<PAGE>

     As filed with the Securities and Exchange Commission on May 22, 2002

               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                                   FORM 20-F

[  ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE
     SECURITIES EXCHANGE ACT OF 1934

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934 FOR THE FISCAL YEAR ENDED FEBRUARY 28, 2002

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

   For the transition period from     to

   Commission file number:          0-31943
                           -----------------------
                                 ImagicTV Inc.
                   ---------------------------------------
            (Exact name of Registrant as specified in its charter)

                                Not applicable
                   ---------------------------------------
                (Translation of Registrant's name into English)

                                    Canada
                   ---------------------------------------
                (Jurisdiction of incorporation or organization)

                 One Brunswick Square, 14th Floor, Saint John,
                         New Brunswick, Canada E2L 3Y2
                   ---------------------------------------
                   (Address of principal executive offices)

   Securities registered or to be registered pursuant to Section 12(b) of
      the Act.

                                     None
                   ---------------------------------------
   Securities registered or to be registered pursuant to Section 12(g) of
      the Act.

                          Common shares, no par value
                   ---------------------------------------
   Securities for which there is a reporting obligation pursuant to Section
       15(d) of the Act.

                                     None
                   ---------------------------------------
   Indicate the number of outstanding shares of each of the issuer's classes
   of capital or common stock as of the close of the period covered by the
   annual report.

               24,669,336 Common Shares as of February 28, 2002
                   ---------------------------------------

    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 which financial statement item the registrant has
elected to follow.

                         Item 17  [   ]Item 18  [ X ]
<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
 <C>         <S>                                                           <C>
 Part I...................................................................   1
    ITEM 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.......    1
    ITEM 2.  OFFER STATISTICS AND EXPECTED TIMETABLE.....................    1
    ITEM 3.  KEY INFORMATION.............................................    1
             A.Selected Financial Data...................................    1
             B.Capitalization and Indebtedness...........................    3
             C.Reasons for the Offer and Use of Proceeds.................    3
             D.Risk Factors..............................................    3
    ITEM 4.  INFORMATION ON THE COMPANY..................................   13
             A.History and Development of the Company....................   13
             B.Business Overview.........................................   14
             C.Organizational Structure..................................   29
             D.Property, Plants and Equipment............................   29
    ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS................   30
             A.and B. Operating Results and Liquidity and Capital
             Resources...................................................   30
             C.Research and Development, Patents and Licenses, etc.......   43
             D.Trend Information.........................................   43
    ITEM 6.  DIRECTORS AND EXECUTIVE OFFICERS............................   44
             A.Directors and Management..................................   44
             B.Compensation..............................................   47
             C.Board Practices...........................................   51
             D.Employees.................................................   52
             E.Share Ownership...........................................   53
    ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS...........   55
             A.Major Shareholders........................................   55
             B.Related Party Transactions................................   56
             C.Interests of Experts and Counsel..........................   58
    ITEM 8.  FINANCIAL INFORMATION                                          58
             A.Consolidated Statements and Other Financial Information...   58
             B.Significant Changes.......................................   58
    ITEM 9.  THE OFFER AND LISTING.......................................   59
             A.Offer and Listing Details.................................   59
             B.Plan of Distribution......................................   60
             C.Markets...................................................   60
             D.Selling Shareholders......................................   60
             E.Dilution..................................................   60
             F.Expenses of the Issue.....................................   60
    ITEM 10. ADDITIONAL INFORMATION......................................   60
             A.Share Capital.............................................   60
             B.Memorandum and Articles of Association....................   61
             C.Material Contracts........................................   62
             D.Exchange Controls.........................................   62
             E.Taxation..................................................   62
             F.Dividends and Paying Agents...............................   67
             G.Statement by Experts......................................   67
             H.Documents on Display......................................   67
</TABLE>

                                       i
<PAGE>

<TABLE>
 <C>         <S>                                                            <C>
             I.Subsidiary Information.....................................   68
    ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...   68
    ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.......   68
 Part II...................................................................  69
    ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                 69
    ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERSAND     69
             USE OF PROCEEDS..............................................
             A.Use of Proceeds............................................   69
    ITEM 15. [RESERVED]...................................................   69
    ITEM 16. [RESERVED]...................................................   69
 Part III..................................................................  69
    ITEM 17. FINANCIAL STATEMENTS.........................................   69
    ITEM 18. FINANCIAL STATEMENTS.........................................   70
    ITEM 19. EXHIBITS.....................................................   93
    INDEX TO EXHIBITS......................................................   I
</TABLE>

                                       ii
<PAGE>

                                    PART I

   In this annual report, "ImagicTV," "the Company," "we," "us" and "our"
refer to ImagicTV Inc. and its subsidiaries.

   All financial information presented in this annual report is expressed in
U.S. dollars, except where indicated to the contrary. References to "$" or
"U.S.$" are to U.S. dollars and references to "C$" are to Canadian dollars.

   Unless we indicate otherwise, all information in this annual report is
stated as of May 14, 2002.

               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

   This annual report contains forward-looking statements. These statements
include statements under the headings "Risk Factors" in "Item 3. Key
Information," "Business Overview" in "Item 4. Information on the Company,"
"Management's Discussion and Analysis" in "Item 5. Operating and Financial
Review and Prospects" and "Use of Proceeds" in "Item 14. Material
Modifications to the Rights of Security Holders and Use of Proceeds" and
elsewhere in this annual report regarding conditions in the telecommunications
industry, our goals and business strategy, our business model and plans, our
efforts to develop and enhance our products, our expected sources of revenue,
our future costs and losses, our capital requirements and the outlook for our
business. When used in this document, the words "will," "plan," "anticipate,"
"expect," "intend," "believe" and similar expressions are intended to identify
forward-looking statements. Such statements reflect our current views with
respect to future events, are based on information currently available to us
and are subject to certain risks, uncertainties and assumptions, including
those matters specifically discussed in "Risk Factors" in "Item 3. Key
Information." These and other factors could cause our actual results,
performance or achievements to differ materially from any future results,
performance or achievements that may be expressed or implied by such forward-
looking statements. These factors should be considered carefully, and readers
should not place undue reliance on the forward-looking statements. We do not
undertake any obligation to update this forward-looking information.

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

  Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

  Not applicable.

ITEM 3. KEY INFORMATION

A. Selected Financial Data

   You should read the following selected consolidated financial data together
with the financial information set forth under the heading "Management's
Discussion and Analysis" in "Item 5. Operating and Financial Review and
Prospects" and our consolidated financial statements and the related notes
included in "Item 18. Financial Statements."

   The consolidated statement of operations data for the fiscal years ended
February 29, 2000, February 28, 2001 and February 28, 2002 and the
consolidated balance sheet data as of February 28, 2001

                                       1
<PAGE>

and February 28, 2002 are derived from, and are qualified by reference to, our
consolidated financial statements which have been audited by KPMG LLP,
Chartered Accountants, and are included elsewhere in this annual report. The
consolidated financial statements are reported in U.S. dollars and are
prepared in accordance with Canadian GAAP. Differences between Canadian GAAP
and U.S. GAAP are described in note 12 to the consolidated financial
statements. The consolidated statement of operations data for the period from
December 24, 1997 (inception) to February 28, 1998 and for the year ended
February 28, 1999 and the consolidated balance sheet data as of February 28,
1998, February 28, 1999 and February 29, 2000 are derived from audited
financial statements not included in this annual report. The historical
results below are not necessarily indicative of the results to be expected for
any future period.

