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

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001

COMMISSION FILE NUMBER: 0-29907

BLUE ZONE, INC.

(Exact name of Registrant as specified in its charter)

|                         |  |                                                          |  |                                     
|------------------------ |  | -------------------------------------------------------- |  | ------------------------------------
|Nevada                   |  | 7370                                                     |  | 86-0863053                          
|                         |  |                                                          |  |                                     
|(State of Incorporation) |  | (Primary Standard Industrial
Classification Code Number) |  | (I.R.S. Employer Identification No.)

329 Railway Street, 5th Floor
Vancouver, British Columbia
Canada V6A 1A4
(604) 685-4310



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(Address and telephone number of principal executive offices)



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Securities to be registered pursuant to Section 12(b) of the Act:
Not applicable

Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value per share
(Title of Class)



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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [ X ] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K: [ ]

The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of the common stock on February 26,
2002 was approximately $326,000. The market value excludes an aggregate of
12,000,100 shares of common stock held by officers and directors of the
registrant and by each person known by the registrant to own 5% or more of the
issued and outstanding common stock. Exclusion of shares held by any of these
persons should not be construed to indicate that such person is an affiliate of
the registrant.

The number of outstanding shares of the registrants common stock on February
26, 2002 was 24,539,350.

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TABLE OF CONTENTS



|         |                                                                                               |  |  |  |  |  |  | 
|-------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I  
|         | ITEM 1. BUSINESS                                                                             
|         | ITEM 2. PROPERTIES                                                                           
|         | ITEM 3. LEGAL PROCEEDINGS                                                                    
|         | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II 
|         | ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                
|         | ITEM 6. SELECTED FINANCIAL DATA                                                              
|         | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|         | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|PART III
|         | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|EX-10.21
|EX-10.22
|EX-10.23
|EX-10.24
|EX-21.1 



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Table of Contents

|         |                                                                                               |  |    |    | 
|-------- | --------------------------------------------------------------------------------------------- |  | -- | -- | 
|PART I   |                                                                                               |  | 1  |   
|        
|         | ITEM 1. BUSINESS                                                                              |  |    | 1  | 
|        
|         | ITEM 2. PROPERTIES                                                                            |  |    | 25 | 
|        
|         | ITEM 3. LEGAL PROCEEDINGS                                                                     |  |    | 25 | 
|        
|         | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  |    | 25 | 
|        
|PART II  |                                                                                               |  | 26 |   
|        
|         | ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                 |  |    | 26 | 
|        
|         | ITEM 6. SELECTED FINANCIAL DATA                                                               |  |    | 28 | 
|        
|         | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS |  |    | 31 | 
|        
|         | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           |  |    | 49 | 
|        
|PART III |                                                                                               |  | 50 |   
|        
|         | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                           |  |    | 50 | 
|        
|         | ITEM 9. CHANGES IN OR DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE   |  |    | 72 | 
|        
|         | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                   |  |    | 73 | 
|        
|         | ITEM 11. EXECUTIVE COMPENSATION                                                               |  |    | 77 | 
|        
|         | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                       |  |    | 81 | 
|        
|         | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                       |  |    | 83 | 
|        
|PART IV  |                                                                                               |  | 84 |   
|        
|         | ITEMS 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                     |  |    | 84 | 
|        
|         | SIGNATURES                                                                                    |  |    | 85 | 
|        
|         | EXHIBIT LIST                                                                                  |  |    | 86 | 

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PART I

This Annual Report on Form 10-K contains forward-looking statements that
involve risks and uncertainties. All statements contained herein that are not
statements of historical fact constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995.
Discussions containing forward-looking statements may be found in the material
set forth under Business, Business  Risks Related to Our Business, and
Managements Discussion and Analysis of Financial Condition and Results of
Operations, as well as in this Annual Report generally. We generally use
words such as believes, intends, expects, anticipates, plans, and
similar expressions to identify forward-looking statements. You should not
place undue reliance on these forward-looking statements. Our actual results
could differ materially from those expressed or implied in the forward-looking
statements for many reasons, including the risks described under
Business 
Risks Related to Our Business and elsewhere in this Annual Report.




ITEM 1. BUSINESS

GENERAL

We are currently engaged in four principal lines of business. The first
involves the continuing development of our MediaBZ family of software
products. MediaBZ software applications allow broadcasters to manage their
television, radio and print content and permit them to transmit that content to
consumers through a variety of outlets, such as a web-enabled computer, an
analog television equipped with a cable set-top box, a digital television, or a
hand-held electronic device such as personal digital assistant or cellular
phone. Blue Zone is also exploring uses for MediaBZ outside of the broadcast
market, to support other types of interactive initiatives. To this end the
Company is pursuing clients in the wireless carrier market and has begun to
explore the education market.

We believe that our MediaBZ software applications enable our clients to
efficiently and effectively create or acquire and manage multiple asset types,
such as video, audio, text, images, animations, and the like, and enhance their
content offering by adding interactivity (e.g. polls, discussion boards,
trivia, etc.). MediaBZ empowers clients to adapt their current technologies to
deliver video, audio and print media content, along with interactive
advertising and e-commerce to multiple platforms including personal computers,
interactive televisions with set-top boxes and web enabled wireless devices
(like cellular phones and personal digital assistants). Ultimately, we expect
to derive fees from developing, marketing, licensing and maintaining our family
of MediaBZ software applications.

The second line of business is graphical interface development for the Web and
Interactive Television (ITV). We create, develop, and maintain interactive
interfaces for our clients to help them establish and expand their presences on
the Internet.

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Thirdly, we provide strategic and technical advice to our clients to help them
identify and exploit Internet applications and outlets for their valuable
content.

Finally, we provide support, maintenance and integration services to companies
using or intending to use MediaBZ products.

We currently have agreements with several of Canadas leading television and
radio broadcasting companies. Our principal client and revenue source is CTV
Television Inc. (CTV), a leading national broadcasting network in Canada. In
addition, until March 2002, we provided services for two radio stations located
in Vancouver, BC, Canada  CKNW and CFMI Rock101, both owned by Corus
Entertainment Inc., one of Canadas leading entertainment companies.

Blue Zones second largest source of revenue in 2001 was Bell Mobility, one of
Canadas leading wireless communication companies. Blue Zone utilized its
MediaBZ technology and expert design services to produce a prototype
application that delivers video and other news content to a wireless PDA
(personal digital assistant). This application has been showcased at a number
of wireless communication events, including the Wireless Internet Conference in
Toronto and an important analyst conference for Bell Mobilitys parent company.

We currently conduct our business through our subsidiaries, Blue Zone
Productions Ltd., Blue Zone Solutions Inc. (formerly Blue Zone Entertainment
Inc.) and Blue Zone International Inc. Blue Zone Productions Ltd., which was
incorporated in British Columbia, Canada on March 9, 1987, is a wholly owned
subsidiary of Blue Zone, Inc. Blue Zone Solutions Inc., which was incorporated
in British Columbia on April 24, 1994, and Blue Zone International Inc., which
was incorporated in Barbados on July 5, 1996, are each wholly owned
subsidiaries of Blue Zone Productions Ltd. During 2001, Blue Zone Solutions
Inc. and Blue Zone Productions Ltd. continued out of British Columbia and into
the federal jurisdiction of Canada under the Canada Business Corporations Act
(CBCA) and subsequent to December 31, 2001, these two companies were
amalgamated to form Blue Zone Solutions Inc., a CBCA company. References in
this document to Blue Zone, the Company, we, us, and our refer to
Blue Zone, Inc. and its subsidiaries.

Our executive offices are located at 329 Railway Street, 5th Floor, Vancouver,
British Columbia, Canada, V6A 1A4. Our telephone number (604) 685-4310. We
expect that our executive offices will move to the United States after the
second quarter of fiscal 2002 (see History).

HISTORY

Blue Zone, Inc. was originally incorporated on March 11, 1997 in the State of
Nevada under the name Western Food Distributors, Inc. On July 21, 1998,
Western Food Distributors, Inc. filed a disclosure statement pursuant to Rule
15c2-11 of the Securities Exchange Act of 1934 with the National Association of
Securities Dealers, Inc. for the purpose of including its common stock, $0.001
par value per share, for trading on the

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OTC Bulletin Board, a quotation service for securities that are not listed or
traded on a national securities exchange.

On October 8, 1999, Blue Zone Productions Ltd. and Western Food Distributors,
Inc. entered into a Share Exchange Agreement. Pursuant to the Share Exchange
Agreement, all of the shares of Blue Zone Productions Ltd. were exchanged for
12 million shares of Western Food Distributors, Inc., Blue Zone Productions
Ltd. became a wholly-owned subsidiary of Western Food Distributors, Inc., and
Western Food Distributors, Inc. changed its name to Blue Zone, Inc. The
former management of Western Food Distributors, Inc. then resigned, and the
officers and directors of Blue Zone Productions Ltd. assumed the management of
Blue Zone, Inc. The common shares of Blue Zone, Inc. thereafter were quoted
publicly on the OTC Bulletin Board under the symbol BLZN.

In connection with the share exchange described above, Blue Zone Productions
Ltd. entered into a Loan Agreement and a General Security Agreement, each dated
as of August 30, 1999, with Terra Growth Investments Fund. Under the Loan
Agreement, Terra Growth loaned Blue Zone Productions Ltd. $2,000,000 to be
repaid within 30 days after the closing of the transaction detailed above.
Contemporaneously with the share exchange, we received proceeds of $5,351,000
from a private placement of our common stock and warrants exercisable for
shares of our common stock. We used a portion of the funds received from the
private placement to repay the outstanding loan to Terra Growth Investments
Fund.

The common stock of Blue Zone, Inc. began trading on the Nasdaq National Market
in July 2000, and in January 2001 the stock moved to the Nasdaq SmallCap
Market. During the quarter ended June 30, 2001, the Company received notice
from the Nasdaq Stock Market indicating that its common stock would be delisted
from the Nasdaq SmallCap Market as a result of Blue Zones failure to meet
certain of Nasdaqs continued listing requirements. The Company filed an
appeal and had a hearing before the Nasdaq Listing Qualifications Panel to
present the Companys plan to regain compliance for continued listing.
However, the Panel notified the Company that its stock would be delisted
effective August 8, 2001. Blue Zones common stock commenced quotation on the
OTC Bulletin Board system on August 8, 2001.

During 2001, Blue Zone faced several challenges, including a declining stock
price, a reduction in revenue from existing clients and difficulty in securing
new financing and revenue opportunities. Blue Zone implemented two operational
restructurings during 2001 in order to reduce operating costs, resulting in the
elimination of a total of 33 administrative and production positions within the
Company.

On March 1, 2002, to further reduce our operating costs, we provided notice of
termination to our six remaining employees. Pursuant to the notice provisions
of their respective employment agreements, the services of all our remaining
employees, including our President and Chief Executive Officer, Bruce Warren,
and our Creative Executive Director, Jamie Ollivier, will be terminated
effective June 30, 2002.

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We intend to enter into consulting contracts with Messrs. Warren and Ollivier
which will likely provide that, following their termination as employees of the
Company, Messrs. Warren and Ollivier will continue to serve Blue Zone as
members of the Companys Board of Directors and act as consultants. Definitive
documentation of these contracts has not been completed as of the date of this
report. We also intend to enter into consulting contracts with other current
and former Blue Zone employees as needed, although we cannot assure you that
the services of these persons will be available on terms favorable to the
Company, or at all.

In order to further reduce our operating costs, we intend to file a Form 15
with the Securities and Exchange Commission on or about May 10, 2002. This
will allow us to terminate the registration of our common shares under Section
12(g) of the Securities Exchange Act of 1934, as amended (the Exchange Act),
and to suspend our reporting requirements pursuant to Section 15(d) of the
Exchange Act. Unless the Form 15 is withdrawn or denied, we anticipate that
the registration of our common shares under Section 12(g) will be terminated on
or about August 8, 2002. If our Section 12(g) registration is terminated, our
common stock will no longer be eligible for quotation on the OTC Bulletin Board
system. We intend to find a market maker that will allow our common stock to
be quoted on the pink sheets, but there can be no assurances that we will be able
to do so. If we are unable to arrange a market maker on the pink sheets
for our common stock, it will no longer be quoted or traded publicly.

The Company currently intends to relocate its executive offices from Vancouver,
British Columbia to the United States after the second quarter of 2002, to
enable the Company to focus its sales and marketing efforts on establishing new
customer relationships with United States broadcasting, media, and
telecommunication companies, and to pursue opportunities for our MediaBZ
technology.

Unless otherwise indicated, all references to share numbers contained in this
report give effect to a five-for-one stock split of all of our issued and
outstanding common stock effected July 14, 1998, and a 1.125-for-1 stock split
of all of our issued and outstanding common stock effected September 27, 1999.

INDUSTRY OVERVIEW

The Internet provides companies with a new outlet to deliver content to
consumers. Recognizing this opportunity, many broadcasters have developed Web
sites to establish their presences on the Internet. Wireless carriers are
making substantial investments in third generation (3G) high-speed wireless
network infrastructure that permits the delivery of rich media such as video to
wireless devices. These carriers are looking to develop and expand their
revenue generating services on these emerging networks by charging for the
delivery of rich media and other content . Education based institutions are
developing ways to communicate more effectively with their alumni, faculty and
students by using the Internet for activities such as distance learning and
providing stakeholders with current information.

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Many broadcasters are focused on determining how they can use the Internet to
generate new business opportunities or to improve their existing business
strategies. Rather than developing Internet-related technology or expertise
in-house, broadcasting companies frequently rely on outside firms such as ours
that can provide specialized products and services. We believe that we are
well positioned to provide these specialized products and services to these
companies.

We believe that the broadcasting industry is a specialized market and that many
of our competitors lack the experience and technical expertise necessary to
address the particular needs of broadcasting companies. In addition, we
believe that our existing relationship with CTV and our past relationships with
other leading Canadian broadcasting companies give us a marketing advantage
over actual or potential competitors that lack similar established industry
relationships. We intend to use our experience to strengthen our competitive
position and reputation in Canada and the United States.

Wireless carriers around the world are exploring the capabilities of wireless
devices and developing business models to capitalize on 2.5 and 3G networks.
These business models typically entail subscription-based fees for enhanced
services. Blue Zone can assist in the delivery of these services by developing
compelling user interfaces and utilizing MediaBZ to deliver live rich media
content such as breaking news, finance, sports and entertainment to any
consumer, anywhere on any device, provided there is a suitable network in
place. With this solution, we believe wireless carriers may be able to attract
more subscribers, achieve a lower churn rate and generate additional revenue
from content-subscription services. Furthermore, as advertising and mobile
commerce strategies evolve, Blue Zone believes MediaBZ has the potential to
assist in positioning its clients to capitalize on these additional revenue
sources.

Blue Zone, in conjunction with PacketVideo (see discussion below under sales
and marketing), developed a prototype for Bell Mobility that delivered CTV News
rich media content to the Compaq iPAQ handheld computer. Our background in
broadcasting and our MediaBZ content management system provide us with the
knowledge, expertise and technology to assist telecommunications companies that
are not accustomed to working in the content world.

Education based institutions are moving into fields such as distance learning.
Many of these institutions are looking for solutions that allow them to
facilitate communication between alumni, staff, students and faculty, as well
as provide the opportunity for effective online learning. The power of MediaBZ
lies in the ability to very easily create, manage and publish rich media
content. We designed the software to enable clients to reduce production
costs, increase the effectiveness of communication and create collaborative
online environments. Faculty, staff and students can work in a user-friendly
environment where technical expertise is not required to distribute rich media
content such as video to the Internet.

Although Blue Zone does not have a history in the education sector, the
education sector is moving towards becoming a type of broadcaster  an area
where Blue Zone has a

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strong history. Blue Zone believes that its strong understanding of
broadcasting and rich media and the strength of MediaBZ in handling rich media
may prove to be a competitive advantage in this industry.

Blue Zone maintains its primary focus on broadcast clients. This is the sector
the Company evolved from and the sector the Company knows and understands.
With the evolution of the Internet, however, has come the ability for other
types of organizations to become broadcasters. Blue Zone believes that it can
use its expertise and the MediaBZ technology to assist organizations such as
wireless carriers and education based institutions in their quest to provide
rich media content to their stakeholders.

BUSINESS

Products and Services

We utilize a multi-stage approach that involves consulting, requirements
documents, trials, product testing and legacy system integration to create,
develop and maintain an interactive offering. We also provide authoring
software to assist in the design and creation of interactive broadcasts for our
clients.

All of our revenue in 2001 was derived from the licensing of our MediaBZ
software and professional services related thereto. In fiscal 2001 we
generated 17% of our revenue from licensing (2000  2%; 1999  nil), 43% from
professional services (including consulting, design, and development work)
(2000  88%; 1999  100%), and 40% from support and maintenance activities
(2000  10%; 1999  nil).

The following description illustrates the range of products and services that
we offer and those that we are currently developing, as well as a typical
timetable for implementation of an interactive broadcasting solution for our
clients.

Initial Consulting Services and Strategy

The typical first step in our methodology consists of consulting with the
client to define its Internet strategy with respect to one or more of the
following: Web/ITV design, content offerings, interactive convergence
broadcasting, targeted advertising or electronic commerce. Our principal focus
at this stage is to provide creative vision and technical advice as well as to
identify and articulate revenue strategies. In addition, Blue Zone provides a
business case that clearly outlines technical and implementation costs and
annual cost savings from the implementation.

This initial phase of our engagement typically lasts for approximately eight
weeks. In that time, we work with the client to understand its business needs
and long-term goals. We attend meetings with senior management, evaluate the
market segment in which the client competes, and assess the clients operating
and technical environment. Once the clients objectives are defined, we
prepare a written plan that identifies the clients strategy, establishes the
projects scope and budget, sets out a detailed working schedule, and defines
clear criteria for implementation.

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An important goal at this stage is to position us to generate more revenue by
having the client select us to develop, deploy, and maintain the clients
interactive broadcasts including its Web site, interactive television, personal
digital television, personal digital assistant and wireless offerings. By
providing strategic and technical advisory services at an early stage, we
believe that we enhance our industry visibility and cement our relationship
with senior management.

To date, we have provided consulting services to CTV as part of our arrangement
to develop interactive broadcasting for its 24-hour NewsNet Station and CTV
National News content properties. We have also previously provided consulting
services to WIC Premium Television and CKNW/CFMI to develop interactive Web
sites both for their specialty pay-per-view television and for their radio
stations. In addition in fiscal 2000 we consulted to FOX Interactive
Television on strategies to launch its Sports and News channels on an
interactive television platform. We seek to enter into similar arrangements
with other television, radio and print media companies and to expand our
business into the United States and elsewhere.

Interactive Broadcasting Design and Development

With the written plan as a guide, we move from design and strategy to
fulfillment and production. We begin by working with the client to define
further the functional, technical, and creative requirements needed to
implement its interactive broadcasting strategies.

We combine third-party software with our own proprietary software to build the
basic platform that can become the basis of the clients interactive offerings.
We customize our software to create a user interface that incorporates the
features, functionality and branding desired by each client. We also typically
develop one or more prototypes of the interactive offering to test design
concepts and functionality.

During this stage, we define the hardware, software, interactive elements,
networking and telecommunications equipment needed to operate the interactive
offering, and we work with the client to integrate the equipment into its
existing information technology infrastructure. We collaborate with the client
to identify staffing requirements and technical expertise necessary to maintain
the interactive offering after launch, and we may begin training the clients
personnel to operate and maintain it.

Each aspect of the design and development phase of a project is documented in
writing, and we collaborate with the client to refine the strategy to ensure
the interactive offering meets the clients goals. We can generally accomplish
the design and development phase of a project in approximately two to six
months depending on the requirements and degree of integration.

ABOUT MEDIABZ

Blue Zones MediaBZ software is a rich media content management and publishing
solution. Empowered with MediaBZ, Blue Zones clients can efficiently and
easily aggregate, create, manage and cross-publish interactive content such as
video, text, audio,

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graphics, images, polls, trivia, and the like, from a user-friendly,
browser-based interface. With MediaBZ, enhanced content is created once and
published simultaneously to any one of a number of devices, including the Web,
interactive television, personal digital assistants (PDAs) and Web-enabled
cell phones.

MediaBZ is a unique content management system (CMS). While competing CMSs
were designed to manage documents and static text, MediaBZ is specialized for
rich media and designed for non-technical content creators. MediaBZ allows
Blue Zones clients to recognize immediate cost savings through increased
productivity and reduced technical staff. Clients with the software may enjoy
a speed-to-market advantage over competitors, because content can be retrieved,
created, edited and published in minutes. In addition, MediaBZ positions Blue
Zones clients to capitalize on emerging revenue streams for the Web and
wireless Internet, such as value-added subscription-based services,
pay-per-view, one-to-one personalized advertising and secured electronic or
mobile commerce (e/m-commerce).

Blue Zone sells MediaBZ to clients both as an application service provider
(ASP) solution, hosted from Blue Zones infrastructure, and as an enterprise
installation, where clients host the application on their own dedicated
servers. Blue Zone works closely with each client to determine the appropriate
type of MediaBZ installation based on a clients size, content requirements and
budget.

MediaBZ is a software application intended to be used by both producers and
consumers of interactive media content. We make the software accessible
through a web browser from anywhere with access to the Internet. MediaBZ
incorporates the following features and functionality:

Producers of News Content

MediaBZ allows a content creator to prepare an interactive news story,
including text, graphics, audio and video clips, without the need for a Web
development team or technical expertise.

While researching the news story, for example, a reporter is able to access the
broadcasters password-protected Web site and, using MediaBZ, search the
broadcasters database of past video, audio and print content for relevant
information. Once the story is complete, the content creator incorporates
audio and video clips, graphics, interactive advertising and links to articles
on the same or related content, into the story. Using the MediaBZ software, a
news reporter is able to send a completed story to an editor for review or
publish the story directly to the broadcasters Web site or other consumer
platforms. Finally, because the broadcasters Web site and the MediaBZ
software are accessible via the Internet, the reporter is able to write the
story as easily from a hotel room in a foreign country as from the office or
from home.

Consumers of News Content

MediaBZ allows consumers to experience interactive content using a Web browser
on their computer, a digital television or an analog television equipped with a
cable set-top

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box, personal digital assistant or a Web-enabled wireless device. For example,
a Web site user can watch and listen to headlines composed of streaming video
and audio clips, similar to a 30-second segment on a conventional television
news program. Unlike conventional television news programs, however, a
consumer using a site powered by MediaBZ can access additional content by
clicking on the streaming video headline with a computer mouse or a
television remote control. The additional content available to the consumer
may include interactive graphics, video and audio clips, or text stories on the
same or related content. As a result, the software combines the immediacy of
video content with the information-rich nature of print publications and the
interactivity of the Internet.

Licensing

We designed MediaBZ to be suitable for licensing to a variety of broadcasting
companies in Canada, the United States, and elsewhere. Accordingly, we
developed MediaBZ as a general software application that can be customized to
suit an individual broadcasters specific needs. For example, while the basic
software functionality will not vary, we can extend and customize the software
to meet a clients unique requirements as well as develop specialized user
interfaces to incorporate the branding, colors, features and functionality
required by a particular client.

On-going Consulting Services

As part of our engagement, we may be retained by a client to provide consulting
services on an on-going basis. CTV retained us to advise them on macro
Internet strategies and technological opportunities. We will attempt to enter
into similar relationships with other clients in the future.

We believe that we benefit from providing on-going consulting services because
we continue to receive access to information, technology and business
opportunities and we maintain strong ties with senior management. We hope
that, as our clients consider how to exploit emerging technologies such as
convergence broadcasting, they will generally continue to utilize our
technology and expertise.

Additional Opportunities for Our Convergence Broadcasting Software

We believe that MediaBZ will present us with additional revenue opportunities
outside of broadcasting. During 2001, we began providing our expertise to the
wireless industry through our relationships with CTV, Bell Mobility and
PacketVideo. We hope to license the MediaBZ software to broadcasting and media
clients and derive fees from licensing, maintenance and the development and
sale of updates to the software. We also believe that our Web-based
interactive broadcasting platform is not limited to the broadcast industry, and
could be extended to further serve telecommunication companies and meet
specific needs of education-based institutions.

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KEY CUSTOMERS

We have developed a customized version of the MediaBZ software platform for
CTV, for which we received development, licensing, and maintenance fees from
CTV. We also provide support and maintenance services for the CTV Web site.
In December 1999, Blue Zone Productions Ltd. signed an agreement with CTV to be
the exclusive provider of Web site development, Web hosting, and strategic
consulting services to the CTV NewsNet and the CTV National News interactive
properties (the 1999 Agreement). The 1999 Agreement included certain
exclusivity provisions that prevent us from providing solutions or performing
services to any other television station in Canada that competes with CTV.

Under the terms of an amendment to the 1999 Agreement dated September 26, 2001
(the Amendment), the parties extended CTVs MediaBZ license until September
20, 2002, and effective December 31, 2001, terminated the 1999 Agreement and
thereby eliminated the exclusivity provisions of the 1999 Agreement. There are
no provisions for renewal included in the Amendment. Subsequent to the signing
of the Amendment, Blue Zone and CTV entered into a source code escrow agreement
which required Blue Zone to deposit with an escrow agent the MediaBZ source
code for the duration of the license.

