UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(Mark One)

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

           For the fiscal year ended June 30, 2002.

                                          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 000-29957

                           TENGTU INTERNATIONAL CORP.
               --------------------------------------------------
             (Exact name of registrant as specified in its charter)

                               Delaware 77-0407366
 -------------------------------------------------------------------------------
                  (State or other jurisdiction (I.R.S. Employer
            of incorporation or organization) Identification Number)

                                 236 Avenue Road
                        Toronto, Ontario, Canada M5R 2J4
 -------------------------------------------------------------------------------
               (Address of Principal Executive Offices) (Zip Code)


        Registrant's Telephone Number, Including Area Code (416) 963-3999

           Securities registered pursuant to Section 12(b) of the Act:

                                 Not applicable.

           Securities registered pursuant to Section 12(g) of the Act:

                      $.01 par value per share common stock
              -----------------------------------------------------
                                (Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.

                     Yes       X      No
                             ------       ------


<PAGE>


Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ X ]

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant - as of August 30, 2002 - $13,892,427

          APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
                         DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.

                     Yes            No
                            ------         ------

                    APPLICABLE ONLY TO CORPORATE REGISTRANTS

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 55,614,857 shares outstanding
as of September 27, 2002.

                       DOCUMENTS INCORPORATED BY REFERENCE

List hereunder, the following documents if incorporated by reference and the
Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) of the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).

            None of the above documents is incorporated by reference.


<PAGE>


                                     PART I


CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

           Certain statements in this report which are not historical facts or
information are forward-looking statements, including, but not limited to, the
information set forth in the Management's Discussion and Analysis section below.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, levels of activity,
performance or achievement of Tengtu International Corp. (the "Company") or
industry results, to be materially different from any future results, levels of
activity, performance or achievement expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions in the United States, China and Canada;
the ability of the Company to implement its business strategy; the Company's
access to financing; the Company's ability to successfully identify new business
opportunities; the Company's ability to attract and retain key executives; the
Company's ability to achieve anticipated cost savings and profitability targets;
changes in the industry; competition; the effect of regulatory and legal
restrictions imposed by foreign governments; the effect of regulatory and legal
proceedings and other factors discussed the Company's Form 10 and 10-Q filings.
As a result of the foregoing and other factors, no assurance can be given as to
the future results and achievements of the Company. Neither the Company nor any
other person assumes responsibility for the accuracy and completeness of these
statements.

           In order to fully assess the risks of an investment in the Company's
stock, investors should refer to the Company's registration statement on Form
S-1 filed on August 14, 2002, under the heading "Risk Factors."

ITEM 1.    BUSINESS

BACKGROUND INFORMATION ON THE COMPANY AND ITS SUBSIDIARIES

           The Company's business focuses on Kindergarten through 12th grade
("K-12") e-education in China, which has approximately 800,000 schools and 250
million students. Through the Company's joint venture and joint venture partner,
and, along with other companies, the Company works in cooperation with the
Chinese Central and Provincial Ministries of Education to implement an
information technology solution for the Chinese schools to fulfill China's goal
of making IT-based education and distance learning available to 90% of K-12
schools by 2010. Specifically, the Company is engaged in the following
businesses:




                                      -1-
<PAGE>


           o sales of educational software to Chinese K-12 schools;

           o development of the China Broadband Education Resource Centre
("CBERC") along with a Division of the Chinese Ministry of Education, the
National Center for Audio/Visual Education ("NCAVE"). CBERC is an electronic
resource center and portal containing educational materials that are transmitted
to schools which download them daily via satellite and which will be accessible
by Internet;

           o development of Local Broadband Education Resource Centers
("LBERC"), along with several Chinese Provinces. The LBERCs will connect with
CBERC and, in addition, will contain their own educational and other materials
as mandated by the Provincial Ministries of Education. Like CBERC, content will
be transmitted to schools daily via satellite and will also be available via
Internet;

           o sales of computer hardware and systems integration services to
Chinese schools; and

           o teacher training in the use of information technology in education.


           The Company was incorporated on May 6, 1988, in the State of
Delaware, under the name of Galway Capital Corporation ("Galway"). Galway
Capital Corporation was formed for the purpose of seeking potential business
ventures. Other than our activities in seeking potential business ventures,
Galway ceased operations during fiscal year 1990 -1991, and was inactive until
May, 1996. On August 20, 1993, Galway changed its name to Tower Broadcast, Inc.
in order to search for a suitable merger or reorganization candidate. On March
20, 1996, under the name Tower Broadcast, Inc. ("Tower"), the Company was
cleared by the National Association of Securities Dealers for an unpriced
quotation on the over-the-counter Bulletin Board. Such clearance was sought
because successful negotiation of one or more acquisition or joint-venture
opportunities seemed imminent and management foresaw a resultant need to raise
capital.

           On May 24, 1996, in connection with a change in management, Tower
changed its name to Tengtu International Corp. This name change was accomplished
to reflect the Company's intended business direction and affiliation with
certain Chinese firms in the Chinese educational software industry. In the
Chinese language, "Teng" is a verb meaning "to grow, carry out or execute
properly" and "tu" is a noun generally meaning a "vision."

           On June 30, 1996, the Company entered into a purchase agreement with
Blue Lake Industries Limited and Tengtu Enterprises Limited, for their 49%
interest in a joint venture called Beijing Tengtu United Electronics Development
Co., Ltd. ("Tengtu United"). The Company's joint venture partner is Beijing
Tengtu Culture & Education Electronics Co., Ltd. ("Tengtu China"). In 1996,
Tengtu China was owned by three Chinese state owned computer companies: Legend
Computer Co., Great Wall Computer Group Co. and Taiji Computer Corporation.



                                      -2-
<PAGE>


1           In 1997, the Company formed TIC Beijing Digital Pictures Co., Ltd.
("TIC Beijing") as a wholly owned subsidiary engaged in the television
post-production business in Beijing. It engaged in that business until 1999 and
is now inactive.

           On March 26, 1998, the Company and Tengtu China agreed to amend the
joint venture agreement such that the Company now has a 57% interest in the
Tengtu United joint venture. Pursuant to the amended joint venture agreement,
after-tax profits may not be distributed to any party unless the losses from
previous years have been recouped and the Company. has received back all the
cash contributions, without interest, made to Tengtu United. Thereafter,
profits, when and if distributed, are to be allocated 43% to Tengtu China and
57% to the Company.

           In 1999, Beijing Oriental Lian Fa Technology and Trade Group, Co.
Ltd. ("Lian Fa") became a shareholder in Tengtu China. Fan Qi Zhang, the owner
of Lian Fa was subsequently elected as one of the Company's Directors. In late
2000 and early 2001, Beijing Jiade Tengtu Technology Group Co. Ltd and Beijing
Oriental Tai He Technology Development Co., Ltd., both of which are owned by Mr.
Zhang and his sister, acquired 100% of the interests in Tengtu China.

ORGANIZATIONAL STRUCTURE

           The Company functions as the North American base for Tengtu United.
As of June 30, 2002, the Company had 2 employees and 4 independent contractors
and focuses on obtaining strategic relationships for the provision of
educational resources to the Chinese Educational market through Tengtu United,
and raising capital.

           The Company has four subsidiaries in addition to its Tengtu United
joint venture. TIC Beijing is the Company's wholly owned subsidiary in Beijing.
Until 1999, it was engaged in television post-production. It is currently
inactive.

           The Company has a wholly owned subsidiary, Edsoft Platforms (Canada),
Ltd., which, through 60.2% owned Edsoft Platforms (H.K.) Limited, was previously
engaged in the educational software business in Hong Kong, but is now in the
process of being dissolved.

           The Company also has a wholly owned subsidiary called
e-biztengtu.com, Inc. which was incorporated in Delaware, but has not been
utilized for any purpose to date.

           The Company's joint venture agreement with Tengtu China requires,
among other things, that Tengtu China assign all material contracts used in its
business to Tengtu United, assist Tengtu United in securing future rights that
relate to its business and assist Tengtu United to maintain good relations
between Tengtu United and all governmental and state agencies. The Company has
been advised that an assignment of Contracts by Tengtu China, while permitted
under Chinese law, is not recommended because of political sensitivities in
contracting with foreign controlled entities in the education industry. Instead,
Tengtu China, a 100% Chinese owned entity, operates and conducts its business on
behalf of the Company and Tengtu United. This arrangement was formally agreed to
in two April, 2001 agreements which obligate Tengtu China and Beijing Tengtu
TianDi Network Co., Ltd. ("TianDi"), a systems integrator and networking company
beneficially owned by Mr. Zhang, to operate on behalf of the Company and Tengtu
United.



                                      -3-
<PAGE>


           Pursuant to recommendations made by PricewaterhouseCoopers after a
review of Tengtu China's operations, Tengtu China internally restructured itself
into the Tengtu Group. The Tengtu Group is made up of the following entities,
divisions and branch offices, with the following functions. As of June 30, 2002,
the Tengtu Group employed approximately 500 people.

TENGTU CHINA

           Tengtu China focuses on software development and sales and CBERC and
LBERC portal development.

BEIJING TENGTU TIANDI NETWORK CO., LTD.

           TianDi focuses on hardware sales, systems integration and satellite
transmission.

TENGTU ELECTRONIC PUBLISHING HOUSE

           Tengtu Electronic Publishing House ("TEP") publishes educational
materials, teacher training materials, cartoons and games on CD ROM. The Company
believes that it is only one of eight companies in China, and the only private
company, granted an electronic publishing license for educational materials.
While Tengtu China has use of its electronic publishing license, TEP does not
operate on behalf of Tengtu United and is a separate entity.

           The shareholders in TEP are: Tengtu China (10%), Beijing Jiade Tengtu
Technology Group Co. Ltd. (51.2%), Beijing Oriental Tai He Technology
Development Co., Ltd. (18.8%) and Taiji Computer Company Ltd. (20%).

TENGTU TEACHER TRAINING

           Tengtu Teacher Training is currently only a division within Tengtu
China and has not been separately incorporated. It is anticipated that it will
assume the function of training teachers in the use of Tengtu products and
services.

BRANCH OFFICES

           Tengtu China has branch offices in the following locations throughout
China. The branch offices are sales and marketing centers for Tengtu products
and services, and also install, update and service Tengtu software and products
and provide systems integration services.


                                      -4-
<PAGE>



Neimeng Brach Office     South Xingan Street, Huhehaote City, Neimeng Province

Shanxi  Branch Office    Banpodong Street  168,  Taiyuan City, Shanxi Province

Shandong Branch Office   Room 401, Entrance 3, Building 8, Block 5, Lixia
                         District, Jinan City, Shandong Province

Shanxi  Branch Office    Yaowangdong 164, Xi'an City, Shanxi Province

Yingchuan Brahch Office  Jinliantong Mansion 509, Xinhua Dong Street 53,
                         Yinchuan City, Ningxia Province

Sichuan Branch Office    Xinghui Xi Street 5, Jingniu District, Chengdu City,
                         Sichuan Province

Guangzhou Branch Office  Jinshan Mansion North Tower, 6th Floor,Tianhe District,
                         Guangzhou City, Guangdong Province

Hubei Branch Office      Wuge Street 460, Wuchang District, Wuhan City, Hubei
                         Province

Fuzhou Branch Office     Hudong Street 168, Fuzhou City, Fujian Province

Anhui Branch Office      Room 102, Building 203, Hupo Garden, Hefei City, Anhui
                         Province

Guizhou Branch Office    North Wengchang Street 102, Guiyang City, Guizhou
                         Province

Hainan Branch Office     Binghai Street, Haikou City, Hainan Province

Hunan Branch Office      Wenyun Street 23, Changsha City, Hunan Province

Liaoning Branch Office   Dongbeiguoshi Mansion 711, Chongshandong Street 71,
                         Huanggu District, Shengyang City, Liaoning Province

Jiangxi Branch Office    Huisheng Mansion 1011, Jianggangshan Street 1028,
                         Nanchang City, Jiangxi Province

Jilin Branch Office      Yongchang Lane 21-1-303, Changchun City, Jilin Province

Jiangsu Branch Office    Zhongqing Mansion 1602, Caochangmeng Street 96, Nanjing
                         City, Jiangsu Province

Guangxi Branch Office    Zhiwu Street 50-1, Nanning City, Guangxi Province

Hebei Branch Office      Jingyi Business Center A-317, Gongnong Street 230,
                         Shijiazhuang City, Hebei Province

Henan Branch Office      Huayuan Street 3-116, Zhengzhou City, Henan Province

Beijing Branch Office    Building 8, Fucheng Street, Beijing


                                      -5-
<PAGE>


CBERC AND LBERC COMPANIES

           The CBERC and LBERC projects will be operated through separate joint
venture companies formed by Tengtu China and the applicable Ministry of
Education. With respect to CBERC, on July 22, 2002, the companies of the Tengtu
Group signed an agreement providing for the creation of a joint venture company
in which the Tengtu Group will have a 70% interest for the first two years and a
53% interest after that. NCAVE will have a 30% interest for the first two years
and a 47% interest after that. SEE "CURRENT BUSINESS DEVELOPMENTS AND
AGREEMENTS"

           With respect to the LBERC projects, a joint venture company has
already been formed by Tengtu China and the Shaanxi Province Audio/Visual
Education Department with Tengtu China having a 60% interest and Shaanxi having
a 40% interest. We anticipate that joint venture companies will also be formed
for LBERC projects in the ShanDong, Sichuan and Fujian Provinces with Tengtu
China having a 60% interest and the Provinces having a 40% interest.

                          TENGTU PRODUCTS AND SERVICES

                                    SOFTWARE

           Tengtu software products have been developed in close cooperation
with the Chinese Ministry of Education. They are continuously updated based on
customers' needs and concerns by Tengtu China's software programming and
research and development staff.

THE TOTAL SOLUTION

           Tengtu China's Total Solution software platform is a package of
bundled software consisting of specialized application software and
subject-specific courseware. It is currently one of the only IT solutions in
China that integrates applications for teaching/learning, home-school
connectivity, school resource management, global inter-school communication, and
resource sharing. The network and software are designed with data security to
prevent unauthorized access and manipulation. The system also features easy,
flexible, and inexpensive implementation, modification, and upgrading.

           In June, 2000, the Chinese Ministry of Education advised Tengtu China
that its Multimedia Electronic Classroom is the only multimedia electronic
classroom recommended by it. However, the Chinese provincial and local
educational agencies are not required to buy the Multimedia Electronic
Classroom.



                                      -6-
<PAGE>


           Tengtu's software is designed to be compatible with Microsoft Windows
and Microsoft Office applications.

           The individual components of the Total Solution, which can be sold
separately or all together, fall under three categories: Teaching Platform,
Resources Platform and Information Management Systems.

TEACHING PLATFORM

MULTIMEDIA ELECTRONIC CLASSROOM

           The Multimedia Electronic Classroom allows for the conduct of classes
electronically through networked computers by allowing the transmission of
audio, video and text content from teacher to student. The Multimedia Electronic
Classroom has 23 functions including electronic hand raising, dialogue between a
teacher and individual student, or with the entire class, video and audio
broadcasting, document delivery and screen monitoring.

           Key technical features used in the Multimedia Electronic Classroom
are: dynamic screen capture, audio and video shunt control, audio compression
and superposition and network flow detection control.

INTERNET NETWORK CLASSROOM

           The Internet Network Classroom allows students to learn to use the
Internet and computer networks in a virtual environment and is designed to
satisfy information technology teaching requirements of the Chinese Ministry of
Education. The Internet Network Classroom emulates web browsing, e-mail, home
page creation and chat rooms. It can also acquire resources from a school's
network or the Internet and make them available to students, provide a forum for
schools announcements and news and make available a test questions bank and
other resources.

VIDEO ON DEMAND SYSTEM (VOD)

           The VOD system allows users to obtain and view video and other
multimedia programming. It can be used to construct multimedia and electronic
reading rooms on a school network. The VOD system includes the following
functions:

           o Program Management - allows administrators to manage programming by
adding and deletion, copy management and analysis.

           o User Management - allows administrators to give different access
rights to different users and keep track of programs ordered by user.



                                      -7-
<PAGE>


           o Broadcast Management - allows administrators to manage
advertisements,  video broadcasts and system news.

           o Program Inquiries - allows users to make  inquiries regarding
available programs before ordering.

           o Multi-Broadcast Program - when a number of users order programming
at the same time, school network speed can be dramatically reduced. Therefore,
the VOD system includes a multi-broadcast function which continuously broadcasts
different programming in a sequence allowing certain programming to be viewed at
certain times, much like a television program.

           Key technical features included in the VOD system are video data
compression and flow control technology to make full use of network resources.

VIRTUAL CD ROM SYSTEM

           The Virtual CD ROM system allows a single courseware CD to be shared
by each stand-alone computer in a school's network. The system works by
compressing CD contents into a virtual CD ROM file and them storing it on a hard
drive.

           The Virtual CD ROM system supports numerous CD formats, including
MPEG1, MPEG2 and AVI, allows for editing of CD content and includes built in
cache management.

SATELLITE LIVE BROADCASTING CLASSROOM

           The Satellite Live Broadcasting Classroom is similar to the
Multimedia Electronic Classroom except that it allows for the reception of
classes broadcast by satellite from a central classroom. The Satellite Live
Broadcasting Classroom allows the teacher in the central classroom to make use
of applications and features on the students' computers such as electronic
pointing and courseware selection. However, the central classroom cannot receive
information from students because the satellite broadcast is only one-way. It
also allows for transmission of courseware, test questions and other teaching
materials in the form of files, and the transmission of written information at
the same time as audio voice data.

TENGTU DISTANCE LEARNING SYSTEM

           The Tengtu Distance Learning System functions like an Internet based
school where teachers can create interactive courseware and students can select
from various subjects.



                                      -8-
<PAGE>


RESOURCES PLATFORM

TEACHING SERVICE SYSTEM

           The Teaching Service System allows teacher access to educational
resources to prepare specific lectures and classes. It allows teachers to
coordinate preparation with each other, as well as to add key points, questions
and highlights for students.

TEACHING RESOURCES DATABASE

           The Teaching Resources Database provides teachers and students with
teaching and self-learning materials, including 100 gigabytes of video, audio
and textual course materials. In addition, 100 CD ROM educational courseware
titles are included.

TENGTU RESOURCES SERVICE SYSTEM 5.0

           The Tengtu Resources Service System allows for easy introduction of
new educational content received by schools as it is received and for migration
to the Internet without any revision. Specifically, it has the following
functions:

           o Resources Introduction - newly received teaching and educational
content can be easily introduced to the school computer system;

           o Application and Management - allows for resources uploading,
downloading, browsing, correcting, deleting and insertion of materials into
Microsoft Word or PowerPoint documents allowing teachers to create their own
customized courseware;

           o Resources Retrieval - educational resources are searchable by name,
subject, grade and resource. The user can define the order of the search
results.

           o System Management - provides for login restrictions, tracking of
user information.

           The Tengtu Resources Service System 5.0 has an easy to use interface
similar to that of Internet Explorer with available on-line help.

TENGTU RESOURCES CENTER MANAGEMENT SYSTEM

           The Tengtu Resources Center Management System is a tool to manage the
educational resources in the CBERC and LBERC portals and provide administrative
functions to local education commissions through LBERCs. It allows access to and
search and storage of various resources. It also has the following functions:

           o Office System for Provincial Education Commissions - allows for
official document management, document sending and receiving, information
distribution, information and bulletins, management of meetings and agendas,
calendar and contact information.



                                      -9-
<PAGE>


           o Data Gathering System - collects administrative information and
statistics about schools to aid in centralized management and decision making.
Allows individual schools and teachers to add information.

           o Information Distribution System - allows for regular or periodic
dissemination of information to schools and can be set to automatically provide
designated information at periodic intervals.

           o User Registration Management System - gathers user information and
can be used to tailor services to the requirements of particular groups.

           o Portal Access Monitoring and Statistics System -  provides usage
analysis for portals and individual pages within the portals.

           o On Line Questionnaire System - collects opinions regarding
designated questions.

           o Search Engine System - establishes indexes for resources to be
searched using key words and them custom builds a page with search results.

           o Payment System

           o Homepage management system

           o Chat Rooms

           o E-Mail System

           o E-Commerce Center

INFORMATION MANAGEMENT SYSTEMS

LIBRARY MANAGEMENT SYSTEM

           The Library Management System allows for the management of
paper-based and electronic school libraries. With respect to paper-based books,
the Library Management System allows for:

           o indexing and searching of available titles,

           o recording information about students who borrow or read titles,

           o circulation management - allows schools to track loans, renewals,
late fees and book losses,


                                      -10-
<PAGE>


           o system inquiries - allows inquiries about titles, new arrivals,
circulation and readers;

           o statistics and analytical data.

           With respect to electronic books, the Library Management System
allows access through an internet web browser to available titles.

SATELLITE RECEIVING SYSTEM

           The Satellite Receiving System is designed to receive and organize
content received by satellite and make it available for use.

TEACHING INFORMATION MANAGEMENT SYSTEM

           The Teaching Information Management System is designed to assist
teachers and administrators in the management of schools. It serves as a
database for teacher and student information, allows for teacher salary
management and class scheduling and can be used to manage access rights to
various applications on a school network.

GENERAL INFORMATION SYSTEM FOR WEB SCHOOLS

           The General Information System for Web Schools allows for information
exchange among teachers, administrators, students and parents. It has the
following functions:

           o News Center - used to issue school news and bulletins;

           o E-mail - allows for information exchange among teachers, students,
administrators and parents;

           o School Principal's Column - allows a school's principal to
communicate with teachers, students and parents;

           o Student Status Management - tracks information regarding a students
progress and status and allows inquiries by the student or parents;

           o Teacher Evaluation - allows for input of information regarding
teacher performance; and

           o Test Question Management - provides for management of a database of
test questions, generation of tests and on-line testing for up to 1,000 students
at once.



                                      -11-
<PAGE>


           Other functions provided are compilation of lesson plans, providing
on-line classes to students, the ability to request video content on line,
personal home pages for students and teachers, e-greeting cards and library
management.


                               E-EDUCATION PORTALS

CBERC AND LBERCS

           CBERC and LBERCs are part of a national initiative to provide content
to computerized classrooms across China. The Tengtu Group and NCAVE are jointly
establishing an educational portal and repository for the distribution of
distance learning, educational information, and e-business products to
individual schools, students, and households across China.

           In late 2000, NCAVE initiated the "School to School" link project.
NCAVE recognized at that time that electronic classrooms and school computer
networks, while able to allow a school to share its internal information
technology resources, could not allow for the sharing on national and regional
educational resources. The goal of the School to School link program is to have
approximately 90% of all elementary and secondary schools in China connected to
national and local education resource centers (CBERC and LBERCs), through a
satellite network within 5 to 10 years.

           CBERC and the LBERCs are to be connected to the China Education
Resources Information Network ("CERNET") by a high speed fiber optic network.
CBERC will have a central web-site maintained in Beijing and is to contain
education resources provided by NCAVE and Tengtu, and will also contain
education resources from LBERCs, which will be uploaded to it through CERNET.
Schools will have access to their local LBERC and to CBREC resources through the
LBERC utilizing the Total Solution or similar platform software.

           At the present time, the Tengtu Group has a contract with NCAVE for
CBERC, an agreement for an LBERC in Shaanxi Province and letters of intent for
LBERCs in ShanDong, Sichuan and Fujian Province. While the CBERC portal is not
yet completed, CBERC is sending, via satellite, approximately six hours of
educational content daily to approximately 10,000 schools across China. The
content consists of required educational coursework in a number of areas which
is then downloaded and modified and utilized using the Total Solution, or
similar software. The Tengtu Group is not yet charging the schools which are
receiving content while CBERC is still under development.

           One of the main tasks in completing the CBERC and LBERC portals is
the development of adequate security measures. The Tengtu Group is currently
developing software to address security issues such as unauthorized use without
payment of fees, corruption of content, unauthorized entry and safety of
end-users' computers.



                                      -12-
<PAGE>


           As explained below, Tengtu China has entered into an agreement with
Sina, a Chinese portal builder, for the final design and completion of the CBERC
portal. This portal will also serve as a template for the LBERC portals. See
"CURRENT BUSINESS DEVELOPMENTS AND AGREEMENTS"

           When completed, it is anticipated that CBERC will have the following
functions:

           o Organization of Educational Resources - LBERCs will upload their
educational resources through CERNET to the CBERC central website which will
process and organize it using database management software;

           o ASP Services - CBERC will provide Active Server Pages to allow
schools to develop their own websites;

           o Educational Information Announcement Platform - will allow for the
broadcasting of educational information and educational policies by the Chinese
Ministry of Education;

           o Video Conferencing; and

           o Virtual Teaching Community - will provide students with on and
off-campus education services.

           When completed, it is anticipated that the LBERCs will have the
following functions:

           o Organization and Uploading of Teaching Resources - each LBERC will
collect and organize its educational materials into local resources for
uploading and sharing on CBERC;

           o Teaching Resources for Schools - local and CBERC educational
content will be combined, organized and made available;

           o Educational Information Announcement Platform - will allow local
Ministries of Education to broadcast educational information and policies to
local education committees, schools and students;

           o Video Conference System - will allow local Ministries of Education
to conduct real time and interactive remote video conferences with local
education committees;

           o Virtual Teaching Community - will provide students with on and
off-campus education services;

           o Video on Demand - will allow teachers and students to view on-line
real-time video educational information or download documents;


                                      -13-
<PAGE>


           o Web-based examination system;

           o Course Preparation for Teachers - the CBERC and LBERC contents will
be able to be manipulated in order to prepare lesson plans and teaching
materials;

           o Web-based Academic Subjects Teaching/Research Center - will provide
teachers with the means of engaging in academic exchanges and discussions with
other teachers; and

           o Software Downloading.

           It is also anticipated that both CBERC and LBERCs will be used for
education related e-commerce and adult continuing education.

                          SYSTEMS INTEGRATION SERVICES

           The Tengtu Group's systems integration services are performed by
TianDi . The services offered include everything necessary to create electronic
and web-based classrooms from software installation to network cabling and sales
of hardware and hardware set-up. TianDi is also working in conjunction with
Beijing Stone Lifang Information Technology Co., Ltd., known in North America as
Sina, to build and perform all services necessary to set up the CBERC and LBERC
portals.

                                TEACHER TRAINING

           In connection with software sales, the Tengtu Group offers training
services to instruct teachers in the use of information technology and Tengtu
products. Tengtu China has assisted the Chinese Government in setting up teacher
training centers in XinJiang, Inner Mongolia, Shanxi, Shandong, Shaanxi,
Sichuan, Fujian, Anwei, Guizhou, Guangdong, and Hainan. To date, approximately
10,000 teachers have been trained.

           In the future, the Tengtu Group plans to offer information technology
teacher training as a fee based service.

