(1) On December 6, 2001, we effected a 20 for 1 reverse split of our common stock, as a result all stock prices have been adjusted on a post-split basis.

On July 25, 2002, the closing price for the common stock as reported by the quotation service operated by the Pink Sheets LLC was $0.30.

As of July 25, 2002, there were approximately 58 holders of record of our common stock. As of such date, 4,308,605 common shares were issued and outstanding.

We currently intend to retain any earnings for use in our business and we do not anticipate paying any cash dividends on our capital stock in the foreseeable future.

We did not issue any unregistered securities during the quarter ended December 31, 2001.

The selected consolidated financial data presented below for the four years ended December 31, 2001 is derived from our consolidated financial statements which were examined by our independent auditor. The information set forth below should be read in conjunction with our Consolidated Financial Statements (including related notes thereto) and "Management's Discussion and Analysis of Financial Condition and Results of Operations". The data is presented in United States dollars.

Fiscal Year Ended December 31

The assets of Online Films, LLC are included in the total assets. The loss from continuing operations includes the losses of Online Films, LLC since October 1, 1999.

This annual report contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled "Risk Factors", that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

The following discussion should be read in conjunction with our audited consolidated financial statements and the related notes that appear elsewhere in this annual report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this annual report, particularly in the section entitled "Risk Factors".

InternetStudios.com, Inc. was incorporated in the State of Nevada on April 14, 1998 under the name The Enterprise, Inc. For a period of time, prior to December 14, 1998, we were engaged in the word processing business. We changed our name to eHealth.com, Inc. in anticipation of acquiring a license to software technology for the health industry. This acquisition was not completed. Effective September 21, 1999 we changed our name to InternetStudios.com, Inc. Since that date, InternetStudios has been in the business of providing web-based solutions for the entertainment industry. We own a proprietary online platform and database to transact film and television rights. With this technology, we have focused on the development and marketing of our website at www.onlinefilmandtvsales.com which has complete transactional capabilities for the licensing of filmed entertainment.

Through our online platform, www.onlinefilmandtvsales.com, we provide an enterprise solution complete with transactional capabilities for the licensing of filmed entertainment, complementary technology to track such transactions, and relevant and timely industry data and information. This yields multiple revenue streams including:

We are still in our infancy as a viable commercial entity and consequently our focus over the past three years has been on the identification of market needs, development of our technology and product, www.onlinefilmandtvsales.com, and the branding of our company and product. We believe that we will generate increased revenue over the next three fiscal years due to the recent release of the upgraded onlinefilmandtvsales.com website. In addition, we plan to hire an experienced sales and marketing team to develop and enhance our sales and marketing program. These individuals will focus on increasing traffic and volume at the site. We expect that initial revenue growth will be reflected in the third and fourth quarters of 2002. We also anticipate a further increase in revenues in fiscal 2003 and 2004, which we expect will result from partnering arrangements with large corporate organizations. We anticipate that the expected growth in revenues may enable us to attract additional financi ng to allow us to add the needed resources to further support the growth of our operations. Despite our expectations, there are no assurances that our estimated revenue growth can be achieved. Should we be unable to achieve the anticipated revenue growth, our business and future success may be adversely affected.

RESULTS OF OPERATIONS

The discussion set forth below relating to results of operations pertains to the comparison of the fiscal year ended December 31, 2001 and the period from April 1998 (incorporation) to December 31, 2000.

REVENUES. InternetStudios has recognized revenues to date of $220,921, all of which are from operating revenues sources. We recognize revenue from our customers listing material on the OFTVS website as well as revenues from transactions consummated by buyers and sellers using the OFTVS system.

COST OF REVENUES. InternetStudios has currently not recognized significant revenues to date, and therefore has not allocated any significant amounts to cost of revenues. Once InternetStudios' revenues increase, cost of revenues will primarily consist of costs associated with marketing, customer service activities, and server and network operations, and to a lesser extent, bank and escrow processing charges on fees earned on transactions, Internet connection charges, depreciation of server and network equipment and allocation of overhead.

ADVERTISING AND MARKETING EXPENSES. Costs related to InternetStudios' advertising and marketing efforts are currently classified as general and administrative expenses. InternetStudios' advertising and marketing expenses consist mainly of advertising expenses, creative development and promotional costs and commissions, and compensation for advertising and marketing personnel. The majority of these costs were directed to programs designed to build brand name recognition, attract filmed entertainment companies and individuals to InternetStudios' websites, and to attract motion pictures and television programming for listing on the OnlineFilmandTVSales.com web site.

WEBSITE AND DEVELOPMENT EXPENSES. These expenses consist primarily of payroll and related expenses for development in network operations personnel and consultants, cost related to modifications, enhancement and new operations to enhance our websites. Website development costs as of December 31, 2000 were $9,536,992 of which $2,639,668 were capitalized under EITF 00-02 and $4,750,000 were recorded as a non-cash cost related to stock based compensation. At December 31, 2001 website development costs were $16,281, none of which were capitalized under EITF 00-02. InternetStudios expects to incur additional website development and maintenance expense in the future.

