NETWORKS NORTH INC - 10-K Annual Report

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

FORM 10-K

(Mark One)

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

For the fiscal year ended: August 31, 1998

OR

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

For the transition period from _________ to __________

Commission file number: 0-18066

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

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

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

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value US$0.0467

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

Yes |X| No |_|

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

Aggregate market value (i.e., last price) of voting stock held by
non-affiliates of the Registrant, as of November 25, 1998 US$3,350,866

Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of November 25, 1998 2,625,170 shares of common
stock, par value US$.0467 per share

DOCUMENTS INCORPORATED BY REFERENCE:
NONE

PART I

EXCHANGE RATES

The currency amounts in this Annual Report on Form 10-K, including the
financial statements, are, unless otherwise indicated, expressed in Canadian
dollars ("Cdn$"). This Form 10-K contains translations of certain amounts in
Canadian dollars into United States dollars ("US$") based upon the exchange rate
in effect at the end of the period to which the amount relates, or the exchange
rate on the date specified. For such purposes, the exchange rate means the noon
buying rate in New York City for cable transfers in Canadian dollars as
certified for customs purposes by the Federal Reserve Bank of New York (the
"Noon Buying Rate"). These translations should not be construed as
representations that the Canadian dollar amounts actually represent such U.S.
dollar amounts or that Canadian dollars could be converted into U.S. dollars at
the rate indicated or at any other rate. The Noon Buying Rate at the end of each
of the five years ended August 31, 1998, the average of the Noon Buying Rates on
the last day of each month during each of such fiscal years and the high and low
Noon Buying Rate for each of such fiscal years were as follows:

August 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----

At end of period......... Cdn$1.5722 Cdn$1.3885 Cdn$1.3685 Cdn$1.3432 Cdn$1.3712
Average for period....... 1.4390 1.3676 1.3634 1.3742 1.3573
High for period.......... 1.5770 1.3942 1.3815 1.4193 1.3890
Low for period........... 1.4100 1.3381 1.3401 1.3410 1.3095

On November 19, 1998 the Noon Buying Rate was Cdn$1.5500.

Item 1. Business.

Formation

Networks North Inc. (the "Company") was originally incorporated under the
laws of the State of New York on May 12, 1986 under the name Triosearch Inc. On
June 9, 1988, Triosearch changed its name to NTN Canada, Inc. NTN Canada, Inc.
changed its name on March 16, 1998 to Networks North Inc. The Company presently
conducts its operations through a wholly-owned subsidiary, NTN Interactive
Network Inc. ("NTNIN"), which is the principal operating company of the entity.
On October 4, 1994, NetStar Enterprises Inc. ("NetStar") (successor in interest
to Labatt Communications Inc.), an integrated broadcasting and communications
enterprise, acquired approximately 35% of the Company's outstanding common stock
for Cdn$4,252,500

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(US$3,150,000 on October 4, 1994).

On October 2, 1996, NTNIN acquired, effective October 1, 1996, all of the
outstanding stock of Magic Lantern Communications Ltd. ("Magic"). Magic conducts
its operations directly and through its wholly-owned subsidiaries, 745695
Ontario Ltd. ("Custom Video") and B.C. Learning Connection ("BCLC"), its 75%
ownership of the outstanding stock of Sonoptic Technologies Inc. ("Sonoptic"),
and its 50% ownership of the outstanding stock of 1113659 Ontario Ltd. ("Viewer
Services"), a joint venture operated with International Tele-Film Enterprises
Ltd. (Magic, Custom Video, BCLC, Sonoptic and Viewer Services are referred to as
the "Magic Lantern Group").

On September 10, 1997 and effective September 1, 1997, NTNIN acquired 51%
of the outstanding stock of Interlynx Multimedia Inc. ("Interlynx"). Interlynx
conducts its operations directly and through its 60% ownership of Interlynx
International Inc. The acquisition was paid for with a combination of cash and
issuance of shares, and was accounted for as a purchase in fiscal 1998.

On April 20, 1998, the Company established and incorporated, under the
Canada Business Corporations Act, 3484751 Canada Inc. This corporation is
wholly-owned by the Company, and was established for the sole purpose of owning
and holding a property on behalf of the Company. On April 27, 1998, 3484751
Canada Inc. purchased this said property located at 10 Meteor Drive in
Etobicoke, Ontario, Canada ("10 Meteor Drive property"). The building was
purchased with the intention that the Magic Lantern Group would occupy the
premises. The Magic Lantern Group subsequently moved to the new premises in July
1998.

Financial Information About Industry Segments

Reference is hereby made to the Business Sector Data for the years ended
August 31 1998, 1997 and 1996 in Exhibit 23 below.

General Description of Business

The Company, through NTNIN, currently provides its products and services
through eight business units or subsidiaries. Of these eight, two are considered
to be the traditional core of the Company's business, that is, directly related
to multi-player interactive entertainment programs. The two traditional core
business units are the Hospitality Group and the Corporate Events/Home Market
Group. Five units, collectively referred to as the "Magic Lantern Group," are
(i) NTNIN's wholly-owned subsidiary Magic, which is involved in the marketing
and distribution of educational video and media resources and software, (ii)
Magic's wholly-owned subsidiary Custom Video, which is involved in the
manufacturing of videotape copies, (iii) Custom Video's wholly-owned subsidiary
BCLC, which is involved in the marketing and fulfilment services of educational
video titles, (iv) Magic's 75%-owned subsidiary Sonoptic, which is involved in
the conversion of analog video to digital video formats, and (v) Magic's
50%-owned subsidiary Viewer Services, which is involved in the inbound
telemarketing and

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fulfilment services for television broadcasters and others. The eighth unit,
Interlynx, designs and develops educational and corporate multimedia, web-based
training programs, CD-ROMs and Web-Sites.

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

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

The Company's revenues have traditionally been primarily derived from the
delivery of Network programming to customer sites, typically by satellite
("program content services"), the rental and sale of equipment used in the
reception of broadcast services and on-subscriber-site interactive participation
in broadcasts over the Network, maintenance services, and event programming for
corporate clients. Revenue from program content services was Cdn$4,134,839
(US$2,629,970) for the Company's fiscal year ended August 31, 1998 (the "1998
Fiscal Year").

Over the past three years, revenue from equipment sales has gradually
decreased, while revenue from equipment rental has risen. These changes reflect
the success of the system rental program introduced over three years ago.
Revenue from equipment sales was Cdn$55,151 (US$35,079), while revenue from
equipment rental was Cdn$1,710,451 (US$1,087,935) for the 1998 Fiscal Year.

Revenues from maintenance services grows in proportion to the number of
Hospitality Network customers, which pay a monthly fee based on the size of
their system. These revenues were Cdn$827,448 (US$526,299) for the 1998 Fiscal
Year.

The Corporate Events/Home Market Group is engaged in developing and
delivering interactive programs for corporate clients for use at sales and
training meetings, trade shows, and special events. Revenues from the Corporate
Events/Home Market Group's activities for the 1998 Fiscal Year were Cdn$602,571
(US$383,266).

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The Magic Lantern Group is involved in marketing and distributing
Educational video and media resources and software, the manufacturing of
videotape copies, the marketing and fulfilment services of educational video
titles, the conversion of analog video to digital video formats and the inbound
telemarketing and fulfilment services for television broadcasters and others.
Revenues from the Magic Lantern Group for the 1998 Fiscal Year were
Cdn$5,054,376 (US$3,214,843).

Revenues from Interlynx for the 1998 Fiscal Year were Cdn$1,367,430
(US$869,756).

The expanding revenue base from Hospitality system clients and the
increase in video and software sales in the 1998 Fiscal Year were the major
contributors to net profit of Cdn$618,065 (US$393,121).

Research and Development

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

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

The NTN Entertainment Network

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

The Network is owned and operated by Communications, a company based in
Carlsbad, California. The Network uses existing technology to broadcast two-way
interactive live events to Subscriber locations. The Network provides digital
data broadcast transmissions, which enable equipment and software at Subscriber
locations to display text and graphics programming and to interpret responses
from Network viewers. All programming is produced at and transmitted from the
NTN Broadcast Center in Carlsbad.

5

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

The computer in each Subscriber System controls the TV monitor display
based upon instructions delivered to it over the Network. Viewer responses
entered on the Playmakers are ordinarily processed and displayed within the
Subscriber System without any need for communication to the Broadcast Center.
The Subscriber System can communicate with the Broadcast Center, however, via
modem when appropriate commands are sent over the Network.

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

Network Programming

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

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

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

6

play.

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

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

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

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

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

Trivial Pursuit Interactive, scheduled on Wednesday evenings, is the
interactive television version of the popular trivia board game.

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

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

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

7

exclusively on the Canadian portion of the Network.

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

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

Hospitality Market

The Hospitality market remained the Company's largest traditional core
business in the 1998 Fiscal Year. The Company positions the Network to prospects
and clients as a means of attracting patrons (to play the games), retaining
their patronage (as they return to play again), and increasing the length of
time patrons stay in their establishment. As the number of repeat customers and
their length of stay increases, the hospitality establishment has an increased
opportunity to sell additional food and beverage.

The Hospitality Group sales force targets the most potent Hospitality
outlets in Canada, including a number of chain accounts. Attractive rental
packages are in place to support the Company's sales efforts. The Company
promotes the Network as one of the best and technically advanced forms of
on-premises advertising to this market, offering long term repetitive exposure
to a captive, attentive, and enthusiastic audience. Some of the organizations
advertising exclusively on the Canadian portion of the Network include
Budweiser, Players, Headline Sports, Brita, General Motors, Sony Music, Castrol
Oil and others.

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

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

8

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

Advertising and sponsorship revenues for the 1998 Fiscal Year were
Cdn$442,424 (US$281,404). Canadian Network sponsors also contributed prizes for
Network game winners, with a total retail value in excess of Cdn$150,000
(US$95,408).

Corporate Market

The Corporate Events/Home Market Group continues to market, develop, and deliver
a variety of corporate training, testing, and entertainment programs to a blue
chip clientele across Canada and abroad. The Company promotes its products and
services to this market through a direct sales staff, as well as through event
agencies whose sales forces sell NTNIN's services as part of their full service
offering. These agencies generated more than 400 events at sales meetings, and
conferences through the 1998 Fiscal Year. Agents, which sell or resell these
services, do not operate under contract to the Company or NTNIN, and they are
compensated by marking up the NTNIN services to their end-clients. None of these
firms have "exclusive" arrangements with the Company or NTNIN.

The marketing focus continues to be to attract more extended and repeat
corporate events. The Corporate Events product targets the tourism,
pharmaceutical, automotive, financial and insurance industries. These industries
have diversified workforces spread throughout the country, requiring effective
and compelling communications tools, which Management believes the Company
provides.

The Group also continues to target human resource departments of large
corporations with the NTNIN Learning Centre product. This product enables
corporate trainers to develop interactive programs and operate the interactive
systems on their own. A yearly license fee is charged to such clients and is set
at an affordable rate to attract volume sales.

The Company has permanent systems installed at several high profile venues,
including the Hockey Hall of Fame in Toronto, GM Place in Vancouver, and the
Manitoba Children's Museum. These popular installations support the Company's
efforts to put its systems and programs into interesting, involving and
profitable use in a variety of Corporate and Retail venues.

Home Market

Corporate Events/Home Market Group has begun marketing its consumer products,
similar to those offered on the Network, to the home consumer market via the
Internet and enhanced distribution systems being launched and tested by
telephone companies, and cable system

9

operators. The home market programs are intended to provide simultaneous
multi-player interactive games through home computers and televisions with
access to third party services such as gateway services, corporate and
commercial WWW sites and interactive cable systems.

The Company has existing contracts with a number of distribution companies,
including Bell Canada, NBTel, and AOL Canada. These agreements contract the
Company to provide its interactive entertainment products on both broadband and
dial-up delivery nodes. Bell Canada's trials are in London, Ontario with a
broadband delivery product called TotalVision. These London Trials have been
cancelled effective December 31, 1998. New trials include the Central Capital
Region project in Ottawa, Ontario starting in early 1999. The Company is also
providing interactive game content for NBTel's broadband internet services,
called VIBE. The existing contract with AOL Canada allows the over 13 million
AOL members access to interactive simultaneous trivia and other games.

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

Sales and Marketing

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

A sublicense agreement exists for the Province of British Columbia. The
sublicensee receives a commission based solely upon its ability to market the
Network within its exclusive territory. During the year ended August 31, 1998,
commissions of Cdn$204,502 (US$130,074) were paid to the British Columbia
sublicensee.

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

Education

Communications has been active for several years in bringing interactive systems
and services to the education field. Through its subsidiary, LearnStar Corp.,
Communications developed LearnStar, a system and curriculum software for
distance learning and in-class use.

10

Communications sold its interest in Learnstar Corp. during 1998, to a third
party that continues to operate the company. The LearnStar product was
introduced to the US Education Market in early 1995 and has been licensed to
approximately 400 schools to date.

The LearnStar product is targeted at schools and teachers who are seeking an
educational tool to increase student interest in learning via interactive
competitions in the classroom. The System enables a school to evaluate the
academic proficiency of the students, while creating an enjoyable environment in
which students seem more apt to participate. Using similar technology to that
used by the Network, the LearnStar interactive learning system can conduct
academic competitions, collect data for surveys, provide local, regional and
national testing capabilities, as well as the ability to conduct teacher
training on new curriculum guidelines. LearnStar can be utilized within a single
classroom, at one distinct site, or at multiple schools throughout the country,
all with instantaneous feedback.