<TABLE>
<CAPTION>
                                                   Fiscal Year Ended
                         ---------------------------------------------------------------------
                         December 24, 1997
                          (inception) to   February 28, February 29, February 28, February 28,
                         February 28, 1998     1999         2000         2001         2002
                         ----------------- ------------ ------------ ------------ ------------
                               (in thousands of U.S. dollars, except per share amounts)
<S>                      <C>               <C>          <C>          <C>          <C>
Consolidated Statement
 of Operations Data:
Revenues:
 License fees...........      $   --         $    --      $ 1,384      $  4,770     $    631
 Royalty fees...........          --              --           --         1,288        1,197
 Services...............          --              14          393         1,791        2,387
 Equipment..............          --             465          321         1,150           --
                              ------         -------      -------      --------     --------
Total revenues..........          --             479        2,098         8,999        4,215
                              ------         -------      -------      --------     --------
Cost of revenues:
 Services...............          --              --          657         2,379        2,603
 Equipment..............          --             604          331         1,068           --
                              ------         -------      -------      --------     --------
Total cost of revenues..          --             604          988         3,447        2,603
                              ------         -------      -------      --------     --------
Gross profit (loss).....          --            (125)       1,110         5,552        1,612
                              ------         -------      -------      --------     --------
Operating expenses:
 Sales and marketing....          18             543        2,325         7,763        8,928
 Research and
 development............          66           2,014        4,084         7,967        7,151
 General and
 administrative.........          26             344          827         2,815        4,582
 Restructuring expense..          --              --           --            --        1,162
                              ------         -------      -------      --------     --------
Total operating
 expenses...............         110           2,901        7,236        18,545       21,823
                              ------         -------      -------      --------     --------
Loss from operations....        (110)         (3,026)      (6,126)      (12,993)     (20,211)
Other income (expense),
 net....................          --             (25)         524         1,559        1,628
                              ------         -------      -------      --------     --------
Loss before provision
 for income taxes.......        (110)         (3,051)      (5,602)      (11,434)     (18,583)
Provision for income
 taxes..................          --             (17)         (44)          (24)        (121)
Net loss--in accordance
 with Canadian and U.S.
 GAAP...................      $ (110)        $(3,068)     $(5,646)     $(11,458)    $(18,704)
                              ======         =======      =======      ========     ========
Basic and diluted net
 loss per share--in
 accordance with
 Canadian and U.S. GAAP.      $(0.05)        $ (0.57)     $ (0.40)     $  (0.58)    $  (0.76)
                              ======         =======      =======      ========     ========
Weighted average number
 of shares used in
 computing basic and
 diluted net loss per
 share..................       2,331           5,336       13,968        19,796       24,606
                              ======         =======      =======      ========     ========
</TABLE>

<TABLE>
<CAPTION>
                                                      As At
                         ----------------------------------------------------------------
                         February 28, February 28, February 29, February 28, February 28,
                             1998         1999         2000         2001         2002
                         ------------ ------------ ------------ ------------ ------------
                                          (in thousands of U.S. dollars)
<S>                      <C>          <C>          <C>          <C>          <C>
Consolidated Balance
 Sheet Data:
Cash and cash
 equivalents............     $245        $ 603        $6,396      $46,414      $45,641
Short-term investments..       --           --            --       14,346          359
Working capital.........     (139)       1,852         6,154       62,807       45,156
Total assets............      289        3,153         9,859       71,846       49,485
Long-term debt..........       --           --         1,737        1,577        1,496
Total shareholders'
 equity.................     (109)       2,493         5,706       64,200       45,793
</TABLE>


                                       2
<PAGE>

B. Capitalization and Indebtedness

   Not applicable.

C. Reasons for the Offer and Use of Proceeds

   Not applicable.

D. Risk Factors

   An investment in our common shares involves a high degree of risk and
should be considered speculative. If any of the following risks occur, our
business, operating results and financial condition could be seriously harmed
and you could lose all or part of your investment. Further, if we fail to meet
the expectations of the public market in any given period, the market price of
our common shares could decline.

Risks Related to Our Financial Condition

   Our limited operating history and the fact that our business is essentially
dependent on one product, our DTV Manager software, makes our business and
prospects difficult to evaluate.

   We have a limited operating history which makes the prospects for our
business difficult to evaluate. We began our operations in January 1998 and
did not release a product until December 1998. Our present operations consist
of (1) licensing our DTV Manager software, as well as our pcVu software and
Movie Manager software which work in conjunction with DTV Manager, to
telephone companies and other service providers, (2) providing related
services and (3) further developing our software products. As such, our
business is essentially dependent on our success in developing DTV Manager
software and licensing it to service providers. There is no significant
historical basis to assess how we will respond to competitive, economic and
technological challenges and a rapidly developing marketplace. If we fail to
meet any of these challenges, or otherwise fail to successfully develop and
license our DTV Manager software or any successor software, our operating
results could suffer and you could lose all or part of your investment.

   We incurred net losses since inception, including a net loss of $18.7
million for the fiscal year ended February 28, 2002. We expect to continue to
incur losses for the foreseeable future, and we may never achieve or sustain
profitability.

   Since our inception, we have not had a profitable quarter. We incurred net
losses of approximately $11.5 million for fiscal year ended February 28, 2001
and $18.7 million for the fiscal year ended February 28, 2002. As of
February 28, 2002, we had an accumulated deficit of approximately $39.0
million. We expect to incur significant operating expenses over the next
several years. As a result of these expenditures, we expect to incur
additional losses for the foreseeable future, and we may never become
profitable.

   To achieve profitability, we must generate and sustain substantially
increased revenues and control future expense levels. We forecast our future
expense levels based on our operating plans and on estimates of future
revenues. We may find it necessary to accelerate expenditures relating to our
sales and marketing efforts or otherwise increase our financial commitment to
the development of our products and services based on circumstances in the
marketplace. If our revenues grow at a slower rate than we anticipate, or if
our spending levels exceed our expectations or cannot be adjusted to reflect
slower

                                       3
<PAGE>

revenue growth, we may not achieve or sustain profitability. If we fail to
become profitable, the value of your investment in our common shares could be
significantly reduced.

   Our software may require a service provider to dramatically change its
established business practices. This may extend the time required to complete
a commercial license agreement, resulting in significant fluctuations in our
quarterly operating results that could cause our share price to decline.

   We believe that the purchase of our DTV Manager and Movie Manager software
and our related services involves a significant commitment of capital and
other resources by a telephone company or other service provider. In many
cases, the service provider's decision to offer services based on our software
products may require a service provider to change its established business
practices, to conduct its business in new ways and potentially make
substantial upgrades to its infrastructure. As a result, we must educate
service providers on the use and benefits of our software products, which can
require us to commit significant time and resources without necessarily
resulting in revenues.

   The time required to complete a license on a commercial basis can be
significant. As a result, we accept significant fluctuations in our quarterly
operating results that could cause our share price to decline.

   Service providers generally must consider a wide range of other issues
before committing to purchase our software products. Many potential customers
enter into trial license agreements with us in order to use our software
products on a trial basis. The success of these trials often determines
whether or not the potential customer licenses our software on a commercial
basis. Further, the telecommunications industry is experiencing a significant
reduction in capital spending which will likely result in a delay in the
substantial capital commitments associated with the commercial deployment of
our software. Potential customers may also need to obtain approval at a number
of management levels and one or more regulatory approvals, which may delay a
decision to purchase our software products.

   As a result of the foregoing, the time from an initial product
demonstration to a customer to the entering into of a commercial license with
the customer may be significant. In the past, our sales cycle has ranged from
six to 18 months and, in some instances, has been significantly longer. This
lengthy sales cycle limits our ability to forecast the timing and amount of
specific sales in a particular quarter and will likely continue to cause
significant fluctuations in our quarterly operating results. Because of these
fluctuations, we believe that neither our past performance nor period-to-
period comparisons of our operating results are, or will be, a reliable
indication of our future performance. If our operating results for a
particular period fail to meet analyst and investor expectations that are
based on our past performance or on period-to-period comparisons of our
operating results, our share price could decline.

   The failure of our common shares to maintain a minimum per share bid price
of $1.00 may subject our common shares to delisting proceedings under the
rules of The Nasdaq National Market. If our common shares are delisted, our
stockholders may experience substantially decreased liquidity in their shares,
the market price of our stock will likely decline and our ability to obtain
financing may be adversely affected.

   Our common shares are traded on The Nasdaq National Market. For continued
listing, Nasdaq requires a share to maintain at least a $1.00 minimum closing
bid price.

   On March 6, 2002, we received a letter from Nasdaq notifying us that for
the preceding 30 consecutive trading days the price of our common shares had
closed below the minimum $1.00 per share requirement for continued inclusion
on The Nasdaq National Market. We have until June 4, 2002 to

                                       4
<PAGE>

regain compliance. To regain compliance, the bid price of our common shares
must close at $1.00 per share or more for a minimum of ten consecutive trading
days. If compliance cannot be demonstrated by June 4, 2002, Nasdaq will
provide written notification that our common shares will be delisted.

   If we determine that we will not satisfy the $1.00 minimum bid price
requirement for continued inclusion on The Nasdaq National Market by June 4,
2002, we intend to apply to transfer the common shares to The Nasdaq SmallCap
Market. To transfer, we must satisfy the continued inclusion requirements for
the Nasdaq SmallCap Market, which makes available an extended grace period
until at least September 3, 2002, for attaining compliance with the minimum
$1.00 bid price requirement. We also may qualify for an additional 180-day
grace period beyond September 3, 2002, to attain compliance with the $1.00 bid
price requirement. If we submit a transfer application and pay the applicable
listing fees by June 4, 2002, initiation of the delisting proceedings will be
stayed pending the Nasdaq staff's review of the transfer application. Even if
we do elect to transfer our common shares to the Nasdaq SmallCap Market, we
can provide no assurances the application will be accepted or that we will be
able to satisfy the continued listing requirements of the Nasdaq SmallCap
Market.