In June 2001, CTV and Blue Zone entered into a Maintenance and Service Level
Agreement under which CTV paid monthly support and maintenance fees to Blue
Zone of approximately $30,000 per month. The agreement was terminated under
the terms of the Amendment and replaced with new support and maintenance
provisions effective November 1, 2001. Under the terms of the Amendment Blue
Zone agrees to provide support and maintenance services at a reduced rate of
approximately $3,000 per month with a 30-day notice period for termination.

In April 2001, Blue Zone developed a wireless application for Bell Mobility.
The application delivered CTV News rich media content to a wireless handheld
device. Bell showcased the device at the Wireless Internet Conference in
Toronto in April and later at a key analyst convention. Bell Mobility
subsequently licensed the wireless application for a further three-month period
ended February 28, 2002. Blue Zone intends to continue to cultivate this
relationship, though there can be no assurances that we will generate further
revenue from Bell Mobility. Blue Zone will also seek to extend its product
offering to wireless carriers in the US, Asia and Europe through our
relationship with PacketVideo.

We have been, and expect to continue to be, substantially dependent upon
several key customer contracts as a source of revenue. For the fiscal year
ended December 31, 2001, approximately 65% of our revenue was derived from the
contracts with CTV and approximately 20% was derived from Bell
Mobility (2000  nil). CTV accounted for approximately 88% of our revenue during the fiscal
year ended December 31, 2000. Unless renewed, CTVs MediaBZ license agreement
will terminate in September 2002. We believe that we will continue to derive a
significant portion of our revenue from a limited number of larger clients.
Any cancellation, deferral or significant reduction in work performed for these
principal clients or a significant number of smaller clients

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would have a material adverse effect on our business, financial condition and
results of operations.

In July 1999, Blue Zone Entertainment Inc. signed a 3-year contract with
CKNW/CFMI, a division of WIC RADIO Ltd., under which we agreed to design,
operate and maintain the Web sites for the radio stations CKNW and Rock 101 in
Vancouver, Canada and provide exclusive Web site hosting and streaming media
services. CKNW/CFMI were subsequently acquired by Corus Entertainment Inc.,
currently one of Canadas leading entertainment companies. We received a fee
for developing the Web sites and received promotional advertising on the
clients Web sites and radio station. Our agreement with CKNW/CFMI contains
certain exclusivity provisions. CKNW/CFMI agreed not to use any party other
than us to maintain, design or host the CFNW and Rock 101 Web sites. We agreed
not to engage directly or indirectly in Web site design services for other
radio stations based in British Columbia over the course of the contract. Our
agreement with CKNW/CFMI may be terminated either by CKNW/CFMI or by us upon
six months notice. This notice was given by Corus in October 2001. We
expect, therefore, that this agreement will be terminated effective March 2002.

SALES AND MARKETING

Our sales and marketing efforts have been dedicated to strengthening our brand
name and enhancing our reputation as a creative provider of the MediaBZ
software platform, as well as providing interactive Web site development and
strategic consulting services to clients. As part of our agreements with our
broadcasting clients, we receive promotion and advertising in the form of
co-branding and attendance at key management and executive meetings of our
clients. We believe that one of the best means of promotion is to co-brand
Blue Zone with the high-quality content of our broadcasting and media clients.

To date, our executive officers have taken primary responsibility for our
marketing and sales efforts. We have begun to develop strategic alliances with
companies that resell our product as part of a joint technical solution to
better serve mutual clients. This is a strategy we intend to continue to
pursue.

To this end, during the year ended December 31, 2001, Blue Zone entered into a
strategic alliance with PacketVideo, the recognized leader in advanced
technologies for wireless multimedia communications, to bring our respective
technologies to the wireless carrier markets in North America, Europe and Asia.
Under the terms of the agreement, Blue Zone hopes to benefit from
PacketVideos direct and indirect worldwide sales force and established
relationships with the major global wireless carriers. PacketVideo is
marketing a solution that combines the PacketVideo technology with Blue Zones
MediaBZ carrier solution, allowing content providers to easily and efficiently
deliver their content to wireless devices and to Blue Zones front-end mobile
applications that display the content on mobile consumer devices. To date, no
revenue has been earned from this strategic alliance.

MediaBZ is integrated with PacketVideos PVAuthor, which is installed at the
content providers facility to automate the encoding process, resulting in
potential labor cost

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savings for the content provider. The combined solution will allow the content
provider to deliver constantly refreshed rich media content (e.g. news, sports,
finance, entertainment, etc.) to wireless devices (e.g. cell phones, smart
PDAs, etc.) via the carriers network. This, in turn, may enable carriers to
implement value-added subscription services that provide a monthly revenue
stream while increasing subscribers airtime consumption.

During 2001 our officers attended conferences, made public presentations and
addressed the broadcasting industry in both public and private venues. We
believe that these types of presentations and meetings have provided
opportunities for us to market and promote our product to new clients.
However, there can be no assurances that such opportunities will ultimately
generate revenue.

RESEARCH AND DEVELOPMENT

We incurred research and development expenditures of $560,000 for the fiscal
year ended December 31, 2001 (2000  $837,000; 1999  $65,000). We expect to
incur significantly lower research and development expenditures for the fiscal
year ending December 31, 2002, as a result of the completion of the current
development cycle for our MediaBZ software and a reduced workforce. As clients
demand new features, we may, however, invest in the necessary product
development to enhance our product offerings, subject to the availability of
capital and human resources.

FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS

We develop, maintain and license software relating to Websites and we provide
consulting services to companies to assist them to identify and exploit
interactive and convergence Internet applications and outlets for their rich
media content. In fiscal 2001, 96% of our revenue was derived from the
broadcast and wireless industries in Canada (2000  98%; 1999  100%). The
balance was derived from customers in the USA. Revenue is attributed to a
particular country based on the location of the clients operations. All of
the Companys long-lived assets are located in Canada, and have been for the
last three fiscal years.

SEASONALITY

The business of the Company is not affected by seasonality.

EMPLOYEES

As of February 26, 2002, we employed six people on a full-time basis, including
corporate officers, excluding temporary personnel, consultants, and independent
contractors. None of our employees is represented by a labor union, and we
believe that our relationship with our employees is good.

On March 1, 2002 we gave termination notice to our six employees, indicating
that they will no longer be permanent employees of Blue Zone effective June 30,
2002. The employees are being terminated in order to extinguish severance
provisions within their employment agreements and to further reduce operating
costs.

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We intend to enter into consulting contracts with Messrs. Warren and Ollivier
that will likely provide that, following their termination as employees
effective June 30, 2002, they will continue to serve Blue Zone as members of
the Companys Board of Directors and as consultants and will continue to pursue
opportunities for the Companys MediaBZ technology. Definitive documentation
of these contracts has not been completed as of the date of this report. We
also intend to enter into consulting contracts with other current and former
Blue Zone employees as needed, although we cannot assure you that the services
of these individuals will be available on terms favorable to the Company, or at
all.

We are substantially dependent upon the continued services and performance of
Messrs. Warren and Ollivier, who co-founded our business. The loss of the
services of either of these key individuals would have a material adverse
effect on our business, financial condition and results of operations.

See Item 11. Executive Compensation for the terms of our employment
agreements with Messrs. Warren and Ollivier.

RISKS RELATED TO OUR BUSINESS

We have a limited operating history and operate in a new and rapidly evolving
market, and are subject to the risks encountered by early stage companies in
developing industries.

We have only a limited operating history and face risks, uncertainties,
expenses and difficulties frequently encountered by companies in their early
stages of development, particularly companies in new and rapidly evolving
markets, such as convergence broadcasting, that are using new and unproven
business models. These risks include, but are not limited to, the possibility
that:



| |  | our revenue forecasts may be incorrect because of our limited
experience selling our products and services;                                                                                                                                         
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | a market for our products and services may not develop because of a
lack of interest in convergence broadcasting by consumers and the
broadcasting industry;                                                                                        
| 
| |  | we may fail in our goal to penetrate the wireless carrier market
because of a lack of demand for high bandwidth mobile applications;                                                                                                                
| 
| |  | we may have difficulty selling to education based institutions given
our limited experience in that industry;                                                                                                                                       
| 
| |  | our products may become obsolete, even if the convergence broadcasting
market develops, because we may not be able to develop new products or
update our existing products to respond to technological developments and
changing industry standards;
| 
| |  | our MediaBZ suite of software applications may not gain broad market
acceptance;                                                                                                                                                                    
| 
| |  | we may not be able to attract and retain qualified personnel;                                                                                                                                                                                       
| 
| |  | we may not be able to develop relationships with strategic partners in
the broadcasting industry; and                                                                                                                                               
| 
| |  | we may be unable to maintain and enhance the Blue Zone brand.                                                                                                                                                                                       

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These risks are described in more detail below. Our future growth will depend
substantially on our ability to address these and the other risks described in
this section. If we do not successfully address these risks, our business
would be significantly harmed.

We have a history of losses and expect future losses, and there can be no
assurances that we will achieve profitability

We have incurred significant net losses and negative cash flow from operations
since our inception. We incurred net losses of $1,422,000 in fiscal 1999,
$3,844,000 in fiscal 2000 and $2,321,000 in fiscal 2001. As of December 31,
2001, we had an accumulated deficit of $8,060,000, and during the year ended
December 31, 2001 we used cash of $2,001,000 in operating activities. Although
we reduced our operating costs and our cash utilization rate significantly
during the 2001 fiscal year, we expect to continue to incur sales and
marketing, research and development, and general and administrative expenses in
the future. As a result, we expect to incur losses for the foreseeable future
and will need to generate significantly higher revenues in order to achieve
profitability. If we achieve profitability, we may not be able to sustain it.

Our financial statements have been prepared on a going concern basis, which
presumes the realization of assets and the settlement of liabilities in the
normal course of operations. Certain conditions currently exist which raise
substantial doubt about the validity of this assumption. The application of
the going concern principle is dependent upon Blue Zone achieving profitable
operations to generate sufficient cash flows to fund continued operations, or,
in the absence of adequate cash flows from operations, obtaining additional
financing. If the Company is unable to achieve profitable operations or obtain
additional financing, we maybe required to further reduce or to limit
operations, or cease operations altogether. The auditors report on the
December 31, 2001 consolidated financial statements contains an explanatory
paragraph that states that the Company has suffered losses and negative cash
flows from operations that raise substantial doubt about the Companys ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

We will need additional capital to continue to operate our business.

We have not yet secured a long-term source of revenue. In the absence of
positive cash flow from operations, we will require additional capital to fund
the continued operation of our business. We anticipate that our current
resources, including available cash and cash equivalents, will be sufficient to
fund our operations for approximately five months from January 1, 2002. To
fund our operations for the remainder of 2002, we will need to seek a minimum
of $400,000 in financing through our convertible secured debenture facility,
subject to Board of Director approval, or through the issuance of other equity
or debt. There can be no assurances that this additional financing will be
available to us when needed.

If we successfully raise additional funds through the issuance of debt, we will
be required to service that debt and are likely to become subject to
restrictive covenants and other

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restrictions contained in the instruments governing that debt, which may limit
our operational flexibility. If we raise additional funds through the issuance
of equity securities, then those securities may have rights, preferences or
privileges senior to the rights of holders of our common stock, and holders of
our common stock will experience dilution.

We cannot be certain that such additional financing will be available to us on
favorable terms when required, or at all. If we cannot raise funds in a timely
manner on acceptable terms, we may not be able to promote our brand, develop or
enhance our products and services, take advantage of future opportunities or
respond to competitive pressures or unexpected requirements, and we may be
required to further reduce or limit operations or to cease operations
altogether.

We are substantially dependent on our agreements with a few broadcasting and
media companies including a single principal client.

We have a limited number of agreements with our clients. The termination of
one or more of these agreements, or our failure to secure a significant number
of new agreements and to increase programming commitments substantially, would
materially adversely affect our business, operating results and financial
condition. During the year ended December 31, 2001, two clients accounted for
approximately 85% of our revenue, and we expect a similar level of dependence
in the future. Unless renewed, our principal clients MediaBZ license
agreement will terminate in September 2002. We believe that we will continue
to derive a significant portion of our revenues from a limited number of larger
clients. Any cancellation, deferral or significant reduction in work performed
for these principal clients or a significant number of smaller clients could
have a material adverse effect on our business, financial condition and results
of operations.

Factors outside our control may cause our financial results to fluctuate widely
and unpredictably.

Our future quarterly operating results may fluctuate significantly due to a
number of factors, many of which are outside our control. These factors
include, but are not limited to:



| |  | whether convergence broadcasting technologies become widely
accepted by broadcasters, media companies and consumers;                                                                        
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | the acceptance and growth of mobile applications in the wireless
carrier market                                                                                                             
| 
| |  | our ability to gain a foothold in the education market with a
product specifically developed for broadcasters;                                                                              
| 
| |  | demand for our products and services, including the extent to which
we can license our MediaBZ suite of proprietary software applications;                                                  
| 
| |  | the announcement or introduction of new or enhanced products or
services by our competitors;                                                                                                
| 
| |  | the ability to manage growth and deployment, including hiring,
training and retaining an adequate number of qualified personnel and
the timing of various expenses and capital expenditures;

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| |  | the amount and timing of operating costs and capital expenditures
relating to our operations;
|- |  | ---------------------------------------------------------------------------------------------
| 
| |  | the effects of existing or new government regulations or legal conditions; and               
| 
| |  | general economic conditions.                                                                 

Due to our brief operating history, we have not generated sufficient data to
permit meaningful period-to-period comparisons of our operating results. Our
quarterly operating results have varied significantly in the past and will
likely vary significantly in the future. As a result, we believe that
period-to-period comparisons of our operating results to date are not
meaningful and should not be relied upon as indicators of our future
performance.

Our past revenues have been derived largely from Web site development
activities and specific technical and consulting services provided on a
per-project basis. In the future, we anticipate that our revenues will depend
substantially on our ability to develop and license our proprietary MediaBZ
software applications. However, our experience with convergence broadcasting
and the development of wireless applications is limited. Accordingly, our
forecasts related to future revenues, particularly those derived from licensing
our MediaBZ suite of software products, are subject to an unusual degree of
uncertainty.

If our MediaBZ suite of software products is not attractive to broadcast
companies and not licensed by them, our business will suffer.

An essential part of our strategy is the adoption and continued use of our
MediaBZ software platform by broadcasting and media companies. It is
impossible to predict the degree to which broadcasters and consumers will use
our products and the extent to which our revenue models will be accurate. The
failure of our products and software applications to become commercially viable
and to achieve market acceptance could significantly reduce the revenues that
we expect to generate. If we are unable to obtain a sufficient level of market
penetration we may be required to further reduce or limit operations, or cease
operations altogether.

Consequently, the effective and reliable performance of our MediaBZ suite of
products is vital to our ability to attract and retain strategic partners, sell
advertising and develop online commerce opportunities. The inability to
successfully build on our launch of the MediaBZ software, integrate the MediaBZ
family of software products with the existing software and hardware
infrastructure of our broadcasting and media partners, or the subsequent
occurrence of significant system interruptions or errors, would materially
adversely affect our business, operating results and financial condition. In
addition, we may be required to change or upgrade our MediaBZ software in order
to respond to changes in the software or hardware used by broadcasters, media
companies or cable television companies. There can be no assurance that we
will be able to implement effectively changes or upgrades to the MediaBZ
software in a timely manner.

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We are uncertain when the wireless carrier market will begin to provide
commercial offerings of products like those developed by Blue Zone and powered
by MediaBZ, if at all. We are also uncertain of our ability to penetrate this
market.

Although wireless carriers have expressed interest in applications like those
developed by Blue Zone and powered by MediaBZ we will require more interest in
the market to actually take the products to trial, let alone commercial
deployment. In addition, business models in this market are unproven and there
is uncertainty that significant revenue will materialize in the near future
from 2.5G and greater infrastructure. Blue Zones risk is increased
significantly by the fact that we are primarily reliant on a strategic partner
to carry out our selling activities in this market. Although this partner has
the backing of some large companies, its long-term viability has yet to be
proven. If it is unsuccessful, our business will be impacted significantly.

We are indebted to our Chairman and principal shareholder, which may result in
conflicts of interest or limit your ability to influence the outcome of key
transactions, including changes of control

During 2001, we issued $300,000 in 8.25% secured convertible debentures due
April 27, 2003 and $300,000 in 8% secured convertible debentures due April 27,
2003 to our Chairman and principal shareholder. As a secured debt holder, our
Chairmans interests may differ from the interests of our company or our
stockholders. Our current operations do not generate cash from which the
debentures can be repaid. If we are unable to repay the debentures as they
become due, our Chairman may be able to sell or otherwise realize against our
assets in preference to other creditors and to our stockholders or negotiate
terms to extend the due date of the debentures that are unfavorable to us.

Our Chairman may also convert the debentures at his option into shares of
common stock at conversion prices of $0.135 and $0.085 per share, respectively.
As of February 26, 2002, the conversion of these debentures into shares of
common stock would have increased our Chairmans ownership from 49% to 59% of
our common stock. The conversion of the debentures would increase our
Chairmans level of control over matters requiring approval of our stockholders
and may result in dilution to our stockholders. In addition, we may issue
additional debentures to our Chairman, which may increase each of the foregoing
risks.

Our success will be impaired if we are unable to procure, protect and enforce
our intellectual property rights.

Our ability to compete is dependent in part upon our internally developed,
proprietary intellectual property. We regard the protection of our
intellectual property rights as critical to our future success. We rely on
trademark, trade secret and copyright law, as well as confidentiality
procedures and licensing arrangements to establish and protect our rights in
our technology. We have filed an application to register our MediaBZ trademark
in the United States. Our trademark application may not, however, result in
the issuance of a valid trademark. In addition, effective trademark, service
mark, copyright and trade secret protection may not be available in every
country in which we

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market our products and services. If we are unable to procure, protect and
enforce our intellectual property rights, we may not realize the full value of
these assets and our business may suffer. In addition, we have a patent
pending for both the system and method of creating enhanced story packages
(ESP) (the MediaBZ software along with ESP files it creates, and its
cross-publishing capabilities) in the Canadian Patent Office, filed September
18, 2000. There is no assurance that a patent will issue from this
application.

Others may develop technologies that are similar or superior to our technology.
We typically enter into confidentiality or license agreements with our
employees, consultants, customers, strategic partners and vendors, and
typically control access to and distribution of our software, documentation and
other proprietary information. Despite these precautions, it may be possible
for a third party to copy or otherwise obtain and use our products or
technology without authorization, or to develop similar technology
independently through reverse engineering or other means. Policing
unauthorized use of our products is difficult. There can be no assurance that
the steps that we take will prevent misappropriation of our technology.
Litigation may be necessary in the future to enforce our intellectual property
rights, to protect our trade secrets, to determine the validity and scope of
the proprietary rights of others or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on our business, operating
results and financial condition.

In the future, we may receive notices of claims of infringement of other
parties proprietary rights. Although we do not believe that our products
infringe the proprietary rights of third parties, infringement or invalidity
claims (or claims for indemnification resulting from infringement claims) may
be asserted or prosecuted against us and any of these types of assertions or
prosecutions may materially adversely affect our business, operating results or
financial condition. Irrespective of the validity or the successful assertion
of any claims, we could incur significant costs and diversion of resources with
respect to the defense of any claims brought, which could have a material
adverse effect on our business, operating results and financial condition. In
addition, the assertion of infringement claims could result in injunctions
preventing us from distributing certain products, which could have a material
adverse effect on our business, operating results and financial condition. If
any claims or actions are asserted against us, we may seek to obtain a license
under a third partys intellectual property rights. However, there can be no
assurances that under these circumstances a license would be available on
reasonable terms, if at all.

We depend on licenses with third parties for the successful operation of our
business.

We rely on technologies that we license from third parties, such as the
suppliers of key database technology, our operating system and specific
hardware components. There can be no assurances that these third party
technology licenses will continue to be available to us on commercially
reasonable terms or at all. The loss of these licenses could require us to
obtain substitute technology of lower quality or performance standards or at
greater

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cost or may leave us with no acceptable substitute for technology that is not
longer available to us.

We depend on our key executive officers.

Our performance is substantially dependent on the continued services and on the
performance of Bruce Warren, our President and Chief Executive Officer, and
Jamie Ollivier, our Executive Creative Director. The loss of services of
either of these executive officers could have a material adverse effect on our
business, financial condition and results of operations. These individuals
will no longer be employees of the Company effective June 30, 2002. Although
they intend to sign consulting agreements to continue to act on behalf of the
Blue Zone, there can be no assurances that they continue to perform services
for the Company in the long term.

Uncertain ability to add and retain qualified personnel and manage growth.

The Companys ultimate success may be dependent in large part upon its ability
to grow its scope of operations. This growth will require additional
personnel, and have associated higher levels of operating expenses. In March
2002, to reduce our operating costs, we provided notices of termination to our
six employees. Although we expect to enter into consulting agreements to
retain the services of Messrs. Warren and Ollivier and may seek to enter into
similar arrangements with other employees, our ability to retain or rehire our
existing personnel and to attract new personnel is uncertain. The failure to
retain and attract sufficient personnel, or to otherwise manage the Companys
operational, financial, and other systems adequately, could have a material
adverse effect on the Companys business, operating results and financial
condition.

The results of our anticipated relocation from Vancouver, British Columbia to
the United States are uncertain.

The Company currently intends to relocate its executive offices from Vancouver,
British Columbia to the United States after the second quarter of 2002. We
hope that our relocation will not adversely affect our existing client
relationships and will enable us to focus our sales and marketing efforts on
establishing new customer relationships with United States broadcasting, media
and telecommunication companies. However, we cannot assure you that we will be
able to secure new clients or that we will be able to effectively manage our
existing client relationships from our new offices. If our relationship with
our existing clients suffer, or if we are unable to secure new opportunities,
we may be required to further reduce or limit operations, or cease operations
altogether.

To date, we have not entered into a lease agreement for new office space in the
United States and we have not subleased or terminated our existing leases in
Vancouver. We cannot assure you that we will be able to enter into such
agreements on terms favorable to the Company, or at all. If we are unable to
secure such agreements on favorable terms, the Companys business, operating
results and financial condition, as well as the timing of and our ability to
effect our planned relocation, could be adversely affected.

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There are certain additional risks inherent in our possible relocation, including:



| |  | potentially increased costs of operations;                                                                                  
|- |  | ----------------------------------------------------------------------------------------------------------------------------
| 
| |  | potentially harmful tax consequences;                                                                                       
| 
| |  | difficulties in staffing and managing our new operations, including
obtaining immigration clearance for our key consultants;
| 
| |  | changes in regulatory requirements, including tax, immigration and
employment regulations; and                              
| 
| |  | increased currency risk.                                                                                                    

There can be no assurances that one or more of these factors will not have a
material adverse effect on our future international operations and,
consequently, on our business, operating results and financial condition.

Our growth and operating results could be impaired by the risks associated with
international operations.

A key component of our strategy is expansion into international markets. We
hope to market our product and service offerings to various foreign markets in
the future, subject to available funds. However, there can be no assurances
that our products and services or our business model will be successful in
these foreign markets. There are certain risks inherent in doing business
internationally, including:



| |  | changes in regulatory requirements and tariffs;                                
|- |  | -------------------------------------------------------------------------------
| 
| |  | language barriers;                                                             
| 
| |  | difficulties in staffing and managing foreign operations;                      
| 
| |  | longer payment cycles and greater difficulty in collecting accounts receivable;
| 
| |  | reduced protection of intellectual property rights;                            
| 
| |  | potentially harmful tax consequences;                                          
| 
| |  | fluctuating exchange rates;                                                    
| 
| |  | price controls or other restrictions on foreign currency;                      
| 
| |  | difficulties in obtaining import and export licenses;                          
| 
| |  | the burden of complying with a variety of foreign laws; and                    
| 
| |  | political or economic constraints on international trade or instability.       

There can be no assurances that one or more of these factors will not have a
material adverse effect on our future international operations and,
consequently, on our business, operating results and financial condition.

Risks Related to the Convergence Broadcasting Industry

Convergence broadcasting is an unproven business concept.

The concept of convergence broadcasting is new and emerging, and, as a result,
demand for and market acceptance of this concept is subject to an unusual
degree of uncertainty. Our success depends upon, among other things, broad
acceptance of the concept of convergence broadcasting by industry participants,
including broadcasters, media

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companies, cable television operators, advertisers, television viewers, and
manufacturers of televisions and set-top terminals.

There have been a number of well-financed, high profile attempts to develop and
deploy interactive television systems, a form of convergence broadcasting.
None of these attempts has been wholly successful, and many key industry
participants have been deterred from participating in interactive television
for a variety of reasons, including: inconsistent quality of service; the need
for new and expensive hardware in homes, transmission networks and broadcast
centers; complicated and expensive processes for creating interactive content;
the need to alter television viewing habits substantially; uncertain protection
of the confidentiality of stored data and information; and conflicting
interests of various participants. Accordingly, these participants may
perceive convergence broadcasting negatively and be reluctant to invest in
convergence broadcasting initiatives.

Our financial viability is dependent upon broad acceptance of the concept of
convergence broadcasting in general and our products and services in particular
by a significant number of industry participants.

The convergence-broadcasting field is still emerging, with multiple, often
conflicting technologies, and the potential for frequent new product and
service introductions. The failure of significant industry participants to
adopt convergence broadcasting in general, and our product and service
offerings in particular, would materially adversely affect our business,
operating results and financial condition and potentially prevent us from
becoming a financially viable operation. Moreover, because of the complex
interrelationships among industry participants, failure to adopt our product
and service offerings by a significant industry participant or group of
participants could deter or preclude adoption by other industry participants.