GENERAL AND ADMINISTRATIVE EXPENSES. InternetStudios' general and administrative expenses consist primarily of salaries and related costs for general and corporate functions, including finance, accounting, facilities and fees for legal and other professional services. InternetStudios' general and administrative expenses, excluding website development costs, for the period from inception and ended December 31, 2000 were $22,013,775 of which $10,925,152 were non-cash related to stock based compensation. At December 31, 2001 these costs were $4,852,157.

SUMMARY

Presently, we have no significant sources of revenue. We have incurred operating losses since inception. The continuation of our business is dependent upon the continuing financial support of our creditors and stockholders, obtaining further financing, successful and sufficient market acceptance of updated versions of our existing services and achieving a profitable level of operations. There are, however, no assurances we will be able to generate further funds required for our continued operations. Accordingly, our consolidated financial statements contain note disclosures describing the circumstances that lead there to be doubt over our ability to continue as a going concern. In their report on the consolidated financial statements, our independent auditors included an explanatory paragraph regarding our ability to continue as a going concern.

LIQUIDITY AND CAPITAL RESOURCES

From inception, InternetStudios has financed its operations entirely from private placements. On December 31, 2001, InternetStudios had no cash or cash equivalents. Since inception, InternetStudios has had negative cash flows from operating activities in each fiscal and quarterly period to date.

Net cash used in operating activities was $17,826,035 for the period from inception and ended December 31, 2000, and $18,182,843 for the period ended December 31, 2001.

As of March 29, 2000, 950,000 shares of common stock were issued for $10 per share to an unrelated third party, U.S.-based investor. This offering was done pursuant to Regulation D. As of April 5, 2000, an additional 480,000 shares of common stock were issued for $10 per share to four unrelated third party, non U.S. investors for a total offering price of $4,800,000. This offering was done pursuant to Regulation S. As of April 10, 2000, an additional 15,000 shares of common stock were issued for $10 per share to an unrelated third party non U.S. investor. A finder's fee of 4% was paid pursuant to this offering.

In February 2001, we received loans from nine individual lenders in the aggregate principle amount of $199,158.66, pursuant to convertible note purchase agreements between our company and each of the lenders. Each loan was evidenced by a convertible grid promissory note that bears no interest and is repayable on demand. These loans were made with the agreement that if our company could not repay the loans from any future equity financings the loans would be convertible into share of our common stock at a price to be negotiated upon notice of conversion. These transactions were effected in accordance with Regulation S under the Securities Act of 1933, as amended.

On February 19, 2001, we received funding from an unrelated third party in the form of a secured loan in the amount of $425,000. This same unrelated third party loaned our company an additional $30,000 on April 20, 2001.

Throughout the third and fourth quarters of 2001, our management loaned funds to interim finance the corporate activities of InternetStudios. Additionally, one executive officer of our Company repaid $104,908 of monies loaned from the Company.

As shown in our financial statements, we have sustained substantial losses from operations since inception. As of the date of this annual report, we have utilized substantially all of our available funding. Our continuation as a going concern will depend on our ability to raise additional capital. No assurance can be given that we will be able to raise additional funds. In the absence of such funds, we will be required to cease operations.

In accordance with our original business plan, we were required to make a significant investment in technology and website development. In addition, the plan called for the necessary investments to market our company and our services to brand our company globally. Website development was substantially completed in October 2000. Revenues derived from implementation of our platform commenced in the fourth quarter of 2000.

Our management has taken steps to revise and reduce our operating requirements, which we believe will be sufficient to assure continued operations and implementation of our plans. These steps include expense reduction in staffing, marketing and consulting, as well as a significant decrease in operating costs as a result of completion of Web developments activities. We are also in the process of securing additional capital through equity transactions, which will be required in order to continue operations.

Given our limited operating history, operating losses and other factors set out above, there can be no assurance that we will be able to achieve our goals and develop a sufficiently large user base of our website to be profitable. Management intends to raise debt and equity capital as needed on a private placement basis to finance the operating and capital requirements of our company. In addition, management expects cash flow from operations to increase over the next year. It is management's intention to continue to finance planned capital expansion and continued development in the e-marketplace and Internet website business. These factors raise substantial doubt about our company's ability to continue as a going concern as described in an explanatory paragraph to our independent auditors' report on the December 31, 2001 audited financial statements. The future of our company will depend upon our ability to obtain adequate financing and continuing support from stockholders and creditors an d to achieve and maintain profitable operations. To the extent that we cannot achieve our plans and generate revenues which exceed expenses on a consistent basis and in a timely manner, our business, results of operations, financial condition and prospects would be materially adversely affected.

In the event that our plans or assumptions change or prove inaccurate (due to delays in development, the inability to sign any significant sales agreements or generate revenues, unfavorable economic conditions, or other unforeseen circumstances), there can be no assurance that such additional financing would be available to us, or if available, that the terms of such additional financing will be acceptable to us.