   If our application to transfer to The Nasdaq SmallCap Market is denied and
we receive a delisting notification, we will have the ability to appeal the
delisting determination to a Listing Qualifications Panel; however, we can
make no assurances that if a hearing is conducted, we will receive a
favourable determination for the continued listing of our common shares.

   If The Nasdaq National Market delists our common shares and we are unable
to transfer our common shares to The Nasdaq SmallCap Market, you may find it
more difficult to dispose of your shares or obtain accurate quotations as to
the share's market value in the United States, and the market price of our
common shares will likely decline further. The failure of our common shares to
be listed on The Nasdaq National Market or The Nasdaq SmallCap Market also may
adversely affect our ability to raise capital through the issuance of
securities or otherwise obtain financing.

If we cannot raise needed additional capital in the future, our business could
suffer.

   Our expenses currently significantly exceed our revenues. We expect that
our cash position, as of February 28, 2002 will be sufficient to meet our
working capital requirements for approximately the next 24 months. In the
longer term, if our revenues do not increase substantially within this time
period we may need to raise additional capital, which may not be available on
terms acceptable to us, if at all. If we cannot raise necessary additional
capital on acceptable terms, we may not be able to increase sales, develop or
enhance our products and services, take advantage of future opportunities or
respond to competitive pressures or unanticipated requirements, any of which
could cause our business to suffer and adversely affect our financial
condition.

Risks Related to Our Business and Industry

   If service providers do not successfully deploy broadband technologies and
services, a market for our software products will not develop. Recent
reluctance of service providers to make significant capital investments may
heighten this issue.

   Our software products can only be implemented over a broadband network.
Telephone companies and other service providers have only recently begun
offering broadband services such as xDSL, which refers to the different
protocols that fall under the digital subscriber line (DSL) umbrella of
broadband technologies. DSL is a technology for pushing a relatively large
number of bits through wiring that is typical for "last mile" telephone
connections. If a significant number of service providers decide not to offer
broadband services, the market for our software products will not grow as we
anticipate.


                                       5
<PAGE>

Sales of our software products largely depend on the increased use and
widespread adoption of broadband services and the ability of service providers
to market and sell broadband services, such as high-speed Internet access and
multi-channel digital television services, to residential subscribers.

   The telecommunications industry has suffered a significant slowdown in the
last 18 months, which is expected to continue for at least the next 12 months,
and there may be a reduction in the number of our potential customers due to
industry consolidation, financial difficulties or other factors. Even if
service providers decide to deploy broadband services, this deployment may not
be successful. Service providers have delayed deployments in the past and may
delay deployments in the future. Factors that could cause a service provider
not to deploy, to delay deployment of or to fail to successfully deploy the
broadband services for which our software products are designed include
the following:

  .  the financial difficulty suffered by many service providers, including
     incumbent local exchange carriers and other telephony providers;

  .  regulatory prohibitions, restrictions, uncertainties and delays;

  .  reduction in capital spending within the telecommunications industry;

  .  the quality of the service provider's network infrastructure and cost of
     infrastructure upgrades and maintenance;

  .  the inexperience of the service provider in providing broadband services
     and the lack of sufficient technical expertise and personnel to install
     products and implement services effectively; and

  .  the inability of the service provider to predict return on its
     investment in broadband-capable infrastructure and equipment.

   Unless service providers successfully deploy the infrastructure required to
provide broadband services to their subscribers, who are the ultimate
consumers of services based upon our software products, their networks will
not be capable of supporting our software products. If that deployment does
not occur, a market for our software products will not develop, and we will
not be able to achieve our business objectives or reverse our history of
losses.

If service providers fail to deploy services based upon our software products
throughout their service areas, our business will not grow.

   We generate revenues from initial license fees charged to our customers
based on the number of homes passed in a geographic area under license, and
from ongoing royalty fees charged to customers on a per subscriber basis. As a
result, our growth and future success depend substantially on our ability to
attract new customers and to convince these customers to deploy services based
upon our software products to their subscribers throughout their service
areas. We believe that many service providers will be unwilling to commit to
broad deployment of services based on our products until they have completed
trials of our software products as well as those of our competitors. Our
ability to sell our software products will depend principally on how
successfully we can demonstrate to service providers that:

  .  our software products are reliable and capable of delivering service to
     a large number of subscribers without degradation of quality;

                                       6
<PAGE>

  .  subscribers will purchase multi-channel digital television and
     interactive media services based on our software products at prices and
     in quantities that will justify the service provider's investment in our
     software products, related services and any necessary infrastructure
     upgrades;

  .  our software products will remain compatible with evolving industry
     standards and technology; and

  .  our software products will enable the service provider to sell new
     services to existing and new subscribers.

   We have licensed our software products to eight customers in North America,
Europe and Asia. Of these customers, three telephone companies have launched
commercial services to subscribers, one additional telephone company has
licensed DTV Manager for commercial deployment, and four other telephone
companies have entered into a trial license agreement. In addition, we have
installed DTV Manager for limited testing purposes on networks of ten other
service providers in North America, Europe and Asia. None of our customers are
contractually obligated to deploy, market or promote services based on our
software products, nor are any of our customers contractually required to
achieve any specific introduction schedule. Accordingly, even if a service
provider initiates a consumer trial of services based on our software
products, the service provider is under no obligation to continue its
relationship with us or to launch a full-scale deployment of services based on
our software products in the geographic area under license or more broadly
through its service territories. If service providers determine that services
based on our software products are not viable as a business proposition or if
they determine that the services do not meet their business or operational
strategies, they may stop using our software products to provide those
services. If we are unable to sell our software products and services to a
substantial number of additional service providers or if our existing and any
new customers fail to broadly deploy services based on our software products,
our growth prospects and revenues will suffer.

If our customers are unable to attract and retain subscribers, our revenues
will suffer.

   Our customers' subscribers are the ultimate consumers of multi-channel
digital television and interactive media services based upon our software
products. We expect to derive a substantial portion of our future revenues
from royalties charged to our customers on a per subscriber basis.
Accordingly, our revenues will depend to a significant extent upon the number
of subscribers to whom our customers deliver multi-channel digital television
and interactive media services based upon our software products. The extent to
which our customers attract and retain subscribers will depend on, among other
things, their ability to effectively configure and package, competitively
price and effectively market their service offerings.

   Also, many of our customers will face competition from companies that offer
multi-channel digital television and interactive media services through
alternative technologies that are incompatible with our software products.
These alternative technologies include coaxial cable, fixed wireless and
satellite technologies. Cable operators, in particular, are currently
deploying products that are capable of delivering voice, Internet and
television services over coaxial cable.

   We cannot assure you that our customers will succeed in attracting and
retaining a meaningful subscriber base that purchases services delivered
through our software products. If our customers are unable to attract and
retain a significant number of subscribers, our revenues will suffer, and we
may never become profitable.

                                       7
<PAGE>

Competitive products may reduce demand for our software products and thus
reduce the value of your investment in our common shares.

   We compete directly with Myrio Corporation, Minerva Networks, Inc.,
Thirdspace Living Limited and Orca Communications, which provide products and
services that are competitive with all or part of our software products and
related services. In addition, Liberate Technologies, an indirect competitor,
provides technology and services relating to interactive television.
Competition in the market for software products that enable the delivery of
multi-channel digital television or interactive media services is significant
and will likely persist and intensify over time. We cannot predict that we
will obtain or maintain the market share or pricing levels that we need to
become and remain profitable. By using the same standards upon which our
software products are based, a competitor with sufficient resources could
design and market a similar product that competes directly with our software
products. Some of our competitors may develop some or all of the interactive
media services that we intend to develop and may sell these services to
service providers for deployment separately or in conjunction with our
software products. This could have a significant effect on our ability to
expand the range of our product offerings over time.

   Many of our existing and potential competitors have longer operating
histories, larger customer bases, greater brand name recognition and
significantly greater financial, technical, sales, marketing and other
resources than we have. If we are unable to continuously improve our software
products or if we cannot generate effective responses to our competitors'
products, pricing strategies, advertising campaigns, strategic partnerships
and other initiatives, sales of our products and our profit margins may
suffer, and we may never become profitable.