                   PAST DEVELOPMENT OF THE COMPANY'S BUSINESS

           During the period from 1996-98, the Company, through Tengtu United,
primarily produced educational CD-ROM titles for the Chinese educational market
and engaged in the television post-production business in Beijing through the
Company's wholly subsidiary, TIC Beijing.



                                      -14-
<PAGE>


           In 1998, pursuant to the joint venture agreement with Tengtu China,
the Company committed an additional $6 million in funding to Tengtu United to
develop the application software platforms needed by the K-12 educational
market. At that time, the Company realized that the Tengtu United software
titles could not be sold in sufficient volume because there was no application
software platform to enable the Chinese teachers and students to utilize them.
Accordingly, the Company's marketing focus changed from sales of individual
titles through Chinese retail channels to direct marketing of a "Total Solution"
to the school systems, including the necessary application software platform.

           In 1999, Tengtu United completed the first and second Torch Projects
which had been awarded to it awarded by the Chinese Ministries of Education and
Information Technology. Torch Projects are national initiatives aimed at
improving the quality of education as designated by the Chinese Government. The
first Torch Project was the development of a Digital Library System and the
second Torch Project was the development of a General School Computer Networking
System, which includes the Network Classroom. The Digital Library System is a
computerized database and catalog of educational books and reference materials.
The purpose of the General School Computer Networking System was to introduce
computer networking to Chinese schools to enable them to realize greater
computer efficiency and sharing of computer software, including such programs as
the Web School and Digital Library. The Torch Projects are the predecessors of
the current Total Solution software.

           From 1998 through 2000, Tengtu United had to re-adjust its business
strategy in alignment with broadening objectives of the Ministry of Education in
China. Technology and architecture was maturing to the point where an
e-education/distance learning delivery system was attainable. During this
transitional period from a traditional retail business model to a model based on
newly available technologies, the Company was unable to promptly fulfill its
funding commitment of $6 million to Tengtu United. As a result Tengtu United
downsized its operations and research and development activities in 1998, 1999
and 2000. This lack of funding combined with the low sales for educational
software in China sold through traditional retail channels led to most of the
operating losses reflected in the Company's past financial statements.

           From August 1999 to November 2000, Tengtu China provided
substantially all of the operating and research funds for Tengtu United. Despite
its downsizing, Tengtu United, with the assistance of Tengtu China, continued to
work with the Chinese Ministries of Education and Information Technology to find
ways to enable Chinese schools to incorporate information technology into
teaching. In June, 2000, the Chinese Ministry of Education advised Tengtu China
that the Multimedia Electronic Classroom was the only multimedia electronic
classroom recommended by it. However, the Chinese provincial and local
educational agencies were not, and are not required to buy the Network
Classroom.

           From 1998 through 2001, Tengtu United found that many Chinese schools
lacked computer hardware. Tengtu United therefore began to provide systems
integration services to the Chinese schools, including the sale of hardware and
software of other companies, which results in a far lower profit margin than the
sale of the software components. At the present time, the Tengtu Group is
finding that more schools have their own computer hardware already, or make
arrangements to procure it themselves.



                                      -15-
<PAGE>


           In 1999, substantial numbers of orders for the Total Solution
software were received. However, Tengtu United lacked the infrastructure to be
able to sell and install Tengtu products, and provide the necessary systems
integration services. In 2000 and 2001, Tengtu China began to open branch
offices to address this problem and to complete the backlog of Total Solution
orders. By mid-2001, Tengtu China had opened thirteen branch offices. As of June
30, 2002, there were 21 branch offices which provide software and hardware
installation services as well as support, sales and marketing services.

           In August, 1999, Tengtu United and Tengtu China entered into a
Cooperation Agreement with the Microsoft (China), Ltd. which allowed Tengtu
China to sell and install Microsoft's Windows operating system and Office suite
of programs at a discounted price to the Chinese schools. It also provided that
Microsoft was to provide teacher training and other services to assist in the
sale of the Total Solution software. From that point forward, Tengtu China
installed Microsoft software where necessary and built the price of that
software into the price of the Total Solution.

           On September 20, 2000, Tengtu China entered into an agreement with
NCAVE called "Operation Morning Sun." Under Operation Morning Sun, Tengtu China
was to install the Total Solution along with Microsoft Windows and Office at
discounted prices in 3,000 schools in certain disadvantaged and rural areas and
arrange for teacher training. Operation Morning Sun was completed in early 2001.

                  CURRENT BUSINESS DEVELOPMENTS AND AGREEMENTS

           Based on the success of Operation Morning Sun the Tengtu Group
companies have gone on to cement their relationship with NCAVE and the Ministry
of Education and assist it in fulfilling its goal to advance information
technology in education.

           On February 13, 2001, Tengtu China entered into a second agreement
with NCAVE called Operation Morning Sun Phase II. It provides for additional
Total Solution and Microsoft Windows and Office installations at an additional
10,000 to 15,000 schools at discounted prices. The term of the agreement runs
until December 30, 2002. To date, the Tengtu Group has installed software at a
total of more than 12,000 schools, including Operation Morning Sun Phase I.

           As of August 1, 2002, the Tengtu Group has a backlog of Total
Solution orders numbering approximately 800. While the Tengtu Group currently
has enough software to meet this demand, the backlog is due to a combination of
a shortage of installation capacity sufficient to meet demand and new upgrades
to the Total Solution, the installation of which is given priority over new
installations. Tengtu China has added 21 branch offices since January 2001 to
address backlogged orders and will attempt to continue to add additional
installation capacity. While it is possible that customers will cancel orders
due to a delay in installation, the Tengtu Group has not experienced significant
cancellations as of June 30, 2002.



                                      -16-
<PAGE>


           In March, 2001, Operation Morning Sun was extended by NCAVE to
include the "School to School Link project initiated by the Chinese Ministry of
Education." This is what the Company now refers to as the CBERC and LBERC
projects.

           On April 9, 2001, Tengtu China and TianDi entered into a cooperation
agreement with NCAVE for the establishment of CBERC. Pursuant to the cooperation
agreement, the annual base fee per school is between RMB 1,035 ($125) and RMB
5,000 ($604). There are to be additional charges for special programs and
additional services, if requested by the subscribing school. Non-subscribers are
to be charged a usage fee for each instance it uses any of the materials
distributed by or through CBERC.

           For those schools that already have the Total Solution, Tengtu China
and TianDi are to furnish one free upgrade if it becomes a subscriber to the
CBERC. For those schools which have not yet purchased the Total Solution as part
of Phases I and II of Operation Morning Sun, Tengtu China and TianDi are to
provide the required satellite equipment free of charge if they sign-up and pay
for the first year's annual base subscription fee to permit usage of the CBERC
distributed materials and products. The Company believes that this will set the
stage for these schools to become purchasers of the Total Solution and other
Tengtu products to be used on that platform.

           For schools in disadvantaged regions, which cannot afford any
computer networking equipment (e.g., it has only a television or one computer),
Tengtu China and TianDi are to donate the satellite reception equipment and sell
them 100 CD ROM titles at a reduced cost. The long range goal is to build up the
necessary relationship so that eventually many of these schools will become
purchasers of the Total Solution and subscribers to CBERC.

           The Cooperation Agreement also called for the sale of up to 30,000
sets of educational software.

           On July 22, 2002, the companies of the Tengtu Group entered into a
final cooperation agreement with NCAVE to set up a joint venture company for
CBERC. The agreement provides for the parties to set up a joint venture company
which is to be capitalized with RMB 30 million. The operating term of the joint
venture company is to be 20 years, subject to government approval. The joint
venture company is still in the process of being registered with the Beijing
Administration Bureau For Industry and Commerce and is to be known as Beijing
Hua Xia Bo Xin Educational Software Corporation Ltd. The agreement requires that
the Tengtu Group initially contribute RMB 21 million and NCAVE will contribute
RMB 9 million. Those monies have been contributed. After the initial capital
contribution, the Tengtu Group will be required to contribute and additional RMB
30 million within 12 months after establishment of the joint venture company and
an additional RMB 20 million within 18 months after establishment of the joint
venture company. It is likely that the Company will need to seek outside
financing for some or all of these additional capital contributions and there
can be no assurance that such financing will be available, or that it will be
available on acceptable terms, if available at all. If these capital
contributions are not made, the Tengtu Group may be unable to proceed with the
CBERC project.



                                      -17-
<PAGE>


           For the first two years after the establishment of the joint venture
company, the Tengtu Group will own a 70% interest and NCAVE will own a 30%
interest. After the second year, the Tengtu Group will own a 53% interest and
NCAVE will own a 47% interest. The profits are to be split in accordance with
the ownership percentages. Pursuant to the Company's amended April 25, 2001
agreement with Tengtu China and TianDi, 57% of the Tengtu Group's interest in
CBERC will be held for the benefit of, and is to be assigned to, the Company.

           The cooperation agreement states that it is exclusive in that after
signing the agreement and that neither party may cooperate with a third party in
the same or a similar line of business.

           All major decisions for the joint venture are to be made by the
shareholders and all such decisions are to be unanimous. The joint venture
company will have a board of directors with a total of eight members. The Tengtu
Group will appoint four members and NCAVE will appoint four members. NCAVE will
have the right to appoint the Chairman of the Board of Directors. NCAVE shall
also have the right to appoint the first general manager, who will be the
highest ranking officer of the joint venture company, and the chief financial
officer of the joint venture company.

           On March 6, 2002, the Company entered into a letter of intent with
Tengtu China for a restructuring whereby Tengtu China will convert its 43%
interest in Tengtu United into the Company's common stock. While the letter of
intent required that a definitive agreement be consummated by June 30, 2002,
this has not yet been done. However, the parties are still working towards a
definitive agreement without a deadline.

           Under the terms of the proposed restructuring, the Company would own
100% of Tengtu United, Tengtu China would continue to operate on behalf of
Tengtu United pursuant to a contractual arrangement and Tengtu United would
acquire Tengtu China and its affiliated companies when permitted under Chinese
law.

           In May, 2002, Tengtu China entered into an agreement with Beijing
Stone Lifang Information Technology Co., Ltd., also known as Sina. Sina is a
well known Chinese network application software provider and Internet company.
Pursuant to the contract, Sina is to design and develop the CBERC portal and
provide such services to the portal as installation, commissioning, inspection
testing and training. The Sina-designed portal is to serve as a template which
we will use for each of the LBERC portals.

           In August, 2001, TianDi, entered into a Cooperation Agreement with
the ShanDong Province Ministry of Education to establish a ShanDong LBERC. The
construction of the portal is currently proceeding pursuant to the agreement.

           The Cooperation Agreement states that all elementary and secondary
schools in the ShanDong Province, of which there are approximately 40,000, are
to become part of the LBERC.



                                      -18-
<PAGE>


           Utilization fees under the Cooperation Agreement are to be collected
every six months. The fees to be charged for content transmitted by satellite
and distance learning programs are as follows: RMB 500 ($60) per month for
senior high schools; RMB 300 ($36) per month for junior high schools; and RMB
200 ($24) per month for elementary schools.

           TianDi is required to provide satellite reception equipment,
application software and training, free of charge. In addition, it is to provide
100 CD-ROM titles free of charge. The Cooperation Agreement requires the
Ministry of Education to obtain the required licenses for the educational portal
and repository and satellite broadcasting and other necessary coordination and
facilitation services.

           Initially, 65% of the utilization fees are to be paid to TianDi. Once
TianDi has recouped its total investment in the project through the receipt of
utilization fees, the distribution of such fees may be reviewed and revised.

           The Cooperation Agreement has a 14 year term. Pursuant to the
Cooperation Agreement, TianDi is required to invest capital in the following
phases: RMB 10 million ($1,208,200) by the end of September, 2001; RMB 20
million ($2,416,400) before December 31, 2001; and RMB 20 million ($2,416,400)
plus a 20% increase each year after 2001.

           The initial RMB 10 million capital investment has been made in
ShanDong, but the RMB 20 million due December 31, 2001 has not yet been paid.
Despite this, the parties have proceeded with the agreement and construction of
a central portal for the ShanDong Province, for which the Company believes the
initial capital contribution is sufficient. The parties are currently
negotiating a joint venture agreement, which will supercede the terms of the
Cooperation Agreement. Pursuant to the parties' discussions, additional capital
contributions by TianDi will be necessary and will be used for construction of
portals at the local and county levels in ShanDong, which is not to be done
until the central portal is completed. There can be no assurance, however, that
such additional capital will be available, which could lead to the loss of the
ShanDong LBERC project.

           On September 18, 2001, Tengtu China entered into a Memorandum of
Cooperation with the Shaanxi Provincial Center for Audio/Visual Education for
the establishment of a Shaanxi LBERC. The Memorandum of Cooperation was followed
by a "Framework Agreement" dated December 18, 2001 between the Shaanxi
Provincial Center for Audio/Visual Education and TianDi. Pursuant to that
agreement, the parties set up a joint venture company to which TianDi
contributed RMB 6 million (approximately, $724,920) for a 60% interest and
Shannxi contributed RMB 4 million (approximately $483,280) for a 40% interest.
The Board of Directors of the joint venture company is to have a total of seven
members, with TianDi appointing four members.

           Pursuant to the agreement, TianDi is to provide satellite receiving
equipment and resources management software to Shannxi schools free of charge.
However, any LBERC fees collected from the schools in the first year will all go
to TianDi. In addition, the parties have agreed to share the profits of any
Total Solution installation in Shaanxi, with Shaanxi receiving RMB 5,000
(approximately $604) from each installation.



                                      -19-
<PAGE>


           In December, 2001, TianDi entered into a Cooperation Agreement with
the Center for Audio/Visual Education of the Department of Education for the
Fujian Province for the establishment of a Fujian LBERC. The Fujian LBERC is to
be called to Fujian Provincial Networked Senior Secondary School. It is
anticipated that it will function as a distance learning school serving people
who did not complete secondary school. The Fujian LBERC has not yet moved beyond
the Cooperation Agreement stage because the Center for Audio Visual Education in
Fujian has decided that it wishes to add additional functionalities to its
portal allowing it to better operate as an on-line school. For this, additional
capital will be required which, the Company has been advised, it is currently
procuring.

           On April 18, 2002, TianDi entered into an agreement with a division
of Fangzheng Science & Information Technology Systems, Ltd., also known as
Founder PC. Founder is a Chinese public company supported by Beijing University
and is part of a larger group known as Shanghai Founder Yanzhong Science &
Technology Group Ltd. It is a manufacturer of computer hardware and systems.
Pursuant to the parties' agreement, Founder will give TianDi its lowest prices
for computers to be resold to schools and will pre-install the Electronic
Classroom component of the Total Solution software sold by Tengtu China on the
computers that it sells to schools directly.

           Pursuant to a December 21, 2001 letter of intent, as amended by a
loan agreement on July 22, 2002, the Company acquired the rights to use and
license the following software products owned by Lifelong.com, Inc.: NeuraLab
and Blast Off. Pursuant to the terms of the July 22, 2002 loan agreement, the
Company loaned CDN $55,000 to Lifelong.com, Inc. Pursuant to that agreement, if
the loan is not repaid within six months, or there is a default in the payment
of interest for more than two months, the Company would own all rights to the
software mentioned above.

           Because Lifelong.com, Inc. required additional capital to complete
development of NeuraLab, Orion Capital Incorporated ("Orion"), a company wholly
owned by William O.S. Ballard, Chairman of the Company's Board of Directors,
advanced an additional CDN$145,000 to Lifelong.com, Inc. on August 20, 2002. In
exchange for the advance, Lifelong.com, Inc. agreed to transfer to Orion all of
its right title and interest in NeuraLab, subject to the encumbrance of the July
22, 2002 loan agreement.

           The letter of intent and loan agreement allow the Company to use
the licensed software, to license it to third parties in China without having to
pay a royalty to Lifelong.

           NeuraLab is a courseware development system, which allows for the
design and delivery of Internet educational courseware. BlastOff is a learning
management system which includes an e-learning portal, or website, which can be
customized to make courseware available and a student management system which
allows student registration, course enrollment, credit tracking, testing,
grading and feedback. It is anticipated that these products will be incorporated
into the Total Solution and CBERC and LBERC projects.



                                      -20-
<PAGE>


           On June 6, 2002, the Company closed a loan agreement with Quest
Ventures, Ltd. ("Quest") for a $4,000,000 loan. Pursuant to the terms of the
loan agreement, the Company issued a $4,000,000 promissory note to Quest due
November 30, 2002 with an interest rate of 12%. The note is secured by a general
security agreement, pursuant to which the Company gave Quest a security interest
in all of its assets. The note is also secured by 10,015,812 shares of the
Company's common stock pledged by Orion, a guarantee from Orion limited to the
pledged stock and a personal guarantee from William O.S. Ballard as to
$2,500,000. Orion is an Ontario company owned by Mr. Ballard, a consultant to
the Company and Chairman of the Company's Board of Directors. Neither Mr.
Ballard, nor Orion, received any consideration for their pledge of common stock
or guarantees.

           The Quest loan was, in part, a bridge loan until the closing of a
private placement on June 20, 2002. Pursuant to the terms of the Quest loan
agreement and note, the $2,500,000 personally guaranteed by Mr. Ballard was
repaid to Quest by July 5, 2002, extinguishing the personal guarantee.
$2,250,800 of the $2,500,000 repaid to Quest was raised in a private placement
of Special Warrants which closed on June 20, 2002. The principal balance of
$1,500,000 remains outstanding on the Quest loan.

           With respect to the $1,500,000 outstanding loan balance due to Quest
on November 30, 2002, Tengtu China has committed to pay it when due from monies
collected in China. If Tengtu China cannot collect sufficient receivables, or
otherwise fulfill its commitment, the Company may default under the Quest loan
agreement and will Quest will have the rights granted to it pursuant to a
General Security Agreement under which it has been granted security interests in
all of the Company's assets.

           The Quest loan proceeds were used to fund CBERC start-up and portal
building and development costs.

              THE CHINESE EDUCATIONAL AND DISTANCE LEARNING MARKET

THE CHINESE EDUCATIONAL SYSTEM AND RECENT POLICIES

           While education has always been a driving force in China's culture
and society, it has become a much greater priority with the emergence of a
market economy. Education is now seen as critical to enable China to compete in
the world economy.

           The Chinese central government, through the Ministry of Education,
manages education in China at a macro level, providing policy guidance and basic
educational requirements that must be taught. To a large degree, the Provincial
governments are left to implement basic education through development of
teaching plans to supplement the required coursework from the central Ministry
of Education and the funding of basic education poorer areas. County level
governments have the main responsibilities for implementing basic education on a
day-to-day basis.



                                      -21-
<PAGE>


           In China, primary and secondary education takes 12 years to complete.
Primary education generally lasts 6 years, and junior middle school and senior
middle schools 3 years each. Children generally begin primary school at the age
of 6. In 1986, China passed the Compulsory Education Law of the People's
Republic of China, which mandates that 9 years of compulsory education (grades 1
through 9) is mandatory, and requires that Provincial and local governments take
the necessary steps to ensure that all students receive at least the required 9
years of education. The goal of the Compulsory Education Law, as well as the
subsequent Guidelines for the Reform and Development of Education in China, put
forth by the Chinese State Education Commission in 1993, was to universalize
compulsory education and to eliminate illiteracy among the Chinese people.

           In 1999, the Chinese Government ratified an Action Plan for
Invigorating Education in the 21st Century, which was formulated by the Chinese
Ministry of Education. The plan recognizes the need to make China competitive in
the world economy, particularly through technology. The plan lays out a strategy
to "Invigorate China through Science, Technology and Education" and states:

           "[T]he comprehensive strength and international competitiveness of
           the nation will increasingly depend on the level of education
           development and innovation in science and technology and knowledge
           and educational development will remain a strategic priority."

The plan emphasizes the use of information technology in education stating:

           "The extensive use of modern information technology in education will
           engender profound changes in the educational sector"

           According to the Xinhuanet news agency, in 2001, the Chinese
Government announced that by 2005, information technology will be a compulsory
course in all middle schools as well as in the primary schools in cities and
other well developed areas. It also announced that before 2010, approximately
90% of all primary and middle schools will gain access to the Internet and
broadband net, and that for the remaining 10%, multimedia teaching facilities
and other resources will be made available.

           The plan also places a strong emphasis on modern distance education:

           "Implementing `Modern Distance Education Project' to Build up an Open
           Education Network and a Lifelong Learning System




                                      -22-
<PAGE>


           Modern distance education is a new type of education that has come
           into being with the development of modern information technology. It
           is a major means to build up a lifelong learning system meeting the
           needs of people living in an era of knowledge economy. The "Modern
           Distance Education Project" implemented on the basis of existing
           distance education facilities and making full use of modern
           information technology can effectively take full advantage of
           available educational resources. This is inline with the
           international trend of developing science and technology education.
           In view of the shortage of educational resources, this is a strategic
           step to extend access to education for the large population of our
           country and therefore the development of this important
           infrastructure must be intensified.

           The demonstrative network CERNET and the existing satellite video
           transmission system can serve as our basis of development and it is
           desirable to raise the transmission speed of the backbone network of
           CERNET, and make full use of the telecommunication resources of the
           country to further enlarge the transmission capacity and network size
           of CERNET. We should strive to link all higher education institutions
           offering bachelor's degree programs and over 1000 secondary schools
           with CERNET and make access to network possible at home to 50 ,000
           university faculty members by the year 2000. We should develop an
           integrated information system based on CERNET for online enrollment
           of students admitted to [college], computer-aided management of
           students , record and status , and network service for new graduates
           seeking employment.

           Satellite-relayed television education programs will continue to
           function in modern distance education. However, the existing TV
           education transmission network needs to be reformed by setting up a
           central station, achieving its high-speed connection with CERNET, and
           connecting a part of distance education sites to computer networks.
           It is envisaged by the year 2000 most schools in rural areas will be
           enabled to receive TV educational programs. Excellent teachers and
           modern teaching methods should be involved to ensure the quality of
           TV educational programs in an endeavor to meet the educational needs
           of remote, insular, mountainous, forestry and pastoral areas.

           The outmoded model of distance education software development, which
           suffers from unnecessary duplication of efforts, should be discarded.
           Here the government should exercise its function of macro-level
           regulation and full advantage should be taken of the educational
           resources possessed by schools of various types and levels.
           Competition and the market mechanisms also should have their role in
           software development. All the above-mentioned measures will
           contribute to the development of high-quality educational software.



                                      -23-
<PAGE>


           The Ministry of Education is in charge of the development of our
           modern distance education program and is responsible for organizing
           the formulation and implementation of the national "Plan for
           Developing Modern Distance Education". The strategy for developing
           the "Modern Distance Education Project" is characterized by
           governmental support at the initial stage and self-financed operation
           in the long run. The advanced means of information technology should
           be adopted in light of China's actual conditions to keep upgrading
           modern distance education.

           To create a favorable condition for the development of modern
           distance education, it is desirable for the telecommunications
           companies to give preferential treatment to the operation of the
           modern distance education network by reducing the rates of fees in
           accordance with current international practice. Besides, tariff
           concession should be accorded to imported equipment, including both
           donated and purchased items, in accordance with applicable legal
           provisions."

           The plan also calls for an increase in financing for education. It
contains a commitment by the Ministry of education to raise educational
appropriations in the budgets of the Provinces and that these increases would be
used to cover portions of expenses created by the plan.

HISTORY OF DISTANCE LEARNING IN CHINA

           While Internet based "modern" distance learning is new to China, as
it is to most countries, China has utilized distance learning for many years.
According to materials available from the China Education and Research Network
(CERNET), available at WWW.EDU.CN:

           "Chinese educational technology first started with college
           audio-visual programs in l920's in the School of Agriculture of
           Jinling University. In l922, they used slides and films with oral
           explanations recorded on phonograph to publicize the scientific
           methods for cotton-planting. Audio-visual education was developed in
           various schools at all levels after l949. Radio and television
           universities were successively established in Beijing, Shanghai, and
           Shenyang in l960. Educational technology was greatly developed after
           the implementation of reform and open to the outside world policies.
           The State Council approved to set up the Central Radio and Television
           University (CRTVU) and the Central Audio-visual Center in China in
           1978. After that radio and television universities and audio-visual
           centers were restored or established in provinces, autonomous
           regions, and municipalities directly under the Central Government and
           separate planning cities except Tibet China Educational Television
           Station was set up in 1986 and provincial educational television
           stations were established in Liaoning, Jilin, Shanghai, Jiangsu,
           Fujian, Jiangxi, Ningxia, Xinjiang and other provinces, cities and
           autonomous regions."



                                      -24-
<PAGE>


           Currently China has approximately 44 radio and television
universities, 831 municipal radio and television university branches, and 1699
county level branches. In 1987, China began using satellite transmissions in its
system of television universities. According to CERNET, by 1997, over 10,000
satellite stations had been established in the Chinese education system.

                          MARKETING AND SALES STRATEGY

           The Tengtu Group refers to its marketing strategy as the "Tengtu
Pattern." Under the Tengtu Pattern, the Company's and the Tengtu Group's goal is
to turn customers into cooperative and joint venture partners. To this end,
through Operation Morning Sun, Tengtu China was able to establish a close
working relationship with the Chinese central Ministry of Education and NCAVE as
partners in the sale and distribution of Tengtu products and services by
performing necessary services and receiving approximately 35% of the income
generated. Operation Morning Sun has also allowed the Tengtu Group companies to
work closely with centers for audio/visual education at the Provincial, city and
county levels providing a sales channel that covers almost all of China.

           Once a Tengtu Group company has entered into a cooperation or joint
venture agreement with a central or local government entity for the provision of
products or services, it becomes very difficult for other companies to compete
with the Tengtu Group in the area covered by the agreement because the
agreements tend to be exclusive.

           With respect to the Total Solution software, the Company's and the
Tengtu Group's marketing goals are to supply a product which meets the standards
set for information technology education by the Ministry of Education and to
stimulate demand for additional teaching and learning resources provided on CDs
and through the CBERC and LBERC portals which are supported by the Total
Solution.

           In order to coordinate marketing activities, Tengtu China has set up
a Marketing Division, with a sales force of approximately 210 people, including
technical support personnel. Most of the sales force is comprised of full-time
employees who are paid a salary plus a commission based on sales. The Tengtu
Group currently has 21 branch offices throughout China with at least 3 marketing
employees per branch.

           The Tengtu Group cooperates closely with the local audio/video
education centers in sales of Tengtu products and services. Generally, marketing
activities with respect to the Total Solution are as follows.



                                      -25-
<PAGE>


           The local audio/video education centers send flyers to the schools
advertising Tengtu seminars where Tengtu Group representatives discuss Tengtu
products as well as information technology and information technology based
education in general. Tengtu Group salesmen attend these seminars, at which
there are up to 100 attendees, in order to meet potential purchasers of Tengtu
products. The salesmen follow-up with the schools that attend the pre-sale
seminars and actually visit the schools in order to get orders. Once software
and/or equipment is installed, post-sale training is offered.