If convergence broadcasting is not broadly accepted by consumers, our business
will be adversely affected.

The adoption by industry participants of our products and services is heavily
dependent upon convincing broadcasting and media companies that our products
and services are an effective way to market their broadcasting and media
content to television viewers and computer users. There can be no assurances,
however, that viewers will react favorably to convergence broadcasting
generally or to our products and services in particular. For example, viewers
may determine that interactive content is too complex or does not add value to,
or interferes with, their viewing experience. Moreover, viewers reactions may
be affected by security or privacy issues concerning the transmission of
personal information through a new electronic medium. To the extent that
television viewers or computer users do not accept convergence broadcasting,
broadcasting and media companies will likely terminate their licenses for our
products and services or fail to adopt our products and services, and our
business, operating results and financial condition would be materially
adversely affected.

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If we do not respond to rapid technological changes, our products and services
could become obsolete and our business would be seriously harmed.

The convergence broadcasting and interactive television fields are still
emerging and may be adopted by the broadcasting industry using standards that
are not compatible with our MediaBZ suite of software applications. In the
event a competing technology is adopted as a standard for convergence
broadcasting or interactive television in general, and we fail to adapt to that
technology, our business, would be materially adversely affected.

Even if the standards adopted for convergence broadcasting are compatible with
our products, the emerging nature of convergence broadcasting technology will
require that we continually improve the performance, features and reliability
of our product and service offerings, particularly in response to offerings by
our competitors. The introduction of new technologies could render our
products and services obsolete or unmarketable. In addition, the widespread
adoption of new television technologies or standards, cable-based or otherwise,
could require us to incur substantial expense to modify or adapt our
technology, products or services. There can be no assurances that we will be
successful in responding quickly, cost effectively and adequately to these
developments or that funds will be available to respond at all. Any failure by
us to respond effectively would significantly harm our business, operating
results and financial condition.

We operate in an intensely competitive industry.

We compete in the rapidly developing industry of information technology, which
is characterized by changing technology, an absence of industry standards,
frequent new product and service introductions and extensive capital
requirements. There are many firms that provide Web site development, hosting
and maintenance services, as well as strategic consulting services. There are
also an increasing number of firms working in the emerging industry of
convergence broadcasting. We anticipate that competition will increase as
existing broadcasting and media companies continue to migrate their businesses
to the Internet and as Internet competitors expand their businesses and market
reach.

We face competition from a number of companies, many of which have
significantly greater financial, technical, manufacturing and marketing
resources than we do, and may be in a better position to compete in the
industry. In addition, with the advent of digital broadcast technologies, we
expect that competition in the convergence broadcasting industry will
intensify. Many of our existing and potential competitors have longer
operating histories, larger client bases, longer-term relationships with
clients, greater brand or name recognition and significantly greater financial,
technical, marketing and public relations resources than we do. As a result of
their greater resources, our competitors may be in a position to respond more
quickly to new or emerging technologies and changes in customer requirements
and to develop and promote their products and services more effectively than we
do.

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There are relatively low barriers to entry into the information technology
services market. As a result, new market entrants pose a threat to our
business. Although, we have filed patent applications that might preclude or
inhibit potential competitors from entering our markets, existing or future
competitors may develop or offer services that are comparable or superior to
ours at a lower price, which could have a material adverse effect on our
business, results of operations and financial condition.

We may become subject to governmental regulation of the Internet, consumer
privacy or online commerce.

We operate in an environment of tremendous uncertainty about potential
government regulation of the Internet. We believe that our business is not
currently subject to direct regulation other than regulations applicable to
businesses generally. However, the Internet is evolving rapidly, and
governmental agencies have not yet been able to adapt all existing regulations
to the Internet environment.

The United States Congress has passed legislation that regulates certain
aspects of the Internet, including online content, copyright infringement, user
privacy, taxation, access charges, liability for third-party activities and
jurisdiction. In addition, federal, state, local and foreign governmental
organizations also are considering other legislative and regulatory proposals
that would regulate the Internet. Laws and regulations may be introduced and
court decisions reached that affect the Internet or other online services,
covering issues such as user pricing, user privacy, freedom of expression,
access charges, content and quality of products and services, advertising,
intellectual property rights and information security.

Our customers or we may also become subject to legislation or regulation in the
broadcasting industry and the cable television industry. In the United States,
broadcasting industries are regulated by the FCC, some states and substantially
all local governments. In Canada, where we have conducted most of our business
to date, the broadcasting industry is regulated by the Canadian
Radio-television and Telecommunications Commission. The United States Congress
has passed legislation that regulates the broadcasting industry, including
programming access and exclusivity arrangements, consumer protection, technical
standards and privacy of customer information. In the future, various
legislative and regulatory proposals under consideration from time to time by
Congress and various federal agencies may materially affect the broadcasting
and cable television industries. Since we market and expect to continue to
market our products and services to companies in the broadcasting and cable
television industries, increased regulation in these areas could have a
material adverse effect on our business, results of operations and financial
condition.

We cannot predict what new laws will be enacted or how courts will interpret
both existing and new laws. As a result, we are uncertain about how new laws
or the application of existing laws may affect our business. In addition, our
business may be indirectly affected by our clients who may be subject to such
legislation. Increased regulation of the Internet or the broadcasting industry
may decrease the growth in the use of the Internet or hamper the development of
convergence broadcasting, which could

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decrease the demand for our services, increase our cost of doing business or
otherwise have a material adverse effect on our business, results of operations
and financial condition.

Risks Related to Our Common Stock

Substantial sales of our common stock could cause our stock price to fall.

If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants, the market
price of our common stock could decline. As of December 31, 2001, we had
outstanding 24,539,350 shares of common stock, debentures convertible at the
option of the holder into 5,751,634 shares of common stock, accrued interest on
the convertible debentures convertible at the option of the holder into 211,874
shares of common stock, and options to acquire an aggregate of 2,375,000 shares
of common stock, of which 924,000 were vested and exercisable. Of the shares
outstanding, 12,539,250 shares of our common stock are freely tradeable in the
public market.

Our officers and directors hold a majority of our stock and, as a result,
control us; this could limit your ability to influence the outcome of key
transactions, including changes of control.

As of February 26, 2002, our officers and directors beneficially owned
approximately 49% of our issued and outstanding common stock. As a result, the
ability of our other stockholders to influence matters requiring approval by
our stockholders, including the election of directors and the approval of
mergers or similar transactions, could be limited.

If we successfully terminate the registration of our common stock under the
Exchange Act, our common stock will cease to be quoted on the OTC Bulletin
Board system and you may be unable to sell your common stock.

In order to further reduce our operating costs, we intend to file a Form 15
with the Securities and Exchange Commission on or about May 10, 2002. This
will allow us to terminate the registration of our common stock under Section
12(g) of the Exchange Act, and to suspend our reporting requirements pursuant
to Section 15(d) of the Exchange Act. Unless the Form 15 is withdrawn or
denied, we anticipate that the registration of our common shares under Section
12(g) will be terminated on or about August 8, 2002. If our Section 12(g)
registration is terminated, our common stock will no longer be eligible for
quotation on the OTC Bulletin Board system. There is presently no other
established market for our common stock. Therefore, you may not be able to
liquidate your investment, and such inability to dispose of your common stock
will likely continue indefinitely. In addition, the common stock may not be
readily acceptable as collateral for a loan. A purchase or continuing
investment in our common stock should be considered as a long-term investment.

Absence of dividends.

For the foreseeable future, the Company does not intend to pay any dividends on
its common stock. Any future decision with respect to dividends will depend upon
the Companys future earnings, future capital needs and the Companys operating
and financial condition, among other factors.

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ITEM 2. PROPERTIES

Our primary administrative, sales, marketing and research and development
facility is located in leased space in Vancouver, British Columbia. This
facility occupies approximately 9,400 square feet. We believe that these
facilities will be adequate to meet our requirements for the foreseeable future
and that suitable additional space will be available if needed.

We currently intend to relocate our executive offices from Vancouver, British
Columbia to the United States after the second quarter of 2001. We are
currently seeking to either terminate or assign our existing leases in
Vancouver.

During 2001, we terminated or assigned leases relating to our studio in Toronto
and our corporate apartment in Toronto, as well as office space in Vancouver,
as part of our efforts to lower our operating costs.




ITEM 3. LEGAL PROCEEDINGS

At present, we are not a party to any legal proceedings and no such action is
pending or has been threatened against us.




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

No matters were submitted during the forth quarter of 2001 to a vote of
security holders.

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PART II




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

Blue Zones common stock traded on the Nasdaq Stock Market under the symbol
BLZN from July 10, 2000 until August 8, 2001. Since August 8, 2001, and
prior to July 10, 2000, the Companys stock has been and was quoted on the OTC
Bulletin Board quotation system. The following table sets forth the high and
low sales prices or the high and low bid prices of our common stock for the
periods indicated, and as reported on The Nasdaq Stock Market or OTC Bulleting
Board, as applicable:

|               |  |   |        |  |  |   |        | 
|-------------- |  | - | ------ |  |  | - | ------ | 
|Fiscal 2000    |  |   | High   |  |  |   | Low    | 
|               |  |   |        |  |  |   |        | 
|First Quarter  |  | $ | 15.375 |  |  | $ | 7.125  | 
|Second Quarter |  | $ | 9.4375 |  |  | $ | 3.6875 | 
|Third Quarter  |  | $ | 9.8125 |  |  | $ | 4.0625 | 
|Fourth Quarter |  | $ | 4.75   |  |  | $ | 0.875  | 
|              
|Fiscal 2001   
|              
|First Quarter  |  | $ | 1.25   |  |  | $ | 0.1562 | 
|Second Quarter |  | $ | 0.30   |  |  | $ | 0.09   | 
|Third Quarter  |  | $ | 0.16   |  |  | $ | 0.04   | 
|Fourth Quarter |  | $ | 0.09   |  |  | $ | 0.04   | 

As of February 26, 2002, there were approximately 130 holders of record of our
common stock.

We intend to file a Form 15 with the Securities and Exchange Commission on or
about May 10, 2002 in order to terminate the registration of our common stock
under Section 12(g) of the Exchange Act, and to suspend our reporting
requirements pursuant to Section 15(d) of the Exchange Act. Unless the Form 15
is withdrawn or denied, we anticipate that the registration of our common
shares under Section 12(g) will be terminated on or about August 8, 2002. If
our Section 12(g) registration is terminated, our common stock will no longer
be eligible for quotation on the OTC Bulletin Board system. There is presently
no other established market for our common stock.

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DIVIDEND POLICY

We have never paid cash dividends on our stock, and anticipate that we will
continue to retain our earnings, if any, to finance the growth of our business.

RECENT SALES OF UNREGISTERED SECURITIES

During 2001, we issued convertible secured debentures in the amount of $600,000
to our Chairman, F. Michael P. Warren. Half of the debentures bear interest at
a rate of 8.25% per year and the other half bear interest at a rate of 8.0% per
year. During 2001, we accrued interest of $21,370 in connection with the
debentures. All of the debentures are due on April 27, 2003. The debentures
are convertible at the option of the lender into common stock of Blue Zone at a
conversion rate of $0.135 per common share for the 8.25% convertible debentures
and $0.085 per common share for the 8% convertible debentures, representing the
prevailing market prices of our common stock on the respective dates of
issuance of the debentures, which were July 6, 2001 and August 13, 2001.
Assuming the conversion of all principal and accrued interest thereon as of the
date 60 days after December 31, 2001, the debentures are convertible into
6,043,147 shares of our common stock. Although definitive documentation has
not been executed, we anticipate that the debentures will be part of a
$1,000,000 debenture facility between us and the lender, draw downs of which
will be subject to Board of Director approval, that we will grant the lender a
security interest in substantially all of our assets, and that we will grant
the lender certain registration rights with respect to the common stock
issuable upon conversion of the debentures. The debentures were issued without
registration under the Securities Act in reliance upon Regulation D and Section
4(2).

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ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with the audited Consolidated Financial Statements and Notes
thereto included in Item 8, with Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operations and with other financial data
included elsewhere in this Form 10-K. The consolidated statement of operations
data for each of the years in the three year period ended December 31, 2001,
and the consolidated balance sheet data as of December 31, 2001 and 2000, are
derived from our audited consolidated financial statements included in Item 8
of this report, which have been audited by KPMG LLP, independent auditors.

The independent auditors report appearing elsewhere in this document contains
an explanatory paragraph that states that the Companys losses and negative
cash flows from operations raise substantial doubt about our ability to
continue as a going concern. The consolidated financial statements and the
selected financial data do not include any adjustments that might result from
the outcome of that uncertainty. The consolidated statement of operations data
for the years ended December 31, 1998 and 1997 and the consolidated balance
sheet data as of December 31, 1999 and 1998 are derived from audited
consolidated financial statements not included in this report. The historical
results are not necessarily indicative of results to be expected in any future
period.

|                                           |  |                         |            |      |  |      |            |      |  |      |            |  |  |   |            |   |  |   |            | 
|------------------------------------------ |  | ----------------------- | ---------- | ---- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- | - |  | - | ---------- | 
|                                           |  | Year Ended December 31,
|                                           |  |                        
|                                           |  | 2001                    |            | 2000 |  | 1999 |            | 1998 |  | 1997
|                                           |  |                        
|Consolidated Statement
of Operations Data: |  |                         |            |      |  |      |            |      |  |      |            |  |  |   |            |   | 
|Revenue                                    |  | $                       | 602,171    |      |  | $    | 1,168,842  |      |  | $    | 883,137    |  |  | $ | 774,830    |   |  | $ | 342,120    | 
|Cost of revenue                            |  |                         | 86,137     |      |  |      | 569,332    |      |  |      | 370,803    |  |  |   | 144,419    |   |  |   | 51,759     | 
|                                           |  |                        
|Gross profit                               |  |                         | 516,034    |      |  |      | 599,510    |      |  |      | 512,334    |  |  |   | 630,411    |   |  |   | 290,361    | 
|Operating expenses                         |  |                         | 2,765,196  |      |  |      | 4,629,404  |      |  |      | 1,984,529  |  |  |   | 663,299    |   |  |   | 304,984    | 
|                                           |  |                        
|Loss before
undernoted                     |  |                         | 2,249,162  |      |  |      | 4,029,894  |      |  |      | 1,472,195  |  |  |   | 32,888     |   |  |   | 14,623     | 
|Interest income                            |  |                         | 45,433     |      |  |      | 186,127    |      |  |      | 49,864     |  |  |   |           |   |  |   |           | 
|Loss on disposal of
fixed assets           |  |                         | (117,395   | )    |  |      |           |      |  |      |           |  |  |   |           |   |  |   |           | 
|Income tax expense
(recovery)              |  |                         |           |      |  |      |           |      |  |      |           |  |  |   | (4,431     | ) |  |   | 2,431      | 
|                                           |  |                        
|Net loss                                   |  | $                       | 2,321,124  |      |  | $    | 3,843,767  |      |  | $    | 1,422,331  |  |  | $ | 28,457     |   |  | $ | 17,054     | 
|                                           |  |                        
|Basic and diluted
loss per share (1)       |  | $                       | 0.09       |      |  | $    | 0.20       |      |  | $    | 0.10       |  |  | $ | 0.00       |   |  | $ | 0.00       | 
|                                           |  |                        
|Weighted average
common shares
outstanding |  |                         | 24,539,350 |      |  |      | 22,472,895 |      |  |      | 14,168,937 |  |  |   | 12,000,000 |   |  |   | 12,000,000 | 
|                                           |  |                        



---

|(1) |  | Basic and diluted loss per share has been adjusted to reflect the
charges related to the redeemable equity securities described in the
audited consolidated financial statements included in Item 8. The net
loss recorded in the statement of operations for the year ended December
31, 2000 has been adjusted by total charges of $627,000 to arrive at the
net loss available to common shareholders, which is the figure into which
the weighted average common shares outstanding is divided in calculating
loss per share.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|                                     |  |                    |         |      |  |      |           |      |  |   |           |  |  |   |         |  
|------------------------------------ |  | ------------------ | ------- | ---- |  | ---- | --------- | ---- |  | - | --------- |  |  | - | ------- | -
|                                     |  | As of December 31,
|                                     |  |                   
|                                     |  | 2001               |         | 2000 |  | 1999 |           | 1998
|                                     |  |                   
|Consolidated Balance Sheet Data:     |  |                    |         |      |  |      |           |      |  |   |           |  |  |   |         |  
|Cash and cash equivalents            |  | $                  | 385,213 |      |  | $    | 1,844,981 |      |  | $ | 4,097,869 |  |  | $ | 891     |  
|Working capital (deficit)            |  |                    | 290,032 |      |  |      | 1,694,286 |      |  |   | 3,763,577 |  |  |   | (51,265 | )
|Total assets                         |  |                    | 989,952 |      |  |      | 3,050,008 |      |  |   | 4,784,850 |  |  |   | 41,906  |  
|Total liabilities                    |  |                    | 827,829 |      |  |      | 516,825   |      |  |   | 595,677   |  |  |   | 52,714  |  
|Total stockholders
equity (deficit) |  | $                  | 162,123 |      |  | $    | 2,533,183 |      |  | $ | 4,189,173 |  |  | $ | (10,808 | )
|                                     |  |                   

The Companys historical financial data reflect the financial position and
results of operations of Blue Zone for each of the years presented and include
the operations of Western Food Distributors from the date of the effective
recapitalization, being October 8, 1999 (see further discussion in History
section of Item 1. Business). Stockholders equity gives effect to the
shares issued to the stockholders of Blue Zone prior to October 8, 1999 and of
the Company thereafter.

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SUPPLEMENTARY FINANCIAL INFORMATION

Quarterly Results of Operations

The following tables present Blue Zones unaudited consolidated quarterly
results of operations for each of our last eight quarters. This data has been
derived from unaudited consolidated financial statements that have been
prepared on the same basis as the annual audited consolidated financial
statements and, in our opinion, include all normal recurring adjustments
necessary for the fair presentation of such information. These unaudited
quarterly results should be read in conjunction with our audited consolidated
financial statements for the year ended December 31, 2001 included in Item 8 of
this report.

|                                               |  |                    |            |               |  |                    |            |                   |  |   |            |  |  |   |            | 
|---------------------------------------------- |  | ------------------ | ---------- | ------------- |  | ------------------ | ---------- | ----------------- |  | - | ---------- |  |  | - | ---------- | 
|                                               |  | Three Months Ended
|                                               |  |                   
|                                               |  | March 31, 2001     |            | June 30, 2001 |  | September 30, 2001 |            | December 31, 2001
|                                               |  |                   
|Revenue                                        |  | $                  | 120,255    |               |  | $                  | 220,817    |                   |  | $ | 144,542    |  |  | $ | 116,557    | 
|Cost of revenue                                |  |                    | 24,736     |               |  |                    | 14,819     |                   |  |   | 38,380     |  |  |   | 8,202      | 
|                                               |  |                   
|Gross profit                                   |  |                    | 95,519     |               |  |                    | 205,998    |                   |  |   | 106,162    |  |  |   | 108,355    | 
|Operating expenses
and other income /
expenses |  |                    | 897,368    |               |  |                    | 825,665    |                   |  |   | 707,116    |  |  |   | 407,009    | 
|                                               |  |                   
|Net loss                                       |  | $                  | 801,849    |               |  | $                  | 619,667    |                   |  | $ | 600,954    |  |  | $ | 298,654    | 
|                                               |  |                   
|Basic and diluted
loss per share               |  | $                  | 0.03       |               |  | $                  | 0.03       |                   |  | $ | 0.02       |  |  | $ | 0.01       | 
|                                               |  |                   
|Weighted average
common shares
outstanding     |  |                    | 24,539,350 |               |  |                    | 24,539,350 |                   |  |   | 24,539,350 |  |  |   | 24,539,350 | 
|                                               |  |                   

|                                               |  |                    |            |               |  |                    |            |                   |  |   |            |  |  |   |            | 
|---------------------------------------------- |  | ------------------ | ---------- | ------------- |  | ------------------ | ---------- | ----------------- |  | - | ---------- |  |  | - | ---------- | 
|                                               |  | Three Months Ended
|                                               |  |                   
|                                               |  | March 31, 2000     |            | June 30, 2000 |  | September 30, 2000 |            | December 31, 2000
|                                               |  |                   
|Revenue                                        |  | $                  | 122,593    |               |  | $                  | 310,863    |                   |  | $ | 481,769    |  |  | $ | 253,617    | 
|Cost of revenue                                |  |                    | 73,128     |               |  |                    | 279,084    |                   |  |   | 197,064    |  |  |   | 20,056     | 
|                                               |  |                   
|Gross profit                                   |  |                    | 49,465     |               |  |                    | 31,779     |                   |  |   | 284,705    |  |  |   | 233,561    | 
|Operating expenses
and other income /
expenses |  |                    | 907,524    |               |  |                    | 1,105,638  |                   |  |   | 1,141,440  |  |  |   | 1,288,675  | 
|                                               |  |                   
|Net loss                                       |  | $                  | 858,059    |               |  | $                  | 1,073,859  |                   |  | $ | 856,735    |  |  | $ | 1,055,114  | 
|                                               |  |                   
|Basic and diluted
loss per share               |  | $                  | 0.04       |               |  | $                  | 0.05       |                   |  | $ | 0.04       |  |  | $ | 0.07       | 
|                                               |  |                   
|Weighted average
common shares
outstanding     |  |                    | 21,538,100 |               |  |                    | 21,538,100 |                   |  |   | 21,773,672 |  |  |   | 22,472,895 | 
|                                               |  |                   

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

The following Managements Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks
and uncertainties. Blue Zones actual results could differ materially from
those anticipated in these forward-looking statements. The following
discussion should be read in conjunction with the audited Consolidated
Financial Statements and related Notes thereto included in Item 8, with Item
6. Selected Financial Data, with the Risk Factors section of Item 1, and with
the Special Note regarding forward-looking statements included elsewhere in
this report.

OVERVIEW

Blue Zone has used in-depth knowledge acquired from working closely with
broadcasting companies to develop proprietary technology for use in media
applications. Our experience with live news delivery, including the large
variety of filming, graphics and editing equipment for audio and video
production, combined with our understanding of the specific communication
standards that exist inside a newsroom between equipment and employees, has
provided us with the opportunity to develop software to service the unique
needs of the broadcast community. The business has historically been focused
on providing Website design and content services and interactive consulting to
a range of Canadian-based media and broadcasting companies. This focus has now
expanded to include convergence technology targeted at North American, Asian
and European broadcast, media, wireless communication, and online learning
companies and organizations.

Bruce Warren, the Companys President and Chief Executive Officer, and Jamie
Ollivier, the Executive Creative Director, have worked in the broadcast field
for over ten years. During this time they acquired valuable insights into the
technology requirements for traditional television and radio broadcast
companies to access the World Wide Web, through set-top-boxes, and other
interactive devices. In 1997, the Company began development of a proprietary
product, now trademarked as the MediaBZ suite of products, to facilitate
convergence of television, radio, and print media content to the interactive
environment.

In the latter half of 1999, Blue Zone contracted with CTV, Canadas largest
private television network, to plan, design, and implement CTV News
interactive broadcasts on the Internet, focused around the MediaBZ product.
The interactive news service, CTVNEWS.com, was launched on September 21, 2000.
CTVNEWS.com utilizes Blue Zones software to publish its content to Web-enabled
computers, interactive television, WAP-enabled cellular telephones, and
personal digital assistants. Blue Zone has also been retained as an ongoing
consultant to CTV. During the year ended December 31, 2001, CTV upgraded to
MediaBZ 2.0, the latest version of Blue Zones software, and renewed its annual
license for a further one year period.

Approximately 65% of the Companys revenue for the year ended December 31, 2001
is derived from delivering product and services related to this CTV contract,
as amended,

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including license, support and maintenance, and consulting revenue. At
December 31, 2001, Blue Zone continues to work closely with CTV in accordance
with the amended contract; however, there can be no assurances that this
relationship will continue to provide a significant portion of the Companys
revenue.

In fiscal 2001, Blue Zone began to work closely with Bell Mobility, Canadas
leading wireless telecommunications service provider in Canada. We have
completed development of one wireless application prototype for Bell Mobility
and hope to develop further applications as a result of this relationship.
Blue Zones application was showcased by Bell Mobility at the Wireless Internet
Conference in Toronto in April 2001, and has been presented by Bell at a number
of important analyst conferences. Blue Zone has not yet signed a definitive
agreement with Bell Mobility.

During the year ended December 31, 2001, Blue Zone entered into a strategic
alliance with PacketVideo, the recognized leader in advanced technologies for
wireless multimedia communications, to bring our respective technologies to the
wireless carrier markets in North America, Europe and Asia. Under the terms of
the agreement, Blue Zone hopes to benefit from PacketVideos direct and
indirect worldwide sales force and established relationships with the major
global wireless carriers. PacketVideo is marketing a solution that combines
the PacketVideo technology with Blue Zones MediaBZ carrier solution, allowing
content providers to easily and efficiently deliver their content to wireless
devices and to Blue Zones front-end mobile applications that display the
content on mobile consumer devices. To date, no revenue has been realized from
this relationship and there can be no assurances that any revenue will ever be
derived from this alliance.