Three customers generated 64% of our revenues in fiscal 2002, and we expect to
continue to rely on a limited number of customers for a significant portion of
our revenues for the foreseeable future.

   In fiscal years 1999, 2000 and 2001, we derived a significant portion of
our revenues from a limited number of customers. Since our target customer
base is primarily telephone companies and other service providers, excluding
cable and satellite network operators, we expect to continue to derive a
significant portion of our revenues from a limited customer base. In fiscal
1999, NBTel Inc. ("NBTel"), a subsidiary of Aliant, our largest shareholder,
accounted for 97% of our revenues. For fiscal 2000, NBTel, Kingston Vision, a
subsidiary of Kingston Communications (Hull) plc, the incumbent local exchange
carrier in East Yorkshire, England and SaskTel, the incumbent local exchange
carrier in the Province of Saskatchewan, each accounted for more than 10% of
our revenues and together accounted for 85% of our revenues. For fiscal 2001,
Aliant, CenturyTel, a provider of integrated communication services in 20
states in the U.S., and Boardwalk Equities, an operator of multiple dwelling
units in Canada, each accounted for approximately 10% or more of our revenues
and together accounted for approximately 55% of our revenues. For fiscal 2002,
Aliant, Sasktel and CenturyTel each accounted for more than 10% of our
revenues and together accounted for approximately 64% of our revenues. In
particular, for fiscal 2002, Aliant accounted for 30% of our total revenues.
For further information on our sources of revenue, see "Management's
Discussion and Analysis--Overview" in "Item 5. Operating and Financial Review
and Prospects." If new customers from our limited base of potential customers
do not license our software or if our existing and any new customers are not
successful in selling services based upon our software products to a
significant number of subscribers, we may never become profitable.


                                       8
<PAGE>

We have a large portion of our common shares held by a small number of our
shareholders. This concentration can affect shareholder votes and cause our
share price to be volatile in the public trading market.

   A large portion of our common shares is held by a small number of
shareholders. As a result, these shareholders are able to influence the
outcome of shareholder votes on various matters, including the election of
directors and extraordinary corporate transactions, including business
combinations. In addition, the occurrence of sales of a large number of our
common shares, or the perception that these sales could occur, may affect our
share price and could impair our ability to obtain capital through an offering
of equity securities. Furthermore, the current ratios of ownership of our
common shares reduce the public float and liquidity of our common shares which
can in turn affect the market price of our common shares.

The failure of interactive television to gain broad market acceptance could
limit our potential growth and revenues.

   Our DTV Manager software enables service providers to deliver interactive
media services in addition to multi-channel digital television services. Some
of our anticipated growth depends, among other things, on the broad acceptance
of interactive television by industry participants, including broadcast and
pay-television networks and manufacturers of televisions and set-top boxes,
and their ability to successfully market interactive television to viewers and
advertisers. Interactive television is a relatively new and emerging business,
and we cannot guarantee that it will attract widespread demand or acceptance
in any of our markets. There have been several well-financed, high profile
attempts in the United States to develop and deploy systems in the broad
category of interactive television. None of these attempts has resulted in
large-scale deployment, and many key industry participants have avoided
participating in interactive television. If interactive television fails to
gain market acceptance, subscriber growth may be adversely affected and our
ability to generate revenues may be restricted.

If we fail to introduce new functionality in our products or if our new
products are unsuccessful, our growth prospects will be limited. We also may
not recover revenues in the amounts we expend for research and development
costs.

   We generate revenues from one-time license fees, royalties payable by
service providers on a per subscriber basis and fees for related maintenance
and professional services. In order to generate long-term revenue growth and
become profitable, we believe we must continue to add new functionality to our
products. In many instances, this new functionality may require the use of new
technologies and/or adherence to new industry standards. To meet this
challenge, we must obtain key contributions from programmers, product
planners, technical architects and other internal staff. We must also obtain
proper information from the marketplace, including our customers and industry
analysts. Our failure to meet this challenge in any way could limit our growth
prospects. We cannot assure you that any costs that we expend for research and
development will result in the generation of any revenues by us.

If we fail to develop and maintain relationships with industry participants,
our business could suffer.

   We rely and expect to continue to rely upon non-exclusive relationships
with a number of major participants in the telecommunications, computer and
software industries to ensure the interoperability of our software with their
hardware and software, such as network and encoder equipment, set-top boxes
and database software systems, and to market and jointly promote the sale of
our products with their products. Generally, our arrangements and formal
agreements with these industry participants are short-term or terminable on
short notice. Further, other industry relationships remain informal. We
typically do not

                                       9
<PAGE>

receive any monetary compensation, in the form of revenues, referral fees or
otherwise, under these arrangements, and we typically do not directly generate
revenues from these arrangements. If the nature of these relationships changed
significantly, or if these relationships failed to evolve in ways consistent
with our business plan, our software products would still operate with their
third-party hardware and software, but our ability to market and sell our
software products could suffer.

If we fail to hire and retain personnel with the necessary skills and
knowledge, the implementation of our business plan could slow and/or our
growth could halt.

   Competition for highly skilled technical, sales, marketing and support
personnel is intense because there are a limited number of people available
with the necessary technical skills, knowledge of the telecommunications
industry and understanding of the market. Any failure to attract, assimilate,
train or retain qualified personnel to fulfil our current or future needs
could slow implementation of our business plan or halt our growth.

   Our future success depends upon the continued services of our executive
officers who have critical industry experience and relationships that we rely
on to implement our business plan. Our key executive officers are Gerald Pond,
Chief Executive Officer, Marcel LeBrun, President and Chief Operating Officer,
Allan Cameron, Vice President of Technology and Jeffrey White, Chief Financial
Officer. The loss of the services of any of these individuals could delay the
development and introduction of, and negatively impact our ability to sell,
our software products and related services.

Currency exchange rate fluctuations could adversely affect our financial
results.

   Fluctuations in foreign exchange rates may affect our results of
operations, which in turn may adversely affect reported earnings and the
comparability of period-to-period results of operations. As our operations are
currently based in Canada, a significant portion of our expenses is in
Canadian dollars. However, a substantial part of our revenues is currently
generated in U.S. dollars, and we expect that a majority of our revenues for
the foreseeable future will be generated in U.S. dollars. If the Canadian
dollar appreciates against the U.S. dollar, our results of operations could be
materially adversely affected. Also, changes in foreign exchange rates may
affect the relative prices at which foreign competitors and we sell products
in the same market.

Risks Related to Our Technology

If our software cannot support and manage a substantial number of users,
demand for our products and services will decline significantly.

   Our software relies on the large-scale use of Internet Protocol and, more
specifically, Internet Protocol multicast technology. Our customers'
commercial deployments to date have shown that our software can support the
concurrent delivery of multi-channel digital television and interactive media
services to approximately 10,500 subscribers. While we believe that our
software, through the use of Internet Protocol multicast technology, can
support delivery of multi-channel digital television and interactive media
services to a significantly larger number of customers without significant
redesign or expense, there is currently no large scale customer deployment of
our software products to support our belief. If our software's reliance on
Internet Protocol multicast technology significantly limits the ability of our
customers to serve their desired subscriber base, demand for our software
products and related services will decline, our ability to generate revenues
will suffer and we may incur significant costs.

                                      10
<PAGE>

If suppliers do not continue to manufacture and make available products that
support our software, we may be unable to meet the demands of service
providers.

   Although we have designed our software so that it can be adapted to work on
a number of different hardware and software platforms, we must modify our
software each time we adapt it to a new platform. At this time, our software
operates only on the following server, database and set-top box platforms:

  .  a Sun Microsystems server platform;

  .  an Oracle Corporation database platform; and

  .  a Pace Micro Technology plc ("Pace") or Thomson Consumer Electronics
     Inc. ("Thomson") set-top box platform.

   If the availability of these products becomes limited, or if the cost of
these products increases, we may be unable to meet, in a timely and cost-
effective manner, demand for software that runs on alternative servers,
databases and set-top boxes. Moreover, although we believe that we can adapt
our software to operate on other servers, databases and set-top box platforms,
we would have to incur additional costs to do so and cannot assure you that
our software products would operate successfully in actual deployment on any
of these other platforms. If we fail to satisfy our customers' demands, they
may cease doing business with us and our revenue will suffer.

Rapid technological advances or the adoption of new standards could impair our
ability to deliver our products to service providers in a timely manner. As a
result, our revenues would suffer.