           Marketing activities for CBERC and LBERC are as follows. When a
province is signed up by the Tengtu Group for an LBERC, the local Ministry of
Education calls a meeting to advise the schools that they need to subscribe
because it is a Provincial initiative. The Province also will issue an order to
the schools that they must use us to connect to CBERC and LBERC. However,
despite this, there is nothing that can be done to actually force a school to
subscribe. The Tengtu Group also plans to promote CBERC and LBERC at the Tengtu
seminars.

           The Company and the Tengtu Group companies do not advertise in any
trade publications or engage in any other advertising activities.

           In the future, the Company and the Tengtu Group plan to target
parents and students as customers by having branch office personnel recruit
teachers in charge of information technology to sell Tengtu products. There will
be a 5% commission paid to the teacher and 20% to the school. The teachers can
recommend Tengtu products to the school principal, who can then recommend them
to other teachers and students. The branch office personnel may also bring
products to the schools and school districts for demonstrations.

                              INTELLECTUAL PROPERTY

           The Company and the Tengtu Group rely primarily on trade secrets to
protect Tengtu proprietary software products. Tengtu China executes
confidentiality and non-disclosure agreements with all software development
employees and limits access to and distribution of proprietary information and
source code. Of the 14 current software products that Tengtu China has
developed, it has applied for copyright protection in China for seven of them
and plans to copyright the remaining seven.

           The departure of any of the Tengtu Group's management or significant
technical personnel, the breach of their confidentiality and non-disclosure
obligations, or the failure to achieve intellectual property objectives may have
a material adverse effect on the Company's business, financial condition and
results of operations.

           The Company believes that its success depends upon the knowledge and
experience of the Tengtu Group's management and technical personnel and the
ability to market existing products and to develop new products. While Tengtu
China has confidentiality and non-compete agreements with its software
development employees in China, the Company does not know the extent to which
such provisions are enforceable in the Chinese courts. While the Company
believes that steps have been taken to adequately protect its and the Tengtu
Group's proprietary technology, and all appropriate and reasonable legal
measures will be taken to protect it, the use of Tengtu's processes by a
competitor could have a material adverse effect on the Company's business,
financial condition and results of operations.



                                      -26-
<PAGE>


              On September 12, 2001, Tengtu China applied to the Trademark
Office of State Bureau of Industry and Commerce of PRC to register the Tengtu
name as a trademark. No response has yet been received and the application is
still pending. There can be no assurance that the Tengtu name will be permitted
as a registered trademark in China and therefore, other companies may be free to
use the Tengtu name in competing or other businesses which could have a material
adverse effect on the Company's business, financial condition and results of
operations.

                                    LICENSES

           In order to operate in China, the companies of the Tengtu Group use
or possess licenses issued by the Chinese Government. There can be no guarantee
that any of these licenses will be renewed, when up for renewal, or that that
they will not be revoked by the Chinese Government. The loss of any of the
licenses they use or possess may have a material adverse effect on the Company's
business.

           In order to transmit content via satellite for CBERC and LBERCs, a
satellite license is required. NCAVE provides Tengtu China and TianDi with the
use of a satellite license pursuant to their Cooperation Agreement with it.
However, sufficient bandwidth for the necessary transmissions is not always
available through NCAVE. Therefore, TianDi had entered into a cooperation
agreement with Beijing Yu Xin Electronics Company, the holder of a satellite
license which terminates in 2004, that allowed TianDi to use Beijing Yu Xin's
satellite delivery platform to deliver K-12 and adult continuing education
content. The term of the agreement expired on August 30, 2002 and has not been
renewed because Tengtu China and TianDi believe that there are numerous other
satellite providers available with which they can contract, if necessary.
However, if Tengtu China and TianDi are unable to enter into an agreement for
the provision of satellite transmissions when necessary, temporary disruptions
in CBERC transmissions could result.

           Tengtu Electronic Publishing House has an electronic publishing
license for educational materials which is renewed every two years. Its renewal
is currently pending, however, Tengtu Electronic Publishing House may, in the
opinion of the Tengtu Group's Chinese counsel, continue using the license during
this period. The Company believes that Tengtu Electronic Publishing House is
only one of eight companies in China, and the only private company, granted an
electronic publishing license for educational materials. Tengtu China makes use
of the electronic publishing license in order to publish educational content
for CBERC and LBERCs.

           In the event that the electronic publishing license is lost, or is
not renewed, the Tengtu Group would not be able to make retail sales of books,
CD ROM's and tapes in the Chinese retail market unless access to another license
is obtained. Sales of the Total Solution and related products to the PRC K-12
schools would be unaffected. While the Company and the Tengtu Group plan to
expand into the retail market in the future, current activities in the retail
market are minimal.


                                      -27-
<PAGE>


           The loss or failure to obtain a renewal of the electronic publishing
license would also prevent the Tengtu Group from providing educational
information and e-business content through CBERC and LBERCs, and therefore, from
deriving any revenues from CBERC and LBERC user fees for electronically
published content. The Company expects that these user fees will be a major
source of our revenues in the future. However, because the Chinese Ministry of
Education, the Tengtu Group's partner in the establishment of the CBERC, also
has an electronic publishing license, it is likely that it would be permitted to
use that license in the event Tengtu Electronic Publishing House's license is
not renewed.

           In September, 2000, the State Council of China and the Chinese
Ministry of Information Industry issued regulations requiring that all
commercial internet content providers obtain an Internet Content Provider
License. Such a license will be necessary for the Tengtu Group once any of the
CBERC or LBERC web portals are completed because information will be
disseminated over the internet through the portals.

           TianDi is currently in the process of obtaining an Internet Content
Provider License. While the Company believes that TianDi will be able to obtain
the necessary license, if it is unable to do so, or if there is a significant
delay in obtaining the necessary license, the Tengtu Group would be unable to
proceed with the CBERC and LBERC projects. This would materially and adversely
affect the Company's operations, business and revenues because the Company
expects that a major portion of the Company's future revenues will be derived
from these projects.

                                   COMPETITION

           The Company and the Tengtu Group face competition in each business in
which they are engaged. With respect to the educational software and distance
learning market in general, the Company has been advised that IBM has recently
stated that it wants to capture 25% of the education market worldwide. In fact,
IBM has already entered the Chinese market and is offering software similar to
the Video On Demand component of the Total Solution and is involved in
developing resource centers and satellite projects.

           With respect to the sale of educational software, the main
competition comes from Beijing Kelihua (Clever) Co., a Chinese public company,
which currently has a large percentage of the educational software market. The
Company believes Kelihua is currently China's largest K-12 educational software
company, and, like the Tengtu Group, it cooperates closely with the Chinese
Government and has also been in the educational software business longer than
the Tengtu Group.

           Another major competitor is Hangzhou Zheda Huatai Science &
Technology Co. which has also been in business longer than the Tengtu Group and
sells products similar to the Total Solution. The Company believes that there
are also five or six other companies which offer software which has some, but
not all, of the functions of the Total Solution.


                                      -28-
<PAGE>


           With respect to the CBERC project, the Tengtu Group does not face any
significant competition at the current time because NCAVE has chosen the Tengtu
Group as its partner for the project. While other companies may create a similar
portal, it is unlikely that NCAVE will promote its use because the Tengtu
Group's May 22, 2002 agreement with NCAVE states that NCAVE shall not cooperate
with a third party in the same or similar business as the joint venture company.
With respect to LBERCs, the main competition is from Kelihua, Legend Computer
Co., a large public company in China, and Bai Nian Shu Ren, another privately
held Chinese company. There are also several other smaller competitors for the
LBERC projects.

           The CBERC and LBERC projects also face competition from educational
resource providers which provide information in other formats. First, there are
several companies, including Kelihua, which set up local web schools via the
Internet. Because broadband connections are generally not available in China,
the types of multimedia content available is limited.

           Second, several companies provide educational content to schools by
means of a teletype machine. While this is a cheap alternative for many schools,
the educational resources in a text format are not compatible with a computer
network.

           Third, several companies provide educational content via a satellite
network only, which allows for transmission of multimedia materials. The price
for these materials tends to be high, but these companies do not have as much
quality content as is currently available through CBERC.

           With respect to systems integration services, there are numerous
companies engaged in this business, some of which are larger than the Tengtu
Group, and many of which are smaller. The smaller companies have an advantage in
that they can get information more rapidly in their local markets and tend to
have personal relationships with their local customers.

                            RESEARCH AND DEVELOPMENT

           For the fiscal years ended June 30, 2001, 2000 and 1999, Tengtu China
funded all of the Company's and Tengtu United's research and development
activities. In the year ended June 30, 2002, the Company incurred research and
development expenses of approximately $971,111 relating to payments to a
software development company for work on the CBERC portal development and a
payment to another company for educational content.

                 THE COMPANY'S SUBSIDIARIES AND OTHER BUSINESSES

                                   TIC BEIJING

           TIC Beijing is a wholly-owned subsidiary of the Company which
commenced operations in July, 1997. Until 1999, TIC Beijing was engaged in the
business of television post-production and the production of two and three
dimensional cartoons. In 1999, TIC Beijing lost a contract with a Beijing
television movie channel that had accounted for approximately 60% of its
revenues. At that time the movie channel purchased its own post-production
equipment and no longer required TIC Beijing's services.


                                      -29-
<PAGE>


           By 1999, relatively inexpensive hardware and software for
post-production became available making it relatively easy for individuals to
accomplish the same post-production work that TIC Beijing could do, at a lower
cost. Therefore, TIC Beijing was unable to replace the business it had lost.

           At the end of 1999, TIC Beijing closed its cartoon production
department because several cartoon deals had fallen through.

           In August 2000, TIC Beijing rented out its equipment to an
unaffiliated company for thirteen months at a rental amount which covered its
expenses and payroll. When that agreement ended, TIC Beijing rented its
equipment to another unaffiliated company for a one-year period in an amount
sufficient to cover its costs.

           TIC Beijing currently has four employees. One employee manages the
relationship with the lessees of the equipment, one maintains the equipment and
the two other employees are accounting personnel required under Chinese law.
There are no current plans for TIC Beijing to engage in any business other than
leasing its equipment as long as the income is sufficient to at least cover its
expenses and payroll.

                         EDSOFT PLATFORMS (CANADA) LTD.
                        AND EDSOFT PLATFORMS (H.K.) LTD.

           In July, 1999, the Company formed a joint venture company, Edsoft
Canada, in which the Company has a 60.2% interest, to market and sell
educational software tailored to the educational market in Hong Kong through
Edsoft H.K., a Hong Kong company wholly owned by Edsoft Canada. The
shareholders, other than the Company, in Edsoft Canada, are Goodwill
Technologies, Ltd. (17.7%) and Wing Fat Hong, Ltd. (22.1%), both British Virgin
Islands companies.

           In 2002, Edsoft ceased operations and began to wind down its business
which was not profitable and which required extensive additional investment.
Edsoft currently does not have any employees and the Company plans to take steps
to dissolve both Edsoft entities.

                           ICONIX INTERNATIONAL, INC.

           On October 6, 2000, the assets of Iconix International, Inc.
("Iconix"), which was 32% owned by the Company, were sold for CDN $5,000,000.
Iconix developed and marketed network management software for the K-12 market.
The Company was to receive a cash distribution of approximately $580,000 from
the proceeds of the sale of the assets. To date, the Company has received
$219,488 of these proceeds. Collection of the balance is doubtful due to
financial difficulties experienced by the purchaser of the assets.

                              EBIZTENGTU.COM, INC.

           On March 6, 2000, the Company formed ebiztengtu.com, Inc. in Delaware
as a wholly owned subsidiary to focus on Internet related businesses. To date,
it has been inactive.



                                      -30-
<PAGE>


                  FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS

           The Company operates principally in two geographic areas: China and
Canada. The following is a summary of the information by area for the fiscal
years ended June 30, 2002 and June 30, 2001 (rounded to the nearest $000). For
the fiscal year ended June 30, 2000, the Company had minimal sales and incurred
principally administrative expenses.


Net Sales to Unaffiliated Customers:           June 30, 2002      June 30, 2001

           China                               $ 14,255,000        $  5,347,000
           Canada                                         0                   0
           Hong Kong                                      0             219,000
                                               --------------------------------
                                               $ 14,255,000        $  5,566,000
                                               ================================
Income From Operations

           China                               $  3,842,000        $  1,356,000
           Canada                                         0                   0
           Hong Kong                                      0            (108,000)
Other income                                      2,046,000             865,000
General corporate expenses                       (4,310,000)         (2,406,000)
                                               --------------------------------
Net income (loss)                              $  1,578,000        $   (293,000)
                                               ================================

Identifiable Assets

      China                                    $ 26,495,000        $  7,508,000
      Hong Kong                                           0              27,000
General corporate assets                          1,239,000           1,298,000
                                               --------------------------------

Total Assets                                   $ 27,734,000        $  8,833,000
                                               ================================



           There were no inter-area sales in the fiscal year ended June 30,
2002. Identifiable assets are those that are identifiable with operations in
each geographic area. General corporate assets consist primarily of cash, cash
equivalents, fixed assets and prepayments. Sales are attributed to areas based
on location of customers.

ITEM 2.    DESCRIPTION OF PROPERTY

           The Company does not own any significant physical properties. The
Company has a lease for its office space with annual rental payments of CDN
$30,000 per year or approximately $19,175. The Company also paid $304,127 in
rent for office space in China to support its operations in China.



                                      -31-
<PAGE>



ITEM 3.    LEGAL PROCEEDINGS

           On September 12, 2001, Swartz Private Equity, L.L.C. ("Swartz"),
served the Company with a complaint which was filed in state court in Fulton
County, Georgia. This complaint was filed in response to the Company advising
Swartz by letter dated August 28, 2001, that the Company viewed the Investment
Agreement between it and Swartz, along with the accompanying commitment warrants
to be void and unenforceable.

           The complaint alleges that the Company breached the Investment
Agreement and commitment warrants by failing to deliver 250,000 shares upon
Swartz's partial exercise of the commitment warrants. Swartz seeks the following
damages: (1) a $200,000 termination fee under the Investment Agreement; (2) a
cash amount equal to the value of our common stock on the date of partial
exercise of the commitment warrant; (3) damages for late delivery of shares
under the commitment warrant; (4)monetary damages for lost market opportunity
equal to the highest value of our common stock during the term of the breach;
(5) a replacement warrant for 850,000 shares of our common stock; (6) attorney's
fees; (7) additional warrants under a Warrant Anti-Dilution Agreement; and (8)
such other and further relief as the court deems just and proper.

           The Company believes it has meritorious defenses to the action and
made a motion to dismiss Swartz's complaint in October 2001. That motion was
denied on September 30, 2002 and the action is proceeding.

           In January, 2002, the Company was served with a summons and verified
complaint which was filed in the United States District Court for the Southern
District of New York. The plaintiff in the action is Hecht & Associates, P.C.,
the Company's former counsel, and the Company is the defendant. The verified
complaint alleges that Hecht & Associates, P.C. was not paid for certain legal
services provided to the Company and seeks a judgment in the amount of
$133,334.12, plus interest at the rate of 1.25%, the costs of the action and
such other relief as the court deems proper. The Company believes that it has
meritorious defenses to the claims in the verified complaint and have moved to
dismiss the complaint in its entirety. That motion is currently pending before
the court.

         In January, 2002, the Company was served with a verified complaint
which was filed in the Supreme Court of the State of New York, County of New
York. The plaintiff in the action is Charles J. Hecht, a principal of Hecht &
Associates, P.C. and one of the Company's shareholders, and the Company is the
defendant. The verified complaint alleges that Mr. Hecht submitted a check in
the amount of the exercise price of certain stock options granted to Hecht &
Associates, P.C. but that the stock was not delivered.

           Plaintiff seeks a mandatory injunction requiring delivery to
plaintiff of 114,166 shares of our common stock. Plaintiff further seeks (1)
damages in the sum of $51,941.34, (2) additional damages for diminution in the
value of the common stock from the time it should have been delivered and (3)
punitive damages. The Company believes it has meritorious defenses to the claims
in the verified complaint and has moved to dismiss the complaint in its
entirety. That motion is currently pending before the court.


                                      -32-
<PAGE>


           On August 30, 2002, the Company was served with a summons and
complaint filed in the Superior Court for the State of California for the County
of Alameda. The plaintiff in the action is VIP Tone, Inc. ("VIP"), a company
with which the Company had an agreement to provide services relating to the
development of the China Broadband educational Resources Centre. The defendant
is the Company.

           The complaint alleges that VIP and the Company entered into their
agreement on November 16, 2001 and that the Company attempted to terminate the
agreement on January 23, 2002. The complaint further alleges that the
termination was ineffective and therefore, continuing payments are due to it.

           VIP has alleged causes of action for breach of contract, fraudulent
misrepresentation, fraud/promise without intent to perform, breach of implied
covenant of good faith and fair dealing, promissory estoppel and quantum meruit.
VIP seeks damages, in an amount to be proved at trial, which it alleges exceed
$1,784,700, plus punitive damages and attorney's fees.

           The Company believes that it has meritorious defenses to the claims
in the complaint and plans to vigorously defend the action.

           On or about September 25, 2002 an arbitration was commenced against
the Company at the American Arbitration Association by Pak Kwan Cheung
("Cheung") and Comadex Industries, Ltd. ("Comadex") pursuant to a Consultant
Agreement by an among Chaung, Comadex and the Company dated as of October 15,
1999. The Statement of Claim filed in the arbitration alleges that Chaung and
Comadex performed their obligations under the Consultant Agreement, that Cheung
was terminated without cause and that Chaung and Comadex are entitled to the
benefits and entitlements under the Consultant Agreement.

           The Statement of Claim seeks the following relief: (1) a declaration
that Comadex is the beneficial owner of 3,000,000 shares it already holds which
were issued to it in March, 2000; (2) an order for the payment of base
compensation of $620,000; (3) an order directing that the Company issue Comadex
an option to purchase 1,000,000 shares of common stock at $.60 per share; (4) an
order directing the payment of incentive compensation equal to 1% of all capital
raised in excess of $3,000,000 by Cheung which is claimed by Cheung and Comadex
to be $155,646.58; (5) an order for the payment of incentive compensation equal
to 1% of the Company's pre-tax net profits; (6) a declaration that Cheung and/or
Comadex is entitled to issuance by the Company of 300,000 options which have
already been granted to him; (7) an order for payment of Cheung's and Comadex's
costs and expenses, including attorney's fees; (8) pre-judgment and
post-judgment interest; and (9) any additional relief to which Cheung and
Comadex may be entitled pursuant to the Consultant Agreement or at law.



                                      -33-
<PAGE>


           Except as set forth above, neither the Company, nor its subsidiaries
are currently a party to any material pending legal proceeding, nor does the
Company know of any proceeding that any governmental authority may be
contemplating against it.

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

           No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders.

                                     PART II

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

           The principal market where the Company's common stock is traded is
the NASDAQ over-the-counter Bulletin Board. The high and low bid prices of the
Company's common stock for each quarter within the period July 1, 1999 through
June 30, 2002 were:

                                       HIGH/ASK              LOW/BID

3rd Quarter 1999 -                      0.2500                0.1250
4th Quarter 1999 -                      4.1875                0.2500
1st Quarter 2000 -                      4.8750                1.8750
2nd Quarter 2000                        2.6875                0.8750
3rd Quarter 2000 -                      1.7969                0.5625
4th Quarter 2000 -                      0.9688                0.2188
1st Quarter 2001 -                      0.5312                0.2188
2nd Quarter 2001 -                      1.3600                0.2500
3rd Quarter 2001 -                      1.8800                0.7700
4th Quarter 2001 -                      1.5500                0.7900
1st Quarter 2002 -                      1.2400                0.5300
2nd Quarter 2002 -                      0.7400                0.4100

           The high and low bid prices for the Company's common stock on
September 30, 2002 were: $.39 and $.37.

           The above over-the-counter market high and low bid quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commissions and may
not necessarily represent actual transactions. These high and low bid quotation
were obtained from Yahoo! Finance.



                                      -34-
<PAGE>


           Because the trading price of the Company's common stock is less than
$5.00 per share, trading in the Company's common stock is subject to the
requirements of Rule 15g-9 under the Securities Exchange Act of 1934, as
amended. Under this rule, broker-dealers who recommend such low-priced
securities to persons other than established customers and accredited investors
must satisfy special sales practice requirements, including a requirement that
they make an individualized written suitability determination for the purchase
and receive the purchaser's written consent prior to the transaction. The
Company's common stock is also subject to the Securities Enforcement Remedies
and Penny Stock Reform Act of 1990, which requires additional disclosure in
connection with any trades involving a stock defined as a "penny stock"
(generally, any equity security not traded on an exchange or quoted on Nasdaq
that has a market price of less than $5.00 per share, subject to certain
exceptions), including the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and the associated risks.
Such requirements could severely limit the market liquidity of the common stock
and the ability of purchasers in this offering to sell their securities in the
market.

           The Company has one class of common equity held by approximately
2,700 holders of record. No dividends have been declared during the last two
fiscal years.

           There are no restrictions which affect or are likely to affect the
Company's ability to pay dividends in the future. However, the Company does not
expect to pay dividends in the foreseeable future.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

           The following table contains information regarding securities
authorized and available for issuance under the Company's equity compensation
plans for employees, Officers, Directors and consultants. Each of the options
listed were issued under the Company's 1997 or 1999 Stock Option Incentive
Plans, or pursuant to an individual agreement. The Company's 1997 and 1999 Stock
Option Plans have expired and therefore, no further option issuances will be
made from those plans. The Company has no current stock option incentive plan.
<TABLE>
<CAPTION>


                      EQUITY COMPENSATION PLAN INFORMATION

          Plan category     Number of securities to be      Weighted average exercise     Number of securities
                              issued upon exercise of         price of outstanding       remaining available for
                               outstanding options,           options, warrants and          future issuance
                                warrants and rights                  rights
----------------------------------------------------------------------------------------------------------------
                                             (a)                      (b)                        (c)

<S>                                     <C>                      <C>                            <C>
Equity compensation plans
  approved by security                    1,760,000                   $.218                       0
  holders (1)

Equity compensation plans
      not approved by                     2,187,382                   $.551                       0
      security holders (2)

Total                                     3,947,382                   $.403                       0

<FN>

(1)    Represents options to purchase the Company's common stock issued under
       our 1997 and 1999 Stock Option Incentive Plans.

(2)    Represents Warrants granted to former investor relations firms.
</FN>
</TABLE>



                                      -35-
<PAGE>


                     RECENT SALES OF UNREGISTERED SECURITIES

           The Company sold the following unregistered securities during the
fiscal quarter ended June 30, 2002, and the subsequent period through the date
of filing of this report, in reliance upon exemptions from registration provided
by Section 4(2) of the Securities Act and Regulation S promulgated thereunder.

           Pursuant to a May 15, 2002 agreement, the Company issued 203,011
shares of common stock to Ng Sau Hang in connection with the winding down of the
business of the Company's majority owned subsidiary, Edsoft Platforms. Ms. Hang
was granted registration rights with respect to the common stock. The issuance
of the common stock was accomplished in reliance upon Regulation S under the
Securities Act. The facts relied upon for the exemption are that Ms. Hang is a
non-U.S. person as defined under Regulation S.

           Pursuant to a May 15, 2002 stock purchase agreement, the Company sold
200,000 shares of common stock to Ng Sau Hang for $100,000. The sale included
100,000 attached warrants to purchase common stock for $.75 per share. Ms. Hang
was granted registration rights with respect to the common stock and the common
stock into which the warrants are exercisable. The issuance of the common stock
was accomplished in reliance upon Regulation S under the Securities Act. The
facts relied upon for the exemption are that Ms. Hang is a non-U.S. person as
defined under Regulation S.

           Pursuant to a settlement agreement with Gregory Mavroudis and 1334945
Ontario Limited, entered into on May 22, 2002, the Company issued 250,000 shares
of common stock to 1334945 Ontario Limited. 1334945 Ontario Limited was granted
registration rights with respect to the common stock. The issuance of the common
stock was accomplished in reliance upon Regulation S under the Securities Act.
The facts relied upon for the exemption are that 1334945 Ontario Limited is a
non-U.S. person as defined under Regulation S. Mr. Mavroudis had been a
consultant to the Company pursuant to an agreement with his company, 1334945
Ontario Limited.

           In connection with a bridge loan to the Company by Quest Ventures,
Ltd. that closed on June 6, 2002, the Company issued 375,000 shares of common
stock to Quest. Quest was granted registration rights with respect to the common
stock. The issuance of the common stock was accomplished in reliance upon
Regulation S under the Securities Act. The facts relied upon for the exemption
are that Quest is a non-U.S. person as defined under Regulation S.


                                      -36-
<PAGE>


           On June 20, 2002, the Company sold 5,982,664 Special Warrants to
non-U.S. investors in a private placement for $2,991,332. The special warrants
entitle the holders to acquire, for no additional consideration, up to 6,580,930
shares of our common stock and warrants to acquire an additional 2,991,332
shares of the Company's common stock.

           The Special Warrants were issued on June 20, 2002 in a private
placement transaction pursuant to an agency agreement between the Company and
Dundee Securities Corporation. In the private placement transaction, the Company
issued an aggregate of 2,991,332 Units consisting of two Special Warrants at a
price of $1.00 per Unit for gross proceeds of $2,991,332. Each outstanding
special warrant entitles the holder to receive, without the payment of
additional consideration, one share of the Company's common stock and one-half
of one share warrant ("Purchase Warrants"). Each whole share warrant entitles
the holder thereof to purchase one additional share of common stock at a price
of $.75.

           Each Special Warrant may be converted into one share of common stock
and one-half of one share warrant at any time prior to 5:00 p.m. (Toronto time)
on the date that is the earlier to occur of: (a) the fifth business day after
the later of: (i) the date a receipt has been issued for the final prospectus
qualifying the distribution of the common stock and share warrants by the
Ontario Securities Commission; and (ii) the date the SEC declares effective a
registration statement on form S-1 for the common stock; and (b) June 20, 2003.
In the event that the Special Warrants are not converted prior to the above
dates, they will be deemed converted without any further action taken by the
holders.

           The issuance of the Special Warrants was conducted pursuant to
Regulation S under the Securities Act. Each of the Special Warrant purchasers is
a non-U.S. person as defined under Regulation S.

           In the event that a registration statement filed with the SEC is not
declared effective, and the Company has not received a final receipt from the
Ontario Securities Commission by November 18, 2002 (the "First Qualification
Deadline"), the conversion rate for each Special Warrant shall increase such
that each Special Warrant will convert into 1.1 shares of common stock and .55
share warrants in lieu of one share of common stock and one-half of a share
warrants. In the event that a registration statement is not filed with the SEC
and declared effective, within 90 days of the First Qualification Deadline,
covering the resale of the Purchase Warrants and shares into which they are
exercisable, each Purchase Warrant shall be exercisable into 1.1 shares of
common stock.