MediaBZ is integrated with PacketVideos PVAuthor, which is installed at the
content providers facility to enable an automated encoding process, which
results in labor cost savings for the content provider. The combined solution
allows the content provider to deliver constantly refreshed rich media content
(e.g. news, sports, finance, entertainment, etc.) to wireless devices (e.g.
cell phones, smart PDAs, etc.) via the carriers network. This, in turn, may
enable carriers to implement value-added subscription services that provide a
monthly revenue stream while increasing subscribers airtime consumption.

The Company has incurred losses in each of the last three fiscal years, and as
of December 31, 2001, had an accumulated deficit of $8,060,000. The net loss
was $2,321,000 in fiscal 2001 and $3,844,000 in fiscal 2000. Blue Zone
continues to incur losses as a result of the focus on executing the Companys
business plan, which is built around marketing of the MediaBZ product line to a
broad range of television and radio media companies throughout North America.

Fiscal 2001 was a difficult year for Blue Zone as a result of significant
structural changes in its target markets. Many existing and potential clients
undertook major restructurings, particularly in their online and interactive
divisions. Instead of investing in new technologies such as ours to advance
their online presence, these companies were refocusing their efforts on
controlling costs in a slowing economy and on trying to define their online and
interactive strategies in a rapidly changing marketplace. 2001 saw

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unprecedented changes to the new economy, and Blue Zone was not immune to these
problems. The Company was forced to rationalize operations in order to survive
the current economic environment.

During the year ended December 31, 2001, Blue Zone effected two operational
restructurings in order to reduce operating costs, resulting in the elimination
of a total of 33 administrative and production positions within the Company.
Blue Zone intends to continue to focus on partner reselling opportunities, such
as value added resellers (VAR), for its core MediaBZ solution, as well as to
maintain the Companys core competency as a software solutions company.

On March 1, 2002 the Company gave termination notice to our six remaining
employees, indicating that they will no longer be permanent employees of Blue
Zone effective June 30, 2002. Bruce Warren and Jamie Ollivier intend to sign
consulting agreements with Blue Zone under which they will continue to act as
directors of and pursue opportunities for Blue Zone. We may seek to retain the
services of other employees on an ongoing, contract basis; however, we cannot
assure you that the services of these persons will be available on terms
favorable to the Company, or at all. In addition, while we expect that we will
be able to continue to serve our existing clients following our workforce
reduction, we cannot assure you that our ability to service our existing
clients or our relationship with our clients will be unaffected. The employees
are being terminated in order to extinguish severance provisions within their
employment agreements and to further reduce operating costs.

In the near term, we expect to continue to pursue opportunities for the MediaBZ
technology, subject to available human and financial resources. Over the
longer term, Bruce Warren and Jamie Ollivier will continue to be primarily
responsible for our sales and marketing efforts. There can be no assurances
that these efforts will be successful. If these efforts are unsuccessful, we
may be required to further limit operations, or curtail operations altogether.

We intend to move Blue Zones operations to the United States after the second
quarter of fiscal 2002 in order to be closer to where we believe there are more
opportunities for our MediaBZ technology. We do not intend to lease office
space right away and we do not expect to incur significant relocation costs.
We may be required to pay a penalty to terminate our office lease in Vancouver
as a result of the proposed move. We cannot currently predict what that
penalty will be. We are not aware of any other significant costs likely to be
incurred as a result of the proposed move.

CRITICAL ACCOUNTING POLICIES

The following discussion of critical accounting policies is intended to
supplement the summary of Significant Accounting Policies presented as Note 2
to our 2001 audited consolidated financial statements presented elsewhere in
this report. Note 2 summarizes the accounting policies and methods used in the
preparation of our consolidated financial statements. The policies discussed
below were selected because they require the more significant judgments and
estimates in the preparation and presentation of our financial

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statements. On an ongoing basis, the Company evaluates these judgments and
estimates, including whether there are any uncertainties as to compliance with
the revenue recognition criteria described below, bad debts exposure and
recoverability of long-lived assets, as well as the assessment as to whether
there are contingent assets and liabilities that should be recognized or
disclosed for the consolidated financial statements to fairly present the
information required to be set forth therein. The Company bases its estimates
on historical experience, as well as other events and assumptions that are
believed to be reasonable at the time. Actual results could differ from these
estimates under different conditions.

Revenue Recognition

Revenue from MediaBZ software licensing represents approximately 17% of our
total revenue for the year ended December 31, 2001 and is recognized when
specified revenue recognition criteria in accounting literature are satisfied.
We recognize revenue in accordance with Statement of Position 97-2 Software
Revenue Recognition, when the price is fixed and determinable, there is
persuasive evidence of an agreement, we have fulfilled our obligations under
any such agreement and collection is probable. In the majority of the cases,
as the full amount of the license fee is collected up front at the inception of
the license, there is no uncertainty as to the amount of revenue to be earned
under the contract and no collection risk associated with these amounts. In
addition, there are few, if any, ongoing costs associated with license revenue,
so there is no risk of operating losses on these amounts. Changes in
contractual arrangements in the future, could impact the extent and timing of
revenue recognition.

Revenue from professional services, including consulting, design, and
development work, represents approximately 43% or our total revenue for the
year ended December 31, 2001. This revenue is recognized as the work is
performed or over the course of the contract, whichever is more applicable. In
2001 the majority of this revenue was recognized as the work was performed.
Generally this revenue is invoiced upon completion, except for large contracts,
which are invoiced over the term of the contract as milestones are achieved.
If we conclude that we will incur a loss on a contract, we recognize the loss
at that time. To date the direct costs on our professional services contracts
have been less than the revenue realized. Invoiced amounts are generally
collected between 30 and 60 days after invoicing. There is collection risk
associated with these amounts; however, we usually work with large companies
and therefore, we have experienced a low level of losses on collection. If the
timing of delivery of professional services changes or the estimated costs to
completion increases, the timing of the income we recognize will be impacted.

Support and maintenance services represent approximately 40% of our revenue for
the year ended December 31, 2001. This revenue is usually earned in accordance
with a contract that stipulates a monthly charge for the services provided by
Blue Zone. As a result, the revenue is recognized on a month-to-month basis in
accordance with the contract. Amounts are invoiced on a monthly basis and are
usually collected between 30 and 60 days after invoicing. There is collection
risk associated with these amounts;

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however, we provide support and maintenance almost exclusively to large
companies and therefore, we have experienced a low level of losses on
collection.

All but $25,000 of our accounts receivable recorded at December 31, 2001 has
been collected subsequent to year end.

Impairment of Long-lived Assets

Management evaluates long-lived assets for impairment in accordance with
Statement of Financial Accounting Standard 121, Accounting For the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. These
assets comprise mainly property and equipment. The impairment review is
performed by the Company whenever events and circumstances indicate that the
assets may be impaired. In performing this review, we estimate the future net
cash flows from the assets based on our expectations as to future use
and their service to the Company and compare this amount to the carrying value. If
this review indicates the carrying amount may not be recoverable, impairment
losses are measured and recognized based on the difference between the
estimated discounted cash flows over the remaining life of the assets and the
assets carrying value. Changes in our future net cash flow estimates may
impact our assessment as to whether a particular long-lived asset has been
impaired. These changes may result from changes in our business
plans, due to demand for our products or due to other factors that
are outside of our control. We have not recorded an impairment loss in fiscal 2001, but certain
assets were disposed of during the 2001 year and a loss of $117,000 was
recognized upon disposal. Based on the notice of termination delivered to the
Companys employees and the possible relocation of our executive offices and
operations to the United States, we expect that we will record an impairment
charge on our remaining fixed assets during fiscal 2002.

SOURCES OF REVENUE AND REVENUE RECOGNITION

Product and service:

The Company generates product and service revenue through the following
sources: interactive broadcasting development and maintenance, strategic
consulting services for clients, and software licensing from Blue Zones family
of MediaBZ software applications. Consulting service revenues are recognized
upon delivery of the service. Interactive broadcasting maintenance is
recognized over the term of the contracts, typically month to month.

Software licensing revenue is recognized over the term of the license. Blue
Zone recognized license fee revenue of $79,000 during the year, and $60,000 is
recorded as deferred revenue at December 31, 2001, representing the
unrecognized portion of annual license fees.

For long-term development projects such as the CTV contract, revenue is
recognized on a percentage completion basis, based upon achievement of
specifically identifiable milestones.

Revenue that has been prepaid or invoiced but does not yet qualify for
recognition under the Companys policies is reflected as deferred revenue.
There was no deferred revenue recorded at December 31, 2001, other than the
deferred licensing fee mentioned above.

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Exchange product and service:

A significant proportion of Blue Zones reported revenue for the three years
ended December 31, 1999 was earned from a three-year barter exchange agreement
with the Vancouver-based broadcaster, BCTV. The Company recorded exchange
product and service revenue and recorded an equal amount as exchange
advertising expense in the statement of operations. Under the BCTV contract,
Blue Zone exchanged product and services for television airtime on BCTV, rather
than receiving cash payment. The exchange revenue and the advertising expense
were valued at the fair market value of the television airtime. The Company
used this airtime to enhance Blue Zones name recognition to assist in
marketing products to current and potential clients.

In fiscal 2000, the Company adopted EITF No. 99-17 Accounting for Advertising
Barter Transactions. EITF 99-17 provides that the Company recognize revenue
and advertising expenses from barter transactions at the fair value only when
it has a historical practice of receiving or paying cash for similar
transactions. The Company has not recognized any revenue or expense barter
transactions during the years ended December 31, 2001 or 2000.

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RESULTS OF OPERATIONS

The following table sets forth consolidated statement of operations data for
each of the years in the three year period ended December 30, 2001, expressed
as a percentage of total revenues:

|                                           |  |                         |        |      |  |      |        |    |  |  |        |   
|------------------------------------------ |  | ----------------------- | ------ | ---- |  | ---- | ------ | -- |  |  | ------ | --
|                                           |  | Year Ended December 31,
|                                          
|                                           |  | 2001                    |        | 2000 |  | 1999
|                                          
|Consolidated Statement
of Operations Data: |  |                         |        |      |  |      |        |    |  |  |        |   
|Revenue                                    |  |                         | 100.0  | %    |  |      | 100.0  | %  |  |  | 100.0  | % 
|Cost of revenue                            |  |                         | 14.3   | %    |  |      | 48.7   | %  |  |  | 42.0   | % 
|                                          
|Gross profit                               |  |                         | 85.7   | %    |  |      | 51.3   | %  |  |  | 58.0   | % 
|Operating expenses:                        |  |                         |        |      |  |      |        |    |  |  |        |   
|General and administrative                 |  |                         | 246.3  | %    |  |      | 233.1  | %  |  |  | 137.1  | % 
|Research and Development                   |  |                         | 93.1   | %    |  |      | 71.6   | %  |  |  | 7.4    | % 
|Selling and marketing                      |  |                         | 85.4   | %    |  |      | 74.5   | %  |  |  | 69.1   | % 
|Depreciation                               |  |                         | 34.4   | %    |  |      | 16.9   | %  |  |  | 11.1   | % 
|                                          
|Total operating expenses                   |  |                         | 459.2  | %    |  |      | 396.1  | %  |  |  | 224.7  | % 
|                                          
|Loss before undernoted                     |  |                         | (373.5 | %)   |  |      | (344.8 | %) |  |  | (166.7 | %)
|Interest income                            |  |                         | 7.5    | %    |  |      | 15.9   | %  |  |  | 5.6    | % 
|Loss on disposal of fixed
assets           |  |                         | (19.5  | %)   |  |      | 0.0    | %  |  |  | 0.0    | % 
|Income tax expense                         |  |                         | 0.0    | %    |  |      | 0.0    | %  |  |  | 0.0    | % 
|                                          
|Net loss                                   |  |                         | (385.5 | %)   |  |      | (328.9 | %) |  |  | (161.1 | %)
|                                          

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YEARS ENDED DECEMBER 31, 2001 AND 2000

Revenue

Product and service revenue decreased to $602,000 for the year ended December
31, 2001, a decrease of 48% over revenue of $1,169,000 for the year ended
December 31, 2000. The decline in revenue is mainly attributable to a
reduction in the volume of work performed for CTV in fiscal 2001. CTVNews.com
went live in September 2000, meaning that Blue Zone performed the bulk of the
work in fiscal 2000 in anticipation of the CTV launch. The reduction in
revenue from CTV for 2001 was partially offset by revenue generated from
developing a MediaBZ wireless application prototype for trial by Bell Mobility.
CTV accounted for approximately 65% of the revenue for fiscal 2001, compared
to 89% for the same period in 2000.

Cost of Revenue

The principal components of cost of revenue include labor and materials
incurred in the delivery of software and services. Cost of revenue dropped by
85% to $86,000 in the year ended December 31, 2001 from $569,000 for the same
period in 2000. This decrease is mainly a result of the different nature of
the work performed during the periods. In 2001, most of the revenue was
derived from licensing, support and maintenance and demonstration projects,
which are high margin activities, compared to consulting and implementation
work in 2000, which are lower margin tasks. The gross profit percentage
improved to 86% in 2001 from 51% in 2000 because of this change.

We expect our gross profit to fluctuate based on our product mix, geographic
mix, product and patent licenses, and the uncertain costs associated with
hiring competent technical, creative and management personnel and contract
resources. There are no assurances that Blue Zone will be able to maintain
gross margins in future years.

General and Administrative Expenses

General and administrative expenses for the 2001 fiscal year were $1,483,000, a
decrease of $1,242,000 compared to the prior years expenses of $2,725,000.
The lower level of general and administrative expenses is directly attributable
to efforts to control operating costs, such as travel and entertainment,
professional fees, and general office expenses, as well as the elimination of
administrative positions in fiscal 2001. The operational restructurings
effected in the second and third quarters of 2001 resulted in reduced payroll
and other associated costs. The significant components of general and
administrative costs are discussed below.

Labor costs comprised approximately 21% of general and administrative expenses
in 2001, or $315,000. This is a drop of $226,000 over the fiscal 2000 labor
component of $541,000. The decrease can be explained by the lower average
headcount in 2001 as a result of the restructurings described above. Total
headcount dropped from 46 at December 31, 2000 to 6 people at December 31,
2001, with most of the headcount decline taking place in the fourth quarter of
2001. In addition to the drop in labor costs,

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stock based compensation was reduced by $203,000 in fiscal 2001 because there
were fewer stock purchase option grants in 2001 compared to 2000.

Termination costs charged to general and administrative expenses in connection
with the elimination of administrative positions during the year totaled
$75,000 for fiscal 2001, and include the costs of the restructurings discussed
above. These costs relate to severance and other costs associated with
positions that were eliminated in the restructurings. No such costs were
incurred in 2000. At December 31, 2001 there are no remaining amounts payable
related to the restructurings.

Accounting, legal, and investor relations fees were $321,000 for the year ended
December 31, 2001, a decline of 60% over 2000s expenses of $809,000. The
majority of the reduction is attributable to lower legal fees, which dropped
64% in 2001, reflecting a greater effort to manage such costs. In fiscal 2000,
legal costs were incurred in connection with filing the Companys first Form
10, with preparing for the Companys Nasdaq listing in July 2000, with
employment matters, particularly hiring over 20 new employees and with
negotiating new and potential new contracts in 2000.

Investor relations fees decreased 81% or $194,000 during 2001 because of much
lower level of external investor relations activities. Blue Zone conducted an
investor road show in 2000, but not in 2001. Blue Zone cancelled the external
investor relations contract in March 2001 in order to reduce costs.

Travel and entertainment costs charged to general and administrative expenses
fell 75% to $104,000 for the year ended December 31, 2001, compared to $411,000
for the same period last year. During the year ended December 31, 2000, travel
costs were incurred in connection with the CTV contract, other contract
negotiations, and for presentations to the investment community and corporate
financing activities. The travel costs incurred in 2001 were mainly for
general corporate purposes, as well as some travel in connection with CTV and
Bell Mobility. Travel costs also decreased as a result of greater efforts to
manage travel spending in 2001, particularly a restriction on executive class
air travel, and fewer people traveling.

Facilities costs climbed to $198,000 from $187,000 in the prior year, an
increase of 6%. The change from fiscal 2000 can be attributed to the fact that
the Company leased more space in fiscal 2001 compared to 2000. During the year
ended December 31, 2001 Blue Zone assigned or terminated several leases,
including the lease on the Toronto studio, in an effort to reduce operating
costs.

Recruiting costs dropped to $23,000 for the year ended December 31, 2001 from
$79,000 in the same period of 2000, a decline of 71%. The higher level of
recruiting fees in 2000 can be attributed to the costs associated with building
the Companys workforce in 2000 in connection with fulfilling the CTV contract
and other anticipated business. The expenses include placement fees and
advertising costs associated with filling positions within the Company. As
mentioned previously, the Company substantially reduced its headcount in 2001.

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Included in general and administrative expenses at December 31, 2001 is a
foreign exchange gain of $36,000. This compares to a gain of $124,000 in the
prior year. Both amounts relate to the conversion of Canadian dollar cash
flows into US dollars for financial reporting purposes. Fewer Canadian dollars
flowed through the financial statements in 2001 compared to 2000.

Blue Zone recorded a loss on disposal of $117,000 during the year ended
December 31, 2001 in connection with fixed assets that were either sold or
assigned to a third party. The Company closed the Toronto studio in October
2001 and assigned the lease for the space to an unrelated third party. Certain
fixtures and equipment were included in the assignment, and these items were
written down to their net recoverable amount. There was no such amount
recorded in 2000. Blue Zone has no remaining obligations or liabilities
related to these terminated leases at December 31, 2001.

We believe that overall general and administrative expenses will drop further
in fiscal 2002 as a result of the termination of our employees discussed above.
In addition, we expect that legal, accounting, investor relations, and public
company expenses will be lower as a result of our intended filing of a Form 15
and terminating our SEC reporting requirements.

Research and Development

Based on the development and anticipated success of the MediaBZ suite of
software products, Blue Zone has invested funds to improve the MediaBZ products
by providing features and options requested by existing and prospective
clients. To this end, during the year ended December 31, 2001, the Company
released its latest version, MediaBZ 2.0. Once the new version was released,
research and development activities slowed until a higher level of sales can be
achieved. As a result of this situation, research and development costs
declined to $561,000 in fiscal 2001 from $837,000 in the prior year. All of
these expenditures were charged to the statement of operations during the year.
No research and development charges have been capitalized to the balance
sheet.

The most significant component of research and development costs is labor,
which remained flat in fiscal 2001, decreasing slightly to $527,000 in 2001
from $531,000 for the year ended December 31, 2000. Research and development
costs charged to the statement of operations also include an overhead
allocation for employees working on research and development projects.

Blue Zone cannot provide any assurance that expenditures in research and
development will ensure our success or lead to innovations that are not
available to our competition. We believe that research and development costs
will decline further in fiscal 2002 as a result of the termination of our
employees.

Selling and Marketing

Selling and marketing costs fell to $514,000 for the year ended December 31,
2001 from $871,000 for the prior year, a drop of 41%. The reduction in sales
and marketing costs is directly tied to the termination of sales and marketing
employees discussed above, as well

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as a greater effort to conduct preliminary meetings and software demonstrations
by conference call and Internet meeting, and thus avoiding travel costs.
Selling and marketing expenses were high in 2000, coinciding with attempts to
secure new clients.

The Companys sales and marketing activities during the 2001 fiscal year were
focused on securing new customers throughout North America and Asia. The
primary components of selling and marketing costs are salaries and wages,
travel and entertainment, advertising and promotions, and other related costs
incurred in these activities. Blue Zone opened a sales office in Los Angeles
during the 2001 year, but closed it a short time later in an effort to reduce
operating costs in a slowing economy.

Salaries and wages comprised approximately 73% of sales and marketing costs in
2001, or $373,000, compared to 69% or $598,000 in 2000. The differing
proportion of salaries and wages in 2001 compared to 2000 can be explained the
fact that a greater percentage of the President and Chief Executive Officers
and the Executive Creative Directors time was spent on selling and marketing
activities in 2001 compared to 2000. As a result, a larger portion of their
salaries was charged to this account in 2001 compared to 2000. Selling and
marketing expenses as a percentage of total operating expenses remained
consistent at approximately 19%.

There can be no assurances that selling and marketing expenditures will result
in secure, long-term customers or reliable revenue sources. We believe that
sales and marketing costs will decrease further in fiscal 2002 as a result of
the termination of our employees and possibly relocating our office to the
United States.

Stock Based Compensation

Blue Zone has reserved 6,780,000 shares of common stock for issuance under a
stock option plan. The Company believes that the plan is an essential tool to
attract and retain the qualified personnel needed to implement the Companys
business strategy. The plan provides for the granting of stock purchase
options to directors, officers, eligible employees, and contractors. At
December 31, 2001, Blue Zone had 2,375,000 stock purchase options outstanding,
a net decrease of 1,496,250 over the total options outstanding of 3,871,250 at
December 31, 2000.

In 2001 Blue Zone incurred a non-cash compensation charge of $34,000 relating
to the amortization of the intrinsic value of options granted to employees in
prior years. This amount compared to a charge of $359,000 in 2000. All of
the options granted during fiscal 2001, totaling 1,889,000 options, were issued
to employees of the Company. The $34,000 charge in the current year is
allocated entirely to general and administrative expenses, whereas in the prior
year the total charge of $359,000 was allocated to the general and
administrative, selling and marketing, and research and development
departments.

During 2001 Blue Zones Board of Directors approved a voluntary stock option
exchange program for our employees and directors. The stock option exchange
program for employees was later withdrawn, and was replaced with the granting
of new, at-market

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stock purchase options to all employees. Under the exchange program, Blue
Zones directors were given the opportunity to elect to have outstanding stock
options held by them cancelled in exchange for an undertaking by the Company to
issue an equal number of new options to be granted at a future date, which will
be at least six months after the cancellation date. The exercise price of the
new options will be equal to the fair market value of the Companys common
stock on the date of grant. Options to purchase 2,600,000 shares were tendered
for cancellation by Directors during the year in connection with this program.

Depreciation

Depreciation is provided on the declining balance basis using a 30% rate for
all capital asset categories, except for leasehold improvements, which are
amortized on a straight-line basis over five years, representing the term of
the leases to which the improvements relate. Depreciation expense for the year
ended December 31, 2001 increased to $207,000 from $197,000 for the prior year,
reflecting a full years depreciation charge on 2000 additions. Total capital
asset additions were $18,000 for the year ended December 30, 2001, compared to
$610,000 in the prior year.

Income Taxes

No income taxes were payable in 2001 or in 2000, as a result of the operating
loss recorded during those years. Based on a number of factors, including the
lack of a history of profits, management believes that there is sufficient
uncertainty regarding the realization of future tax assets, and, accordingly,
has not booked an income tax benefit at December 31, 2001 or at 2000. All
losses incurred can be carried forward for seven years for Canadian income tax
purposes.

Other Comprehensive Income

Blue Zone recorded other comprehensive loss of $114,000 during the year ended
December 31, 2001, compared to $175,000 in 2000, resulting in accumulated other
comprehensive loss of $314,000 at December 31, 2001. Other comprehensive loss
relates entirely to the foreign currency translation adjustment arising from
the translation of the Companys subsidiary financial statements from Canadian
dollars into US dollars upon consolidation.

YEARS ENDED DECEMBER 31, 2000 AND 1999

Revenue

Product and service revenue increased to $1,169,000 for the year ended December
31, 2000, an increase of 32% over revenue of $883,000 for the year ended
December 31, 1999, principally as a result of increased revenue earned from CTV
offset by decreased revenue earned from BCTV. CTV accounted for approximately
89% of the revenue for the 2000 fiscal year, compared to 12% for the 1999
fiscal year. In the prior year, BCTV accounted for approximately 62% of Blue
Zones revenue, but this customer amounted to less than 1% for the year ended
December 31, 2000.

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Blue Zone recorded no revenue under barter exchange agreements for the year
ended December 31, 2000, compared to $505,000 for the year ended December 31,
1999. This decrease was attributable to the completion of our three-year
website evolution project contract with BCTV on December 31, 1999, as discussed
above. As a result, revenue for which Blue Zone received cash consideration
increased 209%, from $378,000 in 1999 to $1,169,000 in 2000.

Cost of Revenue

The principal components of cost of revenue include labor, materials, and
overhead expenses incurred in the delivery of software and services. Prior to
the Companys reorganization in late 1999, Bruce Warren and Jamie Ollivier
performed much of the detailed software design and code writing, and the bulk
of Blue Zones technical workforce was retained on short-term contracts. With
the signing of the CTV contract in 1999, Blue Zone began to hire full time,
permanent employees. As a result, production staffing increased for the year
ended December 31, 2000 compared to the same period last year. This increase
is offset by a reduction in contract labor costs included in cost of revenues.

Cost of revenue increased by 53% to $569,000 in the year ended December 31,
2000 from $371,000 for the same period in 1999. This increase is partly a
result of the increase in revenue experienced during fiscal 2000, but is also
attributable to higher production costs for the CTV contract. The gross profit
percentage decreased to 50% from 58% in 1999 because of the change in the
nature of the business in fiscal 2000. CTV is the Companys first major
customer for the MediaBZ product. During the year Blue Zone focused on
developing and deploying the MediaBZ product, and, as a result, redirected
designers and other production staff around the software model, migrating the
company from service focused to product and solutions centric operations.

We expect our gross profit to fluctuate based on our product mix, geographic
mix, product and patent licenses, and the uncertain costs associated with
hiring competent technical, creative and management personnel. There are no
assurances that Blue Zone will be able to maintain gross margins in future
years.