The Company has continued to investigate market opportunities for LearnStar in
Canada. Management believes the education market could become a growth area for
the Company in the coming years. The LearnStar product has been introduced into
the private sector with the proposal that corporations underwrite the cost of
LearnStar into Canadian Schools. This approach has been met favourably and the
various schools and schools boards seem accepting of such a proposal. The
Company has the exclusive license to market the LearnStar product in Canada.

Dependency Upon NTN Communications, Inc.

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

Accordingly, the Company is substantially dependent upon the continued
existence of Communications. Based upon its Annual Report on Form 10-K for its
fiscal year ended December 31, 1997, Communications reported net losses of
approximately US$12,457,000, US$22,952,000 and US$3,948,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. According to its latest
Quarterly Report on Form 10-Q, Communications reported a net income of
approximately US$409,000 for the nine months ended September 30, 1998, and
shareholders' equity of US$10,535,000 and working capital of US$3,089,000 at
September 30,

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1998.

Competition

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

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

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

Magic Lantern Group

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

12

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

B.C. Learning Connection has traditionally operated under an exclusive
arrangement with the British Columbia Ministry of Education to provide marketing
and fulfilment services for educational videos in the B.C. school system. The
Company has renewed its contract with the B.C. Government for a further three
years, with automatic renewal provisions.

Sonoptic Technologies Inc., located in Saint John, New Brunswick, operates
a digital video facility which converts analog video to digital video formats
suitable for distribution through the Internet, as well as through broadband
distribution networks being established by telephone and cable companies in
Canada and elsewhere. This is a relatively new type of business and, while there
are numerous "low-end" service providers entering the market in North America,
there are no clear leaders or dominant players which have emerged. Sonoptic has
been granted preferential supplier status by NBTel, the provincial telephone
company in New Brunswick, for the conversion of video materials which will be
delivered on its broadband network, now being introduced in the province.
Sonoptic is also positioning itself as the premier source for digital video
consulting and conversion services within the key markets which are expected to
emerge in the next two to three years. Digital video consulting now represents
60% of Sonoptic's revenues.

Viewer Services, a joint venture company 50% owned by Magic, was created
to assume the inbound telemarketing and product fulfilment business required by
Canadian broadcasters. Viewer Services began operations in November 1996 and
focuses on assuming and building the fulfilment services associated with program
and merchandise offerings by Canadian broadcasters. It has expanded its base of
broadcast clients and now provides services for TV Ontario, VISION TV, the
Knowledge Network and History Television. In either of these regards, it has no
direct competition.

Interlynx Multimedia Inc.

Interlynx designs and develops educational and corporate multimedia, web-based
training programs, CD-ROMs and web sites. It has also recently developed PROFIS,
advanced web-based training software that runs on NT servers. Their sales are
targeted for both local and international markets. Its core competencies include
the production and editing of digital sound and video, computer graphics,
illustration and design, and programming in Visual C++, Java, HTML, ASP, and
Visual Basic running on MS-DOS, Windows 3.1, 95/98 and NT, and Unix platforms.
Interlynx projects are managed using a small team approach, each with a
producer/team leader, a technical lead and a creative lead as a minimum.

13

Interlynx has created over 15 original educational CD-ROMs (which are now in 12
languages) and has produced a number of large scale corporate web sites. It was
founded in 1993 by two university educators, each with over twenty years of
post-secondary teaching experience. Drs. Gary Woodill and Karen Anderson
continue to lead the company and provide their expertise and experience in
instructional design, and work with a talented group of younger staff on all
Interlynx projects.

Interlynx also owns 60% of the outstanding stock of Interlynx International
Inc., the marketing and sales arm of Interlynx responsible for the international
brokering of CD-ROM products from developers around the world.

Employees

The Company has 101 employees in the 8 subsidiaries, consisting of 11
executives, 20 salespersons, 31 persons involved in technical and warehouse
services, 8 involved in graphic development, 13 clerical staff, 7 in marketing
and 11 individuals involved in finance and administration. Employee
relationships are solid and the Company believes its staff to be adequate for
its anticipated needs.

Item 2. Properties.

In November 1994, the Company acquired an approximately 25,000 square foot
parcel of land, located at 14 Meteor Drive in Etobicoke, Ontario, Canada, on
which a 12,500 square foot free-standing, one story building was previously
erected ("Etobicoke property"). The Company and Interlynx presently both utilize
this building as their principal place of business. The Company owns the
Etobicoke property and building free of any liens, the purchase mortgage for the
property having been paid in full and satisfied on October 2, 1995.

Magic owns three office units, comprising an aggregate 8,000 square feet
of office space, in a building located in Oakville, Ontario, Canada ("Oakville
property"). It intends to rent out these premises in Fiscal 1999. The Oakville
property has been re-financed through a Credit Facility Agreement, with the
Royal Bank of Canada, which is discussed below. Magic and its subsidiaries also
lease additional properties as follows:

Lease
Expiration
Location Purpose Square Feet Date Annual Rent
-------- ------- ----------- ---- -----------

Saint John, New Brunswick Offices and warehouse 2,342 6/30/00 Cdn$35,130 US$25,670
Vancouver, British Columbia Offices 8,451 8/31/00 78,171 57,119

In April 1998, the Company acquired the 10 Meteor Drive property, an
approximately 29,000 square foot parcel of land in Etobicoke, Ontario, Canada,
on which a two-story building was previously erected. The Magic Lantern Group
presently utilizes this building as its principal place of business. This
property, as well as the Oakville property, have been

14

financed through a Credit Facility Agreement, with the Royal Bank of Canada,
dated April 24, 1998. The principal balance outstanding regarding these two
properties, as at August 31, 1998 was Cdn$1,309,496 (US$832,907).

The Company believes that the facilities of the Company and Magic
are adequate for their present requirements.

Item 3. Legal Proceedings.

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

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

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

The basis for the Company's claim in the Company Action is that the
systems used by the Company to produce interactive programming are not
within the scope of the claims of the Interactive Patent. The Company
thereafter amended its complaint to include a claim of invalidity of the
Interactive Patent based upon untrue and materially misleading claims made
by Interactive in its petition for the Interactive Patent.

This action was discontinued on September 9, 1998.

(b) Subsequent to the commencement of the Company Action, and on
June 18, 1992, Interactive commenced a lawsuit against the Company,
Communications and NTNIN in the Federal Court of Canada, Trial Division,
Montreal, Quebec, under the titled Interactive Network, Inc. v. NTN
Communications, Inc., NTN Sports, Inc. and NTN Canada, Inc. (the
"Interactive Action"). The Interactive Action alleges that Interactive
granted Communications the right to use the Interactive Patent, which
right Communications then improperly licensed to the Company and NTNIN.
Interactive alleges that the license agreement between Communications and
the Company and NTNIN infringes upon the Interactive Patent. The
Interactive Action seeks a declaration of the validity of the Interactive
Patent, an injunction restraining the Company from further infringement,
and either damages (in an unspecified amount) or an accounting of profits
derived from certain games used in Canada. Except for the aforementioned
pleadings, no proceedings or discovery have been undertaken in the
Interactive Actions.

15

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

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

Revenue Canada is currently in discussions with the Company regarding a
potential liability with respect to withholding tax on certain amounts paid to
Communications. No assessment has been made to date by Revenue Canada.
Management believes that it has valid defenses with respect to these matters and
accordingly, no amount has been recorded in these financial statements. In the
event that such matters are settled in favour of Revenue Canada, the amounts
could be material and would be recorded in the period in which they become
determinable.

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

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

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

The Company did not submit any matters to a vote of its security holders
during the quarter ended August 31, 1998.

16

PART II

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

Market Information

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

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

November 30, 1996........................................ US$ 8 US$ 4-7/8
February 29, 1997........................................ 5-1/4 3-7/8
May 31, 1997............................................. 4-5/8 2-7/8
August 31, 1997.......................................... 6-5/8 3-7/16

November 30, 1997........................................ 6 4
February 28, 1998........................................ 4 2-3/4
May 31, 1998............................................. 3-1/4 2-1/16
August 31, 1998.......................................... 4 1-1/4

Holders

As of the close of business on August 31, 1998, there were 226 holders of
record of Common Stock. The Company believes that there are approximately 600
beneficial holders of Common Stock.

Dividends

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

17

Item 6. Selected Financial Data.

The following table sets forth a summary of selected financial information
regarding the Company and its subsidiaries, consolidated, for each of the five
fiscal years ended August 31, 1998. For the convenience of the reader, the
selected financial information is also given in U.S. dollars, converted at the
Noon Buying Rate in effect at the end of the period to which the amount relates.
(For applicable Noon Buying Rates, see "Exchange Rates" preceding Item 1 above.)
The earnings per share amounts, prior to 1998, have been restated as required to
comply with Statement of Financial Accounting Standards No. 128 Earnings Per
Share ("SFAS 128"). For further discussion of earnings per share and the impact
of SFAS 128, see note 13 to the consolidated financial statements.

Statement of Operations Data (Canadian Dollars):

Year Ended August 31,
--------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----

Operating revenues........... Cdn$14,771,972 Cdn$10,351,689 Cdn$6,318,251 Cdn$4,559,382 Cdn$3,147,980
Cost of sales................ 5,515,241 3,395,898 2,223,916 1,701,629 1,244,462
Gross profit................. 9,256,731 6,955,791 4,094,335 2,857,753 1,903,518
Net income................... 618,065 609,387 541,059 357,535 75,694
Net income per share......... .24 .25 .25 .21 .07
Weighted average number of
shares outstanding.......... 2,550,805 2,441,992 2,144,175 1,699,239 1,049,244

Balance Sheet Data (Canadian Dollars):

August 31,
--------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----

Total assets................. Cdn$16,047,907 Cdn$14,287,602 Cdn$9,883,093 Cdn$8,352,670 Cdn$3,575,115
Long-term obligations........ 2,840,218 2,185,249 -0- -0- -0-
Shareholders' equity......... 11,033,178 9,488,648 8,877,434 7,536,411 2,338,277

Statement of Operations Data (United States Dollars):

Year Ended August 31,
--------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----

Operating revenues........... US$9,395,733 US$7,455,304 US$4,616,917 US$3,394,418 US$2,295,785
Cost of sales................ 3,507,977 2,445,731 1,830,963 1,266,847 907,571
Gross profit................. 5,887,756 5,009,573 2,785,954 2,127,571 1,388,214
Net income................... 393,121 438,882 395,366 266,182 55,203
Net income per share......... .15 .18 .18 .16 .05
Weighted average number of
shares outstanding.......... 2,550,805 2,441,992 2,144,175 1,699,239 1,049,244

Balance Sheet Data (United States Dollars):

August 31,
--------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----

Total assets................. US$10,207,294 US$10,289,955 US$7,221,844 US$6,218,486 US$2,607,289
Long-term obligations........ 1,806,525 1,573,820 -0- -0- -0-
Shareholders' equity......... 7,017,668 6,833,740 6,486,981 5,610,788 1,705,278

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

18

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

Introduction

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

Results of Operations

Year Ended August 31, 1998 Compared to Year Ended August 31, 1997

Revenues. Revenues from program content services for the 1998 Fiscal Year
were Cdn$4,134,839 (US$2,629,970), compared to Cdn$3,932,912 (US$2,832,490) for
the Company's fiscal year ended August 31, 1997 (the "1997 Fiscal Year"), an
increase of Cdn$201,927 or 5.1%. This increase was the result of an increase in
the average number of Hospitality sites outstanding during 1998 when compared to
the average number of Hospitality sites outstanding during 1997.

Revenues from equipment rental for the 1998 Fiscal Year were Cdn$1,710,451
(US$1,087,935), compared to Cdn$1,642,305 (US$1,182,791) for the 1997 Fiscal
Year, an increase of Cdn$68,146 or 4.1%. This increase was primarily the result
of an increase in the average number of rental systems outstanding in 1998 when
compared to the average number of rental systems outstanding in the comparable
prior period.

Revenues from event programming for the 1998 Fiscal Year were Cdn$602,571
(US$383,266), compared to Cdn$434,965 (US$313,263) for the 1997 Fiscal Year, an
increase of Cdn$167,606 or 38.5%. This increase was due to an increased number
of corporate events hosted, both in Canada and abroad, in 1998 when compared to
the number of events hosted in 1997.

Revenues from maintenance services were Cdn$827,448 (US$526,299) for the
1998 Fiscal Year, compared to Cdn$539,349 (US$388,440) for the 1997 Fiscal Year,
an increase of

19

Cdn$288,099 or 53.4%. This increase was the result of an increase in the average
number of systems and rental Playmakers outstanding in 1998, over the average
number outstanding in 1997. Also, additional revenues were earned, exclusive to
the 1998 Fiscal Year, from a project undertaken by the Technical department of
Hospitality, where Playmakers were repaired and refurbished for Communications.

Revenues from equipment sales, which were Cdn$55,151 (US$35,079),
decreased by Cdn$89,597 or 61.9% from Cdn$144,748 (US$104,248) for the 1997
Fiscal Year. This decrease is reflective of the Company's continuing initiatives
in and success of the rental equipment program introduced over 3 years ago.

Revenues from ad sponsorship were Cdn$442,424 (US$281,404) for the 1998
Fiscal Year, compared to Cdn$246,090 (US$177,234) for the 1997 Fiscal Year, an
increase of Cdn$196,334 or 79.8%. This increase was the result of an increase in
the number and size of corporate sponsors over the level experienced in the
previous period, and due to additional marketing and sales efforts in this area
in 1998. Examples of the additional marketing initiatives were the use of a
corporate brochure and video in presentations to prospective clients, and the
employment on a full-time basis of an advertising sales manager.

