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 not