Future Cash Requirements

We expect that the release of our revamped website services will lead to an increase in revenues in fiscal 2002. We expect that further development and marketing of the service combined with the planned introduction of new services in late 2002, will lead to increased revenues in 2003 and 2004. Although we expect to see an increase in revenues in 2002, we do not anticipate this to materialize until the third and fourth quarter of fiscal 2002. Consequently we required approximately $200,000 over the period ended July 25, 2002 to accomplish our goals. We estimate that approximately $375,000 is required to the end of fiscal 2002, $100,000 of which is required to hire sales and marketing persons and to implement our sales and marketing program. The balance of $275,000 will be required to support general corporate expenses, including expenses in connection with the engaging of both senior and intermediate management personnel and other general operating expenses. We intend to receive the balanc e of the cash requirements through private placements or by debt financing.

Plan of Operation

Our primary objective over the twelve months ending December 31, 2002 will be to implement an aggressive sales and marketing program in connection with the OnlineFilmandTVSales.com website service. We plan to achieve a critical mass of product listing for buyers and sellers to transact business using OFTVS technology as well as offer "private-label" enterprise solutions for larger industry players through the customization of the OFTVS platform.

Our strategy is to continue to enhance www.onlinefilmandtvsales.com's functionality through new feature development to meet the continually changing requirements of our customers. At the same time, we plan to complete development of an off-line filmed entertainment catalogue management system, which communicates with the OFTVS software. Additionally, we intend to assemble a major library of filmed content by expanding the number of copyrights and distribution rights that InternetStudios owns, represents or brokers, which will generate growth and annuity income.

SALES AND MARKETING

Since the acquisition of Online Films, InternetStudios' management team has focused on marketing and public relations efforts to attract vendors to list their filmed entertainment rights on the OnlineFilmandTVSales.com website. InternetStudios believes that much of the awareness of the OnlineFilmandTVSales.com website will be generated by attendance at film festivals, entertainment industry forums and other events.

InternetStudios intends to generate additional brand awareness from specific promotional activities such as:

InternetStudios expects to hire sales personnel as demand increases.

To date, InternetStudios has used a combination of online and offline advertising to generate awareness of InternetStudios and OFTVS. This expense was significant in fiscal 2001 as we built brand awareness in the industry. However, this type of expense will be reduced in 2002-2003 as industry acceptance is achieved. In 2002, we intend to establish a customer relations center that will assist clients of OFTVS as well as aggressively market programming on the system to end-users worldwide.

In addition, we intend to focus on a number of key initiatives in order to increase the revenues in the digital marketplace:

Assuring a strong presence at film festivals, entertainment industry forums and other events to service existing clients and sign new contracts and register new buyers will generate ongoing awareness of the OnlineFilmandTVsales.com Web site. Our executives intend to provide sales and marketing expertise and the most comprehensive information and complete catalogue of film and TV product in the world.

EMPLOYEES

As of July 25, 2002, InternetStudios had 6 full time employees with 4 in the area of corporate administration and 2 in sales and marketing. We also have 7 independent contractors providing product development services, management consulting services and capital raising services. Over the 12 months ending December 31, 2002, we plan to expand our total number of permanent employees in these same departments as required.

PURCHASE OR SALE OF EQUIPMENT

We do not anticipate that we will spend any significant amount on equipment for our present or future operations over the twelve months ending December 31, 2002. However, we will continue to purchase computer hardware and software, as needed, for our ongoing operations.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS No. 133 requires companies to recognize all derivatives contracts as either assets or liabilities on the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (I) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS No. 133 was effective for all fiscal quarters of fiscal years beginning after June 15, 2000.

Historically, our company has not entered into derivatives contracts either to hedge existing risks or for speculative purposes. Accordingly, adoption of the new standards on January 1, 2001 did not affect our consolidated financial statements.

In June 2001, the Financial Accounting Standards Board ("FASB") finalized SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that we recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that we reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141.

SFAS 142 requires, among other things, that companies no longer amortise goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that we identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible asset, and cease Amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires us to complete a transitional goodwill impairment test six months from the date of adoption. We are also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, is to be applied prospectively.

The implementation of these new standards is not expected to have a material effect on the our consolidated financial statements.

We do not utilize derivative instruments to manage market related risks. We do not have any long-term debt instruments so our company is not subject to market related risks such as interest or foreign exchange on long-term debt. All of our operations are conducted in the United States and thus, we are not exposed to significant risk of currency loss due to fluctuations in the Canadian and U.S. exchange rates.

Selected Quarterly Data

Our financial statements are stated in United States dollars (US$) and are prepared in accordance with United States Generally Accepted Accounting Principles.

The following consolidated financial statements are filed as part of this annual report:

1205 - 1095 West Pender Street
Vancouver, B.C. Canada
V6E 2M6
Telephone (604) 682-2778
Facsimile (604) 689-2778
Email rjl@labonteco.com

To the Stockholders and Board of Directors of Internetstudios.com, Inc.

We have audited the consolidated balance sheet of Internetstudios.com, Inc. as at December 31, 2001 and the statements of operations, stockholders' equity and cash flows for the year then ended. 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 Canadian and United States generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2001 and the results of its operations and its cash flows for the year then ended in accordance with United States generally accepted accounting principles.