Revenues from video and software sales were Cdn$5,456,738 (US$3,470,766)
for the 1998 Fiscal Year. Of these revenues, Cdn$1,367,430 (US$869,756) was
earned by Interlynx in its first year of ownership by the Company. Revenues from
video and software sales earned by the Magic Lantern Group for the 1998 Fiscal
Year were Cdn$4,089,308 (US$2,601,010), an increase of Cdn$1,811,540 or 79.5%
over the Cdn$2,277,768 (US$1,640,452) earned in the 1997 Fiscal Year. Both a
greater emphasis on marketing and additional revenues generated from the
business assets of Image Media Ltd., acquired by Magic, on August 31, 1997 have
contributed to this increase over the prior year.

Revenues from video dubbing were Cdn$747,138 (US$475,218), an increase of
Cdn$348,056 or 87.2% over the Cdn$399,082 (US$287,420) earned in the 1997 Fiscal
Year. This increase also can be attributed to additional revenues generated from
the business assets of Image Media Ltd., acquired by Magic, on August 31, 1997.

Other revenues, as earned by NTNIN and Networks North Inc., which consist
primarily of revenue from internet services and interest income, were
Cdn$577,282 (US$367,181), compared to Cdn$595,168 (US$428,641) for the 1997
Fiscal Year, a decrease of Cdn$17,886 or 3.0%. Other revenues, as earned by the
Magic Lantern Group, consist primarily of revenue from video conversion
services. Revenues from this area were Cdn$217,930 (US$138,615) compared to
Cdn$139,302 (US$100,326) for the 1997 Fiscal Year, an increase of Cdn$78,628 or
56.4%. This increase was a direct result of an increased level of consulting in
regards to video conversion services provided in 1998.

As a result of the foregoing, the Company's total revenues in aggregate
were Cdn$14,771,972 (US$9,395,733), compared to Cdn$10,351,689 (US$7,455,304)
for the 1997 Fiscal Year, an increase of Cdn$4,420,283 or 42.7%. Excluding
revenues earned by Interlynx of

20

Cdn$1,367,430 (US$869,756), revenues were Cdn$13,404,542 (US$8,525,978) for the
1998 Fiscal Year. When compared to revenues of Cdn$10,351,689 (US$7,455,304)
from the 1997 Fiscal Year, an increase of Cdn$3,052,853 or 29.5% was experienced
in the 1998 Fiscal Year.

Cost of Sales. Commissions for the 1998 Fiscal Year were Cdn$2,136,659
(US$1,359,025), compared to Cdn$1,757,922 (US$1,266,058) for the 1997 Fiscal
Year, an increase of Cdn$378,737 or 21.5%. This increase resulted from all of
the following. First, there was an increase in the average number of Hospitality
sites outstanding in 1998 compared to the average number outstanding in 1997.
Since the amount the Company is billed by Communications is a direct function of
the number of sites outstanding, the above-noted increase translates into higher
commissions payable to Communications. Secondly, the amount of commissions
charged per site by Communications increased by 5% in March of 1998. Lastly,
given that these commissions are payable in US dollars, the decrease in the
value of the Canadian dollar over the past year has also contributed to the
increase. As a percentage of the Company's total revenues, such costs decreased
to 14.5% for the 1998 Fiscal Year from 17.0% for the 1997 Fiscal Year. This
decrease is primarily the result of an increase in sales which are not
commissionable, including sales made by the Company's direct sales force who do
not receive commissions, and revenues from both the Magic Lantern Group and
Interlynx for the year.

Equipment costs were Cdn$89,287 (US$56,791), compared to Cdn$258,701
(US$186,317) for the 1997 Fiscal Year, a decrease of Cdn$169,414 or 65.5%. As a
percentage of the Company's total revenues, such costs decreased to 0.6% for the
1998 Fiscal Year from 2.5% for the 1997 Fiscal Year. This decrease was
commensurate with the decrease in equipment sales for the reasons discussed
above.

Video and software costs in aggregate were Cdn$2,212,985 (US$1,407,572)
for the 1998 Fiscal Year. Of these costs, Cdn$484,639 (US$308,255) was incurred
by Interlynx in its first year of ownership by the Company. Costs attributable
to video and software sales of the Magic Lantern Group for the 1998 Fiscal Year
were Cdn$1,728,346 (US$1,099,317), an increase of Cdn$930,710, or 116.7%, over
the Cdn$797,636 (US$574,459) incurred in the 1997 Fiscal Year. This increase was
caused by the requirements of operating the business assets of Image Media Ltd.,
which were acquired by Magic on August 31, 1997. As a percentage of the
Company's total revenues, these costs have risen to 15.0% in the 1998 Fiscal
Year from 7.7% in the 1997 Fiscal Year, with the costs of Interlynx accounting
for 3.3% of the percentage increase.

Video dubbing costs were Cdn$620,642 (US$394,760). These costs have
increased by Cdn$408,570, or 192.7%, over the Cdn$212,072 (US$152,735) incurred
in the 1997 Fiscal Year. This increase also can be attributed to the additional
costs resulting from the requirements of operating the business assets of Image
Media Ltd., acquired by Magic, on August 31, 1997.

Other costs, originating from activities of NTNIN, were Cdn$447,227
(US$284,459), compared to Cdn$359,886 (US$259,190) for the 1997 Fiscal Year, an
increase of Cdn$87,341 or 24.2%. This increase was primarily due to increased
parts and labour costs, exclusive to the 1998 Fiscal Year, from a project
undertaken by the Technical department of Hospitality, where Playmakers were
repaired and refurbished for Communications. As a percentage of the

21

Company's total revenues, such costs decreased to 3.0% for the 1998 Fiscal Year
from 3.5% for the 1997 Fiscal Year. Other costs, originating from the activities
of the Magic Lantern Group, were Cdn$8,441 (US$5,369) in the 1998 Fiscal Year,
compared to Cdn$9,681 (US$6,972) for the 1997 Fiscal Year. As a percentage of
the Company's total revenues, such costs remained at 0.1% for the 1998 Fiscal
Year.

As a result of the foregoing, the Company's total cost of sales was
Cdn$5,515,241 (US$3,507,977), compared to Cdn$3,395,898 (US$2,445,731) for the
1997 Fiscal Year, an increase of Cdn$2,119,343 or 62.4%. Excluding Interlynx's
cost of sales of Cdn$484,639 (US$308,255), cost of sales were Cdn$5,030,602
(US$3,199,721) in the 1998 Fiscal Year, compared to $3,395,898 (US$2,445,731) in
the prior year, an increase of $1,634,704 or 48.1%. Total gross margins
decreased to 62.7% in the 1998 Fiscal Year from 67.2% in the 1997 Fiscal Year,
and excluding the results of Interlynx, the gross margin was 62.5% in the 1998
Fiscal Year.

Expenses. Selling, general and administrative expenses for the 1998 Fiscal
Year were Cdn$6,591,941 (US$4,192,813), compared to Cdn$4,786,519 (US$3,447,259)
for the 1997 Fiscal Year, an increase of Cdn$1,805,422 or 37.8%. These expenses
for the 1998 Fiscal Year, excluding those of Interlynx of Cdn$445,872
(US$283,598), totaled Cdn$6,146,069 (US$3,909,216), and have increased by
Cdn$1,359,550 or 28.3% when compared to the expense total of Cdn$4,786,519
(US$3,447,259) for the 1997 Fiscal Year. This increase was caused by the
following factors. Firstly, advertising and promotion expenses have increased as
a result of both the increased promotion and prizing of our QB1game in
Hospitality, and the additional marketing efforts in the areas of video,
software and dubbing sales and ad sponsorship. Additional expenses have also
been incurred resulting from the requirements of operating the business assets
of Image Media Ltd., acquired August 31, 1997. Thirdly, salaries and benefits
have risen due to both annual increases and additional staffing requirements.
Travel expenses have increased due to the increase in the number of Corporate
events being hosted abroad and the travel costs associated with the area
representatives hired, in 1998, to provide both customer service and training to
both new and existing Hospitality sites. Lastly, freight charges have increased.
This increase was commensurate with the increase in advertising and promotion,
the increase in volume of equipment being shipped to both Corporate events and
Hospitality sites, and an increase in the volume of videos and software being
shipped to customers. As a percentage of the Company's total revenues, total
selling, general and administrative expenses decreased to 44.6% for the 1998
Fiscal Year from 46.2% for the 1997 Fiscal Year.

Bad debts expense was Cdn$43,123 (US$27,428), compared to Cdn$48,284
(US$34,774) for the 1997 Fiscal Year, a decrease of Cdn$5,161 or 10.7%. As a
percentage of the Company's total revenues, such costs decreased to 0.3% for the
1998 Fiscal Year from 0.5% for the 1997 Fiscal Year.

Interest and bank charges for the 1998 Fiscal Year were Cdn$137,942
(US$87,738), compared to Cdn$109,834 (US$79,103) for the 1997 Fiscal Year, an
increase of Cdn$28,108 or 25.6%. This increase was the result of additional
interest arising from long-term debt, acquired in April 1998, to finance the
Company's purchase of the 10 Meteor Drive property and refinance the debt on
Magic's property, located at 775 Pacific Road in Oakville. As a percentage of
the

22

Company's total revenues, such costs decreased to 0.9% for the 1998 Fiscal Year
from 1.1% for the 1997 Fiscal Year.

Depreciation and amortization for the 1998 Fiscal Year were Cdn$1,310,689
(US$833,666), compared to Cdn$952,145 (US$685,736) for the 1997 Fiscal Year, an
increase of Cdn$358,544 or 37.7%. This increase is the result of both
depreciation on the capital asset additions in 1998, and amortization of
goodwill associated with the purchase of Interlynx. As a percentage of the
Company's total revenues, such costs decreased to 8.9% for the 1998 Fiscal Year
from 9.2% for the 1997 Fiscal Year.

Income Taxes. Provision for income taxes was Cdn$419,084 (US$266,559) for
the 1998 Fiscal Year, compared to Cdn$433,900 (US$312,495) for the 1997 Fiscal
Year, a decrease of Cdn$14,816 or 3.4%. The provision for taxes is lower in 1998
when compared to the 1997 provision due to a lower level of taxable income
experienced in 1998.

Net Income. As a result of all of the above, the Company's net income for
the 1998 Fiscal Year was Cdn$618,065 (US$393,121), compared to Cdn$609,387
(US$438,882) for the 1997 Fiscal Year, an increase of Cdn$8,678 or 1.4%. This
represents a decrease in net income as a percentage of total revenues to 4.2% in
the 1998 Fiscal Year from 5.9% in the 1997 Fiscal Year.

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

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

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

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

Revenues from equipment sales, which were Cdn$144,748 (US$104,248),
remained

23

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

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

Revenues from video sales and video dubbing, as earned by the Magic
Lantern Group, were Cdn$2,277,768 (US$1,640,452) and Cdn$399,082 (US$287,420)
respectively, for the 1997 Fiscal Year, the first year of ownership by the
Company.

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

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

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

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

24

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

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

As a result of the foregoing, the Company's total cost of sales was
Cdn$3,395,898 (US$2,445,731), compared to Cdn$2,223,916 (US$1,625,076) for the
1996 Fiscal Year, an increase of Cdn$1,171,982 or 52.7%. Excluding the Magic
Lantern Group's cost of sales of Cdn$1,019,389 (US$734,166), cost of sales were
Cdn$2,376,509 (US$1,711,566) in the 1997 Fiscal Year, compared to Cdn$2,223,916
(US$1,625,076) in the prior year, an increase of $152,593 or 6.9%. Total gross
margins improved to 67.2% in the 1997 Fiscal Year from 64.8% in the 1996 Fiscal
Year, and excluding the Magic Lantern Group, the gross margin improved to 68.5%
in the 1997 Fiscal Year.

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

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

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

Depreciation and amortization for the 1997 Fiscal Year were Cdn$952,145
(US$685,736), compared to Cdn$383,776 (US$280,436) for the 1996 Fiscal Year, an
increase of

25

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

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

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

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

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

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

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

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

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

26

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

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

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

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

Equipment costs were Cdn$298,243 (US$217,934), compared to Cdn$198,344
(US$147,665) for the 1995 Fiscal Year, an increase of Cdn$99,899 or 50.4%. As a
percentage of the Company's total revenues, such costs increased to 4.7% for the
1996 Fiscal Year from 4.4% for the 1995 Fiscal Year. This increase, both in
total amount and as a percentage of total revenue, is primarily the result of
increased refurbishing costs related to equipment at Group Subscriber locations.

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

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

Expenses. Selling, general and administrative expenses for the 1996 Fiscal
Year were Cdn$2,642,853 (US$1,931,204), compared to Cdn$2,043,369 (US$1,521,269)
for the 1995 Fiscal Year, an increase of Cdn$599,484 or 29.3%. As a percentage
of the Company's total revenues, such expenses decreased to 41.8% for the 1996
Fiscal Year from 44.8% for the 1995 Fiscal Year. This decrease in percentage is
primarily the result of improved utilization of staff and resources, as

27

well as the Company's existing physical premises having the capacity to serve it
without additional cost as revenues increased.

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

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

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

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

Net Income. As a result of all of the above, the Company's net income for
the 1996 Fiscal Year was Cdn$541,059 (US$395,366), compared to Cdn$357,535
(US$266,182) for the 1995 Fiscal Year, an increase of Cdn$183,524 or 51.3%. This
represents an increase in net income as a percentage of total revenues to 8.6%
in the 1996 Fiscal Year from 7.8% in the 1995 Fiscal Year.