General and Administrative Expenses

General and administrative expenses for the 2000 fiscal year were $2,725,000,
an increase of $1,513,000 compared to the prior years expenses of $1,212,000.
The higher level of general and administrative expenses is directly
attributable to the augmented headcount, and the associated overhead costs, the
overall elevated level of business activity during the year ended December 31,
2000, and the higher costs associated with operating as a public company for a
full year in 2000. The significant components of general and administrative
costs are discussed below.

Labor costs comprised approximately 20% of general and administrative expenses
in 2000, or $541,000. This is an increase of $249,000 over the fiscal 1999
labor component of $292,000. The increase can be explained by the ramp-up of
the Companys workforce that coincided with the CTV contract, as well as a
continued evolution of the business.

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Blue Zone hired employees to perform more services in-house, rather than using
outside professionals. Overall headcount increased to 46 employees at December
31, 2000, compared to 27 at December 31, 1999.

Accounting, legal, and investor relations fees were $809,000 for the year ended
December 31, 2000, an increase of 94% over 1999s expenses of $416,000. The
majority of this increase is attributable to higher legal fees, which increased
as a result of several factors, including higher legal costs associated with
being a public company for a full year in 2000, compared to only one quarter in
fiscal 1999, legal costs associated with potential new customers, and legal
costs in connection with employment matters, particularly hiring over 20 new
employees. Investor relations fees increased 237% during the 2000 fiscal year
because the Company retained an outside investor relations firm for the full
year.

Travel and entertainment costs charged to general and administrative expenses
increased 40% to $411,000 for the year ended December 31, 2000, compared to
$293,000 for the same period last year. Travel costs were incurred to service
the CTV contract, for sales and marketing activities, and for general corporate
purposes such as presentations to the investment community, corporate financing
activities, and board of directors meetings.

General office expenses increased to $287,000 during the year ended December
31, 2000 from $69,000 in the prior year. This increase of $218,000 can be
attributed to the costs associated with maintaining the Companys offices in
Vancouver and Toronto for the full year in fiscal 2000, versus only four months
and two months, respectively, in the prior year. In addition, the higher staff
complement contributed to higher costs in 2000.

Facilities costs, which include rent, utilities, and operating costs, were
$187,000 for the 2000 fiscal year, an increase of $151,000 over the prior year.
Blue Zone had office space in Vancouver and Toronto for a full year in 2000,
compared to only part of the year in 1999. In addition, the Company rented
additional space in Vancouver and an apartment in Toronto during the year ended
December 31, 2000.

Blue Zone incurred membership fees of $140,000 in fiscal 2000, an increase of
$137,000 over the prior year. The majority of these fees were incurred in
connection with the Companys successful listing on the Nasdaq National Market
at the end of fiscal 1999, requiring payment of listing fees at the beginning
of the 2000 year.

Research and Development

Research and development costs increased to $837,000 in fiscal 2000 from
$65,000 for the same period last year. The significant increase over the prior
year can be explained by the Companys focus on continuously improving the
MediaBZ products and making them more useful to a wider range of potential
customers. All of these expenditures were charged to the statement of
operations during the year.

The most significant component of research and development costs is labor,
which increased by $466,000 in fiscal 2000. The increase from $65,000 in 1999
to $531,000 for the year ended December 31, 2000 can be explained by the change
in the Companys

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focus and the increase in headcount, as discussed above. The increase in labor
costs in 2000 coincides with a decrease in contract labor cost over the prior
year, as contract employees were hired on a full-time basis in 2000. Research
and development costs charged to the statement of operations also include an
overhead allocation for employees working on research and development projects.

Selling and Marketing

Selling and marketing costs increased to $871,000 for the year ended December
31, 2000 from $105,000 for the prior year, an increase of 730%. The increase
in sales and marketing costs is directly tied to the execution of Blue Zones
business plan, as discussed above. Selling and marketing expenses increased
significantly in the latter part of 2000, coinciding with the go-live of the
CTV Web site. The Companys senior executives turned their focus toward
developing contacts with new potential customers. As the Company continued to
evolve into a product focused operation, more of Blue Zones Presidents and
the Chief Executive Officers time was focused on selling and marketing
activities. During the 1999 fiscal year their time was spent more on
activities related to potential investors and corporate administration, as well
as product development.

The Companys sales and marketing activities during the 2000 fiscal year were
focused on securing new customers throughout North America. The Company had
more employees involved in this activity in fiscal 2000, and incurred higher
costs in the areas of salaries and wages, travel, advertising and promotions,
and other related costs.

Exchange advertising dropped from $505,000 in 1999 to nil in 2000 as a result
of the termination of the BCTV contract and the change in accounting principles
applicable to barter transactions.

Interest Income

The Company recorded interest income of $186,000 in fiscal 2000, relating to
interest earned on short-term investments (see Liquidity and Capital Resources
section below). This is an increase of $136,000 over 1999 levels, reflecting
higher average short-term investment balances in fiscal 2000 in connection with
proceeds from share issuances late in fiscal 1999 and in 2000.

Stock Based Compensation

Blue Zone had reserved 6,780,000 shares of common stock for issuance under a
stock option plan. The plan was amended during 2000 to expand the number of
shares of common stock reserved for issuance from 4,500,000 shares. At
December 31, 2000, Blue Zone had 3,871,250 share purchase options outstanding,
a net increase of 1,876,250 over the total options outstanding of 1,995,000 at
December 31, 1999. During 2000, Blue Zone incurred a non-cash compensation
charge of $359,000 relating mainly to the intrinsic value of options granted to
directors and the fair value of options granted to consultants during the year.
This amount compared to a charge of $297,000 in 1999.

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All but 6,000 of the options granted during fiscal 2000 were issued to
employees, officers, and directors of the Company.

Depreciation

Depreciation is provided on the declining balance basis using a 30% rate for
all capital asset categories, except for leasehold improvements, which are
amortized on a straight-line basis over five years, representing the term of
the leases to which the improvements relate. Depreciation expense for the year
ended December 31, 2000 increased to $197,000 from $98,000 for the prior year,
reflecting a full years depreciation charge on 1999 additions and a partial
years charge on 2000 additions. Total capital asset additions were $610,000
for the year ended December 30, 2000, compared to $483,000 in the prior year.
Blue Zone continued to build a technical infrastructure, and capital
expenditures rose accordingly.

Income Taxes

No income taxes were payable in 2000 or in 1999, as a result of the operating
loss recorded during those years. Based on a number of factors, including the
lack of a history of profits, management believes that there is sufficient
uncertainty regarding the realization of future tax assets, and, accordingly,
has not booked an income tax benefit at December 31, 2000. The loss incurred
in 2000 can be carried forward for seven years for Canadian income tax
purposes.

Other Comprehensive Income

Blue Zone recorded other comprehensive loss of $175,000 during the year ended
December 31, 2000, compared to $26,000 in 1999, resulting in accumulated other
comprehensive loss of $199,000 at December 31, 2000. Other comprehensive loss
relates entirely to the foreign currency translation adjustment arising from
the translation of the Companys subsidiary financial statements from Canadian
dollars into US dollars upon consolidation.

LIQUIDITY AND CAPITAL RESOURCES

The Company does not have an adequate source of reliable, long-term revenue to
fund operations. As a result, Blue Zone is reliant on outside sources of
capital funding. There can be no assurances that the Company will in the
future achieve a consistent and reliable revenue stream adequate to support
continued operations. In addition, there are no assurances that the Company
will be able to secure adequate sources of new capital funding, whether it be
in the form of share capital, debt, or other financing sources.

Blue Zone had cash and cash equivalents of $385,000 and working capital of
$290,000 at December 31, 2001. This compares to cash and cash equivalents of
$1,845,000 and working capital of $1,694,000 at December 31, 2000. The
balances were higher at the 2000 year end because of proceeds from a private
placement of $2,500,000 in December 2000. The absence of a significant
financing in 2001, combined with our operating loss, contributed to an erosion
of working capital. Surplus cash is invested in high-grade

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corporate securities and guaranteed investment certificates with terms to
maturity of less than three months.

During the year ended December 31, 2001, Blue Zone used cash of $2,001,000 in
operating activities compared to using $3,600,000 in the prior year. The
significant decrease in cash used for operations can be explained chiefly by
the operational restructurings and other cost containment exercises that
occurred in 2001.

Net cash provided by financing activities was $600,000 in 2001, which compares
to $1,958,000 in 2000. During the year ended December 31, 2001, the Company
issued secured convertible debentures in the amount of $600,000. The funds
were used to fund working capital requirements. Half of the convertible
debentures bear interest at a rate of 8.25% per year and the other half bear
interest at a rate of 8.0% per year; all of the debentures are due on April 27,
2003. The debentures are convertible into common stock of the Company at a
conversion rate of $0.135 per share for the 8.25% convertible debentures and
$0.085 for the 8% convertible debentures, the prevailing market prices of the
Companys common stock on the date of issuance of the debentures. Although
definitive documentation has not been executed, the Company anticipates that an
additional $400,000 may be available under the $1 million debenture facility
that the Company and the lender have agreed to establish; draw-downs will be
subject to business plans of the Company as may be approved by the Board of
Directors from time to time. The net cash from financing activities in 2000
resulted from a private placement of the Companys common stock in December
2000, which generated net proceeds of $2,003,000, after the deduction of
issuance costs of $497,000. This source of funds was offset by the repayment
of a stockholder loan in the amount of $46,000 in 2000. The Company also
received proceeds from the exercise of stock options in the amount of $6,000 in
2000.

Our future capital requirements will depend on a number of factors, including
costs associated with product development efforts, the success of the
commercial introduction of our products and the possible acquisition of
complementary businesses, products and technologies. We anticipate that our
current resources, including available cash and cash equivalents, will be
sufficient to fund our operations for approximately five months from January 1,
2002. To fund our operations for the remainder of 2002, subject to business
plans as may be approved by the Board of Directors from time to time, we will
need to seek a minimum of $400,000 in financing through our convertible secured
debenture facility, or through the issuance of other equity or debt. There can
be no assurances that such additional capital will be available when we need it
on terms that we consider acceptable. The auditors report on the Companys
December 31, 2001 consolidated financial statements contains an explanatory
paragraph that states that the Company has suffered losses and negative cash
flows from operations that raise substantial doubt about the Companys ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

AUDIT COMMITTEE

The Company has established an Audit Committee of the Board of Directors, the
charter of which is to oversee the activities of management and Blue Zones
external auditors as

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they relate to the financial reporting process. In particular, the Audit
Committees role includes ensuring that management properly develops and
adheres to a sound system of internal controls, and that our external auditors,
through their own review, assess the effectiveness of those controls and
managements adherence to them.

In fulfilling its responsibilities, the Audit Committee held regular meetings
with Blue Zones external auditors. In these meetings, the Audit Committee
discussed with management and our external auditors the quality and
acceptability of accounting principles and significant transactions or issues
encountered during the period. In addition, the Audit Committee met with Blue
Zones external auditors independent of management to provide for independent
and confidential assessment of management and the internal controls as they
relate to the quality and reliability of our financial statements. Blue Zone
has also adopted an Audit Committee Charter as required by Nasdaq in compliance
with the Nasdaqs Marketplace Rules.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of December 31, 2001, Blue Zone had not entered into or acquired financial
instruments that have material market risk. The Company has no financial
instruments for trading purposes, or derivative or other financial instruments
with off balance sheet risk. All financial assets and liabilities are due
within the next twelve months and are classified as current assets or
liabilities in the consolidated balance sheet included in this report, except
for the debentures payable, which are due April 2003. The fair value of all
financial instruments at December 31, 2001 is not materially different from
their carrying value.

Blue Zone regularly invests funds in excess of immediate needs in guaranteed
investment certificates issued by major Canadian banks or high-grade corporate
debt securities. The fair value of these instruments, which generally have a
term to maturity of 90 days or less, does not differ significantly from their
face value.

To December 31, 2001, substantially all revenues and the majority of cash costs
have been realized or incurred in Canadian dollars. We expect that, following
the relocation of our executive offices to the United States, a significantly
larger portion of our cash costs will be incurred in United States dollars.
Therefore, if our revenues continue to be realized in Canadian dollars, we will
be subject to increased currency risk. To date, Blue Zone has not entered into
foreign currency contracts to hedge against foreign currency risks between the
Canadian dollar or other foreign currencies and our reporting currency, the
United States dollar. Generally, however, the Company attempts to manage our
risk of exchange rate fluctuations by maintaining sufficient net assets in
Canadian dollars to retire our liabilities as they come due.

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PART III




ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements of the Company and related schedules described under
Item 14. Financial Statements and Financial Statement Schedules, are included
following this page.

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BLUE ZONE, INC.

Consolidated Financial Statements

(Expressed in U.S. dollars)

Years ended December 31, 2001,
2000 and 1999

|                                  |                                    |  |    |    | 
|--------------------------------- | ---------------------------------- |  | -- | -- | 
|Auditors Report                  |                                    |  | 52 |   
|Consolidated Financial Statements |                                    |  |    |   
|                                  | Balance Sheets                     |  |    | 53 | 
|                                  | Statements of Operations           |  |    | 54 | 
|                                  | Statements of Stockholders Equity |  |    | 55 | 
|                                  | Statements of Cash Flows           |  |    | 56 | 
|                                  | Notes                              |  |    | 57 | 





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INDEPENDENT AUDITORS REPORT
The Board of Directors and Stockholders
Blue Zone, Inc.

We have audited the consolidated balance sheets of Blue Zone, Inc. as of
December 31, 2001 and 2000 and the consolidated statements of operations,
stockholders equity (deficit) and cash flows for each of the years in the
three year period ended December 31, 2001. 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
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of Blue Zone, Inc. as of December 31,
2001 and 2000 and the results of its operations and its cash flows for each of
the years in the three year period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company has suffered losses and
negative cash flows from operations that raise substantial doubt about its
ability to continue as a going concern. Managements plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

/s/ KPMG LLP

Chartered Accountants

Vancouver, Canada
January 25, 2002,
except for notes 1 and 12, which are
as of March 21, 2002



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BLUE ZONE, INC.
Consolidated Balance Sheets
(Expressed in United States dollars)

December 31, 2001 and 2000

|                                     |                                                                                                                            |                                         |         |            |          |   |           |            |          |  
|------------------------------------ | -------------------------------------------------------------------------------------------------------------------------- | --------------------------------------- | ------- | ---------- | -------- | - | --------- | ---------- | -------- | -
|                                    
|                                     |                                                                                                                            |                                         |         | 2001       |          |   | 2000      |           
|                                    
|Assets                               |                                                                                                                            |                                         |         |            |          |   |           |           
|Current assets:                      |                                                                                                                            |                                         |         |            |          |   |           |           
|                                     | Cash and cash equivalents                                                                                                  |                                         | $       | 385,213    |          |   | $         | 1,844,981  |         
|                                     | Accounts receivable, net of allowance for doubtful accounts of $36,000 (2000  $82,025)                                    |                                         |         | 100,284    |          |   |           | 221,363    |         
|                                     | Prepaid expenses                                                                                                           |                                         |         | 32,364     |          |   |           | 144,767    |         
|                                    
|                                     |                                                                                                                            |                                         | 517,861 |            |          |   | 2,211,111 |           
|Fixed assets (note 3)                |                                                                                                                            |                                         | 472,091 |            |          |   | 838,897   |           
|                                    
|                                     |                                                                                                                            | $                                       | 989,952 |            |          | $ | 3,050,008 |           
|                                    
|Liabilities and Stockholders Equity |                                                                                                                            |                                         |         |            |          |   |           |           
|Current liabilities:                 |                                                                                                                            |                                         |         |            |          |   |           |           
|                                     | Accounts payable                                                                                                           |                                         | $       | 43,001     |          |   | $         | 258,728    |         
|                                     | Accrued liabilities (note 4)                                                                                               |                                         |         | 124,557    |          |   |           | 198,077    |         
|                                     | Deferred revenue                                                                                                           |                                         |         | 60,271     |          |   |           | 60,020     |         
|                                    
|                                     |                                                                                                                            |                                         |         | 227,829    |          |   |           | 516,825    |         
|Debenture payable (note 5)           |                                                                                                                            |                                         | 600,000 |            |          |   |          |           
|Stockholders equity (note 6):       |                                                                                                                            |                                         |         |            |          |   |           |           
|                                     | Preferred stock, authorized 5,000,000 shares, $.01 par value,
none issued in 2001 or 2000                                  |                                         |         |           |          |   |           |           |         
|                                     | Common stock, $.001 par value, authorized 100,000,000 shares;
issued and outstanding 24,539,350 shares (2000  24,539,350) |                                         |         | 24,539     |          |   |           | 24,539     |         
|                                     | Additional paid in capital                                                                                                 |                                         |         | 8,511,343  |          |   |           | 8,446,877  |         
|                                     | Deficit                                                                                                                    |                                         |         | (8,059,789 | )        |   |           | (5,738,665 | )       
|                                     | Accumulated other comprehensive loss:                                                                                      |                                         |         |            |          |   |           |            |         
|                                     |                                                                                                                            | Foreign currency translation adjustment |         |            | (313,970 | ) |           |            | (199,568 | )
|                                    
|                                     |                                                                                                                            |                                         | 162,123 |            |          |   | 2,533,183 |           
|                                    
|                                     |                                                                                                                            | $                                       | 989,952 |            |          | $ | 3,050,008 |           
|                                    

Continuing operations (note 1)
Contingency (note 11)

See accompanying notes to consolidated financial statements.

Approved on behalf of the Board:

|                  |  |          |  |                  |  |         
|----------------- |  | -------- |  | ---------------- |  | --------
|/s/  Bruce Warren |  | Director |  | /s/  Jay Shecter |  | Director

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BLUE ZONE, INC.
Consolidated Statements of Operations
(Expressed in United States dollars)

Years ended December 31, 2001, 2000 and 1999

|                                                                          |                                      |   |            |           |   |      |            |           |      |   |            |           | 
|------------------------------------------------------------------------- | ------------------------------------ | - | ---------- | --------- | - | ---- | ---------- | --------- | ---- | - | ---------- | --------- | 
|                                                                         
|                                                                          |                                      |   |            | 2001      |   | 2000 |            |           | 1999 |  
|                                                                         
|Product, license and service revenue                                      |                                      | $ | 602,171    |           |   | $    | 1,168,842  |           |      | $ | 378,358    |          
|Exchange product and service revenue (note 2(c)(ii))                      |                                      |   |           |           |   |      |           |           |      |   | 504,779    |          
|Cost of revenues                                                          |                                      |   | 86,137     |           |   |      | 569,332    |           |      |   | 370,803    |          
|                                                                         
|Gross profit                                                              |                                      |   | 516,034    |           |   |      | 599,510    |           |      |   | 512,334    |          
|Operating expenses:                                                       |                                      |   |            |           |   |      |            |           |      |   |            |          
|                                                                          | General and administrative           |   |            | 1,483,034 |   |      |            | 2,725,085 |      |   |            | 1,211,606 | 
|                                                                          | Research and development             |   |            | 560,523   |   |      |            | 836,595   |      |   |            | 65,158    | 
|                                                                          | Selling and marketing                |   |            | 514,283   |   |      |            | 870,606   |      |   |            | 105,231   | 
|                                                                          | Exchange advertising (note 2(c)(ii)) |   |            |          |   |      |            |          |      |   |            | 504,779   | 
|                                                                          | Depreciation                         |   |            | 207,356   |   |      |            | 197,118   |      |   |            | 97,755    | 
|                                                                         
|                                                                          |                                      |   | 2,765,196  |           |   |      | 4,629,404  |           |      |   | 1,984,529  |          
|                                                                         
|Loss before undernoted                                                    |                                      |   | 2,249,162  |           |   |      | 4,029,894  |           |      |   | 1,472,195  |          
|Other income (expenses):                                                  |                                      |   |            |           |   |      |            |           |      |   |            |          
|                                                                          | Interest income                      |   |            | 45,433    |   |      |            | 186,127   |      |   |            | 49,864    | 
|                                                                          | Loss on disposal of fixed assets     |   |            | (117,395  | ) |      |            |          |      |   |            |          | 
|                                                                         
|Loss for the year                                                         |                                      | $ | 2,321,124  |           |   | $    | 3,843,767  |           |      | $ | 1,422,331  |          
|                                                                         
|Net loss per common share, basic and diluted (note 2(l))                  |                                      | $ | 0.09       |           |   | $    | 0.20       |           |      | $ | 0.10       |          
|                                                                         
|Weighted average common shares outstanding, basic and diluted (note 2(l)) |                                      |   | 24,539,350 |           |   |      | 22,472,895 |           |      |   | 14,168,937 |          
|                                                                         

See accompanying notes to consolidated financial statements.

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BLUE ZONE, INC.
Consolidated Statements of Stockholders Equity
(Expressed in U.S. dollars)