   Our success depends in large part on our ability to keep our software
current and compatible with evolving technologies and standards. Unexpected
changes in technology or standards could disrupt the development of our
software products and prevent us from meeting deadlines for the delivery of
our software products. If we are unable to keep pace with technological
advancements and adapt our software to new standards in a timely manner, we
may lose customers and our revenue will suffer.

The occurrence of any defects, errors or failures in our software could result
in delays in installation and loss of customers.

   Our software is complex and may contain undetected defects, errors or
failures. These problems have occurred in our software in the past. Additional
problems may occur in our software in the future, which could result in the
loss of, or delay in, market acceptance of our software products. In addition,
we have limited experience with commercial deployment, and we expect
additional defects, errors and failures as our business expands from trials to
commercial deployment of our software product with customers. These problems
could result in a loss of sales and additional costs and liabilities to us,
including loss of our existing customers.

If our technology is responsible for the failure of any service provider to
deliver services to subscribers, our reputation and viability could be
seriously damaged.

   We expect that most service providers that purchase our software products
will deliver multi-channel digital television and interactive media services
in conjunction with voice and Internet services. If our software is
responsible, or appears to be responsible, for a failure to deliver voice,
Internet or television, a likely result would be severe customer service or
public relations problems that could seriously damage our reputation and
viability.


                                      11
<PAGE>

Risks Related to Legal Uncertainties

Because much of our potential success and value lies in our ownership and use
of intellectual property, our failure to protect our intellectual property
could negatively affect us.

   Our ability to compete effectively is dependent in large part upon the
maintenance and protection of our intellectual property. We currently do not
have patents or trademark registrations protecting our products and other
intellectual property other than a Canadian trademark registration for a
stylized form of the word "ImagicTV." To date, we have relied on trade secret
and copyright law, as well as confidentiality procedures and licensing
arrangements, to establish and protect our rights to our technology. We
typically enter into confidentiality or license agreements with our employees,
consultants, customers, strategic partners and vendors in an effort to control
access to and distribution of our software, documentation and other
proprietary information. Despite these precautions, it may be possible for a
third-party to copy or otherwise obtain and use our proprietary technology
without authorization. Policing unauthorized use of our intellectual property
is difficult. The steps we are taking may not prevent misappropriation of our
intellectual property, and the agreements we enter into may not be
enforceable. In addition, effective intellectual property protection may be
unavailable or limited in some jurisdictions outside Canada and the United
States. Litigation may be necessary in the future to enforce or protect our
intellectual property rights or to determine the validity and scope of the
proprietary rights of others. That litigation could cause us to incur
substantial costs and divert resources away from our daily business, which in
turn could have a material adverse affect on our business.

We may be subject to damaging and disruptive intellectual property litigation.

   The software development and interactive television businesses are very
litigious. We may be subject to intellectual property litigation that could:

  .  be time-consuming and expensive;

  .  divert attention and resources away from our daily business;

  .  impede or prevent delivery of our products and services; and

  .  require us to pay significant royalties, licensing fees and damages.

   Although we are not aware that any of our software products or related
services infringe any published patents or registered trademarks, and although
we have not been served notice of any potential infringement, we may be
subject to infringement claims in the future. Because patent applications are
kept confidential for a period of time after filing, applications may have
been filed that, if issued as patents, could relate to our products or
services.

   Parties making claims of infringement may be able to obtain injunctive or
other equitable relief that could effectively block our ability to provide our
products and services in Canada, the United States and other jurisdictions,
potentially resulting in us being required to pay substantial damages. In the
event of a successful claim of infringement, our customers and we may need to
obtain one or more licenses from third-parties, which may not be available at
a reasonable cost, if at all. The defence of any lawsuit could result in time-
consuming and expensive litigation, regardless of the merits of such claims,
as well as resulting damages, license fees, royalty payments and restrictions
on our ability to provide our products or services, any of which could harm
our business.


                                      12
<PAGE>

Laws and government regulation and policies in various jurisdictions may
restrict the willingness or ability of service providers to license our
software product and deliver multi-channel digital television and interactive
media services to subscribers.

   Service providers in jurisdictions where we currently do business and where
we intend to do business in the future operate in heavily regulated
industries. Although we, in providing our products and services, are not now
directly subject to significant regulation, our existing and potential
customers are subject to laws, regulations and policies, including licensing
and permit requirements, zoning restrictions, laws regulating the provisioning
of television services, copyright laws which may be interpreted or amended to
restrict the capture and "time shifting" of television programming and foreign
share ownership restrictions, that could adversely affect their willingness or
ability to:

  .  invest in technology necessary for our software to operate; or

  .  offer multi-channel digital television and interactive media services to
     subscribers.

   As a result, these laws, regulations and policies may impede sales of our
software products and related services. For a more thorough discussion of the
regulatory issues that may affect our business, see "Business Overview--
Regulation of Service Providers" in "Item 4. Information on the Company."

If we are treated as a passive foreign investment company for U.S. federal
income tax purposes, our U.S. shareholders may be subject to an unfavourable
tax regime.

   While we believe, based on our income, assets and activities, that we
should not be a passive foreign investment company for our taxable year ended
February 28, 2002, it is possible that we will nonetheless be treated as a
passive foreign investment company for U.S. federal income tax purposes for
such taxable year or for later taxable years. If we are classified as such, a
special tax regime would apply to "excess distributions" with respect to
shares held by a U.S. shareholder and gain realized in the disposition of
shares held by a U.S. shareholder, unless the U.S. shareholder timely makes an
election available under applicable law. For a more thorough discussion of the
passive foreign investment company rules, see "Certain Canadian and United
States Income Tax Considerations--United States Federal Income Tax
Considerations--Passive Foreign Investment Company Considerations" in "Item
10. Additional Information."

   You should rely only on the information contained in this annual report. We
have not authorized any other person to provide different information. The
information appearing in this annual report is as of May 14, 2002. Our
business, financial condition, results of operations and prospects may have
changed since that date.

ITEM 4. INFORMATION ON THE COMPANY

A.History and Development of the Company

  See "Organizational Structure" in "Item 4. Information on the Company."

   Our principal executive officers are located at One Brunswick Square, 14th
Floor, Saint John, New Brunswick E2L 3Y2, Canada. Our agent for service in the
United States is CT Corporation System, located at 111 Eighth Avenue, 13th
Floor, New York, New York 10011, whose telephone number is (212) 590-9200.

                                      13
<PAGE>

B.Business Overview

   We develop and license infrastructure software products and provide related
services that enable telephone companies and other service providers to
deliver multi-channel digital television and interactive media services to
their subscribers' televisions and personal computers over a broadband or
high-speed communications network. Our software is based on open, Internet-
based standards for software and networking and is designed to work in
conjunction with industry standard third-party hardware and software. Service
providers can implement our software in conjunction with industry standard
third-party hardware and software over existing copper phone lines using xDSL
technology, including ADSL and various broadband access technologies such as
fiber to the home and broadband wireless technologies.

   Our customers include incumbent local exchange carriers and other telephony
providers. We also offer our software products and related services to
providers of broadband transmission services such as power and utility
companies and Internet service providers.

   We believe telephone companies and other service providers are seeking
solutions that will allow them to deliver multi-channel digital television
services and other revenue generating applications bundled with their existing
voice and Internet service offerings and thus to compete with cable and
satellite television operators in the emerging market for integrated voice,
Internet and television services. By implementing our primary software
product, DTV Manager, over existing broadband networks and by acquiring and
installing additional equipment as subscribers activate service, we believe
that service providers can cost-effectively offer their subscribers the
following services through televisions and personal computers:

  .  Digital television with unlimited channel capacity; and

  .  interactive media services, such as:

    .  Internet-on-television, including e-mail and Web access;

    .  video-on-demand;

    .  self-service pay-per-view;

    .  an interactive program guide; and

    .  a customizable television portal that provides access to various
       available services, including television stations, web sites, digital
       music channels and e-commerce sites.

   Our DTV Manager software also enables service providers to manage
subscriber accounts through service provisioning, customized package offerings
and integrated voice, Internet and television billing.

The ImagicTV Solution

   Our software enables telephone companies and other service providers to
deploy multi-channel digital television and interactive media services over a
broadband network. It is designed to work in conjunction with industry
standard third-party hardware and software and to integrate with the service
provider's existing network and systems. Our software takes advantage of
advancements in communications transmission technology, Internet Protocol
networking standards and video and audio

                                      14
<PAGE>

compression technologies. To implement our software, the service provider's
network must comply with various Internet-based standards for software and
networking.