Liquidity and Capital Resources

At August 31, 1998, the Company had working capital of Cdn$4,073,835
(US$2,591,168), an increase of Cdn$573,973 from working capital of Cdn$3,499,862
(US$2,520,606) at August 31, 1997. This increase is primarily due to the
retirement of short-term debt through long-term financing, and the repayment of
a current note payable through the issuance of common shares.

For the 1998 Fiscal Year, the Company had a net decrease in cash flow of
Cdn$1,420,682 (US$903,627), a decrease from its net increase in cash flow of
Cdn$643,908 (US$463,744) for the 1997 Fiscal Year. Net decrease in cash flow for
the 1996 Fiscal Year was Cdn$1,320,251 (US$964,743). The decrease in net cash
flow for the 1998 Fiscal Year was primarily due to cash used in investing
activities.

Cash provided by operating activities for the 1998 Fiscal Year was
Cdn$475,343

28

(US$302,343). The major factors contributing to the cash provided from
operations for the 1998 Fiscal Year include: net income before depreciation and
amortization and loss from investment of Cdn$1,954,412 (US$1,243,106); a
decrease in inventory of Cdn$316,740 (US$201,463), caused by inventory being
converted to rental equipment and parts requirements for the Playmaker repair
project undertaken during the year; and increases in accounts payable and
accrued liabilities of Cdn$260,060 (US$165,412) due mainly to expanding
operations, including the operations of Image Media Ltd., and as a result of the
high level of property and equipment purchases during the year. These sources of
operating cash were mitigated by the uses of cash resulting from: an increase in
short-term investments of Cdn$337,319 (US$214,552), both from income earned on
the investments and a foreign exchange gain resulting from holding the US dollar
investments during a year when the US dollar gained in strength relative to the
Canadian dollar; an increase in accounts receivable of Cdn$1,034,931
(US$658,269) commensurate with the 42.7% growth in revenues over the year and
the purchase of the operations of Image Media Ltd.; an increase in prepaid
expenses of Cdn$120,464 (US$76,621) due to increases in producer advances
arising from video sales and software catalogues that will be used by Magic in
their sales efforts over an extended period; and decreases in deferred revenues
of Cdn$321,452 (US$204,460) and income taxes payable of Cdn$385,335 (US$245,093)
also contributed to the uses of cash from operations. Cash provided by operating
activities for the 1997 Fiscal Year was Cdn$3,814,770 (US$2,747,404). Cash used
in operating activities for the 1996 Fiscal Year was Cdn$354,143 (US$258,782).
The major factors contributing to the cash provided by operations during the
1997 Fiscal Year include: net income before depreciation and amortization and
loss from investment of Cdn$1,594,079 (US$1,148,058); a decrease in short-term
investments of Cdn$1,872,137 (US$1,348,316); a decrease in inventory of
Cdn$180,134 (US$129,733), due to an increased level of inventory converted to
rental equipment during the year; a decrease in prepaid expenses of Cdn$253,487
(US$182,562); and increases in accounts payable and accrued liabilities and
income taxes payable of Cdn$92,744 (US$66,794) and Cdn$108,197 (US$77,924)
respectively, due mainly to expanding operations, higher debt load, and higher
effective tax rates in 1997, respectively. These sources of operating cash were
mitigated by the use of cash resulting from the increase in accounts receivable
of Cdn$286,008 (US$205,983), which resulted from increased sales levels in 1997.
Cash used in operations for the 1996 Fiscal Year was Cdn$354,143 (US$258,782).
Cash used in operations was due to the following: an increase in net income
before depreciation and amortization and deferred taxes of Cdn$944,835
(US$690,417), as well as an increase in accounts payable and accrued liabilities
of Cdn$251,329 (US$183,653), resulting from growth in the Company's operations.
Income taxes payable increased Cdn$162,294 (US$118,593) from the prior year as a
result of increased taxable income. These sources of operating cash were offset
by the use of cash in increasing short-term investments by Cdn$1,525,770
(US$1,114,921). Also, inventory increased by Cdn$75,915 (US$55,473), as required
to service the increase in Group Subscriber locations, prepaid expenses
increased by Cdn$11,732 (US$8,573), and accounts receivable increased by
Cdn$99,184 (US$72,476) in the 1996 Fiscal Year, primarily due to increased sales
levels.

Cash used in investing activities in the 1998 Fiscal Year was
Cdn$2,454,791 (US$1,561,373). This amount was primarily made up of purchases of
property and equipment (including the purchase of the property, building and
leasehold improvements therein, located at 10 Meteor Drive), totaling
Cdn$2,012,543 (US$1,280,081), an increase in licenses due to the

29

payment of Cdn$78,400 (US$50,000 at August 28, 1998) to Players Network Inc. for
the right to be the exclusive Canadian distributor of its products for a 10-year
period, and the purchase of Interlynx, which totaled Cdn$380,001 (US$241,700).
Cash used in the 1997 Fiscal Year was Cdn$3,092,057 (US$2,226,905). The
Company's purchase of the Magic Lantern Group, totaling Cdn$1,644,497
(US$1,184,369), the purchase of property and equipment for Cdn$1,040,765
(US$749,561), the investment in Viewer Services of Cdn$38,305 (US$27,587) by
Magic and the purchase of certain of the business assets and the resulting
goodwill of Image Media by Magic, for Cdn$590,000 (US$424,919), accounted for
the use of cash. These uses of cash were somewhat offset by the decrease in
notes receivable in the 1997 Fiscal Year of Cdn$221,510 (US$159,532). In the
1996 Fiscal Year, cash used in investing activities totaled Cdn$1,521,849
(US$1,112,056). The purchase of property and equipment, for Cdn$1,171,849
(US$856,302), and the forwarding of a note receivable to Magic of Cdn$350,000
(US$255,754) accounted for the cash used.

Cash provided by financing activities in the 1998 Fiscal Year totaled
Cdn$558,766 (US$355,403). This mainly resulted from proceeds on the exercise of
options to purchase common shares of Cdn$101,465 (US$64,537), and the
acquisition of a long-term operating loan from the Royal Bank of Canada of
Cdn$1,309,246 (US$832,748). The loan was used to retire and refinance short-term
debt, as reflected in the decrease of bank indebtedness of Cdn$577,982
(US$367,626), and finance the purchase of long-term assets. Cash used in
financing activities in the 1997 Fiscal Year was Cdn$78,805 (US$56,755). This
cash was used primarily in the retirement of short-term debt. Cash provided by
financing activities was Cdn$555,741 (US$406,095) in the 1996 Fiscal Year. The
Company received net proceeds of Cdn$799,964 (US$584,555) on the issuance of
385,386 shares of its Common Stock. This source of cash was offset by the
retirement of the Company's mortgage payable totaling Cdn$244,223 (US$178,460).

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

Inflation

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

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

30

Conversely, if the value of the Canadian dollar rises against the US dollar,
gross profit and net income will increase.

Year 2000

The Year 2000 Issue arises because many computerized systems use two
digits, rather than four, to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900, or some other date, resulting in errors when
information using year 2000 dates is processed. In addition, similar problems
may arise in some systems which use certain dates in 1999 to represent something
other than a date. The effects of the Year 2000 Issue may be experienced before,
on, or after January 1, 2000, and if not addressed, the impact on operations and
financial reporting may range from minor errors to significant systems failure,
which could affect an entity's ability to conduct normal business operations. It
is not possible to be certain that all aspects of the Year 2000 Issue affecting
the entity, including those relating to the efforts of customers, suppliers, or
other third parties, will be fully resolved.

Item 8. Financial Statements and Supplementary Data.

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

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

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

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

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

None.

31

PART III

Item 10. Directors and Executive Officers of the Registrant.

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

Peter Rona 52 President, Chief Executive Officer, 1987
Principal Financial and Accounting Officer
and Chairman of the Board of Directors of
the Company
Douglas R. Connolly 45 President of Magic Lantern Communications
Ltd.; Director of the Company 1996
Daniel C. Downs 59 Director of the Company 1993
Dale G. Smith 49 Director of the Company 1993
Lorne C. Stephenson 47 Director of the Company 1998
Adrian P. Towning 54 Director of the Company 1994
Mark Truman 44 Secretary of the Company N/A
Bart Yabsley 35 Director of the Company 1998

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

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

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

32

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

Lorne C. Stephenson is the Senior Vice President, Administration and
Corporate Affairs (1995 to present) of NetStar Communications Inc. ["NetStar"],
a company involved in broadcast operations. Mr. Stephenson was the Vice
President, Corporate Affairs (1991 to 1995), Vice President, Entertainment (1989
to 1991), Executive Assistant to Chairman and CEO (1983 to 1989) and Director of
Corporate Affairs (1979 to 1983) for John Labatt Ltd., a Canadian-owned
international consumer product and entertainment conglomerate. He is a member of
the Canadian Cultural Advisory Group on International Trade, a member of the
Board of Governors and Chairman of the University Advancement Committee of
McMaster University, and a member of the Board of Directors of Montcrest, a
private school in Toronto, Ontario, Canada.

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

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

Bart Yabsley is the General Counsel, Corporate and Secretary (May 1998 to
present) of NetStar. Mr Yabsley was the Associate General Counsel, Corporate
(November 1997 to April 1998) and Legal Counsel (October 1994 to October 1997)
of NetStar.

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

33

Item 11. Executive Compensation.

Summary Compensation Table

The following table sets forth information concerning the compensation
paid or accrued by the Company during the three years ended August 31, 1998 to
those individuals who served as Chief Executive Officer of the Company during
the 1998 Fiscal Year and all other executive officers of the Company or any of
its subsidiaries at August 31, 1998 who received total annual salary and bonuses
in excess of $100,000 during the 1998 Fiscal Year (collectively, the "Named
Executive Officers").

Long-Term
Compensation
------------
Annual Compensation Awards
----------------------------------- ------------
Securities
Year Ended Other Annual Underlying
Name and Principal Position August 31, Salary Bonus Compensation Options
- --------------------------- ---------- ------ ----- ------------ -------

Peter Rona, President and 1998 US$117,044 US$22,907 $-0- 40,000
Chief Executive Officer 1997 119,103 34,030 -0- 25,000
1996 115,090 10,961 3,483 37,500

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

Option Grants Table

The following table sets forth (a) the number of shares underlying options
granted to each Named Executive Officer during the 1998 Fiscal Year, (b) the
percentage the grant represents of the total number of options granted to all
Company employees during the 1998 Fiscal Year, (c) the per share exercise price
of each option, (d) the expiration date of each option, and (e) the potential
realized value of each option based on: (i) the assumption of a five (5%)
percent annualized compounded appreciation of the market price of the Common
Stock from the date of the grant of the subject option to the end of the option
term, and (ii) the assumption of a ten (10%) percent annualized compounded
appreciation of the market price of the Common Stock from the date of the grant
of the subject option to the end of the option term.

34

Potential Realizable Value at
Assumed Rates of Stock Price
Appreciation for Option Term
-----------------------------
Percentage of
Total Options
Number of Shares Granted to
Underlying Employees in Exercise Expiration
Name Options Granted Fiscal Year Price Date 5% 10%
- ---- --------------- ----------- ----- ---- -- ---

Peter Rona 40,000 25.6% US$3.00 11/17/02 US$33,153 US$73,612

Options Exercised and Remaining Outstanding

Set forth in the table below is information, with respect to each of the
Named Executive Officers, as to the (a) number of shares acquired during the
1998 Fiscal Year upon each exercise of options granted to such individuals, (b)
the aggregate value realized upon each such exercise (i.e., the difference
between the market value of the shares at exercise and their exercise price),
(iii) the total number of unexercised options held on August 31, 1998,
separately identified between those exercisable and those not exercisable, and
(iv) the aggregate value of in-the-money, unexercised options held on August 31,
1998, separately identified between those exercisable and those not exercisable.

Value of Unexercised
Number of Unexercised Options In-the-Money Options at
at August 31, 1998 August 31, 1998
----------------------------- --------------------------
Shares
Acquired on
Name Exercise Value Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------------- ----------- ------------- ----------- -------------

Peter Rona 30,000 -0- -0- 177,500 -0- -0-

Director's Remuneration

Each director, not otherwise a full time employee of the Company, is
eligible to receive Cdn$500 for each meeting of the Board of Directors or
committee thereof which they attend, along with the reimbursement of their
reasonable expenses incurred on the Company's behalf. The NetStar designees on
the Company's Board have declined such compensation in the 1998 Fiscal Year and
in previous fiscal years. In addition, each director, not otherwise a full time
employee of the Company, is eligible to receive 1,500 stock options annually.
All such directors have waived their entitlement to these options for the year.

Employment Contracts with Named Executive Officers

As of September 1, 1997, NTNIN extended by two years its employment
agreement (the "Rona Employment Agreement") with Peter Rona, its President and
Chief Executive Officer,

35

originally dated as of September 1, 1994. Mr. Rona is also the President, Chief
Executive Officer, Chief Financial and Accounting Officer and Chairman of the
Board of Directors of the Company. NTNIN's obligations under the Rona Employment
Agreement have been guaranteed by the Company. Mr. Rona does not receive any
compensation from the Company other than pursuant to the Rona Employment
Agreement.

The Rona Employment Agreement provides for an initial base compensation of
Cdn$165,375 with annual increases to be subject to review by the Board of
Directors, but in no event less than the proportional increase in the Consumer
Price Index as published by Statistics Canada, plus a bonus equal to a
percentage of the annual base compensation paid to Mr. Rona determined by
reference to the excess of NTNIN's actual net income before taxes over specified
amounts set forth in the Rona Employment Agreement. The Rona Employment
Agreement further provides for the granting to Mr. Rona of stock options at the
discretion of the Board of Directors. The Board awarded Mr. Rona stock options
to purchase 40,000 shares of Common Stock as of November 17, 1997. In all other
respects, the basic provisions of the Rona Employment Agreement remain the same.