           In the Special Warrant transaction, the Company paid the agent a cash
commission of $199,200 and reimbursed the agent's expenses. 541,332 of the
Special Warrants were sold to Orion Capital Incorporated ("Orion"), a company
wholly owned by the Chairman of the Company's Board of Directors, William O.S.
Ballard.



                                      -37-
<PAGE>


           Pursuant to a July 30, 2002 amended stock purchase agreement, the
Company sold 1,000,000 shares of common stock and 500,000 warrants to FanQi
Zhang. Mr. Zhang was granted registration rights with respect to the common
stock and the common stock into which the warrants are exercisable. The warrants
are exercisable until a date that is one year after a registration statement is
declared effective including the shares of common stock into which the warrants
are exercisable. The issuance of the common stock was accomplished in reliance
upon Regulation S under the Securities Act. The facts relied upon for the
exemption are that Mr. Zhang is a non-U.S. person as defined under Regulation S.

           Mr. Zhang is a member of the Company's Board of Directors and is the
Chief Executive Officer and principal owner of our joint venture partner, Tengtu
China.

           Under a contract between the Company and Orion, a significant
shareholder of the Company, William Ballard provides consulting services to the
Company. As compensation for these services, the Company issues Orion 20,834
shares of Common Stock each month. During the quarter ended June 30, 2002,
62,502 shares of Common Stock were earned by Orion under the agreement. The
shares issued to Orion are not registered and are issued in reliance upon an
exemption from registration provided by Section 4(2) under the Securities Act of
1933, as amended . The bases for the exemption are that Orion is an accredited
and sophisticated investor, and Mr. Ballard, an Orion principal, is also
Chairman of the Company's Board of Directors and therefore familiar with all of
the Company's operations and functions.

ITEM 6.    SELECTED FINANCIAL DATA

           The following is selected summary financial information for the past
five years of the Company's operations presented on a consolidated basis.
<TABLE>
<CAPTION>

                                                            For the fiscal year ended June 30,
                                                            ----------------------------------
                                         2002           2001           2000           1999          1998
                                         ----           ----           ----           ----          ----
<S>                                   <C>           <C>            <C>            <C>            <C>
Total Assets                          $27,734,300   $ 8,833,335    $ 2,407,842    $ 1,911,912    $ 2,871,926
Total Sales                            14,255,417     5,566,039        358,026        624,121      3,223,170
Income (Loss) from Continuing           1,578,108      (293,169)    (4,701,285)    (1,886,399)    (4,402,014)
Operations
Income (Loss) from Continuing               0.032         (.012)         (.225)         (.100)         (.234)
Operations per Common Share
Dividends Declared per Common Share             0             0              0              0              0
</TABLE>



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

OVERVIEW

           The Company's business focuses on K-12 e-education in China which has
approximately 800,000 schools and 250 million students. Through the Company's
joint venture and joint venture partner, and, along with other companies, the
Company works in cooperation with the Chinese central and Provincial Ministries
of Education to implement an information technology solution for the Chinese
schools to fulfill China's goal of making IT-based education and distance
learning available to 90% of K-12 schools by 2010. Specifically, the Company is
engaged in the following businesses:



                                      -38-
<PAGE>


           o sales of educational software to Chinese K-12 schools;

           o development of CBERC along with NCAVE. CBERC is an electronic
resource center and portal containing educational materials that are transmitted
to schools which download them daily via satellite and which will be accessible
by Internet;

           o development of LBERC, along with several Chinese Provinces. The
LBERCs will connect with CBERC and, in addition, will contain their own
educational and other materials as mandated by the Provincial Ministries of
Education. Like CBERC, content will be transmitted to schools daily via
satellite and will also be available via Internet;

           o sales of computer hardware and systems integration services to
Chinese schools; and

           o teacher training in the use of information technology in education.

           All of Tengtu United's business with any Chinese government entity is
conducted through the Company's joint venture partner, Tengtu China. The Total
Solution platform makes available via Intranet or Internet a comprehensive set
of tools for computerized class instruction, on-line learning, school office
administration, and management of educational and multimedia resources. The
Total Solution platform is designed, in co-operation with NCAVE, to accommodate
broadband Internet connections via satellite and cable and is an ideal tool to
support distance learning.

           The Total Solution platforms are being installed under Operation
Morning Sun, a project awarded to Tengtu China by the Chinese Ministry of
Education and through contracts with provincial education ministries.

           In April, 2001 Tengtu China entered into a cooperation agreement with
the Ministry of Education under which Tengtu United agreed to be the Ministry's
operating and development partner for its (1) distance learning network in China
and (2) CBERC. A similar initiative has been undertaken with provinces such as
Shandong, Sichuan, Shaanxi and Fujian for the development of LBERCs.



                                      -39-
<PAGE>


           In the fiscal year ended June 30, 2001 Tengtu China launched
Operation Morning Sun in over 20 provinces, installing 3,017 Total Solution
platforms in Phase I of the project. Phase II of Operation Morning Sun was
launched in July 2001, 7292 Total Solution platforms were installed in the
fiscal year ended June 30, 2002. In addition, 3,245 sets of satellite equipment
and 1,748 packages of educational CD-ROM's were sold to schools.

           Tengtu China operates the Chinese joint venture: paying operating
expenses, collecting receivables and remitting net operating profits to Tengtu
United. The amount of working capital required to carry out Operation Morning
Sun has been higher than anticipated due to slow collections of accounts
receivable by Tengtu China. This in turn has caused delays in Tengtu China's
payment of net operating profits to Tengtu United.

           The Company believes that payment processes slower than those
experienced in North America are not unusual in China, especially when dealing
with a number of levels of government; however, the Company and Tengtu China are
taking steps in conjunction with the Ministry of Education to reduce the payment
cycle. The Company and its joint venture partner are also investigating other
Chinese government programs operated in conjunction with Chinese banks that
would allow for faster collection of accounts receivable.

           As Operation Morning Sun is expanded, Provincial Ministry of
Education contracts are signed and the CBERC project is launched, the Company
anticipates that Tengtu United will benefit from a number of revenue sources,
including:

           o        E-education application software and equipment. Many of the
                    K-12 schools in China will require e-education application
                    software such as the Total Solution platform.

           o        CBERC and LBERC connectivity fees for K-12 schools with
                    e-education curriculum content and other learning resources.

           o        User fees for students studying outside of the K-12 school
                    system.

           The Company's future success is dependent on its ability to raise
additional capital to fund its new projects such as CBERC and LBERCs. Currently,
the Company has the following capital commitments:

           o        The total capital requirement for the CBERC joint venture is
                    RMB 71 million, or approximately $8,576,800, of which RMB 21
                    million, or approximately $2,536,800, has been funded. An
                    additional RMB 30 million, or approximately $3,624,000, is
                    required within 12 months after the establishment of the
                    CBERC joint venture Company, which the Company believes will
                    occur in October, 2002, and RMB 20 million, or approximately
                    $2,416,000, within 18 months after the establishment of the
                    CBERC joint venture company. The total outstanding capital
                    commitment to the CBERC joint venture is therefore currently
                    RMB 50 million, or approximately $6,040,000.


                                      -40-
<PAGE>


           o        The total capital requirement for the ShanDong LBERC joint
                    venture is RMB 56 million, or approximately $6,764,800, of
                    which RMB 10 million, or approximately $1,208,000, has been
                    made through Tengtu China. An RMB 20 million, or
                    approximately $2,416,000, capital investment which was due
                    by December 31, 2001 has not yet been made. Despite this,
                    Tengtu China and the joint venture partner of ShanDong LBERC
                    have proceeded with the agreement and construction of a
                    central portal for the ShanDong Province. The total
                    outstanding capital commitment to the ShanDong LBERC joint
                    venture is currently RMB 46 million, or approximately
                    $5,556,800.

           o        The capital commitment to Sichuan LBERC joint venture is RMB
                    6 million, or approximately $724,800. The Sichuan LBERC has
                    not yet been established under Chinese law and the timing of
                    the required capital contribution has not yet been
                    determined.

           o        The capital commitment to Fujian LBERC joint venture is RMB
                    8 million, or approximately $966,400. The Fujian LBERC has
                    not yet been established under Chinese law and the timing of
                    the required capital contribution has not yet been
                    determined.

           The Company currently does not have adequate funds available to
fulfill all capital commitments. The Company's ability to fulfill these capital
commitments is dependent upon (i) whether Tengtu China can collect sufficient
funds from accounts receivable in China and/or (ii) whether the Company will be
able to raise additional financing. There can be no assurance that such
financing will be available, or that it will be available on acceptable terms,
if available at all. The Company is currently pursuing a number of financing
initiatives. However, if the Company is unsuccessful, the Company may have to
alter its business plan accordingly.

LIQUIDITY AND CAPITAL RESOURCES FOR THE FISCAL YEARS ENDED JUNE 30, 2002, 2001
AND 2000

Fiscal Year Ended June 30, 2002
-------------------------------

CHANGES IN CASH FLOW

           For the fiscal year ended June 30, 2002, net cash used by operating
activities totaled $3,435,798. The net income for the year, $1,578,108, includes
non-cash gains on loan forgiveness of $236,559, plus non-cash charges for
depreciation and amortization of $357,512, non-cash compensation expenses
associated with the issuance of common shares for services and fees of $518,615,
non-cash interest expense of $86,555 related to convertible debentures, and
impaired assets write-off of $246,732, resulting in a net cash increase of
$2,550,963.

           This increase in cash was offset by the increase of $6,155,603 in due
from Tengtu China for the installation of Total Solution Platforms and the sales
of other Tengtu products. The increase in prepaid expense related to advances to
a third party for software products, which negatively impacted operating cash
flow by $516,876. The decreases in accounts receivable, inventories, notes
receivables, and other receivables resulted in a favorable change of $152,846 to
operating cash flow.



                                      -41-
<PAGE>


           In order to conserve working capital, the Company continued to defer
part of its consulting fees and management compensation which contributed to the
increase of due to related party consultants by $387,496. The increase of
$133,209 in accounts payable and $28,822 in accrued expenses are related to
normal operating activities.

           The net change from investing activities was a decrease of
$13,094,349 in cash. The Company advanced $9,059,902 (RMB 74,999,185) to Tengtu
China, of which $1,208,000 (RMB 10,000,000) was invested in the ShanDong LBERC
and $724,800 (RMB 6,000,000) was invested in the Shaanxi LBERC as a long term
investment, $2,536,800 (RMB 21,000,000) was invested to CBERC as a long term
investment, and the balance was used to provide the working capital for
Operation Morning Sun and other provincial LBERC projects. The Company also
deposited $4,000,000 with Min Sheng Bank (of China) as collateral for a
long-term loan with that bank (see Financial Statement Note 6).

           The net cash flow generated from financing activities totaled
$16,425,160. On June 6, 2002, the Company closed a $4,000,000 loan agreement
with Quest Ventures, Ltd. ("Quest"). Pursuant to the terms of the loan
agreement, the Company issued a $4,000,000 promissory note to Quest due November
30, 2002 with an interest rate of 12%. The note is secured by a general security
agreement, pursuant to which the Company gave Quest a security interest in all
of its assets. The note is also secured by 10,015,812 shares of the Company's
common stock pledged by Orion, a guarantee from Orion limited to the pledged
stock and a personal guarantee from William O.S. Ballard as to $2,500,000. The
Quest loan was, in part, a bridge loan until the closing of a private placement
on June 20, 2002. Pursuant to the terms of the loan agreement and note, the
$2,500,000 personally guaranteed by Mr. Ballard was repaid to Quest by July 5,
2002 extinguishing the personal guarantee. $2,250,800 of the $2,500,000 repaid
to Quest was raised in the Company's private placement of Special Warrants which
closed on June 20, 2002.

           The principal balance of $1,749,200 remained outstanding on the Quest
loan as of June 30, 2002. On July 3, 2002, an additional $249,200 was repaid to
Quest leaving a principal balance of $1,500,000. The Quest loan proceeds were
used to fund CBERC start-up and portal building and development costs.

           With respect to the $1,500,000 outstanding loan balance due to Quest
on November 30, 2002, Tengtu China has committed to pay it when due from monies
collected in China. If Tengtu China cannot collect sufficient receivables or
otherwise fulfill its commitment, the Company may default under the Quest loan
agreement and will Quest may have the rights granted to it pursuant to a
General Security Agreement under which it has been granted security interests in
all of the Company's assets.


                                      -42-
<PAGE>


           The Company borrowed, on a short term basis, $675,560 from Orion for
general corporate administrative use. $541,332 of the $675,560 was converted to
Special Warrants on June 20, 2002. The Company expects to issue a convertible
note to Orion for the balance of the loan, $134,228.

           The Company borrowed approximately $3,745,000 in Chinese renminbi
from Min Sheng Bank (of China) on June 26, 2002. This line of credit bears
interest at 5.58% and is payable in full on June 26, 2007. This line of credit
is fully secured by $4,000,000 in restricted U.S. dollar denominated deposits at
the Min Sheng Bank (of China). The funds were used to fund CBERC start-up and
portal building and development costs.

           In the fiscal year ended June 30, 2002, the total cash received from
shares and options issued and exercised was $10,891,082.

           Between August 1, 2001 and June 30, 2002, the Company sold a total of
7,872,113 shares of its common stock and 1,066,667 attached warrants for
$7,832,600 through series of private placements. As part of the private
placements, the Company sold 1,300,000 shares of common stock and 216,667
attached warrants with the exercise price of $1.20 per share for $1,300,000 on
October 31, 2001 and 700,000 shares of common stock and 116,667 attached
warrants with the exercise price of $1.20 per share for $700,000 on November 15,
2002 to Orion. Orion is a Canadian corporation that is wholly owned by the
Chairman of our Board of Directors, William O.S. Ballard. Orion also provides
consulting services to us.


           The total cash received from warrants and options issued and
exercised was $3,058,482.

           On June 20, 2002, the Company sold 5,982,664 Special Warrants in a
private placement for gross proceeds of $2,991,332. In the Special Warrant
transaction, the Company paid the agent a cash commission of $199,200 and
reimbursed the agent's expenses, resulting in net proceeds of $2,792,132.
541,332 of the Special Warrants were sold to Orion, a company wholly owned by
the Chairman of the Company's Board of Directors, William O.S. Ballard. The
Special Warrants entitle the holders to acquire, for no additional
consideration, up to 6,580,930 shares of our common stock and warrants to
acquire an additional 2,991,332 shares of common stock at $.75 per share.

           50,000 previously issued stock warrants were exercised at $0.218 per
common share for $10,900. 100,000 warrants were also exercised by Swartz Private
Equity, LLC at $0.285 per common share for $28,500. In addition, $16,350 was
received to exercise 75,000 previously issued options, but shares have not been
issued as of June 30, 2002. On June 12, 2002, the Company received $250,000 from
Fan Qi Zhang pursuant to a stock purchase agreement. Subsequently, the Company
received another $250,000 from Mr. Zhang in July 2002. Pursuant to a July 30,
2002 amended stock purchase agreement, the Company sold 1,000,000 shares of
common stock to Mr. Zhang for the $500,000 received. The sale included 500,000
attached warrants to purchase common stock at $.75 per share. Mr. Zhang is a
member of the Company's Board of Directors and is the Chief Executive Officer
and principal owner of the Company's joint venture partner.


                                      -43-
<PAGE>


           In addition to shares issued for cash, the non-cash transactions
involving issuing common shares are described below:

           Pursuant to a May 15, 2002 agreement, the Company issued 213,011
shares of common stock to Ng Sau Hang in connection with the winding down of the
business of the Company's subsidiary, Edsoft Platforms. Of the
total shares issued, 43,011 shares were issued as full payment of the loan and
the Company recorded a $236,559 gain on the forgiveness of debt, 120,000 shares
were issued in payment of the accrued interest of $60,000 on the loan, and
50,000 shares were issued for the consulting services for which the cost was
recorded in 2001.

           In connection with a bridge loan to the Company by Quest that closed
on June 6, 2002, the Company issued 375,000 shares of common stock to Quest,
which resulted in a charge of $187,500 for a financing expense that was
reflected in the cash flow from operating activities.

           Pursuant to a contract between the Company and Orion, William Ballard
provides consulting services to the Company. As compensation for the services,
the Company agreed to issue Orion 20,834 shares of the Company's common stock
each month. During the fiscal year ended June 30, 2002, 250,008 shares were
issued to Orion and a charge to compensation expense of $231,257 was recorded
and reflected in the cash flow from operating activities.

           Subsequent to the year-end, the Company issued 250,000 shares of
common stock to 1334945 Ontario Limited on July 18, 2002 pursuant to a
settlement agreement with Gregory Mavroudis and 1334945 Ontario Limited.

           The net cash flow generated from financing activities was less than
the funds used to support Operation Morning Sun, the CBERC and LBERC projects,
and other corporate activities by $104,988. After taking into consideration a
negative foreign exchange effect of $6,574, cash decreased by $111,561 to
$914,838.

           Pursuant to a $1,500,000 convertible debenture issued to Top Eagle
Holdings, Ltd. ("Top Eagle") in December, 1999 and due December, 2003, the
Company makes quarterly interest payments at a rate equal to the best lending
rate of The Hong Kong and Shanghai Banking Corporation plus two percent
(approximately 7% and 9% at June 30, 2002 and 2001, respectively). The total of
those payments for the fiscal year ended June 30, 2002 was $115,969. During the
fiscal quarter ended March 31, 2002, the Company defaulted on its quarterly
interest payment to Top Eagle which was due on December 15, 2001. While the
amount due was subsequently paid, the failure to timely pay interest is an
"Event of Default" which gives Top Eagle the right, at its option, and in its
sole discretion, to consider the Debenture immediately due and payable, without
presentment, demand, protest or notice of any kind. Upon an Event of Default,
the amounts due under the Debenture may be paid in cash, or stock, at the
prevailing conversion price set forth in the Debenture.


                                      -44-
<PAGE>


           To date, Top Eagle has not exercised its option to declare the
Debenture immediately due and payable and, in fact, has advised the Company's
auditors that there is no current default with respect to the Debenture.


CONTRACTUAL OBLIGATIONS

           The following table summarizes the Company's contractual obligations
at June 30, 2002.
<TABLE>
<CAPTION>

Contractual Obligations                                       Payments Due by Period
-----------------------                                       ----------------------
                           Total        Less than 1 year    1 - 3 years       4 - 5 years      After 5 years
                           -----        ----------------    -----------       -----------      -------------
<S>                    <C>               <C>                 <C>               <C>
Short-term loans       $1,883,428        $1,883,428 (1)
Long-term loans        $5,244,800                            $1,500,000 (2)   $3,744,800 (3)
Total Contractual      $7,128,228        $1,883,428          $1,500,000       $3,744,800
Obligations

<FN>

(1) The short-term loan consists of $1,749,200 from Quest and $134,228 from
Orion. $249,200 of the loan from Quest Ventures was paid on July 3, 2002. The
remainder of $1,500,000 is due November 30, 2002. The Company's expects to issue
a convertible note to Orion for the balance of its loan, $134,228. (see
Financial Statements Notes 5)

(2) The $1,500,000 convertible debenture issued to Top Eagle Holdings, Ltd. is
due December 15, 2003.

(3) The $3,744,800 long-term loan secured by $4,000,000 deposited in the same
bank, Min Sheng Bank, is due June 26, 2007. (see Financial Statements Notes 6)
</FN>
</TABLE>


Fiscal Year Ended June 30, 2001
-------------------------------

           For the fiscal year ended June 30, 2001, net cash used by operating
activities totaled $5,967,658.

           The net loss for the year, $293,169, included such non-cash items as
depreciation and amortization ($286,468), non-cash compensation expenses
associated with the issue of common shares for services ($987,846), and non-cash
interest expense related to convertible debentures ($79,695), resulting in a net
cash increase of $1,060,840.


                                      -45-
<PAGE>


           This increase in cash was offset by increases in operating assets
associated with the completion of Phase I and start of Phase II of Operation
Morning Sun. Operation Morning Sun required $5,160,337 in working capital to
complete the installation of the 3,017 Total Solution platforms and prepare for
the start of Phase II of the project. The accounts receivable balance related to
the installation of the Phase I platforms was the most significant component of
this working capital requirement at $3,895,063. In addition to the working
capital required for Operation Morning Sun, the Company advanced $1,000,000 to
start work on the CBERC project.

           Prepaid expenses increased due to the recording of a prepaid
financing expense. Other receivables increased because of recoverable taxes paid
by Tengtu United on certain purchases. The decrease in accounts payable is
related to a $632,974 reversal of accrued balances in the past years including a
lawsuit with a former landlord in China that has been resolved with minimum
liability.

           Net cash used in investing activities was minimal; $5,013 was used to
purchase various office equipment.

           Net cash flow from investing activities was $6,085,200. The funds
were used primarily to fund the start of Operation Morning Sun and the CBERC
project.

           In November 2000 under a loan agreement with Orion, the Company
borrowed $1,000,000 from Orion, until December 31, 2001, with an interest rate
of 10%. In connection with the loan, the Company granted Orion a warrant to
purchase 670,000 shares of the Company's common stock with an exercise price of
$.30. In March 2001, the Company borrowed an additional $1,000,000 from Orion,
pursuant to a second Orion loan agreement, pursuant to which Orion loaned the
Company $1,000,000 in exchange for a 15 month, 10% convertible promissory note.
The note was convertible into common stock at the rate of $.30 per share.

           On June 14, 2001, the Company sold 13,260,669 shares of common stock
in a private placement for an aggregate purchase price of $3,978,200 or $0.30
per common share. Concurrently, the first and second Orion Loans were converted
at a conversion price of $0.30 per common share into an aggregate of 6,666,666
shares of the Company's common stock and all warrants issued or issuable in
connection with the loans were cancelled.

           Other transactions involving issuing common shares included the
conversion of $61,259 in interest on the first Orion loan and second Orion loan
at $0.30 per common share, at Orion's option under the loan agreements, into
204,917 shares of the Company's common stock in lieu of the cash payment of
interest to Orion. 188,384 of their shares were issued on July 2, 2001. In
addition, in exchange for advances of funds of $107,671 from William Ballard to
the Company between October 2000 and April 2001, the Company issued 333,333
shares of common stock to Orion, at Mr. Ballard's direction.


                                      -46-
<PAGE>


           Pursuant to a contract between the Company and Orion, William Ballard
provides consulting services to the Company. As compensation for the services,
the Company agreed to issue Orion 20,834 shares of the Company's common stock
each month. During the fiscal year ended June 30, 2001, 145,838 shares were
issued to Orion and a charge to compensation expense of $84,669 was recorded.

           Pursuant to a contract with the Company's former Controller, Simon
Hui, Mr. Hui was issued 491,033 shares of the Company's common stock on June 15,
2001 for which a charge to compensation expense of $61,844 was recorded.

           The net cash flows from financing activities exceeded the funds used
to launch the Operation Morning Sun, start the CBERC project and support other
corporate activities by $112,529. After taking into consideration a negative
foreign exchange effect of $5,220, cash increased by $107,308 to $1,026,400.


Fiscal Year Ended June 30, 2000
-------------------------------

           For the fiscal year ended June 30, 2000, net cash used by operating
activities totaled $1,185,677, including a net loss of $4,701,285, and
depreciation and amortization of $266,614. Accounts receivable, prepaid
expenses, inventories, and other assets decreased by $22,398, $26,188, $16,377
and $28,390 respectively, primarily due to a write down of obsolete inventory,
scaling down and the product refocusing of Tengtu United operations during the
year. Accounts payable, accrued expenses, due to related party consultants and
other liabilities increased by $90,249, $14,384, $355,477 and $366,267,
respectively. To conserve cash, the Company deferred payment to consultants and
senior management until a major financing.

           During the year, the Company issued common stock for services
totaling $947,813 and recorded an interest expense due to a beneficial
conversion feature of $1,194,334 on the $1,500,000 convertible debenture
issued during the year.

           Net cash used by investing activities amounted to $42,535 primarily
due to acquisitions of equipment for the start-up operations of Edsoft H.K.
Funds generated by financing activities during the year included the $1,500,000
convertible debenture, $258,064 from an Edsoft H.K. shareholder and $100,000
from a Director. During the year, the Company issued shares for $175,725.


                                      -47-
<PAGE>


           The Company incurred a net loss of $4,701,285 for the year ended June
30, 2000, and, as of that date, had a working capital deficiency of $2,886,444.
During the fiscal year ended June 30, 2000, the Company continued a
restructuring and reduction of operating expenses to a minimum and deferred
payments of consulting and management fees.

           During the fiscal year ended June 30, 2000, Tengtu China continued to
provide funding for Tengtu United's operations and the Total Solution platform
was being shipped and installed in China.

FISCAL YEAR 2002, 2001 AND 2000 COMPARATIVE OPERATING RESULTS

Revenues
--------

                     2002                    2001                    2000
                    ------                  ------                  ------
                   $14,255,417           $5,566,039                $358,026

           The Company experienced rapid growth in 2002 with the sales exceeding
$14 million, a 150% increase from 2001 sales. The continued success with the
Operation Morning Sun project in China provided the majority of sales. In fiscal
2002, Tengtu China installed 7,292 Total Solution platforms at the average unit
price of $1,549 for total revenue of $11,293,251 or 79% of sales. Tengu China
also installed 3,245 sets of satellite equipment for $1,675,197 and 1,748
resource CDs for $109,892. Sales of other e-education products and services,
such as system integration projects, through Tengtu China, were $1,067,753. The
total Tengtu United/Tengtu China operations accounted for 99% of sales.

           Other miscellaneous revenue from TIC Beijing accounted for the
remaining $109,324 in revenue. Sales of educational software and services by
Edsoft was minimal as these subsidiaries were essentially inactive during
the period. In January 2002 the operations of Edsoft were closed.

           The Company's sales increased in 2001, due to the start of Operation
Morning Sun, under which 3,017 Total Solution platforms were sold at an average
price of $1,547 for total revenue of $4,667,123 or 84% of sales. Sales of other
e-education products and services through Tengtu China were $539,437 or 10% of
sales. Tengtu United's operations accounted for 94% of sales.

           Sales of educational software and services by Edsoft H.K. were
$218,643 or 4% of sales. Other miscellaneous revenue from TIC Beijing accounted
for the remaining $140,805 in revenue.



                                      -48-
<PAGE>


         Revenue in 2000 was depressed due to the downsizing and product
refocusing of Tengtu United's operations and the delay of Total Solution
platform shipments and installations caused by the Company's inability to
attract financing to the projects. In 2000 the Company derived its revenues from
systems integration, educational and entertainment software, and animation
businesses. Revenue in 2000 from Tengtu United was $232,668 and miscellaneous
revenue from TIC Beijing was $125,358.