   Third-party hardware and software are required to utilize our software
products. At this time, our software operates on a Sun Microsystems server
platform, an Oracle database platform and a Pace or Thomson set-top box
platform. Required video encoder equipment is available from Harmonics
Software Inc. We are currently upgrading the set-top box components of DTV
Manager to operate on a Next Level Communications, Inc. set-top box platform.
We anticipate further modification of our software in the future so that it
will operate on other servers, databases and set-top box platforms.
Furthermore, our software products are designed to operate over standard
network equipment deployed by our customers, which consists of hardware
products from a variety of vendors, including Alcatel, Cisco Systems, Inc.,
Innovia Telecom, Lucent Technologies Inc. and Next Level Communications.

   Our software products are designed to support multiple televisions and
personal computers in the home. The number of televisions and personal
computers in a home that our software can support will depend upon the
capacity of the broadband network and the type of video compression employed
by the service provider. For example, using current ADSL technology at
transmission rates of six megabits per second and with data compression
allowing video transmission at a rate of 3.5 megabits per second, our software
can support one television and one personal computer over a single line to the
home. By further compressing data to allow video transmission at a rate of 2.5
megabits per second, the service provider can simultaneously support service
to two televisions and a personal computer over the same line. With faster
technologies such as VDSL and fiber to the home, where and when available, the
service provider can use our software to support additional devices in the
home. In each case, a subscriber can also use the same line to simultaneously
access telephone and high-speed Internet services while using our software
products to access television services.

Products and Services

   Our software products currently consist of DTV Manager, pcVu, Movie Manager
and the iMagicTV Developer Network (IDN) which are offered together with our
related professional services and maintenance and technical support services.

DTV Manager

   DTV Manager, our primary product, is a suite of software that integrates,
supports and manages the hardware and software components of the service
provider's network to enable the service provider to deliver multi-channel
digital television and interactive media services from its head office to its
subscribers' homes. DTV Manager software falls into three broad categories:
viewer component software, administration system software and operations
system software.

   Viewer Component Software. The viewer component software supports set-top
boxes in a subscriber's home and allows the subscriber, through the use of a
standard television remote control, a wireless keyboard or other device, to
browse through a television portal or an interactive program guide, to make
on-screen selections of video-on-demand programming and television, pay-per-
view and Web channels, and to view information banners that appear at the top
of the television screen when new channels are selected. The interactive
program guide and the television portal are features of the viewer component
software that a service provider can customize to brand its service offering
and incorporate local content. The interactive program guide includes up to
seven days of information on channel content, which a service provider may
update on a regular basis. The television portal also provides access to
interactive channels which, for example, may offer online shopping, online
banking, Web browsing, video-on-demand and other services. The viewer
component software is stored in memory on

                                      15
<PAGE>

the set-top box. Without any action required by the subscriber, a service
provider can make changes to the viewer component software by remotely
distributing software updates over the service provider's network to the
subscriber's set-top box.

   Administration System Software. The administration system software allows
service providers to maintain information about subscribers, including the
subscriber's profile, class of service, passwords and usage. It supports
workstations at a service provider's head office, where the service provider's
administrative personnel can use subscriber information to define and
configure subscriber accounts and programming packages. Administration system
software also allows a service provider's administrative personnel to manage
individual subscriber accounts, for example, by blocking particular television
channels pursuant to a subscriber's requests.

   Operations System Software. The operations system software facilitates the
service provider's management of the content delivered to subscribers. The
operations system software consists of a variety of components resident on
servers at the service provider's head office and at the subscriber's premises
on a set-top box or PC. These components allow the service provider to track
and collect subscriber usage data, to deliver television programming
information to set-top boxes, to initialize and support the set-top boxes and
to run a business support system and a network management system. Through the
operations system, a service provider can also customize programming packages.

pcVu

   pcVu works in conjunction with DTV Manager and allows a subscriber to
receive multi-channel digital television services on a personal computer. It
includes a software-based tuner resident on the personal computer and does not
require additional hardware in the personal computer. pcVu is designed to
deliver high quality digital broadcast television signals so that, to the
subscriber, there is no visible distinction between a broadcast delivered over
a television and a broadcast delivered over a personal computer. The pcVu
software is designed to allow a subscriber to watch television while
simultaneously using his or her Web browser and other standard software
packages.

Movie Manager

   Movie Manager works in conjunction with DTV Manager to allow subscribers to
access DVD quality video content on demand. It provides VCR style control to
the subscriber through the use of the set-top box remote control. With Movie
Manager, the service provider can manage the delivery of the content and
customize its business application for video rentals by the subscriber.

iMagicTV Developer Network (IDN)

   The iMagicTV Developer Network is an Independent Software Vendor (ISV)
program. Its purpose is to help developers create applications that extend
ImagicTV software solutions. Its members have access to a complete set of
application development resources, including a developer's toolkit, a
developmental environment, training and support. In addition, our customers
can use IDN is to develop their own solution on top of our platform.

Services

   Professional Services. We provide professional services that a service
provider may need in conjunction with the introduction of a DTV Manager
service offering. For example, we offer project management services, which
assist the service provider in defining its subscribers' needs and creating an
implementation plan. We also offer ongoing program management services,
including operational

                                      16
<PAGE>

planning, marketing strategy and portal design and customization. In addition,
we assist service providers in identifying and negotiating agreements with
potential hardware, software and content providers.

   Maintenance and Technical Support Services. We provide comprehensive
technical support services that include training, installation, configuration,
maintenance and support services. We assist customers in the design of their
networks, the selection of hardware and software components and the
integration of our software with their existing systems. We also offer a
training course for all new customers prior to receiving and installing a
system. In addition, we provide direct on-site or telephone support. We also
maintain an Internet-based management interface to our equipment to assist
with diagnostics.

Benefits of Our Software

   Our software products and related services are designed to provide numerous
potential benefits to service providers and enable service providers to
deliver various benefits to their subscribers.

Benefits to the Service Provider

   Our software is designed to provide the following benefits to service
providers:

  .  Integrated Bundled Services to Subscribers. Service providers can offer
     subscribers multi-channel digital television and interactive media
     services, through the television and the personal computer, in
     conjunction with voice and high-speed Internet services. This offers a
     service provider the potential opportunity to increase its revenue
     stream from existing subscribers and to increase its subscriber base.

  .  Uses Existing Infrastructure. Service providers can take advantage of
     existing broadband networks, including xDSL, fiber optic and wireless
     broadband access technologies, to implement DTV Manager. As a result, we
     believe that service providers can quickly and cost-effectively design
     and implement our software products. Subsequent investments in
     technology are variable and directly related to the number of
     subscribers the service provider activates or anticipates activating.

  .  Flexible Technology Architecture. Our software products are based on
     open, Internet-based standards and are designed to work in conjunction
     with industry standard, third-party hardware and software. Our software
     can simultaneously support xDSL, fiber optic and wireless broadband
     technologies on a single network so that a service provider can continue
     to use our software throughout its network upgrade process.

  .  Scalability. Our software products take advantage of Internet Protocol
     multicast technology and are designed to enable a service provider to
     simultaneously serve a large number of subscribers from a single server
     without degradation of service and without any changes to our software.
     Our infrastructure software is based on industry leading scalability
     products.

  .  Ability to Fully Manage Network Remotely. Using features of DTV Manager,
     a service provider can remotely perform diagnostics and reboot set-top
     boxes in subscribers' homes. DTV Manager keeps track of a variety of
     information related to subscriber usage and maintains error-log files so
     that the service provider can troubleshoot problems from its premises.


                                      17
<PAGE>

  .  Ability to Deliver Integrated Television Portal. An important element of
     DTV Manager is its ability to enable our customers to integrate a Web-
     based portal page with the services they offer. A service provider can
     customize its portal with local content and seek to generate additional
     revenue by selling space to advertisers, such as e-commerce companies
     and local subscriber area merchants.

  .  Customized Services and Pricing. Service providers can brand their
     service offerings and customize them to particular subscribers or groups
     of subscribers by offering a variety of program packages. Service
     providers can also structure a variety of subscriber payment packages
     based on subscription, pay-per-view and other pricing models.

  .  Unlimited Channel Capacity and Enhanced Media Services. Our software can
     support an unlimited number of channels and allows for the delivery of
     video-on-demand, digital music, Internet content and web sites as
     separate channels in addition to broadcast television channels.

  .  Customized Revenue Generating Applications. Using the tools and
     application program interfaces available under the IDN, our customers
     have the ability to quickly build customized applications to potentially
     increase their average revenue per subscriber.

