notes - GalaVu [NOTE 13[E]]                          2,662,698      2,662,698
------------------------------------------------------------------------------------------
                                                                 7,623,226      2,662,698
------------------------------------------------------------------------------------------
 Liens notes                                                            --          2,119
------------------------------------------------------------------------------------------
                                                                 8,298,480      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

                                      F-15
<PAGE>

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
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.  EITF-00-27  "Application  of Issue No.
98-5 to Certain  Convertible  Instruments"  requires that a discount be recorded
for any beneficial  conversion  features  associated with convertible  debt. The
Company has recorded a discount of  $1,959,144 in October 2000 and has amortized
$589,981 to interest  expense for the year ended Aug 31, 2001.  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-16
<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-17
<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

                                      F-18
<PAGE>

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.

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>
                                                     COMMON SHARES               CAPITAL IN
                                              ---------------------------       EXCESS OF PAR
                                                 NUMBER        AMOUNT              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            5,426,772       372,923          2,229,291    2,602,214
      [NOTE 13[F]]
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                                                --            --            117,359      117,359
Consulting fees rendered                           145,000        10,405            456,218      466,623
Beneficial conversion feature on debt                   --            --          1,959,144    1,959,144
Exercise of 62,750 stock options                    62,750         4,416            208,637      213,053
---------------------------------------------------------------------------------------------------------
BALANCE AS AT AUGUST 31, 2001 (RESTATED)         9,028,239       604,109         15,849,971   16,454,080
=========================================================================================================
</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

                                      F-19
<PAGE>

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.
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

                                      F-20
<PAGE>

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].

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                (13,000,844)  (2,518,310)  (1,399,105)
   =========================================================================

   PRO FORMA LOSS PER SHARE
   Basic                                   (1.55)       (0.88)       (0.53)
   Diluted                                 (1.55)       (0.88)       (0.53)
   =========================================================================

                                      F-21
<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)         $(11,747,639)     $(2,323,621)    $(971,497)
 per share]
 Accretion of interest on non-interest bearing convertible          $183,513         $173,076       $31,084
 promissory notes (anti-dilutive)
 Numerator for diluted earnings (loss) per share                $(11,564,126)     $(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                                                $(1.38)          $(0.81)       $(0.36)
 Diluted loss per share                                              $(1.38)          $(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.

                                      F-22
<PAGE>

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  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.

                                      F-23
<PAGE>

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-24
<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
         =======================================================

                                      F-25
<PAGE>

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.

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

                                      F-26
<PAGE>

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
             ==================================================

         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

                                      F-27
<PAGE>

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.

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

                                      F-28
<PAGE>

$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-29
<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:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
                                                2001           2000            1999
                                                  $              $               $
--------------------------------------------------------------------------------------
<S>                                         <C>            <C>              <C>
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                                 (2,635,280)    (1,218,183)       (319,634)
--------------------------------------------------------------------------------------
                                            (9,816,094)    (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                                    479,330        895,894         837,653
--------------------------------------------------------------------------------------
                                            11,221,912     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                                    650,576        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
--------------------------------------------------------------------------------------
</TABLE>

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.

                                      F-30
<PAGE>

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-31
<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

[A]      DISCOUNT ON CONVERTIBLE DEBT

         On October  3,  2000,  the  Company  closed the sale of a  US$3,000,000
Convertible  10%  Debenture  of  which  US$1,700,000  has  been  advanced  (NOTE
8[VIII]).  EITF-00-27  "Application  of Issue No.  98-5 to  Certain  Convertible
Instruments"  requires that a discount be recorded for any beneficial conversion
features  associated  with  convertible  debt.  The  Company  did not record the
discount on the  US$1,700,000  debt and therefore had to make an adjustment  and
restate its Fiscal 2001  financial  statements.  The Company has now  recorded a
discount of $1,959,144  in October 2000 and has  amortized  $589,981 to interest
expense for the year ended Aug 31, 2001.

         Also as part of this transaction, the Company issued 50,000 warrants to
purchase 50,000 common shares at US $3.00 per share.  These warrants were valued
and the Company  recognized a $252,706 cost associated with these warrants.  The
company had  expensed  $77,215  and had  $175,491  as other  assets.  The entire
transaction  has  been  reversed  because  the  value of the  warrants  has been
included in the calculation of the discount above.

The following table presents the impact of the 2001 restatements.

  ----------------------------------------------------------------------------
                                            As Previously      As Restated
                                               Reported
  ----------------------------------------------------------------------------
                                                   For the year ended
                                                    August 31, 2001

    Balance sheet:
        Other Assets                                388,802           212,539
  Long-term debt                                  5,884,339         4,523,822
      Share Capital

        Capital in excess of par value           14,143,533        15,849,971
        Deficit                                 (12,499,514)      (13,020,928)

    Statement of operations:
      Selling, general and administration        16,250,171        16,181,604
      Interest and Bank Charges                     881,398         1,471,379
      Net loss                                  (11,226,225)      (11,747,639)

  EPS
      Basic loss per share                            $1.34             $1.38
       Diluted loss per share                         $1.34             $1.38
  ----------------------------------------------------------------------------

[B]      CHANGE IN PREFERRED SHARES

                                      F-32
<PAGE>

         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 2000 restatements.

    ------------------------------------------------------------------------
                                                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-33
<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-34
<PAGE>

                           CHELL GROUP CORPORATION INC
                                FORM 10-K/A No.1
                                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

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<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


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<PAGE>

10.24     Covenant   of   Networks   North  Inc.   for   valuable
          consideration  to  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.

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<PAGE>

EXHIBIT 22.  LIST OF SUBSIDIARIES OF CHELL GROUP CORPORATION AS AT
             NOVEMBER 26, 2001

Name of Subsidiary(1)                             Jurisdiction of Incorporation
---------------------                             -----------------------------

Chell Merchant Capital Group, Inc.......................................ONTARIO
Magic Lantern Communications Ltd.(2) ................................... Canada
NTN Interactive Network Inc............................................. Canada
3484751 Canada Inc...................................................... Canada
Sonoptic Technologies Inc.(4)........................................... Canada
GalaVu Entertainment Network Inc. ..................................... Ontario
TutorBuddy Inc.(3)..................................................... Ontario
Chell.com (USA) Ltd..................................................... Nevada

----------

NOTES:

(1)  Unless   otherwise   indicated,   all  named   entities  are   wholly-owned
     subsidiaries of Chell Group Corporation.

(2)  Wholly-owned subsidiary of NTN Interactive Network Inc.

(3)  Wholly-owned subsidiary of Magic Lantern Communications Ltd.

(4)  Majority owned (75%) subsidiary of Magic Lantern Communications Ltd.


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