Gross Profit (Loss)
-----------------------

                    2002                      2001                    2000
                   ------                    ------                  ------
                  $9,213,132                $2,410,196              $(148,838)

           In the fiscal year ended June 30, 2002, the overall gross margin
associated with sales under Operation Morning Sun was 65% of which $8,422,529
was for Total Solution platforms at 75% or $1,155 per platform, $495,034 was for
satellite equipment at 30%, $11,234 was for educational CD-ROMs at 10%, and
$460,845 was for other educational software and services at 43%. Costs of Total
Solution platforms were lower in fiscal 2002 compared to fiscal 2001 primarily
because the Microsoft operating system was not needed in most platforms sold.
Most of the school computers where the platforms were installed were already
equipped with appropriate operating software. The reduction of platform costs
contributed to the improvement in gross margins.

           Gross profit in 2001 was attributable primarily to the 3,017 Total
Solution platforms sold. The gross margin for these items, at 41%, was
$1,897,487 or $629 per platform. Gross margins on the other e-education products
and services was $512,709 or 57%.


Research and Development Expenses
---------------------------------

                   2002                      2001                  2000
                  ------                    ------                ------
                 $971,111                     $0                    $0

           In the fiscal 2002, $971,111 research and development expenses were
incurred with respect to a portal software project and educational content
software for China's educational market. No research and development expenses
were undertaken by the Company in 2001 as the Company focused its activities on
launching of Operation Morning Sun. No research and development expenses were
recorded by the Company in 2000 because such activities were funded by Tengtu
China, the Company's joint venture partner.


                                      -49-
<PAGE>


General and Administrative Expenses
-----------------------------------

                     2002                    2001                 2000
                    ------                  ------               ------
                  $2,511,430             $2,014,899            $1,537,833

           General and administrative expenses increased 25% in the fiscal year
ended June 30, 2002 from 2001 due to the higher legal and financing fees
associated with raising capital to support Operation Morning Sun and the CBERC
and LBERC projects.

           General and administrative expenses increased in 2001 from fiscal
2000 due to increased activities in Tengtu United associated with the launch of
Operation Morning Sun.


Related Party Consultants
-------------------------

                      2002                    2001               2000
                     ------                  ------             ------
                    $865,202               $ 829,772          $1,492,813

           Related party consultants' expense during the fiscal year ended June
30, 2002 was consistent with the fiscal 2001 amount. Related party consultants'
expense decreased in 2001 from fiscal 2000 primarily due to the reversal of
certain expenses accrued in 2000 in the amount of $300,000. Related party
consultants' expenses in 2000 included a non-cash compensation expense of
$750,000 and accrued consultant fees of $80,000 for an Officer.


Collection Provision
--------------------

                    2002                    2001                2000
                   ------                  ------              ------
                  $444,031                $163,684            $ (8,984)

           The collection provision for the fiscal year ended June 30, 2002 is
related to possible uncollected receivables for products and services sold under
Operation Morning Sun. The increase in collection provision in fiscal 2002 is
due to the higher sales compared to fiscal 2001 sales.

           There was a bad debt recovery of $8,984 in fiscal 2000 from an
over-provision of $143,347 in fiscal 1999.



                                      -50-
<PAGE>


Advertising Expense
-------------------

                    2002                      2001                 2000
                   ------                     ------               ------
                   $31,885                  $ 39,406             $ 28,991

           Advertising expenses were consistent in the last three years. Limited
amounts were spent in 2002, 2001 and 2000 on advertising to promote the Total
Solution platform in China.

Selling Expense
---------------

                      2002                 2001                2000
                     ------                ------             ------
                   $1,837,924             $602,132           $ 74,819

           Since the start of Operation Morning Sun, selling expenses have
increased significantly due to the rapid growth in sales. Revenue in fiscal 2002
grew 150% from the 2001 level, and selling expenses increased accordingly.
Selling expense is 13% of total sales in fiscal 2002 compared to 11% in fiscal
2001. This percentage increase is due to the expansion of sales teams and new
markets serviced. Salespersons' compensation, travel, and new product training
are the main components of the selling expenses in fiscal 2002 and 2001.


Depreciation and amortization
-----------------------------

                    2002                      2001                  2000
                   ------                    ------                ------
                   $81,741                  $55,910               $58,698

           During the downsizing and product refocusing of Tengtu United's
operations in 1999 and 2000, Tengtu China took over management of Operation
Morning Sun on behalf of the joint venture. Accordingly, the Company has not
made any significant purchases of equipment in the past three years and
depreciation and amortization expenses have remained at consistent and low
levels.



                                      -51-
<PAGE>



Equity earnings in investee
---------------------------

                     2002                   2001                  2000
                    ------                  ------                ------
                      $0                  $ 219,488              $(80,147)

           The equity earnings in investee relate to the Company's investment in
Iconix. The 2001 balance reflects a distribution received from Iconix on the
sale of its assets of $219,488. The investment in Iconix was written off in the
fiscal year ended June 30, 2001. (See Financial Statement Note 19)

Interest expense
----------------

                   2002                   2001                   2000
                   ------                ------                 ------
                 $254,029               $176,111              $1,311,373

           Interest expense increased in fiscal 2002 from 2001 due to interest
payments made on a short-term loan from Quest. In addition, fiscal 2002 is the
first full year for interest on the Top Eagle loan, as there was an interest
holiday to December 2000. (See Financial Statement Notes 6.)

           Interest expense of $1,311,373 in fiscal 2000 was due to a non-cash
interest expense on the convertible debenture issued during that year to Top
Eagle.


Other income
------------

                      2002                 2001                2000
                     ------               ------              ------
                   $2,045,902            $947,692            $ 2,240

           Other income in fiscal 2002 included a $236,559 non-cash gain on debt
forgiveness related to the Edsoft transaction and a $1,803,079 VAT tax credit in
China. The increase of VAT tax credit is associated with the increase of sales
from operations in China.

           Other income in 2001 relates to a reversal of accrued amounts in the
past years including a lawsuit with a former landlord that has been resolved
with minimum liability. In addition, a VAT tax credit in China of $314,718 was
recorded as other income in 2001.



                                      -52-
<PAGE>



Other expense
-------------

                    2002                 2001                   2000
                   ------               ------                 ------
                  $263,352              $1,731                $ 29,839

           The majority of other expenses in fiscal 2002 relate to asset
write-offs, which consist of $75,000 for a software license fee and $171,732 of
idled assets in China.

Minority interest
-----------------


                   2002                    2001                       2000
                   ------                  ------                    ------
                 $2,424,092                $   0                   $ (28,200)

           In fiscal 2002, Tengtu United's net profit exceeded its accumulated
losses from prior years. Hence, 43% of Tengtu United net profits was allocated
to Tengtu China and $2,424,092 in minority interest was recorded.

           The minority interest in subsidiary's loss of $28,200 in fiscal 2000
was due to the start-up losses of Edsoft. No minority interest in Tengtu
United's operating profit or Edsoft losses was recorded in 2001 as these two
subsidiaries had deficits.


ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

           The Company operates through subsidiaries located in Beijing, China
and grants credit to customers in this geographic region. The Company's
administrative office is located in Toronto, Canada.

           The Company performs certain credit evaluation procedures and do not
require collateral. The Company believes that credit risk is limited because it
routinely assesses the financial strength of its customers, and based upon
factors surrounding the credit risk of customers, establishes an allowance for
uncollectable accounts. Therefore, the Company believes its accounts receivable
credit risk exposure beyond such allowances is limited.

           The Company established an allowance for doubtful accounts of
$607,715 at June 30, 2002, which are reserves against related party receivables.
We believe any credit risk beyond this amount would be negligible.

           At June 30, 2002, the Company had approximately $4,914,838 of cash in
banks uninsured.



                                      -53-
<PAGE>

           The Company does not require collateral or other securities to
support financial instruments that are subject to credit risk.

           For the fiscal year ended June 30, 2002, approximately 99% of sales
were generated through Tengtu United. Receivables related to these sales
transactions are grouped together with amounts due from a related party, Tengtu
China, in the Company's financial statements. For the fiscal years ended June
30, 2002 and 2001, while the Company recorded sales pursuant to agreements with
the Chinese Ministry of Education, no single school customer accounted for more
than 10% of total sales.
                        MARKET RISK SENSITIVE INSTRUMENTS

FINANCIAL INSTRUMENT                             CARRYING VALUE      FAIR VALUE

Instruments entered into for trading purposes

NONE

Instruments entered into for other
   than trading purposes

Cash and Cash equivalents
             United States                           $     --         $     --
             Foreign                                    914,838          914,838
                                                     ---------------------------
             Total                                   $  914,838       $  914,838
                                                     ===========================

Accounts and Other Receivables, Net
              United States                          $     --         $     --
              Foreign                                 2,601,354        2,601,354
                                                     ---------------------------
              Total                                   2,601,354        2,601,354
                                                     ===========================

Accounts payable
            United States                            $  892,472       $  892,472
            Foreign                                   4,831,458        4,831,458
                                                     ---------------------------
            Total                                    $5,723,930       $5,723,930
                                                     ===========================



           The financial instruments are short-term and are not subject to
significant market risk. Substantially all financial instruments are settled in
the local currency of each subsidiary, and therefore, the Company has no
substantial exposure to foreign currency exchange risk. Cash is maintained by
each subsidiary in its local currency.


                                      -54-
<PAGE>



ITEM 8.    Financial Statements and Supplementary Data.

           The Company's financial statements described below and the reports of
independent auditors thereon are set forth following the Index to Financial
Statements on page F-1 of this report:

         Report of independent auditors                                      F-1

         Consolidated balance sheets at June 30, 2002 and 2001               F-2

         Consolidated statements of operations and comprehensive
         income (loss) for each of the three years in the
         period ended June 30, 2002                                          F-3

         Consolidated statements of shareholders' equity for each of
         the three years in the period ended June 30, 2002                   F-4

         Consolidated statements of cash flows for each of the three
         years in the period ended June 30, 2002                             F-5

         Notes to consolidated financial statements                   F-6 - F-23

                       SUPPLEMENTARY FINANCIAL INFORMATION

Selected Quarterly Financial Data

           The following supplementary financial information is provided for the
periods since we have been required to report on Form 10-Q.


<TABLE>
<CAPTION>

                  JUNE 30,      MARCH 31,     DEC. 31,      SEPT. 30,      JUNE 30,       MARCH 31,       DEC. 31,      SEPT. 30,
                    2002          2002          2001          2001           2001           2001            2000           2000
<S>              <C>           <C>           <C>           <C>            <C>           <C>               <C>         <C>
Revenues         $3,959,491    $2,993,603    $4,061,008    $3,241,315     $2,612,335    $1,450,879        $359,379    $1,143,446
Gross Profit     $2,605,005    $2,169,126    $2,379,319    $2,059,682     $1,437,678      $818,748         $46,291      $107,479
Gross Profit             66%           72%           59%           64%            55%           56%             13%            9%
Margin
Operating        $1,365,729      $379,632      $147,465      $576,982       $887,078    ($143,496)    ($1,496,927)    ($542,262)
Income (Loss)
Net Income         $670,679       $50,554     ($ 7,237)      $864,112     $2,110,188    ($238,776)    ($1,566,746)    ($597,835)
(Loss)
Earnings per
Share
-Basic                $0.01         $0.00       $(0.00)         $0.02         $0.08        ($0.01)         ($0.07)       ($0.03)
-Diluted              $0.01         $0.00       $(0.00)         $0.02         $0.08        ($0.01)         ($0.07)       ($0.03)

<FN>

*          earnings per share is based on weighted average number of common
           shares outstanding. However, the number of common shares outstanding
           changed significantly during the fourth quarter of 2001. Earnings per
           share for the quarter ended June 30, 2001, based on the 45,089,673
           shares outstanding at June 30, 2001, is $0.05 per share.
</FN>

</TABLE>


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

           There has been no change in the Company's independent auditors during
the previous two fiscal years. Nor have there been any disagreements with the
Company's independent auditors during the previous two fiscal years.

                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

                        DIRECTORS AND EXECUTIVE OFFICERS

           The following are the names, ages and current principal position(s)
and office(s), if any, with us of each of our current Directors and Executive
Officers. Each of the Directors set forth below was elected at the Company's
annual shareholders meeting on November 27, 2001.

           The Company does not have a Chief Executive Officer. As of January
12, 2002, our Board of Directors replaced the CEO position with an Executive
Committee of the Board of Directors. The members of the Executive Committee are
to consist of not less than two members of our Board of Directors, as our Board
may determine from time to time. The Executive Committee has and exercises all
of the powers of the Board in the oversight and management of our business and
affairs.

           The current members of our Executive Committee are William Ballard
and John Watt.

                                            CURRENT PRINCIPAL POSITION(S)
NAME                       AGE              AND OFFICE(S)
---------------------------------------------------------------------------
William O.S. Ballard       55          Chairman of the Board of Directors
                                                  and Consultant

John Watt                  56          Director and President

Jing Lian                  50          Director, Vice President and
                                              President of TIC Beijing

Yung Sang Dai              37          Director

John McBride               44          Director

Fan Qi Zhang               44          Director

Bin Huang                  36          Director


                                      -55-
<PAGE>


           The following is a description of the qualifications and experience
of each of our current Directors:

           WILLIAM O.S. BALLARD is the Chairman of the Company's Board of
Directors, the Chairman of Executive Committee of the Company's Board of
Directors and a consultant to the Company. Mr. Ballard's investment company,
Orion, is currently the Company's largest shareholder. Mr. Ballard has a law
degree from Osgoode Hall, Toronto, Canada and is a Canadian entrepreneur and
lawyer. Mr. Ballard currently serves as a Director of two Canadian public
companies, Devine Entertainment and Northfield Capital Corporation. Until 1998,
Mr. Ballard was a partner in The Next Adventure Inc., an international
entertainment company and has, for many years, been involved in the concert
promotion business. Mr. Ballard is the founder and past President of the Toronto
Entertainment District Association, one of Canada's largest business
associations and the founder and co-chairman of Canada's prestigious Walk of
Fame. He also served on the President's Council at Sir Wilfrid Laurier
University and the Senate of York University. Mr. Ballard was elected to the
Company's Board of Directors on November 27, 2001.

           FAN QI ZHANG is a member of the Company's Board of Directors. Mr.
Zhang is Chief Executive Officer and principal owner of the Company's joint
venture partner, Tengtu China. Mr. Zhang has a Master of Arts degree from
Beijing University. He has extensive management and banking experience in China,
having founded the only civil publishing enterprise in China (Tengtu Electronic
Publishing Co.) and Beijing Jiade Pharmaceutical Co. Ltd. (a pharmaceutical
manufacturer). He is the Vice President of the Medical Funds Association of
China and an Executive of the Association of Entrepreneurs of China. Mr. Zhang
has served as a Director since August, 1999.

           JOHN WATT is a member of the Company's Board of Directors, a member
of the Executive Committee of the Board of Directors and the Company's
President. Mr. Watt has served as a Director since June, 1996 and was appointed
Executive Vice President on September 17, 2000, prior to being appointed
President on July 1, 2001. Mr. Watt has been President of John D. Watt &
Associates, Ottawa, Canada, a consulting firm specializing in media and
entertainment industries, from 1995 to July 1, 2001. Between 1980 and 1990, Mr.
Watt served as a Director General for the Government of Canada, overseeing
federal policies in cultural industries, broadcasting, and telecommunications.
He was also an advisor to the NAFTA negotiations. Mr. Watt was responsible for
regulated foreign investment policies and negotiating bilateral treaties with 26
countries including China. Mr. Watt graduated with a B.A. degree from Sir
Wilfred Laurier University before earning his L.L.Th. in post-graduate studies
at University of Toronto and a Marketing Management Diploma from George Brown
College, Toronto.



                                      -56-
<PAGE>


           JING "JACK" LIAN is a member of the Company's Board of Directors, a
Vice President of the Company and President of TIC Beijing. During the past five
years, Mr. Lian has been Vice-President of Bluelake Industries, Ltd., Seattle,
Washington. Mr. Lian has served as a Director and Vice President since June
1996. Mr. Lian is also the President of our TIC Beijing Digital Pictures, Ltd.
subsidiary and is the founder and Secretary of the Chinese Educational Software
Council. Mr. Lian received an M.S. degree in Computer Science from Tsing Hua
University, Beijing, China. Mr. Lian was a also visiting scholar at the
University of Washington, Seattle, Washington.

           YUNG SANG DAI is a member of the Company's Board of Directors and a
Vice President. Mr. Dai was the Vice General Manager of Pioneer Pharmaceutical
Company, a China based pharmaceutical company, where he was responsible for
financial operations and marketing. Mr. Dai is a graduate of the Beijing China
Renmin University and has worked as an economic analyst for the Guangxi Province
in China. Mr. Dai was elected to the Company's Board of Directors on November
27, 2001.

           JOHN MCBRIDE is a member of the Company's Board of Directors. He is
the Managing Partner of CC Capital Partners, a merchant banking group, and
majority owner of Charmac Capital Corp., a private investment company. Mr.
McBride is a Director of Integrative Proteomics Inc., a Toronto, Canada based,
biotechnology company involved in the field of determining the structure and
function of the human proteome. Mr. McBride is also a Director of Northfield
Capital Corporation and a founding partner of Charleswood Investments, both
Toronto, Canada based merchant banking and venture capital companies. Mr.
McBride was elected to the Company's Board of Directors on November 27, 2001.

           BIN HUANG is a member of the Company's Board of Directors. Mr. Huang
is currently the General Manager of Beijing Pan-Pacific Investment Co., Ltd., a
China based investment company, where he serves as an investment analyst and
portfolio manager. From 1997 through 2001, Mr. Huang served as a Senior Manager
in the Investment Banking Department of Haitong Securities Co., Ltd., a China
based securities company. Mr. Huang previously served as a Deputy Director in
the Investment Department of China Zhonghong Group Corp., a China based
investment bank. Mr. Huang has a Masters Degree in Economics from the Graduate
School of Xiamen (Amoy) University in China. Mr. Huang was elected to the
Company's Board of Directors on November 27, 2001.


           The following are the names, ages and current principal position of
our executive and significant officers who do not also serve as directors and
therefore, are not listed above:


                       CURRENT PRINCIPAL
NAME                          AGE                 POSITION(S) AND OFFICE(S)
---------------------------------------------------------------------------
Peng "Paul" Lin               32                  Chief Financial Officer



                                      -57-
<PAGE>


           Peng "Paul" Lin is the Company's Chief Financial Officer. From 1999
to 2002, Mr. Lin was Manager, Financial Planning and Analysis, at Cole National
Corporation, in Cleveland, Ohio and Markham, Canada, where he led long-range
strategic planning and analysis. Mr. Lin was responsible for UCAR International
Inc. global operations in Cleveland, Ohio as an Internal Auditor from 1997 to
1999. From 1996 to 1997, Mr. Lin was a Financial Analyst at Cargill Inc. in
Minneapolis, Minnesota where he measured the performance of the company's
world-wide operations. Mr. Lin has a Master of Information Systems degree from
Cleveland State University, Bachelor of Science major in accounting from Ohio
State University and is a Certified Public Accountant.

FAMILY RELATIONSHIPS

           There are no family relationships between any Director, Executive
Officer, or person nominated or chosen by us to become a Director or Executive
Officer.

INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

During the past five years, none of the Company's Directors or Executive
Officers has:

           (1)  been general partner or executive officer of a business at the
                time a bankruptcy petition was filed by, or against it, or a
                receiver, fiscal agent or similar officer was appointed by a
                court for it or its property;

           (2)  been convicted in a criminal proceeding and are not currently a
                named subject of a pending criminal proceeding (excluding
                traffic violations and other minor offenses);

           (3)  been subject to an order, judgment or decree, permanently or
                temporarily enjoining, barring, suspending or otherwise limiting
                their involvement in any type of business, securities or banking
                activities; or

           (4)  been found by a court of competent jurisdiction (in a civil
                action), the Securities and Exchange Commission, or the
                Commodity Futures Trading Commission, to have violated a federal
                of state securities or commodities law.


             SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

           The Company is not aware of any failure to file beneficial ownership
reports required by Section 16(a).



                                      -58-
<PAGE>


ITEM 11.   EXECUTIVE COMPENSATION.

COMPENSATION OF DIRECTORS

           No cash compensation was paid to any of the Company's Directors
during the fiscal year ended June 30, 2002, in their role as Directors. Pursuant
to a resolution passed by the Company's Board of Directors on April 27, 1997,
each outside director who is not an employee or consultant to the Company is
entitled to the following compensation:

           Annual Fee: $6,000
           Each Board of Directors meeting attended: $500
           Each Board of Directors Committee meeting attended: $250

           No cash compensation pursuant to the April 27, 1997 resolution has
been paid to any Director. For the fiscal years ended June 30, 2000 and 1999,
each member of the Board of Directors received options to purchase the Company's
common stock in lieu of a cash payment.

EXECUTIVE COMPENSATION

           Cash compensation of $356,192 was paid to the Company's executive
officers during the fiscal year ended June 30, 2002. On March 29, 1999, the
Company adopted a deferred compensation plan for future payment of past due
amounts. Pursuant to the deferred compensation plan, all compensation to
executive officers is to be deferred until the Company receives certain amounts
of financing. At that time, the Company will begin paying salaries or consulting
fees at the agreed-upon rate and 90% of the payments will be applied to current
obligations and 10% to past due compensation and fees which have been deferred.
In the interim, the Company has advanced $45,000 to John Watt, our President,
and $144,000 to Jack Lian, a Director and Vice President. The total compensation
deferred as of June 30, 2002 was $2,013,329, net of advances.

SUMMARY COMPENSATION TABLE

           The following table provides information relating to compensation for
the fiscal years ended June 30, 2000, 2001 and 2002 for the Company's former
Chief Executive Officer and compensation payable to other highly compensated
executive officers whose total salary and bonus (as determined pursuant to SEC
rules) exceeded $100,000 (determined by reference to fiscal 2002). The amounts
shown include compensation for services in all capacities provided to the
Company. With respect to the Company's former Chief Executive Officer, Pak Kwan
Cheung, the salary listed represents the amount set forth in an agreement
between the Company and Comadex Industries, Ltd., a company owned by him, but
not amounts received by Comadex. Comadex received $20,000 for the fiscal year
ended June 30, 2002. With respect to Mr. Watt, his compensation was deferred in
1999 and 2000. In 2001, $90,000 was paid to Mr. Watt and $30,000 was deferred.
For the fiscal year ended June 30, 2002, $161,089 was paid to Mr. Watt in salary
and advances.



                                      -59-
<PAGE>
<TABLE>
<CAPTION>


                           SUMMARY COMPENSATION TABLE

                        Annual Compensation                                Long Term Compensation
                                                Awards                          Payouts

   Name                                                     Other       Restricted    Securities
   and                                                     Annual        Stock        Underlying       LTIP
Principal                                                  Compen-      Awards(s)      Options/       Payouts     All Other
 Position               Year   Salary ($)     Bonus ($)   sation ($)       ($)         SARs (#)         ($)         Comp.


<S>                     <C>    <C>               <C>    <C>                <C>           <C>             <C>        <C>
John Watt               2002   $120,000          0      $ 41,089           0             0               0          0
President               2001   $120,000          0             0           0             0               0          0
                        2000   $120,000          0             0           0             0               0          0

Pak Kwan Cheung         2002   $128,400          0             0           0             0               0          0
Director(1)             2001   $128,400          0             0           0             0               0          0
                        2000   $128,400          0      $750,000(2)        0             0               0          0

Gregory Mavroudis       2002
Exec. Vice President    2001    124,000          0             0      75,000(4)          0               0          0
 (3)                    2000    120,000          0             0           0             0               0          0


<FN>

(1)        Pak Kwan Cheung's services are retained by the Company through a
           consulting contract with Comadex entered into in October 1999.
           Comadex has not been paid all monies set forth therein during the
           fiscal years ended June 30, 2000, 2001 or 2002 under the contract.
           The amount listed represents compensation stated in the agreement.
           See "Legal Proceedings."

(2)        Pursuant to the contract between the Company and Comadex, all past
           due compensation to Pak Kwan Cheung was discharged in exchange for
           3,000,000 shares of Company common stock with a value of $.25 per
           share on the date of the grant.

(3)        Gregory Mavroudis' services were retained by the Company through a
           consulting agreement with 1334945 Ontario Limited dated April 1,
           2000. Mr. Mavroudis is no longer performing services for the Company
           pursuant to a settlement agreement entered into in May, 2002.
           Pursuant to the settlement, 1334945 Ontario Limited received 250,000
           shares of common stock, U.S. $70,000 and the Company paid CDN $30,000
           for its legal fees.

(4)        75,000 options to purchase the Company's common stock were granted to
           Gregory Mavroudis pursuant to the 1334945 Ontario Limited contract
           with an exercise price equal to the fair market value at the time of
           the grant of $0.218 per share.
</FN>
</TABLE>



                                      -60-
<PAGE>


EMPLOYMENT OR CONSULTING CONTRACTS WITH EXECUTIVE OFFICERS AND DIRECTORS

COMADEX INDUSTRIES LTD.

           Effective October 1999, the Company we entered into a consulting
agreement with Comadex to retain the services of Pak Kwan Cheung as our Chairman
of the Board of Directors and Chief Executive Officer. The agreement may be
summarized as follows:

           (1) Comadex will receive a base salary of $10,700 per month,
commencing November 30, 1999, inclusive of the Canadian General Services Tax;

           (2) Beginning October 17, 2000, the Compensation Committee of the
Board of Directors can increase the base salary up to a maximum of $10,000 per
year;

           (3) For past due services of Mr. Cheung, the principal of Comadex,
from July 1996 through October 17, 1999, and the seven weeks thereafter, Comadex
received 3,000,000 shares of restricted stock, which was the amount determined
by the Compensation Committee. The Company's Common Stock was trading at
approximately $.10 per share in October 1999;

           (4) Comadex shall receive an incentive of 1% of the capital raised in
excess of $3,000,000 by Mr. Cheung for us or any company subsidiary that is 50%
or more owned by the Company;

           (5) Comadex shall receive 1% of the Company's net profits if the
Company exceeds pre-set profit targets and our audited pre-tax profits exceed
that target(s). No such targets have been set as of June 30, 2002 by the Board
of Directors;

           (6) Comadex shall receive certain payments in the event the agreement
is terminated without cause or if we are merged into or acquired by another
company.

           As of January 2002, Mr. Cheung was no longer serving as Chief
Executive Officer as that position was replaced with an Executive Committee of
the Board of Directors.

           Mr. Cheung and Comadex commenced and arbitration against the Company
relating to the agreement in September, 2002. See "Legal Proceedings."