The financial statements as at December 31, 2000 and for the year then ended were audited by other auditors who rendered an unqualified opinion in their report dated April 14, 2001.

/s/ Labonte & Co.
CHARTERED ACCOUNTANTS

Vancouver, B.C.
May 31, 2002

In the United States, reporting standards for auditors would require the addition of an explanatory paragraph following the opinion paragraph when the financial statements are affected by conditions and events that cast substantial doubt on the Company's ability to continue as a going concern, such as those described in Note 1. Our report to the stockholders and Board of Directors dated May 31, 2002 is expressed in accordance with Canadian reporting standards which do not permit a reference to such conditions and events in the auditors' report when these are adequately disclosed in the financial statements.

/s/ Labonte & Co.
CHARTERED ACCOUNTANTS

Vancouver, B.C.
May 31, 2002

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

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

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

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

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, as shown in the accompanying financial statements, the Company has sustained substantial losses from operations since inception. In addition, the Company has used, rather than provided, cash in its operations. As of December 31, 2001, the Company had a working capital deficiency of $2,405,063 and commencing in June 2001 significantly reduced the scope of operations due to the lack of operating capital.

In view of the matters described in the preceding paragraph, there is substantial doubt regarding the Company's ability to continue operations as a going concern. Recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company's ability to meet its financing requirements on a continuing basis and to succeed in its future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

Management of the Company has taken steps to revise and reduce its operating requirements, which it believes will be sufficient to assure continued operations and implementation of the Company's plans. These steps include expense reductions in staffing, marketing and consulting, as well as a significant decrease in operating costs as a result of completion of website development costs.

The financial statements include the accounts of the Company and its subsidiaries described above. All intercompany accounts and balances have been eliminated in consolidation.

Preparation of the Company's financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

The Company considers all liquid investments with an original maturity of three months or less to be cash equivalents.

Revenue is recognized at the time a transaction is consummated by a buyer and seller using the Company's website. The Company also may charge for its services and recognizes revenue at the time the customer lists material on the Company's website. Revenue related to financing of outside productions is amortized over the life of the agreement, typically 18 months, using a method that approximates the effective interest method.

Furniture and equipment are stated at cost. Depreciation is recorded using accelerated methods over useful lives of three to five years. Carrying values are reviewed periodically for impairment whenever events or changes in circumstances indicate the carrying amount of assets may not be recoverable. During the second quarter of 2001 the Company disposed of substantially all its furniture and equipment and recorded a full impairment provision for all remaining furniture and equipment.

The financial statements are presented in United States dollars. In accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation", foreign denominated monetary assets and liabilities are translated to their United States dollar equivalents using foreign exchange rates which prevailed at the balance sheet date. Revenue and expenses are translated at average rates of exchange during the year. Related translation adjustments are reported as a separate component of stockholders' equity, whereas gains or losses resulting from foreign currency transactions are included in results of operations. Translation adjustments were immaterial for all periods presented.

Basic loss per share includes no dilution and is computed by dividing the net loss by the weighted average number of common shares outstanding for the period. Diluted loss per share reflects the potential dilution of securities that could share in the earnings of the Company. Convertible securities and stock options were not included in the calculation of weighted average number of shares because the effect would be anti-dilutive. The weighted average number of common shares outstanding for prior periods have been recalculated to take into effect the 20:1 roll-back as described in Note 9.

The Company adopted EITF 00-2 "Accounting for Web Site Development Costs" and development costs incurred subsequent to June 30, 2000, associated with the Company's Web Site were recorded in accordance with EITF 00-2. Development costs of $2,639,668 have been capitalized and are being amortized on the straight-line method over a period of 3 years.

The Company accounts for stock-based compensation in respect to stock options granted to employees and officers using the intrinsic value based method in accordance with APB 25. Stock options granted to non-employees are accounted for using the fair value method in accordance with SFAS No. 123. In addition, with respect to stock options granted to employees, the Company provides pro-forma information as required by SFAS No. 123 showing the results of applying the fair value method using the Black-Scholes option pricing model.

The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with SFAS No. 123 and the conclusions reached by the Emerging Issues Task Force in Issue No. 96-18. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by EITF 96-18.

The Company has also adopted the provisions of the Financial Accounting Standards Board Interpretation No.44, Accounting for Certain Transactions Involving Stock Compensation - An Interpretation of APB Opinion No. 25 ("FIN 44"), which provides guidance as to certain applications of APB 25. FIN 44 is generally effective July 1, 2000 with the exception of certain events occurring after December 15, 1998.

The Company evaluates its long-lived assets by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. If such evaluations indicate that the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values.

Intangible assets, principally goodwill, are amortized on the straight-line method over a period of 3 years. The carrying amount of intangible assets are assessed for impairment when operating profit from the related business indicates the carrying amount of the assets may not be recoverable. Carrying values are reviewed periodically for impairment whenever events or changes in circumstances indicate that the carrying amounts of intangible assets may not be recoverable. Effective June 30, 2001 as a result of the significant reduction in the scope of operations due to the lack of capital the Company recorded a full impairment provision for the unamortized balance of goodwill in the amount of $15,462,534.