Magic has entered into two separate Employment Agreements, each dated
October 1, 1996, with Douglas Connolly and Wendy Connolly. These Employment
Agreements each have two year terms commencing on September 1, 1997 and
terminating on August 31, 1999, and pursuant to which Mr. and Ms. Connolly shall
receive annual base salaries of Cdn$125,000 (US$79,506 at August 31, 1998) and
Cdn$70,000 (US$44,524), respectively, together with automotive expenses of
Cdn$12,000 (US$7,632) and Cdn$8,400 (US$5,343), respectively. There is a
provision in each Employment Agreement for a cost-of-living adjustment to their
base salaries for the second year of the term. In addition, under their
respective Employment Agreements, Mr. and Ms. Connolly shall each be entitled to
a bonus, not to exceed Cdn$50,000 (US$31,803) and Cdn$28,000 (US$17,809),
respectively (subject to a cost-of living adjustment for the second year of
their respective terms), to be based upon the actual net income before taxes, if
any, of Magic during each year of the terms of the Employment Agreements. The D.
Connolly Employment Agreement further provides for Mr. Connolly to serve as
President and Chief Operating Officer of Magic during its term.

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

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

36

Compensation Committee Interlocks and Insider Participation

The Company's Audit and Compensation Committee currently consists of Dale
G. Smith, Lorne C. Stephenson and Adrian P. Towning. Messrs. Smith, Stephenson
and Towning are not officers or employees of the Company, and have not served in
such capacities in the past. No executive officer of the Company served as a
director or member of the compensation committee (or group performing similar
functions) of another entity, one of whose executive officers served on the
Audit and Compensation Committee or as a director of the Company.

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

Set forth in the table below is information concerning the ownership, as
of the close of business on August 31, 1998, of the Common Stock by each person
who is known to the Company to be the beneficial owner of more than five (5%)
percent of the Common Stock, the Company's directors and Named Executive
Officers, and all directors and executive officers as a group.

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

NetStar Enterprises Inc.(2)........................... 925,787 32.9%
Lorne C. Stephenson(3)................................ 925,787(4) 32.9
Bart Yabsley(3)....................................... 925,787(4) 32.9
Peter Rona(6)......................................... 222,857(6) 7.9
Anor Management Ltd.(7)............................... 192,857(7) 6.8
Douglas Connolly...................................... 87,255(8) 3.1
Adrian P. Towning..................................... 5,250 0.2

All directors and executive officers as a group
(7 persons)................................. 1,241,149(9) 44.0%

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

(2) The address for NetStar Enterprises Inc. is 2225 Sheppard Avenue East -
Suite 100,

37

North York, Ontario, Canada M2J 5C2.

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

(4) Includes the 925,787 shares of Common Stock owned by NetStar, of which Mr.
Stephenson is Senior Vice President, Administration and Corporate Affairs
and Mr. Yabsley is General Counsel, Corporate and Secretary.

(5) The address for Mr. Rona is c/o Networks North Inc., 14 Meteor Drive,
Etobicoke, Ontario, Canada, M9W 1A4.

(6) Includes (a) 192,857 shares of Common Stock issuable upon conversion of
the 900,000 shares of Convertible Preferred Stock held of record by Anor
Management, Ltd. ("Anor") and (b) 30,000 common shares owned by Mr. Rona.
Mr. Rona is the President, sole director and sole shareholder of Anor.

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

(8) Represents the payments of stock in lieu of cash based upon two promissory
notes issued to companies controlled by Mr. Connolly. The 87,255 shares of
common stock are beneficially owned by 1199846 Ontario Ltd. and
Connolly-Daw Holdings Inc., both of which Mr. Connolly is a principal
shareholder and an officer. The remaining stock payments due under the
promissory notes are not due within the next 60 days.

(9) Includes 192,857 shares issuable upon conversion of the convertible
preferred stock referred to in note (6) above.

Item 13. Certain Relationships and Related Transactions.

Set forth below is a description of certain transactions between the
Company and its directors, executive officers, beneficial owners of five percent
or more of the outstanding Common Stock, or member of the immediate family of
any of the foregoing persons, as well as certain business relationships between
the Company and its directors, which occurred or existed during the 1998 Fiscal
Year.

(a) During the 1998 Fiscal Year, both pursuant to the License
Agreement and otherwise, the Company paid Communications an aggregate
Cdn$1,792,002 (US$1,139,805) as commissions. Under the License Agreement,
the Company, through NTNIN, holds the exclusive license to market the
products and programs of

38

Communications throughout Canada through December 31, 2015. Daniel C.
Downs, a director of the Company, is a former President, Chief Operating
Officer of Communications.

(b) On October 2, 1996, pursuant to a Stock Purchase Agreement,
dated October 1, 1996 (the "Magic Lantern Purchase Agreement"), the
Company, through NTNIN, acquired all of the outstanding stock of Magic. As
consideration for the purchase of such stock the Company delivered
Cdn$200,000 (US$146,800 on October 1, 1996) and a Non-Negotiable
Promissory Note (the "Connolly-Daw Note") in the principal amount of
Cdn$703,133 (US$516,099) to Connolly-Daw Holdings Inc. ("Connolly-Daw")
and a Non-Negotiable Promissory Note (the "1199846 Note") in the principal
amount of Cdn$546,867 (US$401,400) to 1199846 Ontario Ltd ("1199846"). The
Connolly Note requires principal payments of Cdn$78,133 (US$57,350),
Cdn$312,500 (US$229,375) and Cdn$312,500 (US$229,375) on August 31, 1998,
1999, and 2000, respectively. In lieu of such cash payments, the Company
has the option to tender payment to Connolly-Daw, and Connolly-Daw has the
option to demand payment, in the form of 12,276, 49,097 and 49,096 shares
of Common Stock (collectively, the "Connolly-Daw Shares"), respectively.
The 1199846 Note requires principal payments of Cdn$312,500 (US$229,375)
and Cdn$234,367 (US$172,025) on August 31, 1997 and 1998, respectively. In
lieu of such cash payments, the Company has the option to tender payment
to 1199846, and 1199846 has the option to demand payment, in the form of
49,097 and 36,821 shares of Common Stock (collectively, the "1199846
Shares"), respectively. Also pursuant to the Magic Lantern Purchase
Agreement, Connolly-Daw, NTNIN and the Company entered into an Option
Agreement, dated October 1, 1996, and 1199846, NTNIN and the Company
entered into an Option Agreement, dated October 1, 1996 (together, the
"Option Agreements"). Under the terms of the Option Agreements, in the
event that either Magic or Mr. Connolly chooses not to extend the term of
the D. Connolly Employment Agreement beyond its initial term expiring on
August 31, 1999, on or after September 1, 1999 and on or before September
30, 1999, Connolly-Daw and 1199846 shall each have the right to cause the
Company to purchase any of the Connolly-Daw Shares or 1199846 Shares, as
the case may be, then held by Connolly-Daw or 1199846 at a price equal to
90% of the market value (as defined in the Option Agreements) of such
shares (Connolly-Daw having been granted the right in this event to cause
acceleration of the September 1, 2000 payment under the Connolly-Daw Note
to August 31, 1999) and the Company shall have the right to cause the
Connolly-Daw and 1199846 to sell to the Company any of the Connolly-Daw
Shares or 1199846 Shares, as the case may be, then held by Connolly-Daw or
1199846 at a price equal to 110% of the market value (as defined in the
Option Agreements) of such shares (Connolly-Daw having been granted the
right in this event to cause acceleration of the September 1, 2000 payment
under the Connolly-Daw Note to August 31, 1999). Douglas Connolly, a
director of the Company and President of Magic, is the President and a
principal shareholder of both Connolly-Daw and 1199846.

On September 5, 1997, the Company issued 38,158 shares of the common
stock of the Company and Cdn$65,000 to 1199846 in lieu of the August 31,
1997 payment

39

pursuant to the 1199846 Note.

On August 31, 1998, the Company issued 12,276 shares of its common
stock in lieu of the Cdn$78,133 payment due that date, pursuant to the
Connolly-Daw Note. Similarly, another 36,821 shares of the common stock of
the Company were issued in lieu of the Cdn$234,367 payment due August 31,
1998, pursuant to the 1199846 Note.

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

(d) The Company purchased 51% of the outstanding shares of Interlynx
Multimedia, Inc. effective September 1, 1997. Cross-reference is made to
Interlynx Multimedia Inc. on page 13 in this Form 10-K for further
information.

40

PART IV

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

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

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

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

- ----------
* Page F-1 follows page 45 to this Annual Report on Form 10-K.

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

(b) The Company did not file any Current Reports on Form 8-K during its
fourth fiscal quarter ended August 31, 1998.

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

41

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

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

+Incorporated by reference. See Exhibit Index.

42

SIGNATURES

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

NETWORKS NORTH INC.

Date: November 27, 1998 By: /s/ Peter Rona
-------------------------------------
Peter Rona, President

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

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

/s/ Peter Rona President, Chief Executive November 27, 1998
- ------------------------------ Officer, Principal
Peter Rona Financial and Accounting
Officer, Chairman of the
Board and Director

/s/ Douglas Connolly Director November 27, 1998
- ------------------------------
Douglas Connolly

/s/ Daniel C. Downs Director November 27, 1998
- ------------------------------
Daniel C. Downs

/s/ Dale G. Smith Director November 27, 1998
- ------------------------------
Dale G. Smith

/s/ Lorne C. Stephenson Director November 27, 1998
- ------------------------------
Lorne C. Stephenson

/s/ Adrian P. Towning Director November 27, 1998
- ------------------------------
Adrian P. Towning

/s/ Bart Yabsley Director November 27, 1998
- ------------------------------
Bart Yabsley

43

2.1 Stock Purchase Agreement, dated October 1, 1996, among Connolly-Daw
Holdings Inc., 1199846 Ontario Ltd., Douglas Connolly, Wendy
Connolly and NTN Interactive Network Inc., minus Schedules
thereto................................................+1, Exh. 10.1
3.1 Articles of Incorporation, as amended to date..................p. 59
3.2 By-Laws, as amended to date....................................p. 62
4.1 Specimen Stock Certificate.....................................p. 71
10.1 License Agreement, dated March 23, 1990, between NTN Communications,
Inc. and NTN Interactive Network Inc...................+2, Exh. 10.9
10.2 Stock Purchase Agreement, dated as of October 4, 1994, between NTN
Canada and NetStar Enterprises Inc. (formerly, Labatt Communications
Inc.).....................................................+3, Exh. A
10.3 Option, dated as of October 4, 1994, registered in the name of
NetStar Enterprises Inc. (formerly, Labatt Communications
Inc)......................................................+3, Exh. B
10.4 Designation Agreement, dated as of October 4, 1994, among NTN
Canada, Inc., NTN Interactive Network Inc. and NetStar Enterprises
Inc. (formerly Labatt Communications
Inc.).....................................................+3, Exh. C
10.5 Registration Rights Agreement, dated as of October 4, 1994, between
NTN Canada and NetStar Enterprises Inc. (formerly, Labatt
Communications Inc.)......................................+3, Exh. D
10.6 Promissory Note of NTN Interactive Network Inc. registered in the
name of Connolly-Daw Holdings, Inc.....................+1, Exh. 10.2
10.7 Promissory Note of NTN Interactive Network Inc., registered in the
name of 1199846 Ontario Ltd............................+1, Exh. 10.3
10.8 Option Agreement, dated October 1, 1996, among Connolly-Daw
Holdings Inc., NTN Interactive Network Inc. and NTN Canada,
Inc....................................................+1, Exh. 10.5
10.9 Option Agreement, dated October 1, 1996, among 1199846
Ontario Ltd., NTN Interactive Network Inc. and NTN Canada,
Inc....................................................+1, Exh. 10.6
10.10 Registration Rights Agreement, dated October 1, 1996, among NTN
Canada, Inc., Connolly-Daw Holdings Inc. and 1199846 Ontario
Ltd....................................................+1, Exh. 10.4
10.11 Employment Agreement, dated as of August 31, 1994, between NTN
Interactive Network Inc. and Peter Rona...............+4, Exh. 10.11
10.12 Management Agreement, dated October 1, 1996, between
Magic Lantern Communications Ltd. and Connolly-Daw Holdings
Inc...................................................+4, Exh. 10.12
10.13 Employment Agreement, dated October 1, 1996, between Magic Lantern
Communications Ltd. and Douglas Connolly..............+4, Exh. 10.13
10.14 Employment Agreement, dated October 1, 1996, between Magic Lantern
Communications Ltd. and Wendy Connolly................+4, Exh. 10.14
22 List of Subsidiaries..........................................p. 110
23 Business Sector Data..........................................p. 111
27 Financial Data Schedule...........................................++

- ----------

44

+1 All Exhibits so indicated are incorporated herein by reference to the
exhibit listed above in the Company's Current Report on Form 8-K (Date of
Report: October 2, 1996) (File No. 0-18066), filed on October 17, 1996.
+2 All Exhibits so indicated are incorporated herein by reference to the
exhibit listed above in the Annual Report on Form 10-K of NTN
Communications, Inc., for its fiscal year ended December 31, 1990) (File
No. 2-91761-C), filed on April 1, 1991.
+3 All Exhibits so indicated are incorporated herein by reference to the
exhibit listed above in the Company's Current Report on Form 8-K (Date of
Report: October 4, 1994) (File No. 0-18066), filed on October 18, 1994.
+4 All Exhibits so indicated are incorporated herein by reference to the
exhibit listed above in the Company's Annual Report on Form 10-K (Date of
Report: November 27, 1996) (File No. 0-18066), filed on December 16, 1996.
++ Filed electronically pursuant to Item 401 of Regulation S-T.