  .  Integration with Existing Systems. DTV Manager is designed to integrate
     with a service provider's existing accounting, marketing and network
     management software systems. For example, DTV Manager's integration with
     existing billing systems allows, subject to regulatory restrictions, a
     service provider to deliver one bill to a subscriber for voice, Internet
     and television services.

Benefits to the Subscriber

   With our software, service providers can deliver the following benefits to
their subscribers:

  .  Multi-channel Digital Television. Subscribers can access multi-channel
     digital television through standard televisions and personal computers.

  .  Feature-Rich Interactive Program Guide. An interactive program guide
     allows subscribers to view present and future programming information
     and to make on-screen selections of television shows, pay-per-view
     programs, web sites and other content. Subscribers can also use the
     interactive program guide to access a parental control feature that
     enables them to select and block access to channels.

  .  Always on Internet-on-Television. Our software allows for "always on"
     Internet access through the television. With browser software resident
     in set-top boxes and "always on" Internet access, subscribers can be one
     click away from the Internet at all times. Subscribers can browse the
     Web and can send and receive e-mail using the set-top's remote control
     or wireless keyboard.

  .  New Programming and Entertainment Options. The subscriber may access a
     host of enhanced services, including video-on-demand, e-commerce,
     digital music, Web channels and self-serve pay-per-view, without
     requiring equipment changes or service calls.



                                      18
<PAGE>

  .  Convenient Service Offering Package. Subscribers can receive voice,
     Internet and television services through one service provider and can
     pay for these services on a single bill, if offered.

Strategy

   Our goal is to become the leading developer and provider of software
products and related services that enable telephone companies and other
service providers to deliver cost-effectively and manage multi-channel digital
television and interactive media services. Our strategy includes the following
key objectives:

  .  Expand Our Sales and Marketing Efforts. We intend to establish market
     leadership by continuing to focus on the successful and wide scale
     deployment of our software with our current customers and by expanding
     our customer base.

  .  Continue to Build Our Global Presence. Currently we have sales offices
     in Canada, the United States, the United Kingdom and Singapore. We plan
     to continue our presence in North America, Western Europe and in select
     countries in Asia, where we intend to establish sales and service
     centres.

  .  Develop and Expand Our Industry Relationships. We currently have sales,
     marketing and development relationships with several vendors. We believe
     that forging and expanding relationships with key vendors is critical to
     a broad deployment of our products and services and for the further
     development of our software products.

  .  Continue to Enhance Our Products and Develop New Applications. We intend
     to continue investing in research and development, focusing our spending
     on product enhancements and new applications that are designed to enable
     service providers to generate additional revenues, or reduce costs.

  .  Adhere to Industry Standards. We believe that adherence to industry
     standards and development principles strengthens our market position.
     Accordingly, we support these standards and development principles
     throughout our product line. This approach is designed to enable service
     providers to integrate our software products with their existing
     infrastructure on a cost-effective basis.

Technology

Implementation Architecture

   Our software products work with network, head-end and set-top box
components and operate on network architecture that is based on Internet
Protocol and other standard protocols. Head-end equipment is located at the
service provider's premises and consists of digital video equipment and a
server suite. Digital video equipment gathers, processes and distributes
video, and typically includes satellite dishes and receiver units, encoders
and Internet Protocol gateways. The server suite stores and powers DTV Manager
software, standard Web server software and standard database software. Set-top
boxes run DTV Manager client software, provide support for the MPEG and
Internet Protocol multicast technology used in our software and include a Web
browser for integrated Internet capability.

   Three key technologies support our implementation architecture: MPEG,
Internet Protocol multicast and broadband transmission.



                                      19
<PAGE>

  .  MPEG is our main data standard and supports the delivery of high quality
     video and audio over an Internet Protocol network;

  .  Internet Protocol multicast, our data transmission standard, supports
     the efficient delivery of generic data such as video and audio, as well
     as software and set-top configuration data throughout the network
     delivering large amounts of data over a network efficiently because the
     server can broadcast one message to many recipients simultaneously; and

  .  Broadband communications technology provides the speed and capacity
     necessary to deliver multiple data streams, including video channels,
     over a single medium such as twisted pair copper wire or fiber optic
     cable.

   To enhance the capabilities of their existing twisted pair copper wire,
service providers can deploy an xDSL-based architecture, including DSL access
multiplexers and xDSL modems. Generally, DSL access multiplexers connect
broadband lines in the service provider's transport network, or backbone, to
xDSL lines in the service provider's access network. In addition, DSL access
multiplexers separate high-speed data from voice data, putting high-speed data
on the network and low-speed voice data on the conventional phone system. DSL
access multiplexers are located in the service provider's central office or
remote switching centre. xDSL modems connect a set-top box or personal
computer in the home to the xDSL lines in the access network. When MPEG video
is delivered to the set-top box through the xDSL modem, the set-top box
decodes the MPEG video and sends it to the television. In some cases, the xDSL
modem is built into the set-top box.

How Video is Delivered Over an Internet Protocol Network

   Typically, video is distributed from the service provider's head-end to
subscribers in three steps:

  .  Video Capture. Satellite dishes and receiver units capture digital
     television signals in the form of MPEG streams.

  .  Video Conversion. Video encoders or other similar devices convert the
     MPEG streams into Internet Protocol-compliant video streams.

  .  Video Multicasting. Video encoders and network components transmit
     Internet Protocol-compliant video streams over the network to the home.

   At the home, when subscribers use a remote control or wireless keyboard,
this action triggers the set-top box to issue a request to join the
corresponding Internet Protocol multicast address where the corresponding
channel can be found. In response to the request, the server adds the
subscriber to the Internet Protocol multicast address and sends the related
channel data to the set-top box.

Research and Development

   Our research and development efforts focus on the continued development and
enhancement of our existing products and services as well as the development
of new applications and services. These efforts are based on input both from
our customers and from our research and development staff.

   We are currently engaged in the development of the following new products
which we expect to offer as enhancements or "add ons" to DTV Manager:


                                      20
<PAGE>

  .  Virtual VCR. This service would enable subscribers to store and replay
     digital broadcast television and other video content on an "on-demand"
     basis without a video cassette recorder.

  .  Rich Media Applications. This service would enable service providers to
     deliver a pre-packaged bundle of interactive broadband channels to
     subscribers with imbedded interactive e-commerce applications linked to
     third-parties. One example is a channel offering a movie and pizza
     package that subscribers can order through their television. We expect
     that two-way channel services would often be co-branded with retail and
     consumer brands.

   Other on-going research and development efforts include:

  .  developing the next release of DTV Manager to provide additional
     enhancements and features based upon input we have received from service
     providers;

  .  upgrading the viewer component of DTV Manager to enable it to operate on
     the next generations of set-top boxes from Pace, Thomson, and to operate
     for the first time on Next Level Communications' set-top box;

  .  creating a version of our electronic program guide, which provides for
     the presentation, display and design of the guide and data in HTML
     format;

  .  development of a distributed video on demand architecture to allow for a
     more efficient and effective management of video assets; and

  .  enhancement of our DTV Manager infrastructure software to continue
     adopting industry leading standards such as JAVA 2 Enterprise Editor,
     "J2EE," development standard using tools such as BEA infrastructure
     platforms.

   In October 2000, we entered into a memorandum of understanding with America
Online, Inc. to develop custom applications related to the interoperability of
our software with America Online's services. Under the terms of the memorandum
of understanding, we agreed to work with America Online on investigative
research and development, particularly in the delivery of advertising to
selected subscriber groups, and obligated ourselves to provide $500,000 of
research and development services in this regard. We further agreed that, if
America Online licenses our DTV Manager software on a trial basis or for
commercial deployment, we will be contractually obligated to provide an
additional $2.5 million of continued research and development services
relating to these and other custom applications. As of May 14, 2002 we have
not commenced the initial research and development work with America Online
and as such have not incurred any of these costs. See "Item 18. Financial
Statements" "Notes to Consolidated Financial Statements" Note 9(c) for
additional details of our agreement with America Online.