The financial statements are presented in United States dollars. In accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation", foreign denominated monetary assets and liabilities are translated to their United States dollar equivalents using foreign exchange rates which prevailed at the balance sheet date. Revenue and expenses are translated at average rates of exchange during the year. Related translation adjustments are reported as a separate component of stockholders' equity, whereas gains or losses resulting from foreign currency transactions are included in results of operations.

The Company follows the liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the estimated tax consequences attributable to differences between the financial statement carrying values and their respective income tax basis (temporary differences). The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

In March 2000, the Company contributed substantially all of its assets to the capital of OnlineFilmSales.com, LLC, a newly-formed Delaware limited liability company ("OnlineFilmSales"). Included in the assets contributed to OnlineFilmSales were (i) the Company's 91.847% membership interest in Online Films so that Online Films became a subsidiary of OnlineFilmSales, and (ii) a Secured Promissory Note in the amount of $2,025,000 by MediaChase Ltd. Excluded from the assets contributed to OnlineFilmSales were all trademarks, trade names, and domain names containing "InternetStudios.com" or "InternetStudios" and all associated goodwill. As a result of the Asset Contribution, the Company conducts all operations through operating subsidiaries.

In exchange for the assets which OnlineFilmSales received in the Asset Contribution, OnlineFilmSales issued a one hundred percent Class A membership interest, constituting one hundred percent of the voting power of the Class A members of OnlineFilmSales. The Company is the sole holder of a Class A membership interest in OnlineFilmSales

Concurrently with the Asset Contribution, two former officers of the Company also made contributions to OnlineFilmSales. Heidi Lester, the former Chief Executive Officer, contributed an 8.153% interest in Online Films in exchange for Class B Membership Interests in OnlineFilmSales and Steve Fredericks, the former Acting President and Chief Financial Officer contributed to OnlineFilmSales all of his right, title and interest in and to, certain agreements for the development of a digital production center and a related digital training program for artists and producers in the People's Republic of China in exchange for Class B Membership Interests in OnlineFilmSales.

The holders of Class B membership interests in OnlineFilmSales are entitled to convert their interests into up to 1,000,000 pre-consolidation shares of common stock of the Company at any time. The Class B membership interests will automatically be converted into the Company's common stock upon the occurrence of certain transactions and in any event, on March 28, 2007. Each holder of a Class B membership interest is entitled to receive distributions of cash based upon the amount of all cash which each holder of Class B membership interests would have received in the form of dividends on and proceeds from redemptions of that number of shares of common stock into which such holder's Class B Membership Interest is convertible, if such Class B member had held those shares during the period from such member's admission as a Class B member of OnlineFilmSales to the date of such distribution of cash by OnlineFilmSales. Refer to Note 9.

InternetStudios, through OnlineFilmSales, entered into a joint venture with MediaChase Ltd., a Los Angeles based software company, on March 28, 2000 to form ReporterTV.com, LLC.

To fund the development of ReporterTV, InternetStudios advanced $2,025,000 in the form of a loan, evidenced by the MediaChase Note. As a part of the Asset Contribution, InternetStudios contributed to OnlineFilmSales, all of its rights as payee under the MediaChase Note. OnlineFilmSales contributed all of its rights as payee under the MediaChase Note to ReporterTV and MediaChase assigned all of its obligations as payor under the MediaChase Note to ReporterTV, as a result of which contribution and assignment, the MediaChase Note has been cancelled.

Pursuant to the terms of the RTV Agreement, OnlineFilmSales is not obligated to fund ReporterTV for amounts over and above a defined contribution cap of $1,650,000, which contribution was provided by OnlineFilmSales. Additionally, pursuant to the terms of the RTV Agreement, OnlineFilmSales has no ongoing financial obligation to ReporterTV and is entitled to look to MediaChase to provide financing for the company. As no financial resources were made available to fund the ongoing operations of the company, ReporterTV's activities ceased during May, 2001.

During 2000, the Company loaned a total of approximately $761,000 to a film production company. Advances under the loan agreement are collateralized by all of the assets of the production company, bear interest at the prime rate plus 3% and are due on demand. Collectability of these amounts is dependent on the success of the film projects financed. Subsequent to year end the Company assigned this loan to certain creditors in settlement of outstanding debts. Refer to Note 12.

The Company entered into formal employment or management contracts with four officers of the Company or with consulting firms owned by those officers. Subsequent to June 30, 2001, two officers resigned. The remaining contracts provide for a combined base salary of $384,000 per annum for a three year term ending December 31, 2002 and granting of stock options providing the right to acquire a total of 350,000 pre-consolidation shares of common stock at a pre-consolidation price of $5 per share to be vested over the term of the contracts. The contracts include a severance provision of 150% of base salary which totals $576,000 for these two officers. At December 31, 2001, a total of $288,000 is owing under these contracts.