JING LIAN

           The Company and Jing Lian entered into an agreement effective January
1, 1996 for Mr. Lian to serve as a Vice President at an annual salary of
$80,000. The agreement also provides for the possibility of performance and
incentive bonuses.

ORION CAPITAL INCORPORATED

           In December, 2000, the Company entered into a 24 month consulting
agreement with Orion for the provision of consulting services by William O.S.
Ballard, who is now the Chairman of the Company's Board of Directors. Pursuant
to the agreement, Mr. Ballard is to provide strategic and business consulting
services to the Company. As compensation for these services, the Company issues
Orion 20,834 shares of common stock each month.


                                      -61-
<PAGE>


ADDITIONAL INFORMATION WITH RESPECT TO COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION IN COMPENSATION DECISIONS

           None of the members of the Compensation Committee of the Company's
Board of Directors served as officers or employees of the Company during the
fiscal year ended June 30, 2002.

BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS OF TENGTU
INTERNATIONAL CORP.

           The primary purpose of this Committee is to develop executive
compensation policies and practices which coincide with and enhance the business
plans and strategies which the Company undertakes in connection with the pursuit
of its business objectives.

           During the past several years, this Committee has almost exclusively
followed a policy of rewarding its senior executives with compensation packages
consisting of salaries, stock and options which are determined upon the basis of
the following factors: ability to assist in growing the Company's business,
ability to assist in fundraising activities, ability to effectively manage
aspects of the Company's business and the Company's current and future earnings
prospects. In determining the salary to be paid to the Company's Chief Executive
Officer and its other senior executives, this Committee also considers, in
addition to the foregoing factors, the comparative salaries paid to other Chief
Executives and senior executives in similar companies.

           Because of the developing nature of the Company's business, the
Committee has not yet used corporate performance as a measure of compensation.

           In summary, it is this Committee's belief that the compensation
policies that we have described in this report have served the best interests of
the shareholders and the Company. Such policies have been designed to provide
appropriate levels of compensation to the Company's senior executives based upon
the particular combination of factors which apply to this Company. As and when
those factors change, this Committee will make every effort to make adjustments
to its policies in a manner which will provide fair and reasonable levels of
compensation and appropriate incentives to its executives, while continuing to
be in the best interests of the shareholders and the Company.

Respectfully submitted,

The Compensation Committee

/S/ FAN QI ZHANG
----------------

/S/ WILLIAM O.S. BALLARD
------------------------

/S/ JOHN MCBRIDE
----------------

                               PERFORMANCE CHARTS

           The following charts show the cumulative performance for the
Company's common stock over the last five years compared with the performance of
the Nasdaq Composite and Technology Industry Group Performance Composite. The
first chart assumes $100 invested as of September 3, 1996 in our common stock
and in each of the named indices. The performance shown is not necessarily
indicative of future performance.


                   Tengtu          Nasdaq       Industry
     Date          Return          Index         Index
------------------------------------------------------------
                    100             100           100
     6/30/1997       16             126           141
     6/30/1998        4             166           183
     6/30/1999        3             235           289
     6/30/2000       23             347           156
     6/30/2001       30             186            99
     6/30/2002       10             128            56


                   Tengtu          Change
                    Stock        from prior                 Calculated
     Date           Price          period        % chg.       Return
-------------------------------------------------------------------------
      9/3/1996          5              Base               100
     6/30/1997       0.82         -4.18       -83.60%           16
     6/30/1998       0.19         -0.63       -76.83%            4
     6/30/1999       0.13         -0.06       -31.58%            3
     6/30/2000       1.01          0.88       676.92%           23
     6/30/2001       1.32          0.31        30.69%           30
     6/30/2002       0.45         -0.87       -65.91%           10



                                      -62-
<PAGE>


                   Nasdaq          Change
                  Composite      from prior                 Calculated
     Date           Index          period        % chg.       Return
-------------------------------------------------------------------------
      9/3/1996       1142              Base               100
     6/30/1997       1442           300        26.27%          126
     6/30/1998       1895           453        31.41%          166
     6/30/1999       2686           791        41.74%          235
     6/30/2000       3967          1281        47.69%          347
     6/30/2001       2130         -1837       -46.31%          186
     6/30/2002       1463          -667       -31.31%          128


                  Industry
                    Group          Change
                 Performance     from prior                 Calculated
     Date        Technology        period        % chg.       Return
-------------------------------------------------------------------------
      9/3/1996       614              Base             100
     6/30/1997       865           251        40.88%          141
     6/30/1998      1123           258        29.83%          183
     6/30/1999      1773           650        57.88%          289
     6/30/2000       959          -814       -45.91%          156
     6/30/2001       608          -351       -36.60%           99
     6/30/2002       343          -265       -43.59%           56

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
           RELATED STOCKDOLDER MATTERS.

        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                              OWNERS AND MANAGEMENT

           The following table sets forth information furnished to the Company
with respect to the beneficial ownership of our common shares by each Executive
Officer named below, Director and by all Directors and Executive Officers as a
group, each as of June 30, 2002. Unless otherwise indicated, each of the persons
listed has sole voting and dispositive power with respect to the shares shown as
beneficially owned.


TITLE                NAME OF                     AMOUNT AND NATURE OF      % OF
OF CLASS             BENEFICIAL OWNER            BENEFICIAL OWNERSHIP     CLASS
--------------       -----------------------     --------------------   --------
$.01 par             William O.S. Ballard (1)     13,245,509              24.2%
common


$.01 par             Jing Lian (2)                 1,170,750               2.2%
common

$.01 par             John Watt (3)                   112,000              0.20%
common


$.01 par             Zhang Fan Qi (4)              2,537,714               4.6%
common

$.01 par             Yung Sang Dai                         0              0.00%
common

$.01 par             John McBride                    416,000              0.76%
common

$.01 par             Bin Huang                             0              0.00%
common

Totals                                            21,710,055             31.99%


                                      -63-
<PAGE>


(1)        Mr. Ballard's shares are held by Orion, a company owned
           by him. Includes 70,000 shares of common stock pledged to Orion as
           security for a loan made by it one to a Tengtu Officer and Director.
           Mr. Ballard disclaims beneficial ownership as to these shares. Does
           not include 1,082,664 Special Warrants. On June 20, 2002, in a
           private placement transaction, Orion subscribed for 541,332 Units of
           Tengtu for a purchase price of $1.00 per Unit. Each Unit consists of
           two Special Warrants. Each Special Warrant is exercisable, for no
           additional consideration, into one share of our common stock of
           Tengtu and one half of one share purchase warrant at any time prior
           to 5:00 p.m. (Toronto time) on the date that is the earlier to occur
           of: (a) the fifth business day after the later of: (i) the date a
           receipt has been issued for the final prospectus qualifying the
           distribution of the common stock and share purchase warrants by the
           Ontario Securities Commission; and (ii) the date the Securities and
           Exchange Commission declares effective a registration statement on
           Form S-1 for the securities underlying the Special Warrants; and (b)
           12 months following the closing date of the Offering.


(2)        Includes 300,000 shares of common stock issuable upon exercise of
           stock options at $.218 per share granted on March 29, 1999 under the
           Company's Incentive Stock Option Plan.

(3)        Includes 77,000 shares of common stock issuable upon exercise of
           stock options at $.218 per share granted on March 29, 1999 under the
           Company's Incentive Stock Option Plan.


(4)        Includes 500,000 shares of common stock issuable upon exercise of
           warrants acquired in a financing which closed in July, 2002.



                                      -64-
<PAGE>


           The following table shows certain information with respect to all
persons who are not Executive Officers, Directors or nominees, known by the
Company to beneficially own more than five percent of our outstanding common
stock as of June 30, 2002.

                                           AMOUNT AND
TITLE         NAME OF                      NATURE  OF                   % OF
              OWNER                        BENEFICIAL OWNERSHIP         CLASS
---------     -------------------------    ----------------------     ----------
$.01 par      Orion Capital Inc. (1)       13,245,509                    24.2%
 common       Sherway Executive Center
              310 North Queen Street
              Suite 103N
              Etobicoke, Ontario
              M9C 5K4 Canada

(1)        Includes 70,000 shares owned by an Officer and Director, which are
           pledged as collateral for a mortgage Orion has on a residence
           recently purchased by him. Orion has disclaimed any beneficial
           interest in those shares.

<TABLE>
<CAPTION>

                      EQUITY COMPENSATION PLAN INFORMATION

          Plan category    Number of securities to be   Weighted average exercise    Number of securities
                             issued upon exercise of      price of outstanding      remaining available for
                              outstanding options,        options, warrants and         future issuance
                               warrants and rights               rights
----------------------------------------------------------------------------------------------------------
                                       (a)                        (b)                       (c)

<S>                                <C>                        <C>                         <C>
Equity compensation plans
   approved by security             1,760,000                    $.218                       0
   holders (1)

Equity compensation plans
      not approved by               2,187,382                    $.551                       0
      security holders (2)

Total                               3,947,382                    $.403                       0
<FN>


(1)    Represents options to purchase the Company's common stock issued under
       the Company's 1997 and 1999 Stock Option Incentive Plans.

(2)    Represents Warrants granted to former investor relations firms.
</FN>
</TABLE>


                                      -65-
<PAGE>



ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

           The Company's operations, and the collection of receivables, is
carried out by the Company's joint venture partner, Tengtu China. Zhang Fan Qi,
one of the Company's Directors, is the principal owner of Tengtu China. As of
June 30, 2002, Tengtu United had a receivable balance of approximately
$20,821,166.

           During fiscal 2002, 2001 and 2000, respectively, the Company incurred
consulting and related expenses of approximately $865,200, $829,800 and
$1,493,000 from the Company's Officers and Directors or the Company's
subsidiaries or companies controlled by these Officers and Directors.

           On October 6, 2000, Iconix (which was 32% owned by the Company) was
sold for CDN $5,000,000. Barry Clark, who was the Company's President until
March 2000, and a Director until November 27, 2001, and who was the President of
Iconix, and former employees of Iconix, owned approximately 8% of the stock in
the acquiring company. The Company was to receive a cash distribution of
approximately $580,000 from the proceeds of the sale of the assets; to date the
Company has received $219,488 of these proceeds. Collection of the balance is
doubtful due to financial difficulties experienced by the purchaser of the
assets.

           On June 6, 2002, the Company closed a loan agreement with Quest for a
$4,000,000 loan. Pursuant to the terms of the loan agreement, the Company issued
a $4,000,000 promissory note to Quest due November 30, 2000 with an interest
rate of 12%. The note is secured by a general security agreement, pursuant to
which the Company gave Quest a security interest in all of its assets. The note
is also secured by 10,015,812 shares of the Company's common stock pledged by
Orion, a guarantee from Orion limited to the pledged stock and a personal
guarantee from William O.S. Ballard as to $2,500,000. Orion is an Ontario
company owned by Mr. Ballard, the Company's consultant and Chairman of the
Company's Board of Directors. Neither Mr. Ballard, nor Orion, received any
consideration for their pledge of common stock or guarantees.

           As at June 30, 2002, Mr. Ballard, through Orion had advanced $134,228
to the Company for working capital and general corporate purposes. Between June
30, 2002 and September 30, 2002, Mr. Ballard has advanced an additional $395,872
to the Company for working capital and general corporate purposes. The Company
plans to issue Mr. Ballard a promissory note, convertible into the Company's
common stock, in the amount of the advances.



                                      -66-
<PAGE>


           Pursuant to a December 21, 2001 letter of intent, as amended by a
July 22, 2002 loan agreement, the Company acquired the rights to use and license
the following software products owned by Lifelong.com, Inc.: NeuraLab and Blast
Off. Pursuant to the terms of the July 22, 2002 loan agreement, the Company
loaned CDN $55,000 to Lifelong.com, Inc. Pursuant to that agreement, if the Loan
is not repaid within six months, or there is a default in the payment of
interest for more than two months, the Company would own all rights to the
software mentioned above.

           Because Lifelong.com, Inc. required additional capital to complete
development of NeuraLab, Orion Capital Incorporated, a company wholly owned by
William Ballard, Chairman of the Company's Board of Directors, advanced an
additional CDN$145,000 to Lifelong.com, Inc. on August 20, 2002. In exchange for
the advance, Lifelong.com, Inc. agreed to transfer to Orion all of its right
title and interest in NeuraLab, subject to the encumbrance of the July 22, 2002
loan agreement.

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

(a)        The following financial statements are filed as a part of the report:

               Report of independent auditors                                F-1

               Consolidated balance sheets at June 30, 2002 and 2001         F-2

               Consolidated statements of operations and comprehensive
               income (loss) for each of the three years in the
               period ended June 30, 2002                                    F-3

               Consolidated statements of shareholders' equity for each of
               the three years in the period ended June 30, 2002             F-4

               Consolidated statements of cash flows for each of the three
               years in the period ended June 30, 2002                       F-5

               Notes to consolidated financial statements             F-6 - F-24

(b)        Exhibits required by Item 601 of Regulation S-K:

3.1        Articles of Incorporation (filed as part of the Company's Form 10
           filed on May 25, 2000 and incorporated herein by reference);


                                      -67-
<PAGE>


3.2        By-Laws (filed as part of the Company's Form 10 filed on May 25, 2000
           and incorporated herein by reference);

4.1        Stock Purchase Agreement for Purchasers in private placements in
           October and November, 2001 (filed as part of the Company's
           registration statement on Form S-1 filed on August 14, 2002 and
           incorporated herein by reference);

4.2        Amended Warrants issued to investors in private placements in October
           and November, 2001 (filed as part of the Company's registration
           statement on Form S-1 filed on August 14, 2002 and incorporated
           herein by reference);

4.3        Special Warrant issued to investors in a private placement which
           closed June 20, 2002 (filed as part of the Company's registration
           statement on Form S-1 filed on August 14, 2002 and incorporated
           herein by reference);

10.1       English Translation of Agreement between National Center for Audio
           Visual Education and Tengtu Culture and Education Electronics
           Development Co., Ltd. Dated September 20, 2000 - referred to as
           "Operation Morning Sun" (filed as part of the Company's Form 10-Q
           filed on November 14, 2000 and incorporated herein by reference);


10.2       English Translation of Cooperation Agreement among the Chinese
           National Center for Audio/Visual Education of the Ministry of
           Education, Tengtu China and Legend Group (filed as part of our Form
           10-Q filed on November 14, 2000 and incorporated herein by
           reference);

10.7       1999 Non-Qualified Stock Option Incentive Plan (filed as part of our
           Form 10 filed on May 25, 2000 and incorporated herein by reference);

10.8       English Translation of Microsoft Cooperation Agreement(filed as part
           of our Form 10 filed on May 25, 2000 and incorporated herein by
           reference);

10.10      Tengtu United Joint Venture Agreement and the amendment thereto
           (filed as part of our Form 10 filed on May 25, 2000 and incorporated
           herein by reference);

10.11      Employment agreement between Tengtu and Jing Lian (filed as part of
           our Form 10 filed on May 25, 2000 and incorporated herein by
           reference);

10.12      Consulting agreement between Comadex Industries, Ltd. and Tengtu
           (filed as part of our Form 10 filed on May 25, 2000 and incorporated
           herein by reference);

10.13      Top Eagle Holdings, Ltd. Convertible Debenture and Warrant Purchase
           Agreement (filed as part of our Form 8-K dated December 23, 1999 and
           incorporated herein by reference);

10.14      Top Eagle Holdings, 23, 1999 and incorporated herein by reference);



                                      -68-
<PAGE>


10.15      Top Eagle Holdings, Ltd. and incorporated herein by reference);

10.16      Top Eagle Holdings, Ltd. Common Stock Warrant (filed as part of our
           Form 8-K dated December 23, 1999 and Incorporated herein by
           reference);

10.17      English translation of February 13, 2001 Cooperation Agreement
           between National Center for Audio/Visual Education and Tengtu Culture
           and Education Electronics Development Co., Ltd. on Carrying out
           "Operation Morning Sun - Phase II" (filed as part of our Form 10-Q
           filed on May 15, 2001 and incorporated herein by reference);

10.18      January 17, 2001 Letter of Agreement between Tengtu International
           Corp. and the Centre for Education and Training (filed as part of our
           Form 10-Q filed on May 15, 2001 and incorporated herein by
           reference);

10.19      English translations of April 9, 2001 Cooperation Agreement on
           Establishment of "Morning Sun Resources Center under National Center
           for Audio/Visual Education of Ministry of Education" and supplemental
           memorandum between Tengtu China and the Company (filed as part of our
           Form 10-Q filed on May 15, 2001 and incorporated herein by
           reference);

10.20      English translation of Extension to Operation Morning Sun (filed as
           part of our Form 10-Q filed on May 15, 2001 and incorporated herein
           by reference);

10.21      Additional Supplemental Agreement between Tengtu China and the
           Company dated April 25, 2001 (filed as part of our Form S-1/A filed
           on August 7, 2001 and incorporated herein by reference);

10.22      ShanDong Province Cooperation Agreement dated August 17, 2001
           (English translation) (filed as part of our Form 10-K on September
           28, 2001 and incorporated herein by reference);

10.23      Tengtu International Corp. Investment Agreement with Swartz Private
           Equity, L.L.C. dated October 25, 2000 (filed as part of our Form 10-Q
           filed on November 14, 2000 and incorporated herein by reference);

10.24      December 21, 2001 Agreement between Tengtu International Corp. and
           Lifelong.com, Inc. (filed as part of our Form 10-Q filed on May 20,
           2002 and incorporated herein by reference);

10.25      English Translation of Cooperation Agreement effective September 1,
           2001 between the Ministry of Education of the ShanDong Province and
           Beijing Tengtu Tian Di Network Co., Ltd. (filed as part of our Form
           10-Q filed on May 20, 2002 and incorporated herein by reference);


                                      -69-
<PAGE>


10.26      English Translation of September 18, 2001 Memorandum of Cooperation,
           Establishment of Shaanxi Provincial Education Resources Center by and
           among Li Gen Juan, Director of Shaanxi Provincial Center for
           Audio/Visual Education, Suan Pai Yau, Tin Pang and Wu Oi Juan, Deputy
           Directors of Shaanxi Provincial Center for Audio/Visual Education,
           and Lin Xiao Feng, President of Tengtu Culture & Education
           Electronics Development Co., Ltd. (filed as part of our Form 10-Q
           filed on February 19, 2002 and incorporated herein by reference);

10.27      English Translation of Cooperation Agreement between the Center for
           Audio/Visual Education, Department of Education, Fujian Province and
           Tengtu TianDi Network Co., Ltd. (filed as part of our Form 10-Q filed
           on May 20, 2002 and incorporated herein by reference);

10.28      Loan Agreement among Tengtu International Corp., Orion Capital
           Incorporated and Quest Ventures, Ltd. (filed as part of the Company's
           registration statement on Form S-1 filed on August 14, 2002 and
           incorporated herein by reference);

10.29      July 22, 2002 Supplemental Agreement between Tengtu International
           Corp. and Lifelong.com, Inc. (filed as part of the Company's
           registration statement on Form S-1 filed on August 14, 2002 and
           incorporated herein by reference);

10.30      English Translation of July 22, 2002 Cooperation Agreement between
           the National Center for Audio and Visual Education and Beijing Jiade
           Tengtu Science and Technology Group Companies. (filed as part of the
           Company's registration statement on Form S-1 filed on August 14, 2002
           and incorporated herein by reference);

10.31      English translation of December 18, 2002 Framework Agreement between
           Shaanxi Provincial Center for Audio Visual Education and Beijing
           Tengtu TianDi Network Co., Ltd. (filed as part of the Company's
           registration statement on Form S-1 filed on August 14, 2002 and
           incorporated herein by reference);

10.32      Amended understanding between Tengtu China and Tengtu International
           Corp. Governing Activities in China Relating to Operation Morning Sun
           National Center For Audio/Visual Education and the Ministry of
           Education, dated as of April 25, 2001 (filed as part of the Company's
           registration statement on Form S-1 filed on August 14, 2002 and
           incorporated herein by reference).

11.1       Statement re: Computation of Per Share Earnings;

12.1       Statement re: Computation of Ratios;

21.1       List of Subsidiaries;

(c)        Reports on Form 8-K


           No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.


                                      -70-
<PAGE>



                                   SIGNATURES

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


                                                   TENGTU INTERNATIONAL CORP.



Date: October __, 2002                              By: /s/ John Watt
                                                    --------------------------
                                                    John Watt, President

           In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.



/S/ JOHN D. WATT
--------------------------------              October __, 2002
John D. Watt
Director


/S/ PENG LIN
---------------------------------             October __, 2002
Peng Lin
Chief Financial Officer




/S/ JING LIAN
---------------------------------              October __, 2002
Jing Lian
Vice President and Director


/S/ ZHANG FAN QI
---------------------------------              October __, 2002
Zhang Fan Qi
Director


/S/ WILLIAM O.S. BALLARD
---------------------------------              October __, 2002
William O.S. Ballard
Director


/S/ JOHN McBRIDE
---------------------------------              October __, 2002
John McBride
Director

/S/ BIN HUANG
---------------------------------              October __, 2002
Ben Huang
Director


/S/ YUNG SANG DAI
---------------------------------              October __, 2002
Yung Sang  Dai
Director


                                      -71-
<PAGE>


                  CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
                             PURSUANT TO SECTION 302
                        OF THE SARBANES-OXLEY ACT OF 2002


I, John Watt, certify that:

       1. I have reviewed this annual report on Form 10-K of Tengtu
International Corp. ("Tengtu");

       2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and

       3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of Tengtu
as of, and for, the periods presented in this annual report.


Date: October 11, 2002                        /S/ John Watt
                                              ---------------------------------
                                             John Watt, President and Director



                                      -72-
<PAGE>




                  CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
                       PURSUANT TO 18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


           In connection with this annual report on Form 10-K of Tengtu
International Corp. ("Tengtu"), I, John Watt, President of Tengtu, certify,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my
knowledge:

(1) The report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and

(2) The information contained in this report fairly presents, in all material
respects, the financial condition and results of operations of Tengtu.



Date: October 11, 2002                         /S/ John Watt
                                               --------------------------------
                                               John Watt, President and Director

The purpose of this statement is solely to comply with Title 18, Chapter 63,
Section 1350 of the United States Code, as amended by Section 906 of the
Sabarnes-Oxley Act of 2002. This statement is not "filed" for the purposes of
Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the
liabilities of that Act or any other federal or state law or regulation.






                                      -73-
<PAGE>


                  CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
                         PURSUANT TO SECTION 302 OF THE
                           SARBANES-OXLEY ACT OF 2002

I, Peng Lin, certify that:

       1.  I have reviewed this annual report on Form 10-K of Tengtu
International Corp. ("Tengtu");

       2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and

       3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of Tengtu
as of, and for, the periods presented in this annual report.


Date: October 11, 2002                     /S/ Peng Lin
                                           ---------------------------------
                                           Peng Lin, Principal Financial Officer



                                      -74-
<PAGE>



                  CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
                       PURSUANT TO 18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


           In connection with this annual report on Form 10-K of Tengtu
International Corp. ("Tengtu"), I, Peng Lin, the principal financial officer of
Tengtu, certify, pursuant to Section 906 f the Sarbanes-Oxley Act of 2002, that,
to my knowledge:

(1) The report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and

(2) The information contained in this report fairly presents, in all material
respects, the financial condition and results of operations of Tengtu.



Date: October 11, 2002               /S/ Peng Lin
                                     ---------------------------------
                                     Peng Lin, Principal Financial Officer


The purpose of this statement is solely to comply with Title 18, Chapter 63,
Section 1350 of the United States Code, as amended by Section 906 of the
Sabarnes-Oxley Act of 2002. This statement is not "filed" for the purposes of
Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the
liabilities of that Act or any other federal or state law or regulation.



                                      -75-
<PAGE>



                   TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES


                                    CONTENTS

                                                                            PAGE

    Independent Auditor's Report                                             F-1

    Consolidated Financial Statements:

           Balance Sheets as of June 30, 2002 and 2001                       F-2

           Statements of Operations for the Years Ended
                 June 30, 2002, 2001 and 2000                                F-3

           Statements of Stockholders' Equity (Deficit) for the
                Years ended June 30, 2002, 2001 and 2000                     F-4


           Statements of Cash Flows for the Years Ended
                 June 30, 2002, 2001 and 2000                                F-5

           Notes to Financial Statements                             F-6 to F-23




<PAGE>






                          INDEPENDENT AUDITOR'S REPORT

To the Board of Directors and Shareholders
Tengtu International Corp.

We have audited the accompanying consolidated balance sheets of Tengtu
International Corp. and its subsidiaries as of June 30, 2002 and 2001 and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the three fiscal years in the period ended June 30,
2002. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our 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 consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated 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 Tengtu International
Corp. and its subsidiaries as of June 30, 2002 and 2001, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended June 30, 2002 in conformity with accounting principles generally
accepted in the United States of America.