45

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of
Networks North Inc.

We have audited the accompanying consolidated balance sheets of Networks North
Inc. [formerly NTN Canada, Inc.] and subsidiaries as of August 31, 1998 and 1997
and the related consolidated statements of operations and retained earnings and
cash flows for each of the three years in the period ended August 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Networks North
Inc. and subsidiaries as of August 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended August 31, 1998 in conformity with accounting principles
generally accepted in the United States.

/s/ Ernst & Young LLP

Toronto, Canada,
November 13, 1998. Chartered Accountants

F-1

Networks North Inc.
[formerly NTN Canada, Inc.]

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

1998 1997
$ $
- -----------------------------------------------------------------------------------------------

ASSETS
Current
Cash and cash equivalents 1,001,115 2,421,797
Short-term investments [note 4] 2,042,333 1,705,014
Accounts receivable - trade [net of allowance for doubtful
accounts of $53,000; 1997 - $51,000] 2,668,184 1,547,395
Income taxes receivable 33,174 --
Inventory 308,088 624,828
Prepaid expenses 544,255 419,843
- -----------------------------------------------------------------------------------------------
Total current assets 6,597,149 6,718,877
- -----------------------------------------------------------------------------------------------
Investment in Viewer Services -- 5,758
Property and equipment, net [note 6] 5,785,616 4,754,173
Licenses, net of accumulated amortization [note 3] 290,945 225,046
Goodwill, net of accumulated amortization 3,214,197 2,273,748
Notes receivable [note 5] 160,000 310,000
- -----------------------------------------------------------------------------------------------
16,047,907 14,287,602
===============================================================================================

LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Bank indebtedness [note 7] 145,339 641,000
Accounts payable - trade 1,440,223 1,165,434
Accrued liabilities 588,949 455,110
Income taxes payable [note 8] -- 352,161
Current portion of long-term debt [note 9] 348,803 605,310
- -----------------------------------------------------------------------------------------------
Total current liabilities 2,523,314 3,219,015
- -----------------------------------------------------------------------------------------------
Investment in Viewer Services 36,054 --
Long-term debt [note 9] 2,744,991 2,126,076
Less current portion (348,803) (605,310)
- -----------------------------------------------------------------------------------------------
2,432,242 1,520,766
- -----------------------------------------------------------------------------------------------
Deferred income taxes [note 8] 59,173 59,173
- -----------------------------------------------------------------------------------------------
Total liabilities 5,014,729 4,798,954
- -----------------------------------------------------------------------------------------------
Commitments and contingent liability [notes 10 and 14]
Shareholders' equity
Share capital [note 11]
900,000 preferred shares [1997 - 950,000] 10,917 11,523
2,625,170 common shares [1997 - 2,441,992] 162,484 150,211
Capital in excess of par value 8,837,948 7,923,150
Retained earnings 2,021,829 1,403,764
- -----------------------------------------------------------------------------------------------
Total shareholders' equity 11,033,178 9,488,648
- -----------------------------------------------------------------------------------------------
16,047,907 14,287,602
===============================================================================================

See accompanying notes

On behalf of the Board:

Director Director

F-2

Networks North Inc.
[formerly NTN Canada, Inc.]

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

Years ended August 31

1998 1997 1996
$ $ $
- --------------------------------------------------------------------------------------------------------------

REVENUE
Program content services 4,134,839 3,932,912 3,520,814
Equipment rental 1,710,451 1,642,305 959,153
Event programming 602,571 434,965 409,722
Maintenance 827,448 539,349 476,533
Equipment sales 55,151 144,748 148,330
Advertising sponsorship 442,424 246,090 198,989
Video and software sales 5,456,738 2,277,768 --
Video dubbing 747,138 399,082 --
Other 795,212 734,470 604,710
- --------------------------------------------------------------------------------------------------------------
14,771,972 10,351,689 6,318,251
- --------------------------------------------------------------------------------------------------------------

COST OF SALES [does not include depreciation]
Equipment 89,287 258,701 298,243
Commissions [note 10] 2,136,659 1,757,922 1,549,729
Video and software 2,212,985 797,636 --
Video dubbing 620,642 212,072 --
Other 455,668 369,567 375,944
- --------------------------------------------------------------------------------------------------------------
5,515,241 3,395,898 2,223,916
- --------------------------------------------------------------------------------------------------------------

EXPENSES
Selling, general and administrative 6,591,941 4,786,519 2,642,853
Bad debts 43,123 48,284 54,990
- --------------------------------------------------------------------------------------------------------------
6,635,064 4,834,803 2,697,843
- --------------------------------------------------------------------------------------------------------------
Income before interest, loss from investment, depreciation
and amortization, income taxes and minority interest 2,621,667 2,120,988 1,396,492
Interest and bank charges 137,942 109,834 8,657
Loss from investment in Viewer Services 25,658 32,547 --
Depreciation and amortization 1,310,689 952,145 383,776
- --------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 1,147,378 1,026,462 1,004,059
Provision for income taxes [note 8] 419,084 433,900 463,000
- --------------------------------------------------------------------------------------------------------------
Income before minority interest 728,294 592,562 541,059
Minority interest (110,229) 16,825 --
- --------------------------------------------------------------------------------------------------------------
Net income for the year 618,065 609,387 541,059

Retained earnings, beginning of year 1,403,764 794,377 253,318
- --------------------------------------------------------------------------------------------------------------
Retained earnings, end of year 2,021,829 1,403,764 794,377
==============================================================================================================

Earnings per share [note 13]
Basic $0.24 $0.25 $0.25
Diluted $0.22 $0.23 $0.23
==============================================================================================================

See accompanying notes

F-3

Networks North Inc.
[formerly NTN Canada, Inc.]

CONSOLIDATED STATEMENTS OF CASH FLOWS
[Expressed in Canadian dollars]

Years ended August 31

1998 1997 1996
$ $ $
- -------------------------------------------------------------------------------------------------------------

OPERATING ACTIVITIES
Net income for the year 618,065 609,387 541,059
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Depreciation and amortization 1,310,689 952,145 383,776
Deferred income taxes -- -- 20,000
Imputed interest on non-interest bearing long-term debt 36,346 -- --
Loss from investment in Viewer Services 25,658 32,547 --
Amortization of discount on notes and loans payable 107,286 -- --
Changes in assets and liabilities
Decrease (increase) in short-term investments (337,319) 1,872,137 (1,525,770)
Increase in accounts receivable (1,034,931) (286,008) (99,184)
Decrease (increase) in inventory 316,740 180,134 (75,915)
Decrease (increase) in prepaid expenses (120,464) 253,487 (11,732)
Increase in accounts payable and accrued liabilities 260,060 92,744 251,329
Decrease in deferred revenue (321,452) -- --
Increase (decrease) in income taxes payable/receivable (385,335) 108,197 162,294
- -------------------------------------------------------------------------------------------------------------
Cash provided by (used in) operating activities 475,343 3,814,770 (354,143)
- -------------------------------------------------------------------------------------------------------------

INVESTING ACTIVITIES
Purchase of property and equipment (2,012,543) (1,040,765) (1,171,849)
Increase in licenses (78,401) -- --
Acquisition of Magic Lantern Communications Ltd.
[note 15[b]] -- (1,644,497) --
Decrease (increase) in notes receivable [note 5] -- 221,510 (350,000)
Investment in Viewer Services 16,154 (38,305) --
Acquisition of Image Media Ltd. [note 15[c]] -- (590,000) --
Acquisition of Interlynx Multimedia Inc. [note 15[a]] (380,001) -- --
- -------------------------------------------------------------------------------------------------------------
Cash used in investing activities (2,454,791) (3,092,057) (1,521,849)
- -------------------------------------------------------------------------------------------------------------

FINANCING ACTIVITIES
Bank indebtedness (577,982) (270,489) --
Notes and loans payable 1,309,246 189,857 --
Repayment of notes and loans payable (273,963) -- --
Mortgage payable -- -- (244,223)
Proceeds from exercise of options and warrants 101,465 1,827 799,964
- -------------------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities 558,766 (78,805) 555,741
- -------------------------------------------------------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents
during the year (1,420,682) 643,908 (1,320,251)
Cash and cash equivalents, beginning of year 2,421,797 1,777,889 3,098,140
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year 1,001,115 2,421,797 1,777,889
=============================================================================================================

See accompanying notes

F-4

1. DESCRIPTION OF BUSINESS

Networks North Inc. [the "Company"] was incorporated originally under the name
Triosearch Inc. under the laws of the State of New York on May 12, 1986. On June
9, 1988, the Company changed its name to NTN Canada, Inc., and on March 16,
1998, changed its name to Networks North Inc. The Company is the holding company
for NTN Interactive Network Inc. ["Interactive"], which is a wholly-owned
operating company, and also owns all of the outstanding stock of 3484751 Canada
Inc., a corporation the Company established and incorporated under the Canada
Business Corporations Act on April 20, 1998. 3484751 Canada Inc. was
incorporated for the sole purpose of owning a property, purchased in 1998, on
behalf of the Company, to provide Magic Lantern Communications Ltd. ["Magic"]
with new operating facilities.

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

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

Interactive owns all of the outstanding stock of Magic. Magic, which is involved
in the marketing and distribution of educational video and media resources,
conducts its operations directly and through its wholly-owned subsidiaries,
745695 Ontario Ltd. ["Custom Video"] and B.C. Learning Connection ["BCLC"], its
75% ownership of Sonoptic Technologies Inc. ["STI"] and its ownership of 50% of
the outstanding shares of 1113659 Ontario Ltd. ["Viewer Services"], a joint
venture operated with International Tele-Film Enterprises Ltd.

On September 10, 1997, effective September 1, 1997, Interactive acquired 51% of
the outstanding shares of Interlynx Multimedia Inc. ["Interlynx"]. Interlynx
designs and develops educational and corporate mutimedia, web-based training
programs, CD-ROMs and Web Sites. It conducts its operations directly and through
its 60% ownership of the outstanding shares of Interlynx International Inc.,
which is the marketing and sales arm of Interlynx responsible for the
international brokering of CD-ROM products from developers around the world.

2. ECONOMIC DEPENDENCE

Interactive is dependent upon NTN Communications, Inc. as its sole supplier for
the transmission of program content to the Company's subscribers. In the event
that NTN Communications, Inc., which operates under the going-concern
assumption, terminates the transmission of program content, the Company
believes, but cannot assure, that such services are likely to be continued by
others. As of September 30, 1998, NTN Communications, Inc. had shareholders'
equity of $10,535,000 and working capital of $3,089,000 according to its
unaudited balance sheet included in its quarterly report. NTN Communications,
Inc. has reported a quarterly net loss for September 1998 of $322,000, quarterly
net income for June 1998 of $1,344,000 and a quarterly net loss for March 1998
of $613,000. It reported a net loss for the year ended December 31, 1997 of
$12,457,000. All such amounts are quoted in U. S. dollars [notes 10 and 12].

3. SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

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

F-5

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.

Basis of consolidation

These consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiaries Interactive, Magic and 3484751 Canada Inc., and its
51%-owned subsidiary Interlynx. Viewer Services, the joint venture in which
Magic has a 50% interest, has been recorded as an equity investment. There are
no differences between the carrying amount of the investment and the underlying
equity in the net assets of Viewer Services. All significant intercompany
transactions have been eliminated.

Foreign exchange translation

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

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

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

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

Revenues

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

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

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

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

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

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

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

Cash and cash equivalents

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

Short-term investments

Investments at August 31, 1998 consist of debt securities and marketable equity
securities, while the comparable figure for 1997 consists of money market funds,
debt securities and marketable equity securities. The Company has classified its
portfolio as "trading". Trading securities are bought and held principally for
the purpose of selling them in the near term and are recorded at fair value.
Unrealized gains and losses on trading securities are included

F-6

in the determination of net income for the year. The fair value of these
securities represents current quoted market offer prices.

Inventory

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

Property and equipment

Property and equipment are stated at cost less accumulated depreciation.
Equipment is depreciated using a declining balance rate of 20%. Computer
equipment as well as masters and libraries are depreciated using a declining
balance rate of 30%. Automobiles are depreciated on a straight-line basis over 3
years, buildings on a straight-line basis over 25 years, software on a
straight-line basis over 3 years and rental equipment and leasehold improvements
both on a straight-line basis over 5 years.

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

Licenses and goodwill

Licenses are stated at cost less accumulated amortization. Amortization for the
NTNC license is provided over a 24-year period using the straight-line basis to
December 31, 2015. Accumulated amortization amounted to $100,005 [1997 -
$87,503].

On August 28, 1998, the Company entered into an agreement [the "Players
license"] for $78,401 [U.S.$50,000] with Players Network Inc. ["Players"],
whereby the Company was appointed by Players as the exclusive Canadian
distributor of its products. The Company was also granted the irrevocable
option, by Players, to purchase from treasury, up to 50,000 common shares in the
capital stock of Players, at a purchase price of U.S.$1.75 per share. This
option expires on August 28, 2000. The agreement provides the Company the right
to terminate the agreement for the 30-day period immediately following the end
of the first year of the term of the agreement. In the event the agreement is so
terminated, the Company would receive, from treasury, 50,000 common shares in
the capital stock of Players. Amortization of this license will be provided for
over a 10-year period using the straight-line basis to 2008.