Years ended December 31, 2001, 2000 and 1999

|                                                                                                               |                                   |  |                 |   |              |   |            |   |          |  |             |   |               |   |            |   |        |   |           |   |          |   |            |            |       |   |                 |          |   |   |            |            |  
|-------------------------------------------------------------------------------------------------------------- | --------------------------------- |  | --------------- | - | ------------ | - | ---------- | - | -------- |  | ----------- | - | ------------- | - | ---------- | - | ------ | - | --------- | - | -------- | - | ---------- | ---------- | ----- | - | --------------- | -------- | - | - | ---------- | ---------- | -
|                                                                                                              
|                                                                                                               |                                   |  |                 |   |              |   |            |   |          |  |             |   |               |   |            |   |        |   |           |   |          |   |            |            |       |   | Accumulated     |          |   |   |           
|                                                                                                               |                                   |  |                 |   |              |   |            |   |          |  |             |   |               |   |            |   |        |   |           |   |          |   |            |            |       |   | other           |          |   |   |           
|                                                                                                               |                                   |  |                 |   |              |   |            |   |          |  |             |   |               |   |            |   |        |   |           |   |          |   |            |            |       |   | comprehensive   |          |   |   |           
|                                                                                                               |                                   |  |                 |   |              |   |            |   |          |  |             |   |               |   |            |   |        |   |           |   |          |   |            |            |       |   | earnings (loss) |          |   |   |           
|                                                                                                               |                                   |  |                 |   |              |   |            |   |          |  |             |   |               |   |            |   |        |   |           |   |          |   |            |            |       |   |                 |          |   |   |           
|                                                                                                               |                                   |  |                 |   |              |   |            |   |          |  |             |   |               |   |            |   |        |   |           |   |          |   |            |            |       |   | Foreign         |          |   |   |           
|                                                                                                               |                                   |  |                 |   |              |   |            |   |          |  |             |   |               |   |            |   |        |   | Paid-in   |   | Retained |   | currency   |            | Total
|                                                                                                               |                                   |  | Preferred stock |   | Common stock |   | additional |   | earnings |  | translation |   | stockholders'
|                                                                                                               |                                   |  | Shares          |   | Amount       |   | Shares     |   | Amount   |  | capital     |   | (deficit)     |   | adjustment |   | equity
|                                                                                                              
|Balance, December 31, 1998                                                                                     |                                   |  | 5               |   |              | $ | 5          |   |          |  | 7           |   |               | $ | 7          |   |        | $ |          |   |          | $ | (11,500    | )          |       | $ | (423            | )        |   | $ | 16,546     |           
|Adjustments to comply with
recapitalization accounting,
net of cost of recapitalization
transaction of $32,791 |                                   |  | (5              | ) |              |   | (5         | ) |          |  | 21,538,093  |   |               |   | 21,531     |   |        |   | 5,329,360 |   |          |   |           |            |       |   |                |          |   |   | 5,350,886  |           
|Issuance of stock options (note 6(b))                                                                          |                                   |  |                |   |              |   |           |   |          |  |            |   |               |   |           |   |        |   | 368,844   |   |          |   |           |            |       |   |                |          |   |   | 368,844    |           
|Deferred stock compensation
(note 6(b))                                                                        |                                   |  |                |   |              |   |           |   |          |  |            |   |               |   |           |   |        |   | (71,833   | ) |          |   |           |            |       |   |                |          |   |   | (71,833    | )         
|Comprehensive loss:                                                                                            |                                   |  |                 |   |              |   |            |   |          |  |             |   |               |   |            |   |        |   |           |   |          |   |            |            |       |   |                 |          |   |   |            |           
|                                                                                                               | Net loss                          |  |                 |  |              |   |            |  |          |  |             |  |               |   |            |  |        |   |           |  |          |   |            | (1,422,331 | )     |   |                 |         |   |   |            | (1,422,331 | )
|                                                                                                               | Cumulative translation adjustment |  |                 |  |              |   |            |  |          |  |             |  |               |   |            |  |        |   |           |  |          |   |            |           |       |   |                 | (25,585  | ) |   |            | (25,585    | )
|                                                                                                              
|                                                                                                               |                                   |  |                 |   |              |   |            |   |          |  |             |   |               |   |            |   |        |   |           |   |          |   |            |            |       |   |                 |          |   |   | (1,447,916 | )         
|                                                                                                              
|Balance, December 31, 1999                                                                                     |                                   |  |                |   |              |   |           |   |          |  | 21,538,100  |   |               |   | 21,538     |   |        |   | 5,626,371 |   |          |   | (1,433,831 | )          |       |   | (24,905         | )        |   |   | 4,189,173  |           
|Amortization of deferred financing
costs on redeemable equity
securities (note 6(a))                           |                                   |  |                |   |              |   |           |   |          |  |            |   |               |   |           |   |        |   |          |   |          |   | (197,493   | )          |       |   |                |          |   |   | (197,493   | )         
|Accretion of premium on redeemable
equity securities (note 6(a))                                               |                                   |  |                |   |              |   |           |   |          |  |            |   |               |   |           |   |        |   |          |   |          |   | (429,752   | )          |       |   |                |          |   |   | (429,752   | )         
|Excess of carrying value of redeemable
equity securities over
redemption amount (note 6(a))                    |                                   |  |                |   |              |   |           |   |          |  |            |   |               |   |           |   |        |   |          |   |          |   | 166,178    |            |       |   |                |          |   |   | 166,178    |           
|Issuance of common shares for cash,
net of issuance costs of
$44,692 (note 6(a))                               |                                   |  |                |   |              |   |           |   |          |  | 3,000,000   |   |               |   | 3,000      |   |        |   | 2,455,308 |   |          |   |           |            |       |   |                |          |   |   | 2,458,308  |           
|Issuance of stock options (note 6(b))                                                                          |                                   |  |                |   |              |   |           |   |          |  |            |   |               |   |           |   |        |   | 428,341   |   |          |   |           |            |       |   |                |          |   |   | 428,341    |           
|Deferred stock compensation
(note 6(b))                                                                        |                                   |  |                |   |              |   |           |   |          |  |            |   |               |   |           |   |        |   | (69,168   | ) |          |   |           |            |       |   |                |          |   |   | (69,168    | )         
|Exercise of stock options                                                                                      |                                   |  |                |   |              |   |           |   |          |  | 1,250       |   |               |   | 1          |   |        |   | 6,025     |   |          |   |           |            |       |   |                |          |   |   | 6,026      |           
|Comprehensive loss:                                                                                            |                                   |  |                 |   |              |   |            |   |          |  |             |   |               |   |            |   |        |   |           |   |          |   |            |            |       |   |                 |          |   |   |            |           
|                                                                                                               | Net loss                          |  |                 |  |              |   |            |  |          |  |             |  |               |   |            |  |        |   |           |  |          |   |            | (3,843,767 | )     |   |                 |         |   |   |            | (3,843,767 | )
|                                                                                                               | Cumulative translation adjustment |  |                 |  |              |   |            |  |          |  |             |  |               |   |            |  |        |   |           |  |          |   |            |           |       |   |                 | (174,663 | ) |   |            | (174,663   | )
|                                                                                                              
|                                                                                                               |                                   |  |                 |   |              |   |            |   |          |  |             |   |               |   |            |   |        |   |           |   |          |   |            |            |       |   |                 |          |   |   | (4,018,430 | )         
|                                                                                                              
|Balance, December 31, 2000                                                                                     |                                   |  |                |   |              |   |           |   |          |  | 24,539,350  |   |               |   | 24,539     |   |        |   | 8,446,877 |   |          |   | (5,738,665 | )          |       |   | (199,568        | )        |   |   | 2,533,183  |           
|Issuance of stock options (note 6(b))                                                                          |                                   |  |                |   |              |   |           |   |          |  |            |   |               |   |           |   |        |   |          |   |          |   |           |            |       |   |                |          |   |   |           |           
|Deferred stock compensation
(note 6(b))                                                                        |                                   |  |                |   |              |   |           |   |          |  |            |   |               |   |           |   |        |   | 34,117    |   |          |   |           |            |       |   |                |          |   |   | 34,117     |           
|Adjustment of issuance costs
Previously recorded                                                               |                                   |  |                |   |              |   |           |   |          |  |            |   |               |   |           |   |        |   | 30,349    |   |          |   |           |            |       |   |                |          |   |   | 30,349     |           
|Comprehensive loss:                                                                                            |                                   |  |                 |   |              |   |            |   |          |  |             |   |               |   |            |   |        |   |           |   |          |   |            |            |       |   |                 |          |   |   |            |           
|                                                                                                               | Net loss                          |  |                 |  |              |   |            |  |          |  |             |  |               |   |            |  |        |   |           |  |          |   |            | (2,321,124 | )     |   |                 |         |   |   |            | (2,321,124 | )
|                                                                                                               | Cumulative translation adjustment |  |                 |  |              |   |            |  |          |  |             |  |               |   |            |  |        |   |           |  |          |   |            |           |       |   |                 | (114,402 | ) |   |            | (114,402   | )
|                                                                                                              
|                                                                                                               |                                   |  |                 |   |              |   |            |   |          |  |             |   |               |   |            |   |        |   |           |   |          |   |            |            |       |   |                 |          |   |   | (2,435,526 | )         
|                                                                                                              
|Balance, December 31, 2001                                                                                     |                                   |  |                |   |              | $ |           |   |          |  | 24,539,350  |   |               | $ | 24,539     |   |        | $ | 8,511,343 |   |          | $ | (8,059,789 | )          |       | $ | (313,970        | )        |   | $ | 162,123    |           
|                                                                                                              

See accompanying notes to consolidated financial statements.

55



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##### Table of Contents



BLUE ZONE, INC.
Consolidated Statements of Cash Flows
(Expressed in United States dollars)

Years ended December 31, 2001, 2000 and 1999

|                                                             |                                                      |                                                                      |                                  |        |            |          |            |         |            |          |           |         |            |         |  
|------------------------------------------------------------ | ---------------------------------------------------- | -------------------------------------------------------------------- | -------------------------------- | ------ | ---------- | -------- | ---------- | ------- | ---------- | -------- | --------- | ------- | ---------- | ------- | -
|                                                            
|                                                             |                                                      |                                                                      |                                  |        | 2001       |          |            | 2000    |            |          | 1999      |        
|                                                            
|Cash flows from operating activities:                        |                                                      |                                                                      |                                  |        |            |          |            |         |            |          |           |        
|                                                             |                                                      | Net loss                                                             |                                  | $      | (2,321,124 | )        |            | $       | (3,843,767 | )        |           | $       | (1,422,331 | )      
|                                                             |                                                      | Items not involving cash:                                            |                                  |        |            |          |            |         |            |          |           |         |            |        
|                                                             |                                                      |                                                                      | Stock based compensation         |        |            | 34,117   |            |         |            | 359,173  |           |         |            | 297,011 |  
|                                                             |                                                      |                                                                      | Depreciation                     |        |            | 207,356  |            |         |            | 197,118  |           |         |            | 97,755  |  
|                                                             |                                                      |                                                                      | Loss on disposal of fixed assets |        |            | 117,395  |            |         |            |         |           |         |            |        |  
|                                                             |                                                      | Changes in operating assets and liabilities:                         |                                  |        |            |          |            |         |            |          |           |         |            |        
|                                                             |                                                      |                                                                      | Accounts receivable              |        |            | 109,824  |            |         |            | (123,763 | )         |         |            | (97,600 | )
|                                                             |                                                      |                                                                      | Work-in-progress                 |        |            |         |            |         |            | 70,581   |           |         |            | (70,581 | )
|                                                             |                                                      |                                                                      | Prepaid expenses                 |        |            | 104,371  |            |         |            | (51,563  | )         |         |            | (92,646 | )
|                                                             |                                                      |                                                                      | Accounts payable                 |        |            | (202,146 | )          |         |            | 67,053   |           |         |            | 167,256 |  
|                                                             |                                                      |                                                                      | Accrued liabilities              |        |            | (54,805  | )          |         |            | 19,777   |           |         |            | 159,267 |  
|                                                             |                                                      |                                                                      | Deferred revenue                 |        |            | 3,767    |            |         |            | (120,123 | )         |         |            | 180,143 |  
|                                                            
|                                                             |                                                      | Net cash used in operating activities                                |                                  |        | (2,001,245 | )        |            |         | (3,600,177 | )        |           |         | (807,311   | )      
|Cash flows from financing activities:                        |                                                      |                                                                      |                                  |        |            |          |            |         |            |          |           |        
|                                                             |                                                      | Issue of debenture payable                                           |                                  |        | 600,000    |          |            |         |           |          |           |         |           |        
|                                                             |                                                      | Issue of redeemable equity securities,
net of deferred finance costs |                                  |        |           |          |            |         | 3,538,933  |          |           |         |           |        
|                                                             |                                                      | Redemption of redeemable equity securities                           |                                  |        |           |          |            |         | (4,000,000 | )        |           |         |           |        
|                                                             |                                                      | Increase in payable to stockholders                                  |                                  |        |           |          |            |         |           |          |           |         | 36,297     |        
|                                                             |                                                      | Repayment of payable to stockholder                                  |                                  |        |           |          |            |         | (45,559    | )        |           |         |           |        
|                                                             |                                                      | Issue of common stock                                                |                                  |        |           |          |            |         | 2,464,334  |          |           |         | 5,350,886  |        
|                                                            
|                                                             |                                                      | Net cash provided by financing activities                            |                                  |        | 600,000    |          |            |         | 1,957,708  |          |           |         | 5,387,183  |        
|Cash flows from investing activities:                        |                                                      |                                                                      |                                  |        |            |          |            |         |            |          |           |        
|                                                             |                                                      | Purchase of fixed assets                                             |                                  |        | (17,504    | )        |            |         | (610,419   | )        |           |         | (482,894   | )      
|                                                             |                                                      | Proceeds from sale of fixed assets                                   |                                  |        | 20,161     |          |            |         |           |          |           |         |           |        
|                                                            
|                                                             |                                                      | Net cash provided by (used in) investing activities                  |                                  |        | 2,657      |          |            |         | (610,419   | )        |           |         | (482,894   | )      
|Effect of exchange rate changes on
cash and cash equivalents |                                                      |                                                                      | (61,180                          | )      |            |          | (174,663   | )       |            |          | (25,585   | )      
|                                                            
|Net increase (decrease) in cash and cash
equivalents         |                                                      |                                                                      | (1,459,768                       | )      |            |          | (2,252,888 | )       |            |          | 4,096,978 |        
|Cash and cash equivalents, beginning of year                 |                                                      |                                                                      | 1,844,981                        |        |            |          | 4,097,869  |         |            |          | 891       |        
|                                                            
|Cash and cash equivalents, end of year                       |                                                      | $                                                                    | 385,213                          |        |            | $        | 1,844,981  |         |            | $        | 4,097,869 |        
|                                                            
|Supplementary information:                                   |                                                      |                                                                      |                                  |        |            |          |            |         |            |          |           |        
|                                                             | Interest paid                                        |                                                                      | $                                |       |            |          | $          |        |            |          | $         | 23,984  |           
|                                                             | Income taxes paid                                    |                                                                      |                                  |       |            |          |            |        |            |          |           | 1,090   |           
|                                                            
|Non-cash transactions:                                       |                                                      |                                                                      |                                  |        |            |          |            |         |            |          |           |        
|                                                             | Revenue received in exchange for
advertising expense |                                                                      | $                                |       |            |          | $          |        |            |          | $         | 504,779 |           
|                                                            
|Non-cash financing activities:                               |                                                      |                                                                      |                                  |        |            |          |            |         |            |          |           |        
|                                                             | Value assigned on issuance of stock options          |                                                                      | $                                | 34,117 |            |          | $          | 359,173 |            |          | $         | 297,011 |           
|                                                            

See accompanying notes to consolidated financial statements.

56



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##### Table of Contents



BLUE ZONE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

Years ended December 31, 2001, 2000 and 1999



---

1.        Nature of business and continuing operations:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Blue Zone, Inc. (the Company) is incorporated in the state of Nevada and
is in the business of providing innovation, development and realization of
convergence publishing using digital asset management tools. The Company
develops solutions for convergence, interactivity and content management.
Blue Zones product, MediaBZ, is content management and convergence
publishing software. Blue Zone combines its state-of-the-art technology
with professional consulting services to deliver an enhanced viewer
experience across multiple platforms such as the Internet, digital set-top
boxes, and handheld wireless devices. These consolidated financial statements
have been prepared on the going concern basis, which presumes the
realization of assets and the settlement of liabilities in the normal course
of operations. Certain conditions currently exist which raise substantial
doubt about the validity of this assumption, including reduced
sales, continued operating losses and reduced cash and cash equivalent
balances. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty. The application of the going concern basis is
dependent upon the Company achieving profitable operations to generate
sufficient cash flows to fund continued operations, or, in the absence of
adequate cash flows from operations, obtaining additional financing. The
Company has reported losses and incurred negative cash flow from operations
in the last three years, and has an accumulated deficit of $8,059,789 at
December 31, 2001. Management continues to review operations in order to
identify additional strategies, including obtaining future sales contracts,
designed to generate cash flow, improve the Companys financial position,
and enable the timely discharge of the Companys obligations. As
described in note 12, the Company has given notice of termination to
its employees and is considering relocating its executive offices. If management
is unable to identify sources of additional cash flow in the short term, it
may be required to further reduce or limit operations, or cease operations
all together.

2.        Significant accounting policies:



| |                             
| | ----------------------------
| | (a)   Basis of presentation:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On October 8, 1999, Western Food Distributors Ltd. (Western Food), a
public company listed on the over-the-counter bulletin board in the
United States, an entity without significant operations, issued
12,000,000 common shares as consideration in exchange for 100% of the
issued and outstanding shares of Blue Zone Productions Ltd. (Blue
Zone), a company incorporated in the province of British Columbia,
Canada. This transaction was accounted for as a recapitalization of Blue
Zone, effectively as if Blue Zone had issued common shares for
consideration equal to the net assets of Western Food. Immediately
following the transaction, Western Food changed its name to Blue Zone,
Inc.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys historical financial statements reflect the financial
position, results of operations and cash flows of Blue Zone for each of
the years in the three year period ended December 31, 2001 and include
the operations of Western Food from the date of the effective
recapitalization, being October 8, 1999. Stockholders equity gives
effect to the shares issued to the stockholders of Blue Zone prior to
October 8, 1999 and of the Company thereafter.

57



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##### Table of Contents



BLUE ZONE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

Years ended December 31, 2001, 2000 and 1999



---

2.        Significant accounting policies (continued):



| |                                         
| | ----------------------------------------
| | (a)   Basis of presentation (continued):



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States. The
financial statements include the accounts of the Companys wholly-owned
subsidiaries, Blue Zone Productions Ltd., Blue Zone Solutions Inc. (which
changed its name from Blue Zone Entertainment Inc. during the year ended
December 31, 2001) and Blue Zone International Inc. All material
intercompany balances and transactions have been eliminated in the
consolidated financial statements.



| |                        
| | -----------------------
| | (b)   Use of estimates:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The preparation of consolidated financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at
the date of the financial statements and recognized revenues and expenses
for the reporting periods. Significant areas requiring the use of
estimates include the valuation of long-lived assets, the estimation of
the fair market value of equity instruments and the valuation of future
tax assets. Actual results may differ significantly from these
estimates.



| |                           
| | --------------------------
| | (c)   Revenue recognition:



| |                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements (SAB 101). SAB 101 formalizes current interpretations of
software revenue recognition requirements. The Company adopted the
provisions of SAB 101 during the 2000 fiscal year without a change in
accounting principles.



| |                           
| | --------------------------
| | (i)   Product and service:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company generates product and service revenues through the following
sources: creative consulting services, interactive broadcasting
development, and maintenance and software licensing. Consulting service
revenues are recognized upon delivery of the service. Interactive
broadcasting maintenance is recognized over the term of the contracts,
typically month to month. For long-term development projects, revenue is
recognized on a percentage-of-completion basis, based upon achievement of
specifically identifiable milestones. Software licensing revenue is
recognized over the term of the license.



| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | Revenue that has been prepaid or invoiced but does not yet qualify for
recognition under the Companys policies is reflected as deferred
revenue.

58



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##### Table of Contents



BLUE ZONE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

Years ended December 31, 2001, 2000 and 1999



---

2.        Significant accounting policies (continued):



| |                                       
| | --------------------------------------
| | (c)   Revenue recognition (continued):



| |                                                  
| | -------------------------------------------------
| | (ii)   Exchange product and services (continued):



| |                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On August 1, 1997, the Company entered into an agreement to exchange
services with a British Columbia television station. The Company
provided website development and monthly maintenance services in exchange
for daily television advertising. The Company recognized the revenues
and advertising expenses from the barter transaction at the fair value of
the advertising received.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In fiscal 2000, the Company adopted EITF No. 99-17 Accounting for
Advertising Barter Transactions. EITF 99-17 provides that the Company
recognize revenue and advertising expenses from barter transactions at
the fair value only when it has a historical practice of receiving or
paying cash for similar transactions. The Company has not recorded
barter transactions during the years ended December 31, 2001 or 2000.



| |                        
| | -----------------------
| | (d)   Foreign currency:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The functional currency of the Company and its Barbados subsidiary is the
United States dollar. The functional currency of the operations of the
Companys wholly-owned Canadian operating subsidiaries is the Canadian
dollar. Assets and liabilities measured in Canadian dollars are
translated into United States dollars using exchange rates in effect at
the balance sheet date with revenue and expense transactions translated
using average exchange rates prevailing during the year. Exchange gains
and losses arising on this translation are excluded from the
determination of income and are reported as the foreign currency
translation adjustment in stockholders equity. The exchange rate used
to translate the financial statements of the Canadian operations at
December 31, 2001 was $0.6278 (2000  $0.6669).



| |                                 
| | --------------------------------
| | (e)   Cash and cash equivalents:



| |                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company considers all short-term investments with a term to maturity
at the date of purchase of three months or less to be cash equivalents.



| |                    
| | -------------------
| | (f)   Fixed assets:



| |                                 
| | --------------------------------
| | Fixed assets are stated at cost.



| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | Depreciation is provided on the declining-balance basis using the
following annual rates:

|                        |  |      |    |  
|----------------------- |  | ---- | -- | -
|                       
|Asset                   |  | Rate
|                       
|Equipment and computers |  |      | 30 | %
|Software                |  |      | 30 | %
|Furniture and fixtures  |  |      | 30 | %
|                       

59



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##### Table of Contents



BLUE ZONE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

Years ended December 31, 2001, 2000 and 1999



---

2.        Significant accounting policies (continued):



| |                                
| | -------------------------------
| | (f)   Fixed assets (continued):



| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | Leasehold improvements are amortized on the straight-line basis over 5
years representing the term of the lease.



| |                                                
| | -----------------------------------------------
| | (g)   Research and development and advertising:



| |                                                                         
| | ------------------------------------------------------------------------
| | Research and development and advertising costs are expensed as incurred.



| |                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Advertising costs charged to selling and marketing expenses in 2001 total
$7,933 (2000  $4,993; 1999  $513,252). Advertising costs in 1999
include the exchange advertising presented separately in the statement of
operations (note 2(c)(ii)).



| |                                                                                                       
| | ------------------------------------------------------------------------------------------------------
| | Equipment used in research and development is capitalized only if it has
an alternative in future use.



| |                                
| | -------------------------------
| | (h)   Stock-based compensation:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company accounts for its stock-based compensation arrangements with
employees in accordance with APB Opinion No. 25, Accounting for Stock
Issued to Employees and related interpretations. This practice is
allowed under the provisions of Statement of Financial Accounting
Standards No. 123. As such, compensation expense under fixed term option
plans is recorded at the date of grant only to the extent that the market
value of the underlying stock at the date of grant exceeds the exercise
price. In accordance with SFAS 123, since the Company has continued to
apply the principles of APB 25 to employee stock compensation, pro forma
loss and pro forma loss per share information has been presented in note
6(b) as if the options had been valued at their fair values. The Company
recognizes compensation expense for stock options, common stock and other
equity instruments issued to non-employees for services received based
upon the fair value of the services or equity instruments issued,
whichever is more reliably determined. Stock compensation expense is
recognized as earned, which is generally over the vesting period of the
underlying option.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In March 2000, the FASB issued FASB Interpretation No. 44, Accounting
for Certain Transactions Involving Stock Compensation. Blue Zone
adopted FIN 44 effective July 1, 2000 with respect to certain provisions
applicable to new awards and changes in grantee status. FIN 44 addresses
practice issues related to the application of APB 25. The application of
FIN 44 does not have a material impact on the consolidated financial
position or results of operations of the Company at December 31, 2001 or
2000.

60



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##### Table of Contents



BLUE ZONE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

Years ended December 31, 2001, 2000 and 1999



---

2.        Significant accounting policies (continued):



| |                                                                               
| | ------------------------------------------------------------------------------
| | (i)   Impairment of long-lived assets and long-lived assets to be
disposed of:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, Accounting for the Impairment of long-lived
assets and for long-lived assets to be disposed of. At December 31,
2001, the only long-lived assets reported on the Companys consolidated
balance sheet are fixed assets. This statement requires that long-lived
assets and certain identifiable recorded intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount
of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount and the fair value
less costs to sell.



| |                            
| | ---------------------------
| | (j)   Comprehensive income:



| |                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Comprehensive income consists of net loss and foreign currency
translation adjustments that are separately presented in the consolidated
statements of stockholders equity.



| |                    
| | -------------------
| | (k)   Income taxes:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company follows the asset and liability method of accounting for
income taxes. Under this method, current taxes are recognized for the
estimated income taxes payable for the current period. Deferred income
taxes are provided based on the estimated future tax effects of temporary
differences between financial statement carrying amounts of assets and
liabilities and their respective tax bases, as well as the benefit of
losses available to be carried forward to future years for tax purposes.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Future tax assets and liabilities are measured using the enacted tax
rates that are expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered and settled.
The effect on future tax assets and liabilities of a change in tax rates
is recognized in operations in the period that includes the enactment
date. A valuation allowance is recorded for future tax assets when it is
not more likely than not that such future tax assets will be realized.

61



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##### Table of Contents



BLUE ZONE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

Years ended December 31, 2001, 2000 and 1999



---

2.        Significant accounting policies (continued):



| |                          
| | -------------------------
| | (l)   Net loss per share:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Basic loss per share is computed using the weighted average number of
common shares outstanding during the periods, and gives retroactive
effect to the shares issued on the recapitalization described in note
2(a). Diluted loss per share is computed using the weighted average
number of common shares and potentially dilutive common stock
equivalents, including stock options and warrants, outstanding during the
period. As the Company has a net loss in each of the periods presented,
basic and diluted net loss per share is the same, as any exercise of the
share purchase options (note 6(b)) outstanding would be anti-dilutive.



| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The net loss per common share for the year ended December 31, 2000 was
adjusted for the charges related to the redeemable equity securities
described in note 6(a) as follows:

|                                                        |                                                      |   |           |        
|------------------------------------------------------- | ---------------------------------------------------- | - | --------- | -------
|                                                       
|Net loss per statement of operations                    |                                                      | $ | 3,843,767
|Adjustments to income available to common shareholders: |                                                      |   |          
|                                                        | Amortization of deferred finance costs               |   |           | 197,493
|                                                        | Accretion of premium on redeemable
equity securities |   |           | 429,752
|                                                       
|Net loss available for common shareholders              |                                                      | $ | 4,471,012
|                                                       

3.        Fixed assets:



|                        |  |      |         |              |  |             |         |          |  |   |        
|----------------------- |  | ---- | ------- | ------------ |  | ----------- | ------- | -------- |  | - | -------
|                       
|                        |  |      |         |              |  | Accumulated |         | Net book
|2001                    |  | Cost |         | depreciation |  | value      
|                       
|Equipment and computers |  | $    | 562,041 |              |  | $           | 260,669 |          |  | $ | 301,372
|Software                |  |      | 147,284 |              |  |             | 58,315  |          |  |   | 88,969 
|Furniture and fixtures  |  |      | 40,740  |              |  |             | 19,205  |          |  |   | 21,535 
|Leasehold improvements  |  |      | 130,504 |              |  |             | 70,289  |          |  |   | 60,215 
|                       
|                        |  | $    | 880,569 |              |  | $           | 408,478 |          |  | $ | 472,091
|                       

62



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##### Table of Contents



BLUE ZONE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

Years ended December 31, 2001, 2000 and 1999



---

3.        Fixed assets (continued):

|                        |  |      |           |              |  |             |         |          |  |   |        
|----------------------- |  | ---- | --------- | ------------ |  | ----------- | ------- | -------- |  | - | -------
|                       
|                        |  |      |           |              |  | Accumulated |         | Net book
|2000                    |  | Cost |           | depreciation |  | value      
|                       
|Equipment and computers |  | $    | 680,988   |              |  | $           | 179,775 |          |  | $ | 501,213
|Software                |  |      | 151,705   |              |  |             | 29,398  |          |  |   | 122,307
|Furniture and fixtures  |  |      | 91,229    |              |  |             | 23,662  |          |  |   | 67,567 
|Leasehold improvements  |  |      | 222,307   |              |  |             | 74,497  |          |  |   | 147,810
|                       
|                        |  | $    | 1,146,229 |              |  | $           | 307,332 |          |  | $ | 838,897
|                       

4.        Accrued liabilities:

|                  |  |      |         |      |  |   |        
|----------------- |  | ---- | ------- | ---- |  | - | -------
|                 
|                  |  | 2001 |         | 2000
|                 
|Professional fees |  | $    | 24,777  |      |  | $ | 104,697
|Other             |  |      | 99,780  |      |  |   | 93,380 
|                 
|                  |  | $    | 124,557 |      |  | $ | 198,077
|                 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Other accrued liabilities at December 31, 2001 include $3,139 (2000 -
$33,612) payable to a director of the Company, representing un-reimbursed
travel and entertainment expenses incurred by the director during the year
on behalf of the Company. Other accrued liabilities at December 31, 2001
also include accrued interest of $21,370 (2000 - nil) payable to a director
of the Company representing the total interest expense for the year in
connection with the debenture payable (note 5).