                                                 Moore Stephens, P.C.
                                                 Certified Public Accountants

New York, New York
August 16, 2002,
except for Note 18,
as to which the date is
October 2, 2002



                                      F-1
<PAGE>

<TABLE>
<CAPTION>



                   TENGTU INTERNATIONAL CORP. AND SUBSIIARIES
                           CONSOLIDATED BALANCE SHEETS
                                                                     JUNE 30,
                                                                     --------
                                                                             RESTATED
                                     ASSETS
CURRENT ASSETS                                                2002             2001
                                                              -----            ----
<S>                                                      <C>             <C>
 Cash and cash equivalents                               $    914,838    $  1,026,400
 Accounts receivable, net
                                                                 --            16,578
 Due from related party                                     2,579,157       6,330,461
 Prepaid expenses                                           1,016,958         500,082
 Inventories
                                                                 --             2,452

 Other receivables                                             22,197          74,037
                                                         ----------------------------
  Total Current Assets                                      4,533,150       7,950,010
                                                         ----------------------------
PROPERTY AND EQUIPMENT, net                                   222,460         711,385
                                                         ----------------------------

OTHER ASSETS

    Due from Related Party                                 14,497,209            --

 Notes receivable                                              11,881          71,940

 Long-term Investment                                       4,469,600            --
 License fees
                                                                 --           100,000

 Restricted Cash                                            4,000,000            --
                                                         ----------------------------
                                                           22,978,690         171,940
                                                         ----------------------------
TOTAL ASSETS                                             $ 27,734,300    $  8,833,335
                                                         ============================

                      LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
 Accounts payable                                        $  1,092,231    $    959,022
 Accrued expenses                                             301,127         380,684
 Due to related party consultants                           2,012,522       1,625,026

 Short-term loan                                            1,883,428          94,150
 Other liabilities                                            434,644         451,299
                                                         ----------------------------
  Total Current Liabilities                                 5,723,952       3,510,181
                                                         ----------------------------

OTHER LIABILITIES
 Long-term debt                                             3,744,800         255,297
 Convertible debentures, net of discount                    1,360,585       1,274,030
                                                         ----------------------------
                                                            5,105,385       1,529,327
                                                         ----------------------------

COMMITMENTS [Note 8]

STOCKHOLDERS' EQUITY
 Preferred stock, par value $.01 per share; authorized
  10,000,000 shares; issued -0- shares
                                                                 --             --
 Common stock par value $.01 per share; authorized
  100,000,000 shares; issued and outstanding
  54,123,189 shares (2001 -- 45,089,673)                      541,232         450,897
 Additional paid in capital                                30,281,736      18,832,469
 Accumulated deficit                                      (13,899,433)    (15,477,541)
 Accumulated other comprehensive income (loss):
  Cumulative translation adjustment                           (17,788)        (11,214)
                                                         ----------------------------
                                                           16,905,747       3,794,611
Less: Treasury stock, at cost, 78,420 common shares
                                                                 (784)           (784)
                                                         ----------------------------
  Total Stockholders' Equity                               16,904,963       3,793,827
                                                         ----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY               $ 27,734,300    $  8,833,335
                                                         ============================
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                      F-2
<PAGE>

<TABLE>
<CAPTION>



                   TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                           FOR THE YEAR ENDED JUNE 30,

                                                       2002             2001           2000
                                                       ----             ----           ----
                                                                      RESTATED

<S>                                               <C>             <C>             <C>
SALES                                             $ 14,255,417    $  5,566,039    $    358,026
COST OF SALES                                        5,042,285       3,155,843         506,864
                                                  --------------------------------------------
                                                     9,213,132       2,410,196        (148,838)
                                                  --------------------------------------------

OPERATING EXPENSES
 Research and development                              971,111            --              --
 General and administrative                          2,511,430       2,014,899       1,537,833
 Related party consultants                             865,202         829,772       1,492,813
 Collection Provision                                  444,031         163,684          (8,984)
 Advertising                                            31,885          39,406          28,991
 Selling                                             1,837,924         602,132          74,819
 Depreciation                                           81,741          55,910          58,698
                                                  --------------------------------------------
                                                     6,743,324       3,705,803       3,184,170
                                                  --------------------------------------------
OPERATING INCOME                                     2,469,808      (1,295,607)     (3,333,008)
                                                  --------------------------------------------


OTHER INCOME (EXPENSE)
 Equity earnings (loss) in investee                       --           219,488         (80,147)
 Interest income                                         3,871          13,100          22,641
 Interest expense                                     (254,029)       (176,111)     (1,311,373)
 Other income                                        2,045,902         947,692           2,240
 Other expense                                        (263,352)         (1,731)        (29,837)
                                                  --------------------------------------------
                                                     1,532,392       1,002,438      (1,396,476)
                                                  --------------------------------------------
INCOME (LOSS) BEFORE MINORITY INTERESTS              4,002,200        (293,169)     (4,729,484)
MINORITY INTERESTS IN SUBSIDIARYS'-INCOME(LOSS)      2,424,092            --           (28,200)
                                                  --------------------------------------------
NET INCOME (LOSS)                                 $  1,578,108    $   (293,169)   $ (4,701,284)
                                                  ============================================



WEIGHTED AVERAGE NUMBER OF SHARES:
Basic                                               49,880,494      24,977,353      20,863,271
Common stock equivalents                             2,685,171       1,637,441            --
                                                  --------------------------------------------
Diluted                                             52,565,665      26,614,794      20,863,271
                                                  ============================================

EARNINGS (LOSS) PER COMMON SHARE:
Basic                                             $      0.032    $     (0.012)   $     (0.225)
Diluted                                           $      0.030    $     (0.011)   $     (0.225)
</TABLE>


              The accompanying notes are an integral part of these
                       consolidated financial statements.



                                      F-3
<PAGE>

<TABLE>
<CAPTION>

                   TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
            FOR THE YEARS ENDED JUNE 30, 2002, 2001 (RESTATED), 2000


                                                                                                                       ACCUMULATED
                                               COMMON STOCK            ADDITIONAL                                         OTHER
                                               ------------             PAID-IN    COMPREHENSIVE    ACCUMULATED       COMPREHENSIVE
                                         SHARES           AMOUNT        CAPITAL    INCOME (LOSS)      DEFICIT         INCOME (LOSS)
                                         ------           ------        -------    -------------      -------         -------------

<S>                                    <C>               <C>          <C>         <C>              <C>                 <C>
Balance - June 30, 1999                19,477,607        194,777      9,402,909                     (10,483,087)        (6,752)


Issuance of common
  stock for cash
                                          963,000          9,630        166,095           --             --             --
Issuance of common stock
  for promissory notes                    330,000          3,300         68,640           --             --             --
Issuance of common stock
  for services                          3,120,000         31,200        733,800           --             --             --

Amortization of deferred
 compensation related to
 stock options and common
  stock for services                         --             --             --             --             --             --
Issuance of common stock
 options for services - at
  fair value                                 --             --             --             --             --             --

Paid-in capital related to
  convertible debenture                      --             --        1,153,846           --             --             --
Paid-in capital related to
 detachable warrant -
  debenture                                  --             --          346,154           --             --             --
Other Comprehensive Income:
  Foreign currency adjustment                --             --             --              536           --              536

Comprehensive Income:
  Net loss                                   --             --             --       (4,701,285)      (4,701,285)        --
                                                                                   -----------

Comprehensive Income                                                                (4,700,749)
                                       ----------    -----------     ----------    ===========      -----------        -------
Balance - June 30, 2000                23,890,607        238,907     11,871,444                     (15,184,372)        (6,216)
                                       ==========    ===========     ==========                     ===========        =======



Issuance of common stock
  for services                            636,871          6,369        140,144           --             --             --

 Loan conversion                        7,301,526         73,015      2,139,400           --             --             --



Issuance of common stock for cash      13,260,669        132,606      3,845,592           --             --             --

Paid-in capital related to
  granted options & services                 --             --          214,908           --             --             --

Common Shares
  To be issued for interest expense          --             --           56,515           --             --             --

Paid-in capital related to
  warrents issued                            --             --          564,466           --             --             --
Other Comprehensive Income:
  Foreign currency adjustment                --             --             --           (4,998)          --             (4,998)

Comprehensive Income:
  Net Income                                 --             --             --         (293,169)        (293,169)        --
                                                                                   -----------
Comprehensive Income                                                                  (298,167)

                                       ----------    -----------     ----------    ===========    -----------          -------
Balance - June 30, 2001                45,089,673        450,897     18,832,469                   (15,477,541)         (11,214)
                                       ==========    ===========     ==========                   ===========          =======


Issuance of common stock
  for services                            360,008          3,600        300,058           --             --             --

Loan conversion                            43,011            430         21,075           --             --             --

Issuance of common stock
  for financing and
  interest expenses                       495,000          4,950        242,550


Issuance of common stock for cash,
  net of financing expenses             8,060,497         80,605      7,751,995           --             --             --

Issuance of common stock
  for options                              75,000            750         18,000           --             --             --

Common Shares
  To be issued for
  cash & options                             --             --        3,058,482           --             --             --

Paid-in capital related
  to service                                 --             --           57,107

  Foreign currency adjustment                --             --             --           10,781           --             (6,574)

Comprehensive Income:
  Net loss                                   --             --             --        1,578,108        1,578,108         --
                                                                                   -----------
Comprehensive Income                                                                 1,588,889
                                       ----------    -----------     ----------    ===========      -----------        -------

Balance - June 30, 2002                54,123,189        541,232     30,281,736                     (13,899,433)       (17,788)
                                       ==========    ===========     ==========                     ===========        =======












                                        TREASURY     UNAMORTIZED
                                          STOCK       DEFERRED     STOCKHOLDERS'
                                         AT COST    COMPENSATION      EQUITY
                                                                     (DEFICIT)
                                         -------    ------------    -----------


Balance - June 30, 1999                     (784)       (182,813)    (1,075,750)


Issuance of common
  stock for cash
                                             --             --          175,725
Issuance of common stock
  for promissory notes                       --             --           71,940
Issuance of common stock
  or services                                --             --          765,000

Amortization of deferred
 compensation related to
 stock options and common
  stock for services                         --          182,813        182,813
Issuance of common stock
 options for services - at
  fair value                                 --             --             --

Paid-in capital related to
  convertible debenture                      --             --        1,153,846
Paid-in capital related to
 detachable warrant -
  debenture                                  --             --          346,154
Other Comprehensive Income:
  Foreign currency adjustment                --             --              536

Comprehensive Income:
  Net loss                                   --             --       (4,701,285)

Comprehensive Income

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

Balance - June 30, 2000                     (784)           --       (3,081,021)

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

Issuance of common stock
  for services                               --             --          146,513

 Loan conversion                             --             --        2,212,415


Issuance of common stock for cash            --             --        3,978,198

Paid-in capital related to
  granted options & services                 --             --          214,908

Common Shares
  To be issued for interest expense          --             --           56,515

Paid-in capital related to
  warrents issued                            --             --          564,466
Other Comprehensive Income:
  Foreign currency adjustment                --             --           (4,998)

Comprehensive Income:
  Net Income                                 --             --         (293,169)

Comprehensive Income
                                         -------        --------     ----------
Balance - June 30, 2001                     (784)           --        3,793,827
                                         =======        ========     ==========

Issuance of common stock
  for services                               --             --          303,658

Loan conversion                              --             --           21,505

Issuance of common stock
  for financing and
  interest expenses                                                     247,500


Issuance of common stock for cash,
  net of financing expenses                  --             --        7,832,600

Issuance of common stock
  for options                                --             --           18,750

Common Shares
  To be issued for
  cash & options                             --             --        3,058,482

Paid-in capital related
  to service                                                             57,107

  Foreign currency adjustment                --             --           (6,574)

Comprehensive Income:
  Net loss                                   --             --        1,578,108


Comprehensive Income
                                         -------        --------     ----------

Balance - June 30, 2002                     (784)           --       16,904,963
                                         =======        ========     ==========

</TABLE>


              The accompanying notes are an integral part of these
                       consolidated financial statements.




                                      F-4
<PAGE>



<TABLE>
<CAPTION>




                   TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                           FOR THE YEAR ENDED JUNE 30,

                                                                                            2002           2001             2000
                                                                                           -----           ----             ----
                                                                                                         RESTATED
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                                    <C>             <C>             <C>
Net Income (loss)                                                                      $  1,578,108    $   (293,169)   $ (4,701,285)
Adjustments to reconcile net loss to net cash
 used by operating activities:
         Depreciation and amortization                                                      357,512         286,468         266,614
         Provision for (recovery of) bad debt                                                  --              --            (8,984)
         Loss on investment at equity                                                          --              --            80,147
         Noncash Gain on Loan forgiveness                                                  (236,559)           --              --
         Noncash financing expenses on shares issued                                        187,500          61,259            --
         Noncash compensation expense on equities issued for services                       331,115         926,587         947,813
         Noncash interest expense - convertible debenture                                    86,555          79,695       1,194,334
         Impaired Assets Write Off                                                          246,732            --              --
         Changes in operating assets and liabilities:
                    Decrease (Increase) in operating assets:
                               Accounts receivable                                           16,578          19,431          22,398
                               Due from related party                                    (6,155,603)     (6,160,337)        138,208
                               Prepaid expenses                                            (516,876)       (496,368)         26,188
                               Inventories                                                    2,452          15,619          16,377
                               Other receivables                                             73,757         (68,448)          7,757
                               Advance to director                                           60,059            --           (30,011)
                               Other assets                                                    --            30,454          28,390
                    Increase (Decrease) in operating liabilities:
                               Accounts payable                                             133,209        (731,636)         90,249
                               Accrued expenses                                              28,822         (38,476)         14,384
                               Due to related party consultants                             387,496         270,011         355,477
                               Other liabilities                                            (16,655)        131,252         366,267
                                                                                       ------------    ------------    ------------
                                           Net Cash Used by Operating Activities         (3,435,798)     (5,967,658)     (1,185,677)
                                                                                       ------------    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES
         Investing in Related Parties                                                    (4,590,302)           --              --
         Long-term Investment                                                            (4,469,600)           --              --
         Compensating deposit on bank loan                                               (4,000,000)           --              --
         Purchase of property and equipment                                                 (34,447)         (5,013)        (42,535)
                                                                                       ------------    ------------    ------------
                                           Net Cash Used by Investing Activities        (13,094,349)         (5,013)        (42,535)
                                                                                       ------------    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES
         Proceeds from Short-term loans                                                   1,883,428       2,107,000       1,858,064
         Proceeds from Long-term loans                                                    3,744,800            --              --
         Cash paid on short-term loan                                                       (94,150)           --              --
         Cash received for shares and options issued                                     10,891,082       3,978,200         175,725
                                                                                       ------------    ------------    ------------
                                           Net Cash Provided by Financing Activities     16,425,160       6,085,200       2,033,789
                                                                                       ------------    ------------    ------------

EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                      (6,575)         (5,220)         (2,038)
                                                                                       ------------    ------------    ------------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                           (111,561)        107,308         803,539
                                                                                       ------------    ------------    ------------

CASH AND CASH EQUIVALENTS, beginning of the period                                        1,026,400         919,091         115,552

CASH AND CASH EQUIVALENTS, end of the period                                           $    914,838    $  1,026,400    $    919,091
                                                                                       ============    ============    ============

</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                      F-5
<PAGE>


1.         THE COMPANY

      Tengtu International Corp. (the "Company") was incorporated in Delaware on
      May 6, 1988 as Galway Capital Corporation for the purpose of seeking
      potential ventures. On May 24, 1996 the Company changed its name to Tengtu
      International Corp. The Company's main activities, which are carried out
      through its subsidiaries , are the development and marketing of
      e-educational system software and sourcing and distribution of e-education
      course content in China.

2.         SIGNIFICANT ACCOUNTING POLICIES

a)         Principles of Consolidation

           The consolidated financial statements include the accounts of the
           Company and subsidiaries over which it owns more than a 50% equity
           interest. Significant inter-company balances and transactions have
           been eliminated on consolidation.

           The Company contributed capital of $20,430,000 to a Chinese joint
           venture, Tengtu United China ("TUC"), in which the minority Chinese
           partner, Tengtu China, has a 43% interest. No portion of the
           $20,430,000 has been allocated to the minority as the joint venture
           agreement assigns all rights to that contribution to the Company. In
           accordance with Accounting Research Bulletin 51, the Company has
           charged to income the loss applicable to the minority interest that
           is in excess of the minority's interest in the equity capital of the
           joint venture, including any guarantees or commitments from minority
           shareholder for further capital contributions.

           In the case of TUC, the Company and the minority interest holder
           agreed that the contribution of software and hardware by the minority
           interest to the joint venture had no fair market value at the time of
           the contribution. The joint venture, therefore, assigned a $0 value
           to these assets. The minority also contributed a contract to TUC that
           gives the joint venture the right to provide the Chinese public
           school system with certain educational materials, including software
           and textbooks. A value of $0 was assigned to the contract by the
           joint venture, as it could not create a reliable model of revenue
           streams or cash flows associated with the contract at the time of the
           contribution.

b)         Use of Estimates

           The preparation of financial statements in conformity with generally
           accepted accounting principles requires management to make estimates
           and assumptions that affect the reported amounts of assets and
           liabilities at June 30, 2002 and 2001, and reported amounts of
           revenues and expenses during each of the three fiscal years ended
           June 30, 2002. Actual results could differ from those estimates.


                                      F-6
<PAGE>


c)         Revenue Recognition

           Revenue from the sale of hardware is recognized when the products are
           delivered to the customer. Revenue from the sale of software
           products, which do not require any significant production,
           modification or customization for the Company's targeted customers
           and do not have multiple elements, is recognized in accordance with
           paragraphs 7 and 8 of SOP 97-2. These paragraphs require four
           conditions to be present in order to recognize revenue: (1)
           persuasive evidence of an arrangement exists, (2) delivery has
           occurred, (3) the Company's fee is fixed and determinable and (4)
           collectibility is probable.

           Revenue from software license fees is recognized on a straight-line
           basis over the term of the license.

           Hardware and software are delivered to customers at or at
           approximately the same time. Software is generally installed within
           two weeks of delivery.

           The hardware sold includes personal desktop computers, printers,
           network servers, monitors, modems, hard drives and other storage
           media and cables. The Company's software cannot be installed until
           the hardware is delivered. Therefore, a delay in delivery of hardware
           will delay the recognition of software sales revenues.

d)         Long-lived Assets

           Long-lived assets are accounted for in accordance with SFAS No. 144,
           "Accounting for the Impairment or Disposal of Long-Lived Assets." The
           Statement requires that long-lived assets to be disposed of other
           than by sale be considered held and used until they are disposed of.
           SFAS No. 144 requires that long-lived assets to be disposed of by
           sale be measured at the lower of carrying amounts or fair value less
           cost to sell and to cease depreciation (amortization). SFAS No. 144
           requires a probability-weighted cash flow estimation approach in
           situations where alternative courses of action to recover the
           carrying amount of a long-lived asset are under consideration or a
           range of possible future cash flow amounts are estimated.
           Additionally, goodwill will no longer be required to be allocated to
           long-lived assets to be tested for impairment.

           Property and equipment are stated at cost. Depreciation is provided
           primarily by the straight-line method over the estimated useful lives
           of the assets.

e)         Cash Equivalents

           The Company considers all highly liquid investments with maturities
           of three months or less when purchased to be cash equivalents. The
           Company had no cash equivalents at June 30, 2002 and 2001.


                                      F-7
<PAGE>


f)         Income Taxes

           The Company accounts for income taxes in accordance with Statement of
           Financial Accounting Standards ("SFAS") No. 109, "Accounting for
           Income Taxes", which requires an asset and liability approach to
           determine deferred tax assets and liabilities. The deferred assets
           and liabilities are determined based upon the differences between
           financial reporting and tax bases of assets and liabilities and are
           measured using the enacted tax rates and laws that are expected to be
           in effect when the differences are assumed to reverse.

           The Company files a consolidated return with its subsidiaries that
           are eligible to be consolidated. Separate provisions for income tax
           are calculated for subsidiaries that are not eligible for
           consolidation into the U.S. federal income tax return.

g)         Income/Loss per Share

           Income or loss per common and common equivalent share is computed
           based on the weighted average number of common shares outstanding.
           Due to the antidilutive effect of the assumed exercise of outstanding
           common stock equivalents at June 30, 2001 and 2000, loss per share
           does not give effect to the exercise of these common stock
           equivalents in that year, but they are dilutive for the year ended
           June 30, 2002.

h)         Advertising Expense

           The Company expenses advertising costs as incurred.

i)         Foreign Currency Transactions/Translation

           The functional currency of the Company's subsidiary and joint venture
           in China is the Chinese renminbi ("RMB"). The Company's Canadian
           subsidiary uses the Canadian dollar as its functional currency and
           its Hong Kong subsidiary used the Hong Kong dollar as its functional
           currency until the subsidiary was dissolved during the year ended
           June 30, 2002. Foreign currency transactions are translated into the
           functional currency at the exchange rate prevailing on the date of
           the transaction. Material gains and losses from foreign currency
           transactions are reflected in the financial period in which the
           exchange rate changes. Foreign transaction gains and losses in the
           functional currencies are immaterial. Transactions denominated in
           other than the functional currencies are insignificant and,
           therefore, foreign currency transaction gains and losses in
           non-functional currencies are also immaterial.



                                      F-8
<PAGE>


           Assets and liabilities of the financial statements of foreign
           subsidiaries and joint venture are translated into U.S. dollars
           utilizing the exchange rate at the balance sheet date, and revenues
           and expenses are translated using average exchange rates in effect
           during the year. Translation adjustments are accumulated and recorded
           as a separate component of stockholders' equity.

           The Chinese government imposes significant exchange restrictions on
           fund transfers out of China that are not related to business
           operations. These restrictions have not had a material impact on the
           Company because it has not engaged in any significant transactions
           that are subject to the restrictions.

j)         Accumulated Other Comprehensive Income

           Accumulated other comprehensive income represents the change in
           equity of the Company during the periods presented from foreign
           currency translation adjustments.

k)         Stock-based Compensation

           On July 1, 1996, the Company adopted the disclosure requirements of
           SFAS No. 123, "Accounting for Stock-Based Compensation" for stock
           options and similar equity instruments (collectively, "options")
           issued to employees; however, the Company will continue to apply the
           intrinsic value based method of accounting for options issued to
           employees prescribed by Accounting Principles Board ("APB") Opinion
           No. 25, "Accounting for Stock Issues to Employees" rather than the
           fair value based method of accounting prescribed by SFAS No. 123.
           SFAS No. 123 also applies to transactions in which an entity issues
           its equity instruments to acquire goods or services from
           non-employees. Those transactions must be accounted for based on the
           fair value of the consideration received or the fair value of the
           equity instruments issued, whichever is more reliably measurable.

l)         Software Costs

           Software development costs are capitalized if they are incurred after
           technological feasibility has been established. Purchased software is
           capitalized if it has an alternative future use. Research and
           development costs for new products or enhancement of existing
           software and purchased software that do not meet these requirements
           are expensed as incurred. Capitalized costs are amortized under the
           straight-line method over the lesser of five years or the useful life
           of the related product.

m)         Long Term Investment

           Tengtu China is entering into a joint venture, the China Broadband
           Education Resource Center ("CBERC"), with a division of the Chinese
           Ministry of Education on behalf of TUC. CBERC is established for the
           transmission of various educational tools to individual schools for
           an annual fee. This joint venture is expected to be formed in October
           2002.


                                      F-9
<PAGE>


           Tengtu China is also forming joint ventures with various Chinese
           Provinces on behalf of TUC. One of these has already been formed in
           Shanxii and three others are in the process of being organized. Each
           of these joint ventures is a Local Broadband Education Resource
           Center ("LBERC"). They will connect to CBERC and will contain their
           own educational and other materials mandated by the Provinces. This
           content will also be transmitted to individual schools for an annual
           fee.


           The Company, through TUC, has advanced $4,469,600 for the formation
           of CBERC and the LBERCs. For CBERC and the Shanxii LBERC, Tengtu
           China is the majority owner and it is anticipated that it will be the
           majority owner of every LBERC to be formed. Neither CBERC nor the
           Shanxii LBERC had material operations during the year ended June 30,
           2002, and the account balance represents the total funds advanced.
           The particular nature of the Company's investment in these joint
           ventures has not been determined. When that has been established, the
           Company will decide whether to consolidate the entities or treat them
           on the equity basis.

3.         PROPERTY AND EQUIPMENT

      Property and equipment is comprised as follows:
                                                                JUNE 30,
                                                           2002          2001
                                                         ----            ----
              Computer hardware                     $    59,778     $   134,075
              Computer software                               0           9,975
              Furniture and fixtures                      8,755          45,650
              Automobiles                               206,553         206,553
              Office equipment                           67,198         109,489
              Idle equipment                                  -          73,305
              Production equipment                    1,052,868       1,283,276
                                                      ---------       ---------
              Total at Cost                           1,395,152       1,862,323
              Less: accumulated depreciation         (1,172,692)     (1,150,938)
                                                    -----------     -----------
              Net Property and Equipment            $   222,460     $   711,385
                                                    ===========     ===========


      Depreciation charged to operations for the years ended June 30, 2002, 2001
      and 2000 was $357,512, $261,471 and $266,614, respectively, of which
      $248,072, $192,342 and $207,916 was included in cost of sales for the
      years ended June 30, 2002, 2001 and 2000, respectively.



                                      F-10
<PAGE>




4.    LICENSE FEES

      On June 21, 2000, the Company entered into a license agreement with
      Netopia, Inc. The agreement grants the Company a fee-bearing, nonexclusive
      license right to promote and otherwise market Netopia's website product
      and service to the Company's customers. The cost of the agreement of
      $125,000 was to be amortized on a straight-line basis over five years.
      During the year ended June 30, 2002, this license was determined to have
      no remaining value, and the balance of the asset was amortized
      immediately. Amortization for the years ended June 30, 2002 and 2001 was
      $100,000 and $25,000, respectively. No amortization was recorded for the
      year ended June 30, 2000 due to the short amortization period of nine
      days.



5.    SHORT TERM DEBT

      On June 6, 2002 the Company received a bridge loan of $4,000,000 from
      Quest Ventures Ltd. The loan is due on November 30, 2002 and earns
      interest at 12% annually, compounded monthly. The loan is collateralized
      by a security interest in all of the Company's property and a pledge of
      10,015,812 of the Company's common stock owned by Orion Capital
      Incorporated ("Orion"), the Company's largest shareholder. Orion has also
      guaranteed the loan, and Mr. William Ballard, Orion's beneficial owner and
      the Chairman of the Company's Executive Committee, has guaranteed the
      payment of $2,500,000 due on before July 5, 2002. This payment was paid by
      July 5, 2002, relieving Mr. Ballard of his guarantee. The balance of the
      loan at June 30, 2002 was $1,749,200.

      Orion has advanced $134,228 to the Company for working capital purposes.
      The advance is due on demand and interest free

6.    LONG TERM DEBT

      On December 23, 1999, the Company received cash of $l, 500,000 in exchange
      for a four year Floating Convertible Debenture ("Debenture") convertible
      into shares of the Company's $.01 par value common stock ("Common Stock")
      and a separate Common Stock Warrant ("Warrant") for the purchase of
      1,500,000 shares of Common Stock. The Debenture is due December 15, 2003
      and provides for accrual of interest beginning December 15, 2000 at a rate
      equal to the best lending rate of The Hong Kong and Shanghai Banking
      Corporation plus two percent (approximately 7% and 9% at June 30, 2002 and
      2001, respectively).


                                      F-11
<PAGE>


      The Debenture is convertible into the Company's common stock at a
      conversion price of $.50 during the first year, $1.00 during the second
      year, $2.00 during the third year and $4.00 on any date thereafter. The
      unpaid balance of principal and interest outstanding at maturity, if any,
      may be converted by the holder into the Company's Common Stock at the then
      existing market price minus twenty percent.

      The Warrant gives the holder the right to purchase 1,500,000 shares of the
      Company's Common Stock at $1.00 per share during the first year, $2.00 per
      share during the second year and $4.00 thereafter. The Warrant shall
      become void three years after issuance. In connection with the purchase of
      the Debenture and Warrant, the Company and the holder entered into an
      Investor Rights Agreement which provides that on or before June 15, 2000,
      the holder may purchase additional convertible debentures for up to
      U.S.$3.5 million and receive additional warrants on substantially the same
      terms. The holder did not exercise these rights. The Investor Rights
      Agreement also provides the holder(s) of the Debenture, Warrant and or the
      shares issued upon conversion or exercise thereof with registration and
      certain other rights. The effective interest rate of the debenture is
      8.5%.