Goodwill is stated at cost less accumulated amortization. Amortization is
provided using the straight-line basis over a period varying from 10 to 20
years, depending on the transaction which generated the goodwill. Accumulated
amortization amounted to $465,208 [1997 - $269,628].

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

Income taxes

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

F-7

Earnings per share

In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share". Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to the Statement 128 requirements.

Employee stock options

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

Recent pronouncements

The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 130, "Comprehensive Income" ["SFAS 130"], No. 131
"Disclosures About Segments of an Enterprise and Related Information" ["SFAS
131"] and No. 133 "Accounting for Derivative Instruments and Hedging Activities"
["SFAS 133"]. SFAS 130 and SFAS 131 will be effective for the Company's August
31, 1999 year end. SFAS 133 will be effective for the Company's August 31, 2000
year end. The Company has not determined the impact, if any, of these
pronouncements on its consolidated financial statements.

4. SHORT-TERM INVESTMENTS

Short-term investments consist of the following:

1998 1997
$ $
- --------------------------------------------------------------------------------
Money market funds -- 236,668
Cash on hand 308,570 --
- --------------------------------------------------------------------------------
Debt securities
U.S. treasury securities 857,632 574,645
Corporate debt securities 863,759 879,026
- --------------------------------------------------------------------------------
Total debt securities 1,721,391 1,453,671
- --------------------------------------------------------------------------------
Margin account 89,345 34,030
Unrealized loss on margin account (76,973) (19,355)
- --------------------------------------------------------------------------------
Net margin account 12,372 14,675
- --------------------------------------------------------------------------------
2,042,333 1,705,014
================================================================================

All investments are held in United States dollars.

At August 31, 1998, the Company held eighteen September 1998 Canadian dollar
futures contracts [1997 - 10 contracts] as a hedge on the U.S. dollar
denominated short-term investments. Each contract represents the right to
purchase $100,000 Canadian at an exchange rate of 0.6648 [1997 - 0.7334] and
therefore short-term investments of U.S.$1,196,640 were hedged at August 31,
1998 [1997 - U.S.$733,400]. The unrealized loss on this hedge was $76,973 at
August 31, 1998 [1997 - $19,355]. These contracts are marked to market with
realized and unrealized gains and losses deferred and recognized in income on a
basis consistent with the trading security.

F-8

5. NOTES RECEIVABLE

Notes receivable consist of the following:

1998 1997
$ $
- --------------------------------------------------------------------------------
Long-term
Connolly-Daw Holdings Inc. 160,000 160,000
Interlynx Multimedia Inc. -- 150,000
- --------------------------------------------------------------------------------
160,000 310,000
================================================================================

The note receivable from Interlynx was eliminated upon consolidation resulting
from the acquisition of Interlynx in 1998 [note 15[a]].

The unsecured note receivable from Connolly-Daw Holdings Inc. ["Connolly-Daw"]
bears interest at the bank's prime rate, calculated and payable monthly, not in
advance. The note is payable on demand, however, the Company does not intend to
call the note within the next fiscal year. The President and Secretary of
Connolly-Daw are the Controller and Chief Executive Officer of Magic. The bank's
prime rate was 7.5% at August 31, 1998.

6. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

1998 1997
--------------------------------------- ---------------------------------------
Net Net
Accumulated book Accumulated book
Cost depreciation value Cost depreciation value
$ $ $ $ $ $
- ------------------------------------------------------------------------------------------------------------------

Land 785,500 -- 785,500 520,500 -- 520,500
Buildings 1,477,051 115,543 1,361,508 1,069,828 67,012 1,002,816
Rental equipment 3,625,880 1,458,854 2,167,026 2,662,200 826,940 1,835,260
Equipment 1,350,391 420,953 929,438 1,088,875 220,728 868,147
Software 54,948 42,501 12,447 54,948 24,185 30,763
Automobiles 51,173 37,997 13,176 51,173 24,777 26,396
Computer equipment 441,051 178,411 262,640 284,694 73,534 211,160
Masters and libraries 325,464 134,193 191,271 268,729 63,509 205,220
Leasehold improvements 78,164 15,554 62,610 55,433 1,522 53,911
- ------------------------------------------------------------------------------------------------------------------
8,189,622 2,404,006 5,785,616 6,056,380 1,302,207 4,754,173
==================================================================================================================

During the year, depreciation of property and equipment was $1,102,607 [1997 -
$782,568; 1996 - $344,908].

7. BANK INDEBTEDNESS

Bank indebtedness consists of the following:

[a] The Company has a demand operating loan facility with a maximum amount of
$500,000 bearing interest at the bank's prime rate. The Company has not
utilized this facility. The bank's prime rate was 7.50% at August 31,
1998.

[b] Interlynx has a demand operating loan facility, with a maximum amount of
$100,000, bearing interest at the bank's prime rate plus 0.75%. At August
31, 1998, the balance outstanding is $64,339. The amount is due on demand
from the Royal Bank of Canada and interest is payable monthly. Interlynx
also has a demand

F-9

installment loan facility with a maximum amount of $85,000. At August 31,
1998, the balance outstanding is $81,000 and bears interest at the bank's
prime rate plus 1%. The amount is due on demand from the Royal Bank of
Canada and is repayable in monthly principal amounts of $2,000 plus
interest. The weighted average interest rate for fiscal 1998 was 7.06%.
The fair value of the demand operating and demand installment loans
approximates the total carrying value of $145,339.

These demand loans are secured by a general security agreement covering
all assets of Interlynx, other than real property, as well as a guarantee
and postponement of claim signed by Interactive, limited to $185,000.

[c] At August 31, 1997, the Company had a demand installment loan which was
initially established to acquire Magic's land and building at Pacific Road
and was due on demand from the Royal Bank of Canada. The debt bore
interest at the bank's prime rate plus 0.5% [1997 - 5.25%] and was
repayable in monthly principal amounts of $1,500 plus interest. The
weighted average interest rate for fiscal 1997 was 5.07%. The fair value
of the demand installment loan approximated the carrying value of
$641,000. During 1998, this installment demand loan was refinanced with a
five year Matched Fund Term Loan [note 9[v]].

8. INCOME TAXES AND DEFERRED INCOME TAXES

The provision for income taxes consists of the following:

1998 1997 1996
$ $ $
- --------------------------------------------------------------------------------
Current
Federal 273,503 282,000 216,800
Provincial 145,581 151,900 116,800
Foreign -- -- 109,400
- --------------------------------------------------------------------------------
419,084 433,900 443,000
- --------------------------------------------------------------------------------
Deferred
Federal -- -- 13,000
Provincial -- -- 7,000
- --------------------------------------------------------------------------------
-- -- 20,000
- --------------------------------------------------------------------------------
419,084 433,900 463,000
================================================================================

The difference between the provision for income taxes and the amount computed by
applying the combined basic federal and provincial income tax rate of 44.6%
[1997 - 44.6%; 1996 - 44.6%] to income before income taxes is as set out below:

1998 1997 1996
$ $ $
- --------------------------------------------------------------------------------
Statutory rate applied to pre-tax income 511,960 472,318 448,011
Benefit of prior year's losses not
previously recognized (77,537) (87,086) (11,632)
Expenses not deductible for tax purposes 105,414 44,735 6,802
Non-taxable accounting income (154,810) -- --
Other 34,057 3,933 19,819
- --------------------------------------------------------------------------------
419,084 433,900 463,000
================================================================================

As at August 31, 1998, the Company's deferred tax assets primarily related to
the benefit of realizing losses carried forward, net of a valuation allowance of
$558,000 [1997 - $355,000], was nil, and the deferred tax liability
substantially related to property and equipment was $59,173 [1997 - $59,173].

F-10

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

At September 1, 1997, Interlynx and its subsidiary had aggregate operating
losses of $677,000. The purchase price of Interlynx has not been allocated to
the operating losses since a valuation allowance has been charged against the
entire amount.

Accordingly, when realized, the tax benefit of the unrecognized loss
carryforwards will be applied to reduce goodwill related to the acquisitions of
Magic and Interlynx.

At August 31, 1998, certain subsidiaries of the Company have loss carryforwards
of $1,250,000. These losses begin to expire in 1999.

During fiscal 1998, 1997 and 1996, the Company paid income taxes of $795,669,
$343,608 and $277,334, respectively.

9. LONG-TERM DEBT

Long-term debt consists of the following:

1998 1997
$ $
- --------------------------------------------------------------------------------
Loans payable
Provincial Holdings Ltd. ["PHL"] [i] 750,000 750,000
Less unamortized discount -- (43,980)
- --------------------------------------------------------------------------------
750,000 706,020
Business Development Bank of Canada [ii] -- 144,000
Province of New Brunswick ["PNB"] [iii] 19,381 52,381
Atlantic Canada Opportunities Agency
["ACOA"] [iv] 51,010 51,010
Royal Bank of Canada [v] 1,309,246 --
- --------------------------------------------------------------------------------
2,129,637 953,411
- --------------------------------------------------------------------------------

Notes payable
Promissory notes - unsecured principal amount
[note 15] 625,000 1,250,000
Less unamortized discount (47,033) (146,685)
- --------------------------------------------------------------------------------
577,967 1,103,315
Lien notes [vi] 37,387 69,350
- --------------------------------------------------------------------------------
615,354 1,172,665
- --------------------------------------------------------------------------------
2,744,991 2,126,076
================================================================================

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

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

F-11

[ii] The Business Development Bank of Canada loan was repaid in 1998. The loan
bore interest at 9.75% and was repayable in monthly principal amounts of
$4,000 plus interest. The interest rate was fixed until March 2000. The
loan was secured by a charge over the assets of the Company. It was
subject to priority and subordination agreements between the Company, the
Business Development Bank of Canada and the Royal Bank of Canada. The fair
value of this loan at August 31, 1997 was $152,304.

[iii] In June 1995, PNB advanced $100,000 to STI. The loan is subject to a loan
agreement dated May 25, 1995 and is secured by a demand promissory note
which bears interest at 9.7% per annum, calculated half period, not in
advance. Subject to a forgiveness agreement outlined below, the principal
plus interest is repayable at the earlier of [a] January 31, 1998 or
earlier at the option of STI or [b] any breach of STI's obligations under
the loan agreement. No interest or principal repayments have been made and
PNB has not demanded any payments. It is anticipated that PNB will amend
the forgiveness agreement by reducing the number of full-time employees
required and extending the period during which they must be employed.

A forgiveness agreement dated May 24, 1995 provides that the principal
plus interest may be forgiven in whole or in part, the amount dependent
upon STI's number of full-time employees during the 1997 calendar year. An
amount of $80,619 is included as forgiven in these consolidated financial
statements, being a proportionate amount for the period from January to
December 1997. The recorded loan approximates the fair value of the debt
at August 31, 1998.

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

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

The loan is secured by a fixed debenture of $1,000,000, hypothecated to
Magic's land and buildings, a guarantee and postponement of claim of
$650,000 signed by Magic, a collateral first mortgage in the amount of
$490,000 covering the property at 10 Meteor Drive, and a general security
agreement covering all the assets of Interactive, other than real
property.

[vi] The lien notes are secured by charges against certain capital assets held
by Magic and are repayable in monthly blended payments of principal and
interest. Interest rate on the remaining lien note is 13%. The carrying
value of the lien notes approximates the fair value of the debt at August
31, 1998. Approximate annual principal payments required pursuant to these
obligations are as follows:

$
--------------------------------------------------------------------------
1999 22,209
2000 24,328
--------------------------------------------------------------------------
46,537
Less deferred interest 9,150
--------------------------------------------------------------------------
37,387
==========================================================================

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

F-12

$
--------------------------------------------------------------------------
1999 332,692
2000 340,953
2001 50,276
2002 802,926
2003 and thereafter 1,180,757
==========================================================================

During fiscal 1998, 1997 and 1996, the Company paid interest of $101,596,
$46,528 and $8,657, respectively.

10. COMMITMENTS

[a] Commissions expense to NTN Communications, Inc.

Commissions paid to NTN Communications, Inc. are recognized when the
related revenues are earned at the rate of U.S. $2,205 per year per
subscriber [note 12].

[b] Commissions expense

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

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

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

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

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

[c] Lease commitments

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

Vehicles $
--------------------------------------------------------------------------
1999 19,832
2000 8,785
2001 3,661
--------------------------------------------------------------------------
32,278
==========================================================================

Office equipment $
--------------------------------------------------------------------------
1999 30,584
2000 30,584
2001 10,495
--------------------------------------------------------------------------
71,663
==========================================================================

F-13

Premises $
--------------------------------------------------------------------------
1999 113,302
2000 104,608
--------------------------------------------------------------------------
217,910
==========================================================================

Operating lease expenses were $190,792 for 1998, $82,525 for 1997, and
$17,808 for 1996.

[d] Redemption of shares of subsidiary

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

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

As at August 31, 1998, the value of the shares, if redeemed, totaled a
nominal amount.

11. SHARE CAPITAL AND WARRANTS

[a] Authorized shares

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

[b] Issued and outstanding shares

As at August 31, 1998, 900,000 preferred shares [1997 and 1996 - 950,000
preferred shares] with a paid-up amount of $10,917 [1997 and 1996 -
$11,523] were issued and outstanding. During 1998, 50,000 preferred shares
were converted to 10,714 common shares.