During 2000, the Company loaned a total of approximately $535,000 to an executive officer of the Company and a film production company owned and managed by this executive officer. Advances under the loan agreement are collateralized by all of the assets of the related company, bear interest at the prime rate plus 3% until March 31, 2001 and are due on demand. Collectability of these amounts is dependent on the success of the film projects financed. During the year ended December 31, 2001 interest and fees of $37,594 were accrued under this loan. Additionally, during the year ended December 31, 2001 the Company assumed loans to this entity from a bank totaling $215,588 and this officer repaid $104,908 of outstanding loans. Due to uncertainty of recovery the Company recorded an impairment provision of $309,832 leaving a balance outstanding at year end of $373,679 which was assigned to creditors subsequent to year end in settlement of outstanding debts of the Company.

During February 2001 the Company received loans in the aggregate principal amount of $199,159 pursuant to convertible note agreements. These loans are non-interest bearing and are repayable on demand. The convertible note agreement provides the lender the right to convert the outstanding loan into shares of common stock at a price approximating the market price of the Company's shares at the time of notice. Subsequent to year end these loans were converted into 3,487,873 shares of common stock. Refer to Note 12.

The Company's authorized capital consists of 5,000,000 shares of common stock with a par value of $0.0001 per share. During December, 2001 the Company completed a 20:1 roll-back of outstanding common shares which reduced the number of outstanding shares from 16,414,844 shares to 820,742 shares. On March 22, 2002 the authorized capital was increased to 100,000,000 shares.

During 2001 the Company issued 756,580 pre-consolidation shares of common stock on conversion of Class B membership interests in OnlineFilmSales.com, LLC

In December 1999, the Company's Board of Directors approved a U.S. Stock Incentive Plan for a maximum of 1,000,000 pre-consolidation shares of common stock and a non-U.S. Stock Incentive Plan for a maximum of 500,000 pre-consolidation shares of common stock (collectively "the Plans"), under which it is authorized to issue nonqualified and incentive stock options to key employees and consultants. The options have a term not to exceed 10 years and vest over a period of two to three years. At that time, the Board also approved grants of options for 1,012,500 pre-consolidation shares. The plan was approved by the Company's shareholders in January, 2000.

Statement of Financial Accounting Standards No. 123, "Accounting For Stock Based Compensation", encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in previously issued standards. Accordingly, compensation cost for employee stock options is measured as the excess, if any, of the fair market value of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Compensation cost or deferred compensation for stock options issued to employees has been recognized to the extent market value of the stock at the grant date exceeded the option price.

During the year the Company expensed $1,561,356 of previously deferred stock-based compensation relating to outstanding stock options which vested. In addition, the Company reversed $880,656 in deferred compensation related to stock options which expired prior to vesting.

Income taxes are provided pursuant to SFAS No. 109, Accounting for Income Taxes. The statement requires the use of an asset and liability approach for financial reporting for income taxes. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. Accordingly, as the realization and use of the net operating loss carryforward is not probable, the tax benefit of the loss carryforward has been offset by a valuation allowance of the same amount.

The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, Disclosures about Fair Value of Financial Instruments. The estimated fair value amounts have been determined by the Company, using available market information and appropriate valuation methodologies. The fair value of financial instruments, including cash and cash equivalents and notes and accounts receivable and payable, approximate carrying value due to the short-term maturity of the instruments.

During February and March 2002 the Company issued a total of 3,487,873 shares of common stock on conversion of the outstanding convertible loans of $199,159.

Pursuant to settlement agreements executed in May 2002 the Company agreed to assign its outstanding loan receivables of $594,561 from a film production company and $323,679 due from a related party to certain creditors in satisfaction of outstanding debts of approximately $970,000 of which $420,000 is owing to two companies controlled by directors and officers of the Company.

During January 2002 the Directors approved a resolution to issue up to 5,520,000 shares of common stock to directors, officers and employees in settlement of outstanding obligations totaling $315,000.

On October 9, 2001, Grant Thornton LLP resigned as independent accountants for InternetStudios. On October 9, 2001, InternetStudios' board of directors accepted the resignation of Grant Thornton LLP and approved the change of accountants from Grant Thornton LLP to Labonte & Co., Chartered Accountants.

During InternetStudios' most recent fiscal year, and any subsequent interim periods preceding the change in accountants, there were no disagreements with Grant Thornton LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope procedure. The report on the financial statements audited by Grant Thornton LLP for the last fiscal year contained a modifying paragraph with respect to InternetStudios' ability to continue as a going concern. Aside from this modification, the report on the financial statements audited by Grant Thornton LLP did not contain an adverse opinion or a disclaimer of opinion, nor was it qualified or modified as to any other uncertainty, audit scope or accounting principles.

InternetStudios has engaged the firm of Labonte & Co., Chartered Accountants as of October 9, 2001. Labonte & Co., Chartered Accountants was not consulted on any matter relating to accounting principles to a specific transaction, either completed or proposed, or the type of audit opinion that might be rendered on InternetStudios' financial statements.