5.        Debenture payable:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the year ended December 31, 2001, the Company entered into a secured
convertible loan agreement with a director of the Company. Under the terms
of the agreement, the Company can draw down funding of up to $1,000,000, in
$100,000 increments, subject to Board of Director approval, over a two-year
period ended April 27, 2003. The debentures are secured by a security
interest in all present and after-acquired personal property of the Company
and substantially all of the intellectual property of the Company. All
principal and accrued and unpaid interest is payable in April 2003, but may
be prepaid at any time at the option of the Company. The lender may elect
to take any prepayment amount in shares of the Companys common stock, based
on the market price of the Companys common stock on the date of the draw
down of the debenture. The debentures carry interest at the prime rate
quoted by a Canadian chartered bank at the date of draw down, plus 2% per
annum.

63



---



##### Table of Contents



BLUE ZONE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

Years ended December 31, 2001, 2000 and 1999



---

5.        Debenture payable (continued):



| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | At December 31, 2001 the Company had drawn down the following debentures
with the following interest rate and conversion features:

|                 |  |               |      |                 |  |           |       | 
|---------------- |  | ------------- | ---- | --------------- |  | --------- | ----- | 
|                
|Principal amount |  | Interest rate |      | Conversion rate | 
|                 |  |               |      |                 |  | per share |      
|                
|$300,000         |  |               | 8.25 | %               |  | $         | 0.135 | 
|$300,000         |  |               | 8.00 | %               |  | $         | 0.085 | 
|                

6.        Stockholders equity:



| |                         
| | ------------------------
| | (a)   Private placement:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company completed a private placement of common stock effective
September 8, 2000, whereby the Company issued 705,467 common shares at
$7.0875 per share for gross proceeds of $5,000,000, together with initial
share purchase warrants for an additional 148,148 shares at $8.10 per
share, expiring on September 8, 2003. Payment of $1,000,000 of the
$5,000,000 in gross proceeds was contingent upon registration of the
related common stock with the Securities and Exchange Commission. The
Company also issued adjustment warrants to the investors, entitling them
to purchase a significant number of shares of common stock at an exercise
price of $0.001 per share if the price of the Companys shares declined.
In addition, The Company granted a one-year option to the investors to
acquire up to an additional $2,000,000 in shares based on then-prevailing
market prices.



| |                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All of the common shares and the shares underlying the option and the
warrants sold in the private placement, including warrants issued upon
exercise of the option, were subject to redemption at the discretion of
the investors. Due to these redemption provisions, the Company recorded
the $4,000,000 received on the private placement as redeemable equity
securities.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On December 21, 2000, the Company and the investors agreed to amend the
terms of the private placement. As a result, the Company redeemed the
redeemable equity securities for $4,000,000 and cancelled the $1,000,000
payment due to the Company upon registration of the securities and the
related option and warrants originally granted. The excess of the
carrying value of the redeemable equity securities over the redemption
amount was recorded in the statement of stockholders equity.

64



---



##### Table of Contents



BLUE ZONE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

Years ended December 31, 2001, 2000 and 1999



---

6.        Stockholders equity (continued):

(a)   Private placement (continued):



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The 20% redemption premium and amortization of deferred finance costs
related to the issuance of the redeemable equity securities were
recognized as a charge to retained earnings over the period to December
21, 2000, being the redemption date of the redeemable equity securities
as described above. The remaining amount of deferred finance costs was
included in the computation of the excess of carrying value of redeemable
equity securities over redemption amount charged to the consolidated
statement of stockholders equity (deficit) at December 31, 2000.



| |                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Under the new agreement, the Company issued 3,000,000 common shares for
total proceeds of $2,500,000. These common shareholders also have a
two-year right of first refusal on certain types of future sales of Blue
Zone securities.



| |                         
| | ------------------------
| | (b)   Stock option plan:



| |                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company has reserved 6,780,000 common shares for issuance under its
stock option plan. The plan was amended during 2000 to expand the number
of shares reserved for issuance from 4,500,000 shares. The plan provides
for the granting of stock options to directors, officers, eligible
employees and contractors.



| |                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Of the stock purchase options granted during the year ended December 31,
2001, 671,500 vest immediately (2000  1,356,000), and the remaining
options vest at a rate of 25% per year.



| |                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Board of Directors determines the terms of the options granted,
including the number of options granted, the exercise price and their
vesting schedule.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the year ended December 31, 2001 the Company offered members of
its Board of Directors the opportunity to cancel their existing stock
purchase options, in exchange for an undertaking by the Company to grant
an equivalent number of stock purchase options at a future date at the
market price at the future grant date. Options to purchase a total of
2,600,000 shares were tendered for cancellation by members of the Board
of Directors in accordance with this arrangement.

65



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##### Table of Contents



BLUE ZONE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

Years ended December 31, 2001, 2000 and 1999



---

6.        Stockholders equity (continued):



| |                                     
| | ------------------------------------
| | (b)   Stock option plan (continued):



| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | A summary of stock option activity for the two years ended December 31,
2001 is as follows:

|                                       |                     |  |           |            |   |          |          |     
|-------------------------------------- | ------------------- |  | --------- | ---------- | - | -------- | -------- | ----
|                                      
|                                       |                     |  |           |            |   |          | Weighted
|                                       |                     |  | Number    |            |   | average 
|                                       |                     |  | of        |            |   | exercise
|                                       |                     |  | shares    |            |   | price   
|                                      
|Options outstanding, December 31, 1999 |                     |  | 1,995,000 |            |   | $        | 5.00    
|                                       | Granted             |  |           | 2,089,500  |   |          |          | 6.20
|                                       | Exercised           |  |           | (1,250     | ) |          |          | 5.00
|                                       | Cancelled/forfeited |  |           | (212,000   | ) |          |          | 5.00
|                                      
|Outstanding, December 31, 2000         |                     |  | 3,871,250 |            |   |          | 5.65    
|                                       | Granted             |  |           | 1,889,000  |   |          |          | 0.12
|                                       | Exercised           |  |           |           |   |          |          |    
|                                       | Cancelled/forfeited |  |           | (3,385,250 | ) |          |          | 5.70
|                                      
|Outstanding, December 31, 2001         |                     |  | 2,375,000 |            |   | $        | 1.18    
|                                      



| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | The following table summarizes information concerning outstanding and
exercisable stock options at December 31, 2001:

|          |       |             |           |           |             |  |         |        
|--------- | ----- | ----------- | --------- | --------- | ----------- |  | ------- | -------
|         
|Exercise  |       |             |           |           |             |  |         |        
|price     |       | Number      |           |           | Number     
|per share |       | outstanding |           |           | exercisable
|         
|$         | 0.10  |             |           | 1,152,000 |             |  |         | 671,500
|          | 0.12  |             |           | 500,000   |             |  |         |       
|          | 0.13  |             |           | 12,000    |             |  |         |       
|          | 0.16  |             |           | 200,000   |             |  |         |       
|          | 3.03  |             |           | 6,000     |             |  |         | 1,500  
|          | 5.00  |             |           | 500,000   |             |  |         | 248,500
|          | 13.44 |             |           | 5,000     |             |  |         | 2,500  
|         
|          |       |             | 2,375,000 |           |             |  | 924,000
|         



| |                                                                         
| | ------------------------------------------------------------------------
| | The options outstanding at December 31, 2001 expire on November 9, 2009.



| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | Subsequent to December 31, 2001 options to purchase a total of 245,000
shares were cancelled.

66



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##### Table of Contents



BLUE ZONE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

Years ended December 31, 2001, 2000 and 1999



---

6.        Stockholders equity (continued):



| |                                     
| | ------------------------------------
| | (b)   Stock option plan (continued):



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the year ended December 31, 2000, the Company recorded non-cash
compensation expense of $34,117 (2000  $270,428; 1999  $16,094) and
deferred compensation expense of $nil (2000  $69,168; 1999  $48,281)
relating to the issuance of 1,839,000 common stock purchase options to
certain employees and officers of the Company (2000  2,083,500; 1999 -
1,888,500), representing the intrinsic benefit derived from the exercise
price being less than fair market value. The deferred compensation
expense, which relates to options granted to employees, is being
amortized at 25% per year, the vesting period of the underlying options.



| |                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the year ended December 31, 2001, the Company recorded non-cash
compensation expense of $nil (2000  $88,745; 1999  $280,917) relating
to the issuance of nil common stock purchase options to certain
contractors of the Company (2000  6,000; 1999  106,500), representing
the fair value benefit of the options.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys accounting policy for grants to employees under the
Companys existing stock based compensation plan is disclosed in note
2(h). Had compensation cost for the Companys stock option plan been
determined based on the fair value at the grant date for awards under
those plans consistent with the measurement provisions of FAS 123, the
Companys net loss and basic loss per share would have been adjusted as
follows:

|                                   |  |      |           |  |      |   |            |  |      |   |          
|---------------------------------- |  | ---- | --------- |  | ---- | - | ---------- |  | ---- | - | ---------
|                                  
|                                   |  | 2001 |           |  | 2000 |   |            |  | 1999
|                                  
|Loss for the period  as reported  |  | $    | 2,321,124 |  |      | $ | 3,843,767  |  |      | $ | 1,422,331
|Loss for the period  pro forma    |  |      | 2,797,802 |  |      |   | 12,534,750 |  |      |   | 6,943,905
|Basic loss per share  as reported |  |      | 0.09      |  |      |   | 0.20       |  |      |   | 0.10     
|Basic loss per share  pro forma   |  |      | 0.11      |  |      |   | 0.59       |  |      |   | 0.49     
|                                  



| |                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The fair value of each option grant has been estimated on the date of the
grant using the Black-Scholes option-pricing model with the following
assumptions:

|                                |  |         |     |         |      |         |     |      |  |  |      |  
|------------------------------- |  | ------- | --- | ------- | ---- | ------- | --- | ---- |  |  | ---- | -
|                               
|                                |  | 2001    |     |         | 2000 |         |     | 1999
|                               
|Expected dividend yield         |  |         |    |         |      |         |    |      |  |  |     |  
|Expected stock price volatility |  |         | 275 | %       |      |         | 144 | %    |  |  | 70.0 | %
|Risk-free interest rate         |  |         | 4.5 | %       |      |         | 5.0 | %    |  |  | 6.0  | %
|Expected life of options        |  | 5 years |     | 5 years |      | 5 years
|                               

67



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##### Table of Contents



BLUE ZONE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

Years ended December 31, 2001, 2000 and 1999



---

6.        Stockholders equity (continued):



| |                
| | ---------------
| | (c)   Warrants:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During 1999, the Company issued 524,981 stock purchase warrants. The
warrants allowed the holder to purchase 1 common share at a price of
$5.63 per share if the warrant was exercised before October 1, 2000 and a
price of $6.75 per share if the warrant was exercised after October 1,
2000. The exercise price of the warrants exceeded the market price of
the Companys common stock on the date of issuance. The warrants expired
unexercised on October 1, 2001.

7.        Operating leases:



| |                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company leases office facilities in Vancouver under operating lease
agreements that expire at various dates to September 30, 2004. Minimum
lease payments under these operating leases are approximately as follows:

|     |  |   |       
|---- |  | - | ------
|    
|2002 |  | $ | 53,136
|2003 |  |   | 46,032
|2004 |  |   | 34,524
|    



| |                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company paid rent expense totaling $170,603 for the year ended December
31, 2001 (2000  $167,754, 1999  $27,940). During the year ended December
31, 2001 the Company assigned with no recourse the lease on the Toronto
studio to an unrelated third party.

8.        Income taxes:



| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Income tax recovery attributable to losses primarily from foreign operations
was $nil for the years December 31, 2001, 2000, and 1999, and differed from
the amounts computed by applying the United States federal income tax rate
of 34 percent to pretax losses from operations as a result of the following:

|                                                                                          |  |      |          |      |  |      |            |   |  |   |          |  
|----------------------------------------------------------------------------------------- |  | ---- | -------- | ---- |  | ---- | ---------- | - |  | - | -------- | -
|                                                                                         
|                                                                                          |  | 2001 |          | 2000 |  | 1999 |           
|                                                                                         
|Computed expected tax recovery                                                          |  | $    | (789,182 | )    |  | $    | (1,306,881 | ) |  | $ | (483,592 | )
|Increase (reduction) in income taxes resulting from
income taxes in a higher jurisdiction |  |      | (186,460 | )    |  |      | (422,814   | ) |  |   | (156,456 | )
|Permanent difference and other items                                                      |  |      | 389,152  |      |  |      | 487,949    |   |  |   | 133,654  |  
|Change in valuation allowance                                                             |  |      | 586,490  |      |  |      | 1,241,746  |   |  |   | 506,394  |  
|                                                                                         
|                                                                                          |  | $    |         |      |  | $    |           |   |  | $ |         |  
|                                                                                         

68



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##### Table of Contents



BLUE ZONE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

Years ended December 31, 2001, 2000 and 1999



---

8.        Income taxes (continued):



| |                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The tax effects of temporary differences that give rise to significant
portions of the future tax assets and future tax liabilities at December 31,
2001 and 2000 are presented below:

|                     |                                                              |   |      |            |      |   |   |            |  
|-------------------- | ------------------------------------------------------------ | - | ---- | ---------- | ---- | - | - | ---------- | -
|                    
|                     |                                                              |   | 2001 |            | 2000 |  
|                    
|Deferred tax assets: |                                                              |   |      |            |      |   |   |           
|                     | Fixed assets, principally due to differences in depreciation |   | $    | 219,535    |      |   | $ | 94,534     |  
|                     | Net operating loss carryforwards                             |   |      | 2,130,205  |      |   |   | 1,668,716  |  
|                    
|                     | Total gross deferred tax assets                              |   |      | 2,349,740  |      |   |   | 1,763,250  |  
|                     | Less valuation allowance                                     |   |      | (2,349,740 | )    |   |   | (1,763,250 | )
|                    
|                     | Net deferred tax assets                                      |   |      |           |      |   |   |           |  
|                     | Net deferred tax liabilities                                 |   |      |           |      |   |   |           |  
|                    
|                     |                                                              | $ |     |            |      | $ |  |           
|                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The valuation allowance for deferred tax assets as of December 31, 2001 and
2000 was $2,349,740 and $1,763,250, respectively. The net change in the
total valuation allowance for the years ended December 31, 2001 and 2000 was
an increase of $586,490 and $1,241,746, respectively. In assessing the
realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers
the scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. In order to
fully realize the deferred tax asset attributable to net operating loss
carryforwards, the Company will need to generate future taxable income of
approximately $5,500,000 prior to the expiration of the net operating loss
carryforwards, which begin expiring in 2006. Based upon the level of
historical taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, management does not
believe it is more likely than not that the Company will realize the
benefits of these deductible differences.

9.        Financial instruments:



| |                   
| | ------------------
| | (a)   Fair values:



| |                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company regularly invests funds in excess of its immediate needs in
guaranteed investment certificates. The fair value of cash and cash
equivalents, trade accounts receivable, accounts payable and accrued
liabilities approximates their financial statement carrying amounts due
to the short-term maturities of these instruments.

69



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##### Table of Contents



BLUE ZONE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

Years ended December 31, 2001, 2000 and 1999



---

9.        Financial instruments (continued):



| |                               
| | ------------------------------
| | (a)   Fair values (continued):



| |                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The fair value of the debentures payable cannot be determined because the
Company would not likely be able to secure similar financing on similar
terms at a market rate of interest, if at all. As a result, the
financial statement carrying amount of the debentures payable at December
31, 2001 reflects the market value to the Company for the debt.



| |                                    
| | -----------------------------------
| | (b)   Concentration of credit risk:



| |                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the year ended December 31, 2001, approximately 84% of the
Companys revenue was derived from two customers (2000  92% from two
customers; 1999  80% from two customers), and approximately 56% of the
accounts receivable at December 31, 2001 was from one customer
(2000  73% from one customer).



| |                             
| | ----------------------------
| | (c)   Foreign currency risk:



| |                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company operates internationally, which gives rise to the risk that
cash flows may be adversely impacted by exchange rate fluctuations. The
Company has not entered into any forward exchange contracts or other
derivative to hedge against foreign exchange risk.

10.        Segmented information:



| |                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company operates in one business segment, the business of technical and
creative expertise and software licensing related to Website and interactive
television development and related Internet strategies. The revenue for the
three years ended December 31, 2001 has been derived primarily from business
in Canada.

11.        Contingency:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the year ended December 31, 2000, the Company underwent an audit by
the Consumer Taxation branch of the British Columbia Ministry of Consumer
and Corporate Affairs for provincial sales tax for the period from November
1, 1997 to October 31, 2000. The Ministry proposed an assessment of
approximately $182,000 relating to various items from this period, including
tax on revenue and tax on capital assets purchased outside the province for
use in B.C. The Company believes the proposed assessment applies tax to
items that are not taxable and disputed the proposed assessment. The
Company provided $15,700 in the accounts at December 31, 2000, representing
managements best estimate of the amount that will likely be payable in
respect of the possible assessment. This amount was paid in 2001.

70



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##### Table of Contents



BLUE ZONE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

Years ended December 31, 2001, 2000 and 1999



---

12.        Subsequent events:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Effective March 1, 2002, the Company gave notice of termination to its six
remaining employees, in an effort to further preserve cash resources. The
employees will continue to work with the Company until at least June 30,
2002. The Company intends to enter into consulting agreements with certain
key individuals under which they will maintain a certain level of operations
and continue to pursue opportunities for the Company.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company is exploring the possibility of moving its executive offices to
the United States in 2002. Management believes this will allow the Company
to have better access to opportunities for the Companys technology. If the
Company is successful in moving its operations to the United States, it will
likely close its executive offices in Vancouver, British Columbia.
The Company will likely record an impairment charge on its
fixed assets to the extent that the estimated net cash flow and
services from these assets is less than their carrying values. In the
first quarter of 2002, the Company anticipates an impairment charge
of approximately $450,000 related to fixed assets at
December 31, 2001 having a net book value of approximately
$470,000.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In order to further reduce operating costs, the Company intends to file a
Form 15 with the Securities and Exchange Commission on or about May 10,
2002. This will allow the Company to terminate the registration of its
common shares under Section 12(g) of the Securities Exchange Act of 1934, as
amended (the Exchange Act), and to suspend its reporting requirements
pursuant to Section 15(d) of the Exchange Act. Unless the Form 15 is
withdrawn or denied, the registration of the Companys common shares under
Section 12(g) will be terminated on or about August 8, 2002. If the
Companys Section 12(g) registration is terminated, its common stock will no
longer be eligible for quotation on the OTC Bulletin Board system.

13.        Comparative figures:



| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | Certain comparative figures have been reclassified to conform to
presentation adopted in the current year.

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

There were no changes in or disagreements with accountants on accounting and
financial disclosure during the two most recent fiscal years.

72



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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS AND EXECUTIVE OFFICERS

Our directors and executive officers are as follows:

|                           |  |     |    |          |  |                                                   
|-------------------------- |  | --- | -- | -------- |  | --------------------------------------------------
|Name                       |  | Age |    | Position
|                          
|F. Michael P. Warren(1)(2) |  |     | 66 |          |  | Chairman of our Board of Directors                
|Bruce Warren(2)            |  |     | 36 |          |  | President and Chief Executive Officer
and Director
|Jamie Ollivier             |  |     | 38 |          |  | Executive Creative Director and
Director          
|Jeremy Black               |  |     | 34 |          |  | Chief Financial Officer                           
|Tryon Williams(1)(3)       |  |     | 60 |          |  | Director                                          
|David Thomas(3)            |  |     | 55 |          |  | Director                                          
|Jay Shecter(1)(2)(3)       |  |     | 58 |          |  | Director                                          
|                          



|(1) |  | Member of our Compensation Committee.
|--- |  | -------------------------------------
|   
|(2) |  | Member of our Finance Committee.     
|   
|(3) |  | Member of our Audit Committee.       

Our Chief Executive Officer, Bruce Warren is the son of our Chairman, F.
Michael P. Warren. Otherwise, no family relationship exists between or among
any of our directors, executive officers or significant employees or any person
contemplated to become a director, executive officer or significant employee.

F. Michael P. Warren, Q.C.has been our Chairman and a director since October
8, 1999. Mr. Warren is the founder and chairman of Warren Capital Limited, a
venture capital company, and has served as its chairman since March 1998. From
January 1991 to March 1998, Mr. Warren was chairman of International Murex
Technologies Corporation, a medical diagnostics company, which was sold to
Abbott Laboratories in March 1998.

Bruce Warrenhas been our Chief Executive Officer and a Director since October
8, 1999 and our President since May 1, 2001. Mr. Warren co-founded our
subsidiary, Blue Zone Productions Ltd., and has served as its President since
1992. Mr. Warren created and programmed our software prototype, MediaBZ, and,
along with Jamie Ollivier, is primarily responsible for negotiating agreements
with our broadcasting and media clients.

Jamie Ollivierhas been our Executive Creative Director since May 1, 2001,
before which he had served as our President since October 8, 1999. Mr.
Ollivier has also served as one of our Directors since October 8, 1999. Mr.
Ollivier co-founded our Blue Zone

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Productions Ltd. subsidiary and has served as its creative director from 1994
to the present. From January 1991 to January 1993, Mr. Ollivier was secretary
of Balancetech, Inc., a software development firm, which he also co-founded.

Jeremy Blackhas been our Chief Financial Officer since May 1, 2001 and was the
Corporate Controller and Director of Finance from January 2001 until April
2001. Prior to joining Blue Zone, from July 1999 until December 2000, Mr.
Black was Director of Financial Development at Intrawest Corp., a large
publicly traded developer and operator of four-season resorts based in
Vancouver. Until July 1999, Mr. Black was a Senior Manager in the assurance
practice at KPMG LLP in Vancouver, and specialized in providing services to
public companies. Mr. Black is a Chartered Accountant.

Tryon M. Williamshas served as one of our Directors since October 8, 1999.
Since 1984, Mr. Williams has served as a principal of Tarpen Research
Corporation, a private consulting firm, and since 1993, he has been an Adjunct
Professor, Faculty of Commerce and Business Administration at the University of
British Columbia. From 1988 to 1991, he was President and Chief Executive
Officer of Distinctive Software, Inc. in Vancouver, BC, and, upon the
acquisition of that company by Electronic Arts Inc., North Americas largest
developer of entertainment software, he became President and Chief Executive
Officer of Electronic Arts (Canada) Inc., where he continued until 1993. Since
1993, Mr. Williams has also been the Managing Partner of CEG, AVC and PEG
Partnerships, created to invest in entertainment software worldwide. Mr.
Williams is a director of York Medical, Inc., CellStop International Limited
and several other private corporations.

David Thomashas served as one of our Directors since October 8, 1999. In
1997, Mr. Thomas founded Bedarra Corporation, a privately-held management and
technology consulting company, and has served as its President since 1998.
From 1991 to 1998, Mr. Thomas was President and Chief Executive Officer of
Object Technology International, a technology company, which he also founded.
Mr. Thomas was a professor of engineering at Carleton University from 1983 to
1991.

Jay Shecterhas served as one of our Directors since January 1, 2000. From
January 1, 2000 to June 15, 2000, Mr. Shecter served as our Treasurer. From
March 1997 to December 1999, Mr. Shecter was a Vice-President in charge of
strategic sourcing for the Universal Studios subsidiary of the Seagram Company
Ltd. From July 1992 to February 1997, Mr. Shecter was the Senior
Vice-President and Chief Financial Officer for Chivas Brothers Ltd., the
companys Global Whisky Group.

COMPOSITION OF OUR BOARD OF DIRECTORS

We currently have six directors. All directors currently hold office until the
next annual meeting of stockholders or until their successors have been elected
and qualified. Our officers are elected annually by the Board of Directors and
hold office until their successors are elected and qualified.

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Committees of our Board of Directors

AUDIT COMMITTEE

Our Audit Committee, which currently consists of Messrs. Shecter, Thomas and
Williams, recommends the appointment of our independent public accountants,
reviews and approves the scope of our annual audit, and reviews the results
thereof with our independent accountants. Our Audit Committee also assists our
Board of Directors in fulfilling its fiduciary responsibilities relating to
accounting and reporting policies, practices and procedures, and reviews the
continuing effectiveness of our business ethics and conflicts of interest
policies.

COMPENSATION COMMITTEE

Our Compensation Committee, which currently consists of Messrs. Shecter,
Williams and F. Michael P. Warren, recommends to our Board of Directors the
salaries, bonuses and stock awards received by our executive officers. Our
Compensation Committee is also responsible for administering our 1999 Stock
Option Plan. Our Compensation Committee determines the recipients of awards,
sets the exercise price and number of shares granted, and determines the terms,
provisions and conditions of rights granted.

FINANCE COMMITTEE

Our Finance Committee, which consists of Messrs. Shecter, F. Michael P. Warren
and Bruce Warren, reviews and approves our annual capital budget and our
long-term financing plans. Our Finance Committee oversees the implementation
of personnel and systems to manage the financial reporting needs of our
business. When applicable, our Finance Committee also oversees our credit
facilities, insurance coverage, investments, and commercial and investment
banking relationships.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

No member of the Compensation Committee and none of our executive officers has
a relationship that would constitute an interlocking relationship with
executive officers and directors of another entity.

DIRECTOR COMPENSATION

Directors currently do not receive cash compensation for their services as
members of the Board of Directors, although members are reimbursed for expenses
in connection with attendance at Board of Directors, committee meetings, and
specific Blue Zone business meetings. Directors are eligible to participate in
our 1999 Stock Option Plan. Option grants to directors are at the discretion
of the Compensation Committee.