      Because no portion of the price paid by the holder was for the Warrants,
      the Warrants were assigned a value by the Company and the Debenture was
      discounted by that amount. The financial statements reflect entries of
      $346,154 for a discount to the Debenture and paid in capital for the
      Warrant. This value was assigned as follows. On the date that the
      Debenture and Warrant were sold to the holder, the Company's stock was
      trading at $1.60 per share and the Warrant was exercisable at $1.00.
      Therefore, the Warrant had a value between $0 and $.60 per share. The
      Company chose to value the Warrant at $.30 per share. The gross amount of
      the Debenture and Warrant were therefore $1.5 million (Debenture) plus
      $450,000 (Warrant - $.30 x 1,500,000) for a total of $1.95 million. Of the
      $1.95 million, the Warrant represents 23.08% ($450,000/$1.95 million). The
      discount to the Debenture was calculated by multiplying the percentage of
      the total represented by the Warrant (23.08%) by the total proceeds
      received from the sale ($1.5 million). The discount to the Debenture was
      therefore equal to $346,154 and the Debenture was discounted to $1,153,846
      ($1.5 million - $346,154).

      On the date the Debenture was issued, the conversion price was $.50 and
      the market price was $1.60. The conversion feature was valued at the
      full-adjusted amount of the Debenture, after valuation of the Warrant, of
      $1,153,846. Because the Debenture was immediately convertible, the full
      discount was charged to interest expense for the year ended June 30, 2000.

      A group of private investors, in July 1999, advanced approximately
      $250,000 to Edsoft Platforms (Canada), Inc., one of the Company's
      subsidiaries, as a shareholder's loan, bearing a 10% interest rate. One
      half of the loan can be converted into common shares of the Company at $3
      per share if the loan is not paid in full at the maturity date of July 27,
      2002. Edsoft Platforms (Canada), Inc. ceased operations during the year
      ended June 30, 2002 and on May 15, 2002, the Company agreed to issue
      43,011 shares of common stock in payment of the loan and recorded a $
      236,559 gain on the forgiveness of debt.


                                      F-12
<PAGE>


      On June 26, 2002, the Company borrowed approximately $3,745,000 in Chinese
      renminbi from Min Sheng Bank (of China). This line of credit bears
      interest at 5.58% and is payable in full on June 26, 2007. This line of
      credit is fully secured by $4,000,000 in restricted US dollar denominated
      deposits at the Min Sheng Bank.

      Annual maturities of the long-term debt are as follows:

                                        Year Ending
                                           June 30,
                                           -------
                                        2003        $   ---
                                        2004         1,500,000
                                        2005            ---
                                        2006            ---
                                        2007         3,745,000
                                                    ----------
                                                    $5,245,000
                                                    ==========

7.    INCOME TAXES


      For the current year, none of the Company's operating subsidiaries will be
      included in its federal income tax return as these are all foreign
      entities and are therefore ineligible for consolidation.

      The Company has accumulated approximately $15,981,000 of operating losses
      that may be used to offset future federal taxable income. The utilization
      of the losses expires in years from 2006 to 2022.

      Due to an ownership change in the year ended June 30, 1996, annual
      utilization of approximately $265,000 of the losses is expected to be
      limited to an estimated $60,000 by current provisions of Section 382 of
      the Internal Revenue Code, as amended.



                                      F-13
<PAGE>


      As the Company is not liable for either current or deferred income taxes
      for the years ended June 30, 2002, 2001 and 2000, respectively, no
      provision is shown on the statement of operations. For U.S. tax purposes,
      the Company has recorded a deferred tax asset of approximately $5,274,000
      at June 30, 2002 and $3,698,000 at June 30, 2001 due principally to net
      operating losses. A valuation allowance of an identical amount has been
      recorded, as the Company believes that it is more likely than not that the
      losses will not be utilized. The allowance has the effect of reducing the
      carrying value of the deferred tax asset to $0. The valuation allowance
      increased approximately $1,576,000 and $619,500 during the years ended
      June 30, 2002 and 2001, respectively. The Company's Hong Kong subsidiary
      had recorded a deferred tax asset of approximately $73,500 at June 30,
      2001 that was totally offset by a valuation allowance due to the
      uncertainty of realization. The tax asset and related valuation allowance
      of the Company's Hong Kong subsidiary were written off during the year
      ended June 30, 2002 when all operations ceased and the subsidiary was
      dissolved.



      TUC has an income tax "holiday" for its first profitable and four
      subsequent years as computed on a Chinese Tax basis, which is a hybridized
      cash basis of accounting. This holiday reduces income taxes by 100% for
      years one and two, and by 50% for years three through five. The Company
      has not accrued any tax assets, liabilities or expenses due to the tax
      holiday. Chinese tax law allows the carry-forward of operating losses for
      up to five years, but no tax assets for prior operating losses has been
      recorded due to the tax holiday.



      The Company is a U.S. company that operates through a branch office in
      Canada. As a U.S. company, it is required to file an income tax return and
      report those branch operations. The income tax returns have generated the
      above net operating losses.


8.    CONCENTRATION OF CREDIT RISK

      The Company operates through subsidiaries located principally in Beijing
      and Hong Kong, China and an administrative office in Toronto, Canada. The
      Company grants credit to its customers in these geographic regions.



      The Company performs certain credit evaluation procedures and does not
      require collateral. The Company believes that credit risk is limited
      because the Company routinely assesses the financial strength of its
      customers, and based upon factors surrounding the credit risk of its
      customers, establishes an allowance for uncollectible accounts and, as a
      consequence, believes that its accounts receivable credit risk exposure
      beyond such allowances is limited.



                                      F-14
<PAGE>

      For non-related party accounts receivable, the Company established an
      allowance for doubtful accounts at June 30, 2002 and 2001 of $0 and
      $200,097, RESPECTIVELY. For related party accounts receivable, an
      allowance of $607,715 and $163,684 at June 30, 2002 and 2001,
      respectively, has been established (see Notes 11 and 17). The Company
      believes any credit risk beyond this amount would be negligible.



      At June 30, 2002 and 2001, the Company had approximately $4,923,800 and
      $1,016,700 of cash in banks over insurance limits, respectively.



      The Company does not require collateral or other securities to support
      financial instruments that are subject to credit risk.



      For the fiscal year ended June 30, 2002 and 2001, approximately 99% and
      93% of sales were generated through the contract (and successors to the
      contract) contributed to TUC (see Note 2a), respectively. The customers
      for all sales created by the contributed contract and its successors are
      the schools governed by the Chinese Ministry of Education. Receivables
      related to these sales transactions are grouped together with due from
      related party. For the fiscal year ended June 30, 2000, no customer
      accounted for more than 10% of total sales.


9.    COMMITMENTS AND CONTINGENCIES

      a)   The Company has entered into operating leases for office space, on a
           month-to-month basis. There are no minimum rental payments on these
           leases.

           Rent expense for the years ended June 30, 2002, 2001 and 2000 has
           been charged as follows:
                                                            YEAR ENDED JUNE 30,
                                                            -------------------
                                                  2002          2001       2000
                                                  ----          ----       ----
         General and administrative expense     $ 66,409     $ 94,207   $ 62,671
         Selling expense                         142,860       69,747      6,281
         Cost of sales                            94,858       35,433     33,945
                                               ---------     --------   --------
         Total rent expense                    $ 304,127     $199,387   $102,897
                                               =========     ========   ========




                                      F-15
<PAGE>


      The Company has contracts with various executives and consultants. The
      minimum cash compensation due under these contracts is as follows:

                                Year Ending
                                  June 30,
                                    2003               $ 128,400
                                    2004                 128,400
                                    2005                  42,800
                                                       ---------
                                                       $ 299,600
                                                       =========

b)         The Company is committed to begin making deferred compensation
           payments to its related party consultants upon the completion of its
           next major financing transaction. However, the timing of the payment
           of the deferred compensation and additional contributions is
           discretionary and not defined in any agreement. The Company's Board
           of Directors has not defined a "major financing transaction," and
           such definition will be wholly within its discretion.

c)         The Company is party to litigation in the normal course of business.
           In management's opinion, the litigation will not materially affect
           the Company's financial position, results of operation or cash flows.

D)         The Company is committed to fund CBERC and the three LBERCs being
           formed as follows: 1) CBERC - RMB 30 million (approximately
           $3,624,000) within twelve months after the establishment of CBERC and
           RMB 20 million (approximately $2,416,000) within eighteen months
           after the establishment of CBERC; 2) LBERCs - RMB 20 million
           (approximately $2,416,000) was due on December 31, 2001 and RMB 40
           million (approximately $4,832,000) with no definitive due date. The
           total commitment is RMB 110 million (approximately $13,288,000).


                                      F-16
<PAGE>


10.        FOREIGN OPERATIONS

      The Company operates principally in China and Canada, and previously
      operated in Hong Kong. Following is a summary of information by area for
      the years ended June 30, 2002 and 2001. For the year ended June 30, 2000,
      the Company had minimal sales and incurred principally administrative
      expenses.

    Net sales to Unaffiliated Customers:          2002        2001
                                                (In $000)   (In $000)
                                                ---------   ---------
    China                                       $ 14,255    $  5,347
    Canada                                         -0-          -0-
    Hong Kong                                      -0-           219
                                                --------    --------
                                                $ 14,255    $  5,566
                                                --------    --------
Income (loss) from operations:
    China                                       $  3,842    $  1,356
    Canada                                                      -0-
    Hong Kong                                      -0-          (108)
Other income                                       2,046         865
General corporate expenses                        (4,310)     (2,406)
                                                --------    --------
Net income (loss) as reported
  in the accompanying statements                $  1,578    $   (293)
                                                --------    --------

Identifiable assets:
    China                                       $ 26,495    $  7,508
    Hong Kong                                          0          27
General corporate assets                           1,239       1,298
                                                --------    --------
Total assets as reported
  in the accompanying balance sheet             $ 27,734    $  8,833
                                                --------    --------

      There were no inter-area sales in fiscal 2002 and 2001. Identifiable
      assets are those that are identifiable with operations in each
      geographical area. General corporate assets consist primarily of cash,
      cash equivalents, fixed assets, and prepayments. Sales are attributed to
      areas based on location of customers.

11.        RELATED PARTY TRANSACTIONS


      Due to the downsizing of the staff of TUC in prior years, the operations
      of the joint venture during the years ended June 30, 2002 and 2001 were
      carried out by the minority Chinese partner. At June 30, 2002 and 2001,
      TUC has a balance due from the minority Chinese partner of approximately
      $14,283,443 and $6,462,900, respectively. These amounts are net of an
      allowance for doubtful accounts of $607,715 and $163,684 at June 30, 2002
      and 2001, respectively (see Notes 8and 17). The minority interest
      allocated to the minority partner of $2,424,092 and $0 at June 30, 2002
      and 2001, respectively, also offsets this receivable.

      During fiscal 2002, 2001 and 2000, respectively, the Company incurred
      consulting and related expenses of approximately $857,000, $800,000 and
      $1,493,000 from officers and directors of the Company or its subsidiaries
      or companies controlled by these officers and directors. No payments have
      been made for the amounts incurred for the year ended June 30, 2000.
      $356,192 and $375,504 were paid for the years ended June 30, 2002 and
      2001, respectively.



                                      F-17
<PAGE>


      Of the total expenses incurred, approximately $250,000 in 2002, $84,700 in
      2001 and $182,800 in 2000 represent the value of common shares issued for
      services to Officers, shareholders or companies controlled by
      shareholders. The Officers entered into agreements with the Company in the
      year ended June 30, 1997 that entitled them to receive 500,000 and 100,000
      shares, respectively, at the date the agreements were signed. Deferred
      compensation of $731,250 was recorded in the year ended June 30, 1997, and
      was amortized over the three year term of each agreement.


      In October 1999, the Company and Comadex Industries, Ltd. entered into a
      consulting agreement for the employment of Pak Cheung as the Company's
      Chairman and CEO. Pursuant to that agreement Comadex received 3,000,000
      common shares for past services rendered, resulting in a charge to related
      party consultants expense of $750,000. Comadex shall receive an incentive
      of 1% of the capital raised in excess of $3,000,000 by Mr. Cheung for the
      Company or any Company subsidiary that is 50% or more owned by the
      Company.


      On September 9, 1999 a Company director loaned $100,000 to the Company.
      The loan bore interest at 6% per annum and was due in twelve months. The
      loan was convertible at the option of the Company director at the rate of
      $.35 per share, or into an aggregate of 285,714 shares of the Company's
      common stock. Another Director of the Company guaranteed the loan. At the
      date of the loan, the Company's common stock was trading at $.25 per
      share; therefore the loan did not contain a beneficial conversion feature.
      This loan was converted to 285,714 shares in October 2000.

12.        EQUITY LINE


      On October 25, 2000, the Company entered into an investment agreement with
      Swartz Private Equity L.L.C. ("Swartz") (the "Investment Agreement"). The
      Investment Agreement entitles the Company to issue and sell up to $30
      million of the Company's common stock to Swartz subject to a formula based
      on the stock price and trading volume, from time to time over a three year
      period, following the effective date of a registration statement on Form
      S-1. The Securities and Exchange Commission declared the Company's
      registration statement on Form S-1 effective during the quarter ended
      December 31, 2000. The investment Agreement defines each issuance and sale
      as a "Put."

      Under the Investment Agreement, Swartz will pay the Company a percentage
      of the market price for each share of common stock during the 20 business
      days immediately following the date the Company elects to sell stock to
      Swartz in a Put. For each share of common stock, Swartz will pay the
      Company the lesser of:

                          - the "market price" for each share, minus $.075; or
                          - 92% of the "market price" for each share.



                                      F-18
<PAGE>

      The "market price" is the lowest bid price during the 20-day period
      preceding a Put.

      Each time the Company sells shares of its common stock to Swartz, it will
      also issue five year warrants to Swartz to purchase its common stock in an
      amount corresponding to 10% of the number of shares in the Put. Each
      warrant will be exercisable at 110% of the market price for the applicable
      Put.

      As consideration for making its financing commitment to the Company,
      Swartz was issued a warrant to purchase 1,200,000 shares of the Company's
      common stock exercisable at prices determined by a formula until October
      25, 2005. The warrant was valued using the Black-Scholes option valuation
      model. The charge to operations for the years ended June 30, 2002 and 2001
      was approximately $186,200 and $93,100, respectively.

      On August 28, 2001, the Company notified Swartz that the agreements and
      warrants issued to Swartz are void and unenforceable. On September 12,
      2001, the Company was served a complaint filed by Swartz in state court in
      Fulton County, Georgia. In October 2001, the Company made a motion to
      dismiss the suit which is still pending . At that time the Company
      reversed the unamortized portion of prepaid expense of approximately
      $418,900 against paid-in capital (See Notes 9c and 18).

13. STOCK OPTIONS AND WARRANTS

      The Company has established two stock option plans for its employees,
      consultants and directors totaling 5,000,000 common shares. The maximum
      number of shares granted to any individual under the plans is 300,000. For
      the year ended June 30, 2000, certain employees exercised their options to
      purchase a total of 330,000 shares for $71,940. The shares were purchased
      by issuing promissory notes to the Company. The notes mature in five
      years. The notes are interest free in the first year and have an interest
      rate of 3% per annum for each subsequent year that the notes are
      outstanding. Partial or full repayment may be due prior to maturity if the
      employee sells part or all of the shares purchased. The repayment is equal
      to the ratio of the shares sold over the total shares purchased.

      On August 1, 1999 the Company entered into a one-year contract with a
      marketing consultant. As part of its fee, the consultant received three
      warrants from the Company, each representing 50,000 shares of the
      Company's common stock. Each of the warrants is exercisable for five years
      at the following dates and prices: a) warrant 1 - August 1, 1999 at $.75
      per share; b) warrant 2 - February 1, 2000 at $1.50 per share and c)
      warrant 3 - August 1, 2000 at $3.00 per share.



                                      F-19
<PAGE>


      The following table summarizes information concerning currently
      outstanding and exercisable stock options and warrants:



<TABLE>
<CAPTION>
                                                                                   Weighted
                                                                 Excerise           Average
             Contractual        Outstanding                        Price          Contractual
                 Life               at                              at                Life
                (Year)         June 30, 2002         %         June 30, 2002         (Year)

<S>                <C>          <C>                <C>              <C>               <C>
 Options           10           1,760,000          10.84%           0.218             1.08
 Options            5              75,000           0.46%           0.250             0.02
 Options            5             165,542           1.02%           0.285             0.05
 Options            5             216,817           1.34%           0.670             0.07
 Options           10             114,196           0.70%           0.191             0.07
 Warrants           3           1,500,000           9.24%           4.000             0.28
 Warrants           5              50,000           0.31%           0.750             0.02
 Warrants           5              50,000           0.31%           1.500             0.02
 Warrants           5              50,000           0.31%           3.000             0.02
 Warrants           5              46,800           0.29%           0.220             0.01
 Warrants           5           1,100,000           6.77%           0.285             0.34
 Options            5             120,000           0.74%           1.350             0.04
 Warrants           1             966,667           5.95%           1.200             0.06
 Warrants           1           9,823,996          60.50%           0.750             0.60
 Options            5              49,027           0.30%           0.760             0.02
 Warrants           1              75,000           0.46%           1.000             0.00
 Warrants           1              75,000           0.46%           1.500             0.00

                             ------------                                      -----------
Total                          16,238,045                                             2.70
                             ============                                      ===========


</TABLE>



      On September 15 and December 21, 2000, the Company granted
      non-transferable options to its legal counsel to purchase 150,000 and
      100,000 shares, respectively, of common stock at the market price of the
      stock at the dates of the grant. The options are valued using the
      Black-Scholes option pricing model and resulted in a charge to operations
      of approximately $152,500.



      The agreements covering these options contain anti-dilution provisions to
      adjust the number of options and the exercise prices for various changes,
      as defined in the agreements, of the common shares of the Company.



      Had the Company elected to recognize compensation expense for all options
      granted to employees using the fair value method prescribed by SFAS 123,
      the Company's net loss and net loss per share would be the pro forma
      amounts indicated below]:

                                                      Year Ended June 30,
                                           -------------------------------------
                                                2002         2001      2000
                                           -----------  ----------- ------------
           Net Income (Loss) as Reported   $ 1,578,108  $ (293,169) $(4,701,285)
           Pro Forma Net Loss                   --            --         --
           Loss Per Share as Reported           --            --         --
           Pro Forma Loss Per Share             --            --         --



                                      F-20
<PAGE>


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


14. FAIR VALUE OF FINANCIAL INSTRUMENTS

      SFAS No. 107, "Disclosures about Fair Values of Financial Instruments",
      requires disclosing fair value to the extent practicable for financial
      instruments that are recognized or unrecognized in the balance sheet. The
      fair value of the financial instruments disclosed herein is not
      necessarily representative of the amount that could be realized or
      settled, nor does the fair value amount consider the tax consequences of
      realization or settlement.

      For certain financial instruments, including cash and cash equivalents,
      trade receivables and payable, and short-term debt, it was assumed that
      the carrying amount approximated fair value because of the near term
      maturities of such obligations. The fair values of long-term debt and
      long-term notes receivable were determined based on current rates at which
      the Company could borrow or advance funds with similar remaining
      maturities, which amount approximates its carrying value.

15. STATEMENTS OF CASH FLOWS SUPPLEMENTAL DISCLOSURES

      On May 15, 2002, the Company agreed to issue 43,011 shares of its common
      stock to a non-U.S. investor for the forgiveness of indebtedness in
      connection with the winding down of the business Edsoft Platforms
      (Canada), Inc. (see Note 6).

      On May 22, 2002, the Company entered into an agreement with a former
      consultant pursuant to which 250,000 shares of common stock were issued in
      settlement of, among other things, consulting services.

      For the years ended June 30, 2002, 2001 and 2000, the Company issued
      shares of common stock or common stock equivalents in lieu of cash
      payments for services rendered. The value of such services was $331,115,
      $925,887 and $765,000 respectively. The Company also issued 330,000 shares
      of common stock to employees exercising their stock options. The total
      price of the shares was $71,940 and was paid by the employees via
      promissory notes given to the Company.

      For the year ended June 30, 2001, the Company issued 285,714 shares of
      common stock through the conversion of a $100,000 loan from a Director.
      During that same year, the Company received $3,107,000 in loan proceeds.
      The loans with accrued interest, totaling $3,168,259, were converted to
      10,537,529 shares of common stock during the year.




                                      F-21
<PAGE>

                                                  JUNE 30,
                                                  --------
                                    2002              2001          2000
                                    ----              ----          ----
      Interest Paid              $150,654           $158,824         ---
      Income Tax Paid               ---               ---            ---


16. AUTHORITATIVE PRONOUNCEMENTS

      In August 2001, the Financial Accounting Standards Board ("FASB") issued
      SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
      Assets" ("SFAS 144"). This statement is effective for fiscal years
      beginning after December 15, 2001. This supersedes SFAS No. 121
      "Accounting for the Impairment of Long-Lived Assets and Assets to Be
      Disposed Of," while retaining many of the requirements of such statement.
      Implementation of this pronouncement did not have a material effect on the
      financial statements of the Company. The Company has adopted this
      statement for the current year (see note 2d).

      In June 2002, the FASB issued SFAS No. 146, "Accounting for the Cost
      Associated with Exit or Disposal Activities," which addresses accounting
      for restructuring and similar costs. SFAS No. 146 supersedes previous
      accounting standards, and the Company will adopt it for the fiscal year
      ending June 30, 2003. The statement requires that the liability associated
      with exit or disposal costs be recognized when the liability is incurred,
      rather than at the date of commitment to an exit plan, as required by the
      previous standards. Under SFAS No. 146, the liability is initially
      recorded at fair value. Currently the Company does not believe that SFAS
      NO. 146 will have a material impact on its financial position or results
      of operations.



17. ALLOWANCE FOR BAD DEBTS

<TABLE>
<CAPTION>
             For the Year
            Ended June 30,     Balance-     Charged to
                              Beginning      Expense       Charged to                     Balance-
                                                           Other Accts.    Deductions      Ending

               <S>              <C>          <C>           <C>             <C>             <C>
                 2002         $200,097      $  ---          $   ---         $200,097       $   ---
                 2001         $200,097      $  ---          $   ---         $   ---
                 2000         $209,081      $  (8,984)      $   ---         $   ---        $200,097
       ALSO SEE NOTES 7 AND 12.
</TABLE>

18. SUBSEQUENT EVENTS

      On September 30, 2002, the Company's motion to dismiss Swartz's complaint
      was denied (see Note 12). Counsel has advised the Company that the
      dismissal may validate the warrant held by Swartz; however, there
      is no determination at this point as to the likelihood of Swartz
      prevailing on the balance of its complaint. Due to the dismissal, the
      Company reinstated the unamortized portion of the prepaid expense that had
      been reversed against paid-in capital and amortized this as if the prepaid
      expense were outstanding for the entire year.

19. EQUITY INVESTMENT

      The Company owns approximately 32% of the common shares of Iconix
      International, Inc. ("Iconix") and accounts for this investment on an
      equity basis. The Company wrote-off this investment in December of 2001.
      The following is summarized financial information of Iconix as of June 30,
      2001 and 2000 and for each of the fiscal years then ended.

                                                        2001            2000
                                                        ----            ----
      Current assets                                   $ 44,790      $ 70,000
      Non current assets                                353,274       206,473
      Current liabilities                                26,692       221,656
      Non current liabilities                           353,274            --
      Net sales                                         147,939       613,082
      Gross profit                                      148,527       262,087
      Income (loss) from continuing operations         (664,210)     (602,845)
      Net Income (loss)                               1,264,086      (602,845)



                                      F-22
<PAGE>



20. OTHER INCOME

      Edsoft Platforms (Canada), Inc. ceased operations during the year ended
      June 30, 2002 and on May 15, 2002, the Company reached a settlement with
      certain creditors of Edsoft Platforms (Canada), Inc. and recorded a
      $236,559 gain on the forgiveness of debt (See Note 6).

      Other Income also included VAT tax credits of $1,752,309 and $314,718 for
      the years ended June 30, 2002 and 2001, respectively. For the year ended
      June 30, 2001, the Company settled a lawsuit with a landlord, resulting in
      the reduction of a liability of $527,603.

21. QUARTERLY FINANCIAL DATA (UNAUDITED)

      The following table presents certain unaudited results of operations data
      for the interim quarterly periods during the years ended June 30, 2002 and
      2001. The Company believes that all adjustments, consisting only of normal
      recurring adjustments, necessary to present fairly the results of
      operations in accordance with generally accepted accounting principles,
      have been made. The results of operations for any interim period are not
      necessarily indicative of the operating results for a full year or any
      future period.
<TABLE>
<CAPTION>

              ------------------------------------------------------------------------ ------------------------------------------
                                        2002                                                  2001
              ------------------------------------------------------------------------ ------------------------------------------
                    SEPT. 30,    DEC. 31,     MARCH 31,     JUNE 30,       SEPT. 30,        DEC. 31,      MARCH 31,    JUNE 30,
----------------- ------------ ------------ ------------- -------------- -------------- -------------- ------------ -------------
<S>                <C>          <C>           <C>            <C>            <C>              <C>        <C>           <C>
Revenues           $3,241,315   $4,061,008    $2,993,603     $3,959,491    $1,143,446       $359,379   $1,450,879     $2,612,335
----------------- ------------ ------------ ------------- -------------- -------------- -------------- ------------ -------------
Gross Profit       $2,059,682   $2,379,319    $2,169,126     $2,605,005    $  107,479        $46,291     $818,748     $1,437,678
----------------- ------------ ------------ ------------- -------------- -------------- -------------- ------------ -------------
Gross Profit              64%          59%           72%            66%             9%            13%          56%           55%
Margin
----------------- ------------ ------------ ------------- -------------- -------------- -------------- ------------ -------------
Operating            $576,982     $147,465      $379,632     $1,365,729    $(542,262)   $ (1,496,927)   $(143,496)    $  887,078
Income (Loss)
----------------- ------------ ------------ ------------- -------------- -------------- -------------- ------------ -------------
Net Income           $864,112    $ (7,237)       $50,554       $670,679     $(597,835)   $(1,566,746)   $(238,776)    $2,110,188
(Loss)
----------------- ------------ ------------ ------------- -------------- -------------- -------------- ------------ -------------
Earnings per
Share
----------------- ------------ ------------ ------------- -------------- -------------- -------------- ------------ -------------
-Basic                 $0.02         $0.00        $0.00          $0.01          $(.03)         $(.07)       $(.01)        $0.08
----------------- ------------ ------------ ------------- -------------- -------------- -------------- ------------ -------------
-Diluted               $0.02         $0.00        $0.00          $0.01          $(.03)         $(.07)       $(.01)        $0.08
----------------- ------------ ------------ ------------- -------------- -------------- -------------- ------------ -------------

</TABLE>



                                      F-23
<PAGE>