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

F-14

Common shares
----------------------- Capital in excess
Number Amount of par value Total
# $ $ $
--------------------------------------------------------------------------------------------------

Issued and outstanding as at
August 31, 1995 2,056,145 125,573 7,145,997 7,271,570
Issue of common shares through
private placement [i] 134,886 8,615 (8,615) --
Exercise of 167,000 warrants 250,500 15,999 783,965 799,964
--------------------------------------------------------------------------------------------------
Balance as at August 31, 1996 2,441,617 150,187 7,921,347 8,071,534
Exercise of 375 stock options 375 24 1,803 1,827
--------------------------------------------------------------------------------------------------
Balance as at August 31, 1997 2,441,992 150,211 7,923,150 8,073,361
Payment on promissory notes [ii] 87,255 6,066 553,934 560,000
Interlynx acquisition [note 15[a]] 55,209 3,570 261,430 265,000
Conversion of preferred shares 10,714 606 -- 606
Exercise of 30,000 stock options 30,000 2,031 99,434 101,465
--------------------------------------------------------------------------------------------------
Balance as at August 31, 1998 2,625,170 162,484 8,837,948 9,000,432
==================================================================================================

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

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

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

[ii] The consideration for the acquisition of Magic [note 15[b]] included
promissory notes with a maturity value of $1,250,000. Under the
terms of the purchase agreement, the Company elected to issue common
shares as payment against $560,000 of these notes.

[c] Number of outstanding warrants

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

[d] Long-Term Incentive Plan

The Company has adopted a Long-Term Incentive Plan [the "Plan"] designed
to compensate key employees of the Company for the performance of their
corporate responsibilities. The benefits to employees under the Plan are
dependent upon improvement in market value of the Company's common shares.
The Plan offers selected key employees the opportunity to purchase common
shares through the exercise of a stock option. An option entitles the
employee to purchase common shares from the Company at a price determined
on the date the option is granted. The option exercise price is the
closing trading price of the stock on the day prior to the grant date. The
options vest over a two-year period from the grant date, 50% after one
year and 50% at the end of the second year. The options expire five years
after the grant date. The Plan also provides that selected key employees
may receive common shares as an award of Restricted Stock. Restricted
Stock consists of common

F-15

shares that are awarded subject to certain conditions, such as continued
employment with the Company or an affiliate for a specified period. Up to
1,000,000 common shares may be issued under the Plan.

The following is a summary of outstanding stock options:

Weighted average
exercise price Total
U.S.$ #
- --------------------------------------------------------------------------------
Issued and outstanding as at August 31, 1995 186,429
Issued 3.55 116,250
Expired 5.83 (21,429)
- --------------------------------------------------------------------------------
Balance as at August 31, 1996 281,250
Issued 4.82 85,500
Forfeited 3.50 (3,375)
Exercised 3.50 (375)
- --------------------------------------------------------------------------------
Balance as at August 31, 1997 363,000
Issued 4.00 156,500
Forfeited 4.40 (29,500)
Exercised 2.33 (30,000)
- --------------------------------------------------------------------------------
Balance as at August 31, 1998 460,000
================================================================================

Exercise price Expiry date Total
U.S. $ [i] #
- --------------------------------------------------------------------------------
3.00 January 10, 1999 7,500
3.00 October 5, 1999 75,000
3.00 November 23, 1999 30,000
3.00 April 6, 2000 15,000
3.00 November 20, 2000 97,500
3.00 April 29, 2001 4,500
3.00 November 25, 2001 73,500
3.00 April 8, 2002 4,500
3.00 November 17, 2002 152,500
- --------------------------------------------------------------------------------
Balance as at August 31, 1998 460,000
================================================================================

[i] Repriced options

At a meeting of the Company's Board of Directors on July 10, 1998, the
Board determined that it was in the best interests of the Company to offer
the holders of options, pursuant to the Company's Long-Term Incentive
Plan, a reduction in the exercise price of outstanding options to $3.00
per share if the option holders agreed not to exercise such options for at
least six months after the repricing. Option holders were given the choice
of keeping their existing option pricing in lieu of agreeing not to
exercise such options for six months. All option holders chose to receive
repriced options. Accordingly, at August 31, 1998, none of the options are
exercisable. The reprice option exercise amount is the closing trading
price of the Company's stock on July 9, 1998.

Of the 460,000 outstanding stock options, 385,000 [1997 - 253,500]
restricted common shares are issuable upon the exercise of the stock
options outstanding in the above table. Non-restricted common shares are
issuable for the remaining options outstanding. Effective September 2,
1998 all outstanding stock options and restricted common shares were
registered. Therefore, after September 2, 1998 the exercise of any stock
options will result in the issue of non-restricted common shares.

F-16

The weighted average fair value of options granted during 1998 was U.S.
$1.21 [1997 - U.S. $2.56; 1996 - U.S.$1.34].

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

Pro forma information regarding net income and earnings per share is
required by FAS 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
that statement. The fair value for these options was estimated at the date
of grant using a Black-Scholes option valuation model with the following
weighted average assumptions for 1998 and 1997: risk-free interest rate of
5.47% [1997 - 3.0%]; dividend yield of 0% [1997 - 0%]; volatility factor
of 0.709 [1997 - 0.522]; and a weighted average expected life of the
options of 3 years [1997 - 3 years].

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

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

1998 1997
$ $
- --------------------------------------------------------------------------------
Pro forma net income 264,011 428,657
- --------------------------------------------------------------------------------
Pro forma earnings per share
Basic 0.10 0.16
Diluted 0.09 0.15
- --------------------------------------------------------------------------------

The pro forma net income reflects only options granted in 1998, 1997 and
1996. Therefore, the full impact of calculating compensation expense for
options under FAS 123 is not reflected in the pro forma net income since
compensation expense is reflected over the option vesting periods and
compensation expense for options granted prior to September 1, 1995 is not
considered.

12. AGREEMENTS WITH NTN COMMUNICATIONS, INC.

Pursuant to an agreement dated March 23, 1990 and in consideration for the
services granted to it, Interactive pays to NTN Communications, Inc. the amount
of U.S.$2,205 per year per User Agreement executed by Interactive for every year
of each User Agreement. Interactive also pays NTN Communications, Inc. a royalty
fee equal to 25% of the net revenues as defined in the agreement derived from
all services except for certain hospitality and Special Projects that existed at
March 23, 1990; a royalty fee equal to the Production Quotation submitted by NTN
Communications, Inc. plus 10% of the gross profit of Special Projects [special
broadcasts for a non-continuous selective event]; and a one-time royalty fee
equal to NTN Communications, Inc.'s production costs for any new programming
developed by Interactive to be added to the existing programming schedule. The
agreement expires on December 31, 2015.

Total amounts expensed in the year under these agreements were $1,792,002 [1997
- - $1,757,718; 1996 - $1,339,263].

F-17

13. EARNINGS PER SHARE

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

1998 1997 1996
- --------------------------------------------------------------------------------
Numerator
Net income [numerator for basic
earnings per share] $618,065 $609,387 $541,059
Imputed interest on non-interest bearing
long-term debt $36,346 $63,306 --
Numerator for diluted earnings per share $654,411 $672,693 541,059

Denominator
For basic weighted average number of shares 2,550,805 2,441,992 2,144,175

Effect of dilutive securities
Convertible preferred shares 196,673 203,571 203,571
Convertible promissory notes 147,290 185,448 --
Employee stock options 28,000 49,687 36,723

Denominator for diluted earnings per share -
adjusted weighted average number of
shares and assumed conversions 2,922,768 2,880,698 2,384,469

Basic earnings per share $0.24 $0.25 $0.25

Diluted earnings per share $0.22 $0.23 $0.23
- --------------------------------------------------------------------------------

Options to purchase 460,000 shares of common stock at $3.00 per share were
outstanding during 1998, but were not included in the computation of diluted
earnings per share because the exercise price of the options was greater than
the average market price of the common shares, and therefore the effect would be
anti-dilutive.

14. CONTINGENT LIABILITY

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

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

Revenue Canada is currently in discussions with the Company regarding a
potential liability with respect to withholding tax on certain amounts paid to
Communications. No assessment has been made to date by Revenue Canada.
Management believes that it has valid defenses with respect to these matters and
accordingly, no amount has been recorded in these consolidated financial
statements. In the event that such matters are settled in favour of Revenue
Canada, the amounts could be material and would be recorded in the period in
which they become determinable.

F-18

15. BUSINESS ACQUISITIONS

[a] Interlynx Multimedia Inc.

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

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

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

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

The following unaudited pro forma information for the acquisition of
Interlynx has been prepared as if this acquisition had occurred on
September 1, 1996. The information is based on historical results of the
separate companies and may not necessarily be indicative of the results
which may occur in the future. The pro forma information includes the
expense for amortization of goodwill resulting from this transaction, but
does not reflect any synergies or operating cost reductions that may be
achieved from the combined operations.

Year ended
August 31, 1997
$
--------------------------------------------------------------------------
Revenue 10,611,413
Income before amortization of goodwill 442,808
Income after amortization of goodwill 386,007
Earnings per share - diluted 0.13
==========================================================================

[b] Magic Lantern Communications Ltd.

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

$
--------------------------------------------------------------------------
Goodwill 2,219,623
Net assets purchased (575,126)
Acquisition costs capitalized (91,182)
--------------------------------------------------------------------------
Total purchase price 1,553,315
==========================================================================

The excess of cost over tangible assets acquired of $2,219,623 was
allocated to goodwill, which is being amortized over twenty years.

F-19

The purchase price was satisfied by $450,000 in cash and the issue of two
non-interest bearing promissory notes with a maturity value of $1,250,000.
The first promissory note of $703,133 is repayable by cash payments of
$78,133 on August 31, 1998, $312,500 on August 31, 1999 and $312,500 on
August 31, 2000. Notwithstanding the foregoing, the Company has the right
to elect up until June 30, 1998 to issue common shares in lieu of the
aforesaid payments as follows: 12,276 shares on August 31, 1998, 49,097
shares on August 31, 1999 and 49,096 shares on August 31, 2000. Should the
Company not elect to deliver common shares, the noteholder has the right,
exercisable between July 1, 1998 and July 31, 1998, to require the Company
to issue the common shares as described. The balance due of $78,133 on
August 31, 1998 was satisfied by the issuance of 12,276 common shares
[note 11[b]]. The fair value of this promissory note approximates its
carrying value.

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

The second promissory note of $546,867 is payable by cash payments of
$312,500 on August 31, 1997 and $234,367 on August 31, 1998.
Notwithstanding the foregoing, the Company has the right to elect up until
June 30, 1997 to issue common shares in lieu of the aforesaid payments as
follows: 49,097 shares on August 31, 1997 and 36,821 shares on August 31,
1998. The balance due of $312,500 on August 31, 1997 was satisfied by the
payment of $65,000 and the issuance of 38,158 common shares on September
5, 1997. The balance due of $234,367 on August 31, 1998 was satisfied by
the issuance of 36,821 common shares [note 11[b]]. The fair value of this
promissory note approximates its carrying value.

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

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

[c] Image Media Ltd. and Pilot Software

Effective August 18, 1997, the Company acquired certain of the business
assets of Image Media Ltd. and 802117 Ontario Inc., operating as Pilot
Software, for cash of $590,000. This acquisition was recorded using the
purchase method of accounting and, accordingly, the purchase price has
been allocated as follows:
$
--------------------------------------------------------------------------
Equipment 481,000
Goodwill 45,000
Inventory 37,000
Sundry receivable 27,000
--------------------------------------------------------------------------
590,000
==========================================================================

16. SEGMENTED INFORMATION

The Company operates in the interactive television entertainment and educational
and multimedia distribution industries. Business segment information for the
years ended August 31, 1998 and 1997 is as follows:

F-20

Interactive Educational and
television multimedia 1998
entertainment distribution Total
$ $ $
- --------------------------------------------------------------------------------
Total revenue 8,350,166 6,421,806 14,771,972
Operating income 1,118,039 29,339 1,147,378
Identifiable assets 4,887,935 4,451,382 9,339,317
Corporate assets 4,794,976 1,913,614 6,708,590
Capital expenditures 1,787,043 225,500 2,012,543
Depreciation and amortization 784,113 526,576 1,310,689
Loss from equity investment -- (25,658) (25,658)
- --------------------------------------------------------------------------------

Interactive Educational and
television multimedia 1997
entertainment distribution Total
$ $ $
- --------------------------------------------------------------------------------
Total revenue 7,535,537 2,816,152 10,351,689
Operating income 964,052 62,410 1,026,462
Identifiable assets 3,893,824 3,452,415 7,346,239
Corporate assets 5,319,009 1,622,354 6,941,363
Capital expenditures 866,981 654,784 1,521,765
Depreciation and amortization 602,773 349,372 952,145
Loss from equity investment -- (32,547) (32,547)
- --------------------------------------------------------------------------------

Total revenue by industry segment is net of intersegment sales which were
immaterial. Operating income is equal to income before income taxes and minority
interest, and includes deductions for items such as interest and depreciation
and amortization. Identifiable assets by industry are those assets used in the
Company's operations in each industry. Corporate assets are principally cash and
cash equivalents, short-term investments and intangible assets. The Company has
a 50% interest in Viewer Services, whose operations are vertically integrated
with the Company's operations in the educational and multimedia distribution
segment. This investment is being accounted for on the equity basis. The
Company's equity in the net loss of Viewer Services was $25,658 [1997 -
$32,547], while investment in the net assets of Viewer Services was ($36,054)
[1997 - $5,758].

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

17. RELATED PARTY TRANSACTIONS

During 1997, the Company had sales of $157,500 to and purchases of $100,000 from
corporations controlled by a shareholder. There were no similar transactions in
1998.

Included in accounts receivable is approximately $181,000 of amounts due from
employees and shareholders. The amounts are due on demand and non-interest
bearing.

18. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS

The 1997 and 1996 comparative consolidated financial statements have been
reclassified from statements previously presented to conform to the presentation
of the 1998 consolidated financial statements.

F-21