All directors of our company hold office until the next annual meeting of the shareholders or until their successors have been elected and qualified. The officers of our company are appointed by our board of directors and hold office until their death, resignation or removal from office. Executive directors serve at the discretion of the board of directors and are appointed to serve until the first board of directors meeting following the annual meeting of our shareholders.

As of July 25, 2002, our directors and executive officers, their ages, positions held, and duration as such, are as follows:

Mr. MacLean has been Chairman of the Board of Directors and a director of InternetStudios since September 1999, and served as President from September 1999 to December 1999. Mr. MacLean continues to act in an executive capacity for InternetStudios, however he currently has no title or defined responsibility. For the past five years, Mr. MacLean has been an independent producer of filmed entertainment projects. He has produced over twelve independent motion pictures and television movies including such films as CRIMINAL LAW, BRIGHT ANGEL and MAN WITH A GUN. Mr. MacLean also served as head of production at RKO Pictures in Los Angeles and has developed and produced a number of miniseries and movies of the week for ABC, CBS, and HBO. Mr. MacLean began his film career as a documentary filmmaker based in Paris, France where he produced several documentary series including, THE LAST SAILORS and THE GOLD LUST. Mr. MacLean obtained a Bachelor's of Art degree from University of Oregon and a Cert ificate of Advanced Motion Picture Productions from Banff School of Fine Arts.

Mr. Rutledge has been Secretary, Treasurer, Vice President of Business Affairs and a director of InternetStudios since September 1999. He has a Bachelor of Arts (Honors) and a Bachelor of Laws from University of British Columbia. He was the Vice President of Business Affairs for Northwood Entertainment Corp. from 1997 to August 1999, and was the Vice President of Business Affairs for Movie Vista Productions from 1994 to 1997. As Vice President of those two companies, Mr. Rutledge was responsible for negotiating and preparing contracts for film and television distribution and financing of film and television productions. Prior to these positions, Mr. Rutledge practiced law for six years, specializing in the areas of corporate finance and entertainment law. In addition, Mr. Rutledge produced a number of award winning medical documentaries.

There are no family relationships between any director or executive officer.

None of our directors, executive officers, promoters or control persons have been involved in any of the following events during the past five years:

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors and persons who own more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common stock and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% shareholders are required by the Securities and Exchange Commission regulations to furnish our company with copies of all Section 16(a) reports they file.

To our knowledge, based solely upon our review of copies of such reports or written representations from certain reporting persons that no Form 5 was required to be filed by those persons, we believe that for the year ended December 31, 2001, all filing requirements applicable to our officers, directors and greater than 10% beneficial shareholders and other persons subject to Section 16(a) of the Securities and Exchange Act of 1934 were complied with.

The following table summarizes the compensation of our Chairman of the Board and other officers and directors who received annual compensation in excess of $100,000 during the fiscal years ended December 31, 2001, 2000 and 1999. No other officers or directors received annual compensation in excess of $100,000 during the fiscal years ended December 31, 2001, 2000 and 1999.

(1) Mr. MacLean signed a management agreement with the Company the details of which are set out below. This management agreement was terminated by agreement on January 5, 2002. In consideration of the termination of his management agreement, shares will be issued to Mr. MacLean.

(2) Mr. Rutledge signed a management agreement with the Company the details of which are set out below. This management agreement was terminated by agreement on January 5, 2002. In consideration of the termination of his management agreement, shares will be issued to Mr. Rutledge.

(3) Ms. Lester resigned from her position on August 19, 2001.

(4) Ms. Perry resigned from her position on May 15, 2001.

(5) Mr. Beattie resigned from his position on August 27, 2001.

(6) These totals reflect post consolidation amounts.

On December 6, 2001, we effected a 20 for 1 reverse split of our common stock. The numbers of options as stated above have been adjusted to reflect the reverse split.

All of the options that were granted, with the exception of the 13,300 issued to current senior executives, have expired under the terms of the Stock Incentive Plans.

We did not grant stock options to any of our executive officers during the year ended December 31, 2001.

VALUE OF THE OPTIONS GRANTED AS AT DECEMBER 31, 2001

(1) The closing bid price on December 31, 2001 was $0.02 and accordingly the unexercised options as at December 31, 2001 had no value.

InternetStudios, through one of its subsidiaries OnlineFilmSales, entered into an Agreement with Spray Point Consulting Limited for the services of Robert MacLean on April 1, 2000. Under this Agreement, Mr. MacLean will serve as the Company's Chairman for a term of three years. The provisions of the Agreement include:

In the event InternetStudios, or one of its subsidiaries, as the case may be, terminates Mr. MacLean for any reason other than death, disability, or for cause, or in the event Mr. MacLean terminates his services for cause, Mr. MacLean will be entitled to the following compensation on the eighth day after his signing a Confidential Severance Agreement and a letter confirming that he did not revoke and will take no action to revoke the Confidential Severance Agreement:

In addition to the agreement between OnlineFilmSales and Spray Point Consulting Limited, Mr. MacLean also entered into an Employment Agreement with InternetStudios UK LTD and InternetStudios for a term commencing on July 1, 2000 and ending on December 1, 2002. The agreement provided for a 2000 notional annual salary of US$50,000. In addition, Mr. MacLean is entitled to receive an additional $1000 for each day worked (i) in excess of 50 days in that year if a complete year or, (ii) where employment terminates during the year an additional $1000 for each day worked in excess of 50 days per year prorated to the total period of employment for that year. Where Mr. MacLean works less than 50 days in the preceding year or, where less than a year, has worked less than the proportionate number of days, Mr. MacLean is required to pay to InternetStudios UK Limited $1000 for each such day less than 50 days or the proportionate number of days as the case may be. The Employment Agreement also provides f or:

In the event InternetStudios or its subsidiary InternetStudios UK LTD, as the case may be, terminates Mr. MacLean for any reason other than death, disability, or for cause, or in the event Mr. MacLean terminates his services for cause, Mr. MacLean will be entitled to the following compensation on the eighth day after his signing a Confidential Severance Agreement and a letter confirming that he did not revoke and will take no action to revoke the Confidential Severance Agreement:

InternetStudios, through one of its subsidiaries OnlineFilmSales, entered into an Agreement with Carraway Management Inc. for the services of Mark Rutledge on April 1, 2000. Under this Agreement, Mr. Rutledge will serve as the Company's Vice President Business Affairs and as Corporate Secretary for a term of three years. The provisions of the Agreement include:

- noncompetition, nondisclosure and nonconsolidation covenants.

In the event InternetStudios, or one of its subsidiaries, as the case may be, terminates Mr. Rutledge for any reason other than death, disability, or for cause, or in the event Mr. Rutledge terminates his services for cause, Mr. Rutledge will be entitled to the following compensation on the eighth day after his signing a Confidential Severance Agreement and a letter confirming that he did not revoke and will take no action to revoke the Confidential Severance Agreement:

- a lump sum severance payment equal to one and one-half times his base salary; and

- accelerated vesting of his stock options.

Mr. MacLean and Mr. Rutledge have not been paid under the terms of their management agreements since April 2001. The Company and these individuals have agreed pursuant to an agreement dated January 5, 2002, to terminate the management agreements in consideration of the issuance of up to 3,840,000 shares.

There are three former executives who each had a management agreement with the Company.

Under an agreement entered into April 1,2000 Heidi Lester served as Chief Executive Officer for the Company from inception until her resignation on August 19, 2001. Her agreement with InternetStudios terminated upon her resignation on August 19, 2001.

InternetStudios UK Ltd. and InternetStudios entered into a service agreement with Aline Perry on February 1, 2000. This agreement was terminated upon Ms. Perry's resignation on May 15, 2001.

The Company and its subsidiary IEF entered into a management agreement with Robert Beattie on July 1, 2000. This agreement was terminated upon Mr. Beattie's resignation on August 27, 2001.

Our compensation program for our executive officers is administered and reviewed by our board of directors. Historically, executive compensation consists of a combination of base salary and bonuses. Individual compensation levels are designed to reflect individual responsibilities, performance and experience, as well as the performance of our company. The determination of discretionary bonuses is based on various factors, including implementation of our business plan, acquisition of assets, development of corporate opportunities and completion of financing.

Our board of directors also believes that executives should have a substantial equity ownership, both through direct share ownership and through stock options, to provide long-term incentives which link executive compensation to our long-term performance and return to our shareholders. We also believe that non-employee directors should have an equity interest in our company. In that regard, we adopted the 1999 Incentive Stock Option Plans.

The graph set forth below compares the cumulative total shareholder return on our common shares between December 31, 1998 and December 31, 2001 with the cumulative return of (i) the Russell 2000 index and (ii) Standard and Poors 500 index, over the same period. This graph assumes the investment of $100 on December 31, 1998 in our common shares, the Russell 2000 index and Standard and Poors 500 index, and assumes the reinvestment of dividends, if any.

The comparisons shown in the graph below are based upon historical data. We caution that the share price performance shown in the graph below is not indicative of, nor intended to forecast, the potential future performance of our common shares. Information used in the graph was obtained from Yahoo Financial, a source believed to be reliable, but we are not responsible for any errors or omissions in such information.

The following table sets forth, as at July 25, 2002, certain information with respect to the beneficial ownership of our common stock by each shareholder known by us to be the beneficial owner of more than five percent (5%) of our common stock, and by each of our current directors and executive officers. Each person has sole voting and investment power with respect to the shares of common stock, except as otherwise indicated. Beneficial ownership consists of a direct interest in the shares of common stock, except as otherwise indicated.

(1) Based on 4,308,605 shares of common stock issued and outstanding as of July 25, 2002. Except as otherwise indicated, we believe that the beneficial owners of the common stock listed above, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of common stock subject to options or warrants currently exercisable, or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage ownership of the person holding such option or warrants, but are not deemed outstanding for purposes of computing the percentage ownership of any other person.

Other than as listed below, we are unaware of any contract or other arrangement, the operation of which may, at a subsequent date, result in a change in control of our company.