During the year ended December 31, 2000, we granted options to Jay Shecter to
purchase 150,000 shares of common stock. The options had an exercise price of
$5.00 per share and expired on November 10, 2009.

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During the year ended December 31, 1999, we granted options to each of F.
Michael P. Warren, David Thomas, and Tryon Williams to purchase 150,000 shares
of common stock. The options had an exercise price of $5.00 per share and
expired on November 10, 2009.

During the year ended December 31, 2001, all of the above mentioned stock
purchase options were tendered to the Company for cancellation, as described
above in Item 7, in exchange for an undertaking to issue an equivalent number
of at-market stock purchase options at some future date.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Based solely on a review of Forms 3 and 4 and amendments thereto furnished to
the Company under Rule 16a-3(e) during its most recent fiscal year and Forms 5
and amendments thereto furnished to the Company with respect to its most recent
fiscal year, the Company believes that its officers, Directors and
greater-than-10% shareholders filed late reports or failed to file reports
required during or with respect to the fiscal year ended December 31, 2001 as
set out in the table below:

|                     |  |                                    |  |              |  |              |  |             
|-------------------- |  | ---------------------------------- |  | ------------ |  | ------------ |  | ------------
|                    
|                     |  |                                    |  | Form 3/ # of |  | Form 4/ # of |  | Form 5/ # of
|Name                 |  | Reporting Person                   |  | transactions |  | transactions |  | transactions
|                    
|F. Michael P. Warren |  | Chairman of the
Board of Directors |  | n/a          |  | Failure/2*   |  | n/a         
|                    
|Jeremy Black         |  | Chief Financial Officer            |  | Failure/0*   |  | n/a          |  | n/a         
|                    
|Jay Shecter          |  | Director                           |  | n/a          |  | Failure/1*   |  | n/a         
|                    



| |  | The reporting person reported such transactions on a Form 5 filed timely with
respect to the fiscal year ended December 31, 2001.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------

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ITEM 11. EXECUTIVE COMPENSATION

The following table describes the compensation Blue Zone paid to our Chief
Executive Officer and certain of our executive officers (the Named Executive
Officers).

SUMMARY COMPENSATION TABLE

|                                             |  |      |      |                |  |                     |         |                        |  |              |   |         |  |          |   |              |  |            |   |            |  |  |         |  |  |  |   | 
|-------------------------------------------- |  | ---- | ---- | -------------- |  | ------------------- | ------- | ---------------------- |  | ------------ | - | ------- |  | -------- | - | ------------ |  | ---------- | - | ---------- |  |  | ------- |  |  |  | - | 
|                                             |  |      |      |                |  | Annual Compensation |         | Long-term Compensation |  |              |   |        
|                                             |  |      |      |                |  |                     |         |                        |  |              |   |        
|                                             |  |      |      |                |  |                     |         |                        |  |              |   |         |  |          |   |              |  | Restricted |   | Securities |  |  |         | 
|Name and                                     |  |      |      |                |  |                     |         |                        |  |              |   |         |  | Stock    |   | Underlying   |  | All Other 
|Principal                                    |  |      |      |                |  |                     |         |                        |  | Other Annual |   | Awards  |  | Options/ |   | Compensation
|Position                                     |  | Year |      | Salary ($) (1) |  | Bonus ($)           |         | Compensation ($)       |  | ($)          |   | SARs(#) |  | ($)     
|                                            
|Bruce
Warren 
President and CEO             |  |      | 2001 |                |  |                     | 87,500  |                        |  |              |  |         |  |          |  |              |  |            |  |            |  |  |        |  |  |  |  | 
|                                             |  |      | 2000 |                |  |                     | 120,000 |                        |  |              |  |         |  |          |  |              |  |            |  |            |  |  | 500,000 |  |  |  |  | 
|                                             |  |      | 1999 |                |  |                     | 40,000  |                        |  |              |  |         |  |          |  |              |  |            |  |            |  |  | 500,000 |  |  |  |  | 
|Jamie Ollivier 
Executive Creative
Director |  |      | 2001 |                |  |                     | 87,500  |                        |  |              |  |         |  |          |  |              |  |            |  |            |  |  |        |  |  |  |  | 
|                                             |  |      | 2000 |                |  |                     | 120,000 |                        |  |              |  |         |  |          |  |              |  |            |  |            |  |  | 500,000 |  |  |  |  | 
|                                             |  |      | 1999 |                |  |                     | 40,000  |                        |  |              |  |         |  |          |  |              |  |            |  |            |  |  | 500,000 |  |  |  |  | 



---

|(1) |  | All of the compensation paid to the Named Executive Officers is paid
through Blue Zone Entertainment Inc. for services rendered as executives
of all of the Blue Zone group of companies. See additional discussion in
Employment Arrangements section of Item 11 of this report.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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OPTION GRANTS IN THE LAST FISCAL YEAR

There were no stock options granted to Named Executive Officers during the
fiscal year ended December 31, 2001 and no stock options were exercised by any
of our Named Executive Officers during the fiscal year ended December 31, 2001.
During the year ended December 31, 2001, all of the stock options held by the
Named Executive Officers were tendered to the Company for cancellation, as
described above in Item 7, in exchange for an undertaking to issue an
equivalent number of at-market stock purchase options at some future date.

1999 STOCK OPTION PLAN

Our 1999 Stock Option Plan, as amended, has 6,780,000 shares of our common
stock reserved for issuance upon exercises of options under the plan. As of
December 31, 2001 options to purchase a total 2,375,000 shares remained
outstanding at exercise prices ranging from $0.10 to $13.44 per share. Options
to purchase 4,405,000 shares remained available for future grant under the 1999
Stock Option Plan.

Our Compensation Committee administers the 1999 Stock Option Plan. Our
Compensation Committee is authorized to construe and interpret the provisions
of the 1999 Stock Option Plan, to select employees, directors and consultants
to whom options will be granted, to determine the terms and conditions of
options and, with the consent of the grantee, to amend the terms of any
outstanding options. The committee is constituted in such a manner as to
satisfy applicable laws, including Rule 16b-3 promulgated under the Securities
Exchange Act of 1934, as amended. With respect to Awards subject to Internal
Revenue Code Section 162(m), the committee is comprised solely of two or more
outside directors as defined under Internal Revenue Code Section 162(m) and
applicable tax regulations. For grants of awards to individuals not subject to
Rule 16b-3 and Internal Revenue Code Section 162(m), our Board may authorize
one or more officers to grant such awards.

The 1999 Stock Option Plan provides for the granting to our employees of
incentive stock options and the granting to our employees, directors and
consultants of non-qualified stock options. Our Compensation Committee
determines the terms and provisions of each option granted under the 1999 Stock
Option Plan, including the exercise price, vesting schedule, repurchase
provisions, rights of first refusal and form of payment. In the case of
incentive options, the exercise price cannot be less than 100% (or 110%, in the
case of incentive options granted to any grantee who owns stock representing
more than 10% of the combined voting power of Blue Zone or any of our parent or
subsidiary corporations) of the fair market value of our common stock on the
date the option is granted. The exercise price of non-qualified stock options
shall not be less than 85% of the fair market value of our common stock. The
exercise price of options intended to qualify as performance-based compensation
for purposes of Code Section 162(m) shall not be less than 100% of the fair
market value of the stock. The aggregate fair market value of the common stock
with respect to any incentive stock options that are exercisable for the first
time by an eligible employee in any calendar year may not exceed $100,000.

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The term of options under the 1999 Stock Option Plan will be determined by our
Compensation Committee; however, the term of an incentive stock option may not
be for more than ten years (or five years in the case of incentive stock
options granted to any grantee who owns stock representing more than 10% of the
combined voting power of Blue Zone or any of our parent or subsidiary
corporations). Where the award agreement permits the exercise of an option for
a period of time following the recipients termination of service with us,
disability or death, that option will terminate to the extent not exercised or
purchased on the last day of the specified period or the last day of the
original term of the option, whichever occurs first.

If a third party acquires us through the purchase of all or substantially all
of our assets, a merger or other business combination, except as otherwise
provided in an individual award agreement, all unexercised options will
terminate unless assumed by the successor corporation.

EMPLOYMENT ARRANGEMENTS

As of January 1, 2000, our Blue Zone Entertainment Inc. (now known as Blue Zone
Solutions Inc.) subsidiary entered into employment agreements with Bruce
Warren, to serve as Chief Executive Officer, and Jamie Ollivier, to serve as
President. The agreements provided for annual salaries of not less than
$120,000, for these two individuals. These employment agreements were replaced
with new agreements effective May 1, 2001. The new agreements changed Bruce
Warrens title to that of President and Chief Executive Officer, and Jamie
Olliviers title to that of Executive Creative Director. The new agreements
also reduced these two individuals salaries to $60,000 per year. These
salaries are paid by Blue Zone Entertainment, as the operating company in the
Blue Zone group of companies, for executive services to all of the companies in
the Blue Zone group.

The salaries for the Named Executive Officers are set by Blue Zones
Compensation Committee, which may increase the annual salaries for the
preceding year upon review of the executives performance. Under the
agreements, the executives are entitled to receive incentive compensation based
upon the achievement of performance goals to be established jointly by the
executive and the Compensation Committee. If the executive achieves the
performance goals, the executive will receive a bonus equal to 50% of the
executives annual salary. If the executive exceeds the performance goals by
an amount agreed upon by the executive and the Compensation Committee, then the
executive may receive a bonus of up to an additional 100% of the executives
annual salary, for a total bonus of 150% of the executives salary.

Under the agreements, the executives are entitled to receive certain additional
benefits. The executives may participate in our present and future stock
option, benefit and deferred compensation plans.

Under the employment agreements that were terminated effective March 1, 2002,
we retain all proprietary and intellectual property rights in everything
created, developed or conceived by the executives while employed with us. In
addition, so long as any executive is employed with us under these agreements,
the executive is bound by

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non-competition and non-solicitation covenants. During the term of employment and
for one year thereafter, the executive is prohibited from directly competing
with us in any management capacity in any phase of our business in any
geographic area throughout the world in which we presently market our products
and services. If we begin to market our products and services in new
countries, the prohibition is amended automatically to include those new
geographic areas and, if we cease to market our products and services in a
particular geographic area, that area is no longer prohibited after six months.
During the term of employment and for two years thereafter, the executive is
prohibited from soliciting business or customers that the executive serviced
while employed with us and may not solicit or attempt to solicit any of our
employees.

The employment agreements that were terminated effective March 1, 2002 do not
specify a term of employment. We may, however, terminate the executives
employment if (a) the executive is convicted of a felony or any other criminal
offense which has a material adverse effect on us or the executives ability to
carry out his duties of employment; (b) the executive willfully commits acts
materially detrimental to our business or reputation; (c) there is any material
breach of any of the executives covenants or fiduciary duties as specified in
the employment agreement which is not capable of being cured by the executive
or, if capable of being cured, which is not cured by the executive within 15
days following written notice thereof from our Board of Directors; or (d) the
executive knowingly fails to follow specific directives of our Board of
Directors consistent with his duties.

An executives employment may also be terminated at the sole discretion of the
Board of Directors. In such circumstances, however, we are required to pay the
executive at least three months salary, plus an additional months salary for
each completed year of service after January 2, 2001 as severance pay, provide
an equivalent amount of notice of termination, or provide some combination of
such severance and notice. Four months notice was given to both Bruce Warren
and Jamie Ollivier on March 1, 2002. Messrs. Warren and Ollivier will cease to
be full time employees of Blue Zone effective June 30, 2002.

As of May 1, 2001, our Blue Zone Solutions Inc. subsidiary entered into an
employment agreement with Jeremy Black to serve as Chief Financial Officer.
The agreement is on the same terms as our May 1, 2001 employment agreements
with Messrs. Warren and Ollivier, except for Mr. Blacks annual salary, which
is CDN$105,000. On March 1, 2002, we provided Mr. Black with four months
notice. Mr. Black will cease to be a full time employee of Blue Zone effective
June 30, 2002.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information known to us with respect to
beneficial ownership of our common stock as of February 26, 2002 by:



| |  |  | each person known by us to beneficially own 5% or more of our
outstanding common stock;
| | - |  | ---------------------------------------------------------------------------------------
|
| |  |  | each of our directors;                                                                 
|
| |  |  | each of the Named Executive Officers; and                                              
|
| |  |  | all of our directors and Named Executive Officers as a group.                          

In general, a person is deemed to be a beneficial owner of a security if that
person has or shares the power to vote or direct the voting of such security,
or the power to dispose or direct the disposition of such security. In
computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of common stock subject to options
or debentures held by that person that are currently exercisable or convertible
or exercisable or convertible within 60 days of February 26, 2002 are deemed
outstanding.

Percentage of beneficial ownership is based upon 24,539,350 shares of common
stock outstanding at February 26, 2002. To our knowledge, except as set forth
in the footnotes to this table and subject to applicable community property
laws, each person named in the table has sole voting and investment power with
respect to the shares set forth opposite such persons name. Except as
otherwise indicated, the address of each of the persons in this table is as
follows: c/o Blue Zone, Inc., 329 Railway Street, 5th Floor, Vancouver, British
Columbia, V6A 1A4.

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|                                                                               |  |                    |  |                  |  | 
|------------------------------------------------------------------------------ |  | ------------------ |  | ---------------- |  | 
|                                                                               |  | Number of Shares   |  |                  |  | 
|Name and Address of Beneficial Owner                                           |  | Beneficially Owned |  | Percent of Class
|                                                                              
|F. Michael P. Warren
P.O. Box 772
The Valley
Anguilla, B.W.I                   |  | 18,122,867 (1)     |  | 59.1%            |  | 
|                                                                               |  |                    |  |                  |  | 
|Bruce Warren                                                                   |  | Nil                |  | Nil              |  | 
|                                                                               |  |                    |  |                  |  | 
|Jamie Ollivier                                                                 |  | Nil                |  | Nil              |  | 
|                                                                               |  |                    |  |                  |  | 
|Tryon M. Williams
203 Shakespeare Tower
The Barbican
London, England, EC2Y 8DR |  | Nil                |  | Nil              |  | 
|                                                                               |  |                    |  |                  |  | 
|David A. Thomas
Suite 412
1 Stafford Road
Nepean, ON
Canada, K2H 1B9           |  | Nil                |  | Nil              |  | 
|                                                                               |  |                    |  |                  |  | 
|Jay Shecter
1235 North Wetherly Drive
Los Angeles, CA 90069                    |  | Nil                |  | Nil              |  | 
|                                                                               |  |                    |  |                  |  | 
|All directors and Named
Executive Officers as a group
(6 persons)              |  | 18,122,867 (1)     |  | 59.1%            |  | 



---

|(1) |  | Includes 6,122,767 shares of our common stock that could be issued
upon the conversion of the debentures outstanding at February 26, 2002,
including interest accrued as of 60 days after February 26, 2002.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

During the year the Company entered into a secured convertible loan arrangement
with our Chairman, F. Michael P. Warren. Although definitive documentation is
not yet complete, the Company anticipates that, under the terms of the
arrangement, the Company will be able to draw down funding of up to $1,000,000,
in $100,000 increments, subject to Board of Director approval, over the period
ended April 27, 2003.

The debentures are intended to be secured by a security interest in all present
and after-acquired personal property of the Company and substantially all of
the intellectual property of the Company. In addition, the Company intends to
grant the lender certain registration rights with respect to the common stock
that may be issued upon conversion of the debentures. All principal and
accrued and unpaid interest will be payable in April 2003, but may be prepaid
at any time at the option of the Company. The lender may elect to convert the
debentures, including accrued interest, into shares of the Companys common
stock, based on the market price of the Companys common stock on the date of
the draw down of the debenture. The debentures carry interest at the prime
rate quoted by a Canadian chartered bank at the date of draw down, plus 2% per
annum.

Pursuant to this arrangement, the Company issued $300,000 of 8.25% convertible
debentures on July 6, 2001 and $300,000 of 8% convertible debentures on August
13, 2001. The 8.25% convertible debentures have a conversion rate of $0.135
per share and the 8% convertible debentures have a conversion rate of $0.085
per share. The interest accrued on the debentures as of February 26, 2002 was
approximately $30,000.

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PART IV

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

The following documents are filed as part of this Form 10-K:

(1) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

The following audited financial statements of the Company are included in Item
8, together with notes thereto:

|                                   |                                                                                                    
|---------------------------------- | ---------------------------------------------------------------------------------------------------
|Consolidated Financial Statements:
|                                   | Balance Sheets
Statements of Operations
Statements of Stockholders Equity
Statements of Cash Flows

All financial statement schedules are omitted because they are not required,
they are not applicable or information appears included in the financial
statements or notes thereto.

(2) EXHIBITS

The exhibits required by Item 601 of Regulation S-K are listed in the
accompanying Exhibit Index. Each management contract or compensatory plan or
arrangement required to be filed as an exhibit to this Form 10-K has been
identified.

(3) REPORTS ON FORM 8-K

No reports on Form 8-K were filed during the fourth quarter of 2001.

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SIGNATURES

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

BLUE ZONE, INC.

| |       |  |                                                    | 
| | ----- |  | -------------------------------------------------- | 
| | By:   |  | /s/ Bruce Warren                                   | 
| |       |  |                                                    | 
| |       |  | Bruce Warren
President and Chief Executive Officer | 
| |       |  |                                                    | 
| | Date: |  | March 25, 2002                                     | 

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

|          |  |                                              |  |                                                                                  |  |               
|--------- |  | -------------------------------------------- |  | -------------------------------------------------------------------------------- |  | --------------
|Signature |  | Title                                        |  | Date                                                                            
|          |  |                                              |  |                                                                                  |  |               
|By:       |  | /s/ Bruce WarrenBruce Warren                 |  | President and Chief Executive Officer and
Director (Principal Executive Officer) |  | March 25, 2002
|          |  |                                              |  |                                                                                  |  |               
|By:       |  | /s/ Jamie OllivierJamie Ollivier             |  | Executive Creative
Director and Director                                         |  | March 25, 2002
|          |  |                                              |  |                                                                                  |  |               
|By:       |  | /s/ F. Michael P. WarrenF. Michael P. Warren |  | Chairman and Director                                                            |  | March 25, 2002
|          |  |                                              |  |                                                                                  |  |               
|By:       |  | /s/ Tryon WilliamsTryon Williams             |  | Director                                                                         |  | March 25, 2002
|          |  |                                              |  |                                                                                  |  |               
|By:       |  | /s/ Jay ShecterJay Shecter                   |  | Director                                                                         |  | March 25, 2002
|          |  |                                              |  |                                                                                  |  |               
|By:       |  | /s/ Dave ThomasDave Thomas                   |  | Director                                                                         |  | March 25, 2002
|          |  |                                              |  |                                                                                  |  |               
|By:       |  | /s/ Jeremy BlackJeremy Black                 |  | Chief Financial Officer
(Principal Financial and
Principal Accounting Officer)   |  | March 25, 2002

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##### Table of Contents



EXHIBIT LIST

Exhibit
Number                      Description

---



|2.1  |  | Share Exchange Agreement, dated as of October 5, 1999, among F. Michael
P. Warren, Bruce Warren, Jamie Ollivier, Blue Zone Productions Ltd., Blue
Zone Entertainment Inc., Blue Zone International Inc. and Western Food
Distributors, Inc. (A list of exhibits and schedules to the Share Exchange
Agreement is set forth therein. The Registrant agrees to furnish to the
Commission supplementally, upon request, a copy of any such exhibits or
schedules not otherwise filed herewith.). (1)
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|3.1  |  | Articles of Incorporation dated March 10, 1997. (1)                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    
|3.2  |  | Certificate of Amendment to the Registrants Articles of Incorporation,
dated July 14, 1998, providing for a 5-for-1 stock split of all of the
Registrants outstanding common stock. (1)                                                                                                                                                                                                                                                                                                        
|    
|3.3  |  | Certificate of Amendment to the Registrants Certificate of
Incorporation, dated September 28, 1999, changing the name of the
Registrant to Blue Zone, Inc. and providing for a 1.125-for-1 stock
split of all of the Registrants issued and outstanding common stock. (1)                                                                                                                                                                                                                    
|    
|3.4  |  | Bylaws. (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    
|10.1 |  | Web site and Interactive Television Development Agreement, dated as of
December 14, 1999, between CTV Television Inc. and Blue Zone Productions
Ltd. (4)                                                                                                                                                                                                                                                                                                                                         
|    
|10.2 |  | Web site Development Agreement, dated July 1, 1999, between CKNW/CFMI, a
division of WIC RADIO LTD., and Blue Zone Entertainment Inc. (4)                                                                                                                                                                                                                                                                                                                                                        
|    
|10.3 |  | Joint Venture Agreement, dated June 16, 1998, between WIC Premium
Television, a Limited Subsidiary of WIC Western International
Communications Ltd. and Blue Zone Entertainment Inc. (4)                                                                                                                                                                                                                                                                                                         
|    
|10.4 |  | Business Banking Loan Agreement, dated July 9, 1999, between Blue Zone
Productions Ltd. and Royal Bank of Canada. (1)                                                                                                                                                                                                                                                                                                                                                                            
|    
|10.5 |  | Guarantee and Postponement of Claim, dated July 9, 1999, executed by F.
Michael P. Warren in favor of Royal Bank of Canada. (1)                                                                                                                                                                                                                                                                                                                                                                  
|    
|10.6 |  | Common Stock Investment Agreement dated September 8, 2000, between the
Company and each person listed as an investor on Schedule 1 attached
thereto. (3)                                                                                                                                                                                                                                                                                                                                         
|    
|10.7 |  | Registration Rights Agreement dated September 8, 2000, between the
Company and each of the entities listed under investors on the signature
pages thereto. (3)                                                                                                                                                                                                                                                                                                                                   
|    
|10.8 |  | Employment Agreement, dated January 1, 2000, between Blue Zone
Entertainment Inc. and Jamie Ollivier. (1)                                                                                                                                                                                                                                                                                                                                                                                        

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##### Table of Contents



Exhibit
Number                      Description

---



|10.9  |  | Employment Agreement, dated January 1, 2000, between Blue Zone
Entertainment Inc. and Bruce Warren. (1)                                                                                          
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|10.10 |  | Employment Agreement, dated January 1, 2000, between Blue Zone
Entertainment Inc. and Catherine Warren. (1)                                                                                      
|     
|10.11 |  | Subscription Agreement, dated as of September 22, 1999, between Savoy
Holdings Limited and Western Food Distributors, Inc. for private placement
of common stock and stock purchase warrants. (1)
|     
|10.12 |  | Amended and Restated 1999 Stock Option Plan. (2)                                                                                                                                                 
|     
|10.13 |  | Amended Employment Agreement, dated May 1, 2001, between Blue Zone
Entertainment Inc. and Jamie Ollivier. (5)                                                                                    
|     
|10.14 |  | Amended Employment Agreement, dated May 1, 2001, between Blue Zone
Entertainment Inc. and Bruce Warren. (5)                                                                                      
|     
|10.15 |  | Warrant to purchase shares of common stock of Blue Zone, Inc., dated
October 1, 1999, issued to Savoy Holdings Limited. (1)                                                                      
|     
|10.16 |  | Warrant to purchase shares of Blue Zone common stock, dated September 8,
2000, issued to Ladenburg Thalman. (4)                                                                                  
|     
|10.17 |  | Form of Initial Warrants dated September 8, 2000. (3)                                                                                                                                            
|     
|10.18 |  | Form of Adjustment Warrants dated September 8, 2000. (3)                                                                                                                                         
|     
|10.19 |  | Form of Options dated September 8, 2000. (3)                                                                                                                                                     
|     
|10.20 |  | Amendment to September 8, 2000 Private Placement dated December 20, 2000
between Blue Zone, Inc. and Millennium Partners, L.P., Elliott Associates,
L.P. and Westgate International, L.P. (4)    
|     
|10.21 |  | Amendment to the Agreement dated December 14, 1999 by and between CTV
Television Inc. and Blue Zone Productions Ltd. dated September 26, 2001.                                                   
|     
|10.22 |  | Form of Convertible Debenture.                                                                                                                                                                   
|     
|10.23 |  | Form of Stock Option Agreement.                                                                                                                                                                  

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##### Table of Contents



Exhibit
Number                      Description

---



|10.24 |  | Employment Agreement dated May 1, 2001 between Blue Zone Entertainment
Inc. and Jeremy Black.
|----- |  | ---------------------------------------------------------------------------------------------
|     
|21.1  |  | Subsidiaries of the Registrant.                                                              



---

|(1) |  | Filed as an exhibit to the Companys Registration Statement on Form
10 dated March 9, 2000 (File No. 0-29907), and incorporated herein by
reference.                                
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Filed as an exhibit to the Companys 2000 Proxy Statement dated
August 30, 2000, and incorporated herein by reference.                                                              
|   
|(3) |  | Filed as an exhibit to the Companys Current Report on Form 8-K dated
September 8, 2000, filed September 20, 2002.                                                                  
|   
|(4) |  | Filed as an exhibit to the Companys Registration Statement on Form
S-1 dated December 27, 2000 (file No. 333-48236), and incorporated herein
by reference.                         
|   
|(5) |  | Filed as an exhibit to the Companys Quarterly Report of Form 10-Q
for the quarterly period ended September 30, 2001, dated November 13,
2001, and incorporated herein by reference.

88