Customers

   We have licensed our software products to eight customers in North America,
Europe and Asia and currently generate revenues from all of these customers.
Of these customers, four telephone companies have licensed DTV Manager for
commercial deployment and four other telephone companies have entered into
trial license agreements. In addition, we have installed DTV Manager for
limited testing purposes on the networks of ten other service providers in
North America, Europe and Asia. Our license agreements, with those customers
who have licensed for commercial deployment, generally grant a long-term or
perpetual license to use our software products within a specified territory,
sometimes on an

                                      21
<PAGE>

exclusive basis. While our license agreements generally give limited
termination rights to the customer, some of the early commercial license
agreements we entered into, which are applicable to two of our customers, are
terminable by the customer at its option by advance notice to us. None of our
customers, however, are contractually obligated to deploy, market or promote
services based on our software, nor are any of our customers contractually
required to achieve any specific subscriber introduction schedule. For further
information with regard to the risk that our customers will not deploy
services based upon our software to their subscribers, see "Risk Factors--If
service providers fail to deploy services based upon our software products
throughout their service areas, our business will not grow" in "Item 3. Key
Information."

   These license agreements also generally provide for the payment of an
initial license fee, fixed per subscriber royalty fees, typically calculated
on a monthly basis, and fees for maintenance and technical support services.
Because we negotiate our license agreements on an individual basis, the type
of agreement, the amount, timing and other payment terms of initial license
fees, royalty fees and annual fees for maintenance and technical support
services typically differ from one customer to another. In addition, we plan
to charge separate initial license fees and ongoing royalty fees for any new
products that we may introduce.

   Our customers are located in Canada, the United States, Europe and Asia.
The following table identifies, as of May 14, 2002 some of our currently
licensed customers. For additional information on our customers please read
"Item 5. Operating Results and Liquidity and Capital Resources."

<TABLE>
<CAPTION>
   Customer Name   Description and Geographic Area
   -------------   -------------------------------
   <C>             <S>
   Kingston Vision A subsidiary of Kingston Communications (Hull) plc, the
                   incumbent local exchange carrier in East Yorkshire, England.
   NBTel           The incumbent local exchange carrier in the Province of New
                   Brunswick and a subsidiary of Aliant Telecom Inc.
   CenturyTel      CenturyTel Service Group, L.L.C., a provider of integrated
                   communications services in 20 U.S. states.
   MTT             The incumbent local exchange carrier in the Province of Nova
                   Scotia and a subsidiary of Aliant Telecom Inc.
   SaskTel         Saskatchewan Telecommunications, the incumbent local
                   exchange carrier in the Province of Saskatchewan.
   SingTel         Singapore Telecommunications Ltd., the incumbent local
                   exchange carrier in Singapore.
   Telenor         Telenor AS, Research and Development Establishment, the
                   incumbent local exchange carrier in Norway.
</TABLE>

Industry Relationships

   We believe that our success depends, among other things, on our ability to:

  .  market our software products and services to a substantial number of
     customers, and thereby build a large potential royalty base;


                                      22
<PAGE>

   .  ensure the interoperability of our software with hardware and software
from third-party vendors; and

   .  develop new products and services to enhance our software products.

   In order to achieve better these goals, we have entered into non-exclusive
agreements or understandings with a number of participants in the
telecommunications, computer, software and interactive media industries,
including:

  .  network and encoder equipment providers, such as Advanced Fibre
     Communications, Inc., Alcatel, Cisco Systems, Harmonic Software, Nortel
     Networks, Viagate Technologies Inc. and Optibase Ltd.;

  .  server hardware and software providers, such as Oracle and Sun
     Microsystems;

  .  set-top box manufacturers, such as Motorola, Pace and Thomson; and

  .  content and interactive media service providers and broadcasters, such
     as America Online and Atom Shockwave.

   Generally, our agreements and understandings with these industry
participants are short-term or terminable on short notice, and neither
generate revenues from the participant nor require us to pay any fee to the
participant other than out-of-pocket expenses. In addition, in the case of
joint marketing arrangements, we generally do not pay or receive referral
fees, and our obligations are generally limited to marketing and promotion
related activities. We also have and may continue to pursue informal industry
relationships with other third-parties.

Sales and Marketing

   We currently sell our software products and services through a direct sales
force and channel partners. As of May 14, 2002, our sales force consisted of
seven employees supported by a staff of 27 system integrators, sales engineers
and technical support specialists. Sales representatives are paid a salary
plus an incentive bonus based on sales. Direct sales professionals are located
in Saint John, New Brunswick; Halifax, Nova Scotia; Atlanta, Georgia;
Cambridge, England; Paris, France and Singapore. We use our direct sales force
to target service providers we believe provide the highest potential for
service deployment.

   To complement our direct sales efforts, we participate in trade shows in
North America and Europe and engage in joint marketing and sales with vendors
and other market participants with whom we have relationships. We belong to
related industry associations, and our representatives also speak at
telecommunications, e-commerce and multimedia events. In addition, we have
installed our DTV Manager software in customer demonstration centres of
various strategic equipment and software vendors, including Thomson, Sun
Microsystems and Alcatel, which are accessible to our potential customers.


                                      23
<PAGE>

Competition

   We face competition from a number of companies in the market for multi-
channel digital television and interactive media services. Our direct
competitors, Myrio Corporation, Minerva Networks, Thirdspace and Orca
Communications provide products that are sold to telephone companies and other
service providers and are competitive with all or part of our products. An
indirect competitor, Liberate Technologies, provides technology and services
related to interactive television. We also expect additional competition from
other established and emerging companies. We expect competition to persist and
intensify as the market for digital interactive television over broadband
further develops.

   We believe that the success of companies seeking to develop software that
provides telephone companies and other service providers with the ability to
deliver multi-channel digital television and interactive media services will
depend on the following factors:

  .  the ability to provide a complete solution for the delivery and
     management of digital interactive television;

  .  technology that is standards-based and non-proprietary, and is designed
     to work in conjunction with industry standard, third-party hardware and
     software;

  .  the quality and reliability of product offerings;

  .  the price and value of product offerings;

  .  the quality of customer service; and

  .  the ability to provide a deployed customer reference.

   We anticipate that a significant part of our future revenues will be
derived from subscriber-based royalty fees. These royalties will be wholly
dependent on our customers' success in attracting and retaining subscribers.
Our existing and potential customers compete for subscribers with many
different companies that offer video, audio, programming, entertainment,
Internet and voice services, such as cable television companies and direct
broadcast satellite service providers. Cable companies such as Cox
Communications, AT&T and AOL Time Warner Inc. in the United States and Rogers
Communications and Shaw Communications in Canada offer digital television and,
in some cases, limited interactive media and video-on-demand services to their
subscribers. Direct-to-home satellite television services such as DIRECTV,
Inc. in the United States, Bell Expressvu Inc. in Canada and British Sky
Broadcasting Group plc in the United Kingdom also offer digital television
and, in a limited number of cases, interactive and video-on-demand media
services. If existing and potential customers offer personal television
services using our Virtual VCR product currently under development, their
services will compete for subscribers with products and services provided by
TiVo, Inc. Many of these competitors have greater brand recognition, a larger
subscriber base and more significant financial, technical and other resources
than our customers. These competitors may also undertake more extensive
marketing campaigns than our customers and may adopt more aggressive pricing
policies.

   Advances in communications technology, as well as changes in the
marketplace and the regulatory and legislative environment, are constantly
occurring. We cannot predict the effect that ongoing or future developments
might have on the video programming distribution industry generally, our
customers or our Company.


                                      24
<PAGE>

Regulation of Service Providers

Overview

   Although, in providing our products and services, we are not now subject to
significant regulation, our existing and potential customers operate in
heavily regulated industries. Our existing customers are located in the United
States, various member countries of the European Union and Canada. The
paragraphs below summarize various regulatory matters within these
jurisdictions.

United States

   In the United States, the telecommunications and multi-channel video
programming distribution industries are subject to extensive regulation at the
federal, state and local levels. At the federal level, the Federal
Communications Commission, or FCC, regulates the interstate, mixed
intrastate/interstate and international aspects of the telecommunications
industries pursuant to its authority under the Communications Act of 1934, as
amended. Under the Communications Act, state authorities retain jurisdiction
to regulate intrastate telecommunications. Local authorities, pursuant to
their general zoning and police powers, regulate the distinctly local aspects
of telecommunications services, such as tower siting and infrastructure
placement. Federal, state and local authorities also share responsibility for
regulating the provision of multi-channel video programming distribution
services.

   Federal Regulation. Several FCC regulatory policies may affect the way in
which our customers can or choose to offer integrated voice, data and video
services. For example, federal law requires incumbent local exchange carriers
to offer their competitors cost-based access to certain network elements,
which elements comprise many of the significant facilities, features and
capabilities of their networks, in order to enable their competitors to
provide competing services. Although at this time incumbent local exchange
carriers in most cases are not required to provide unbundled access to high-
speed data switching equipment, they are required to offer high-speed data
services to their competitors for resale. Further, the FCC has required the
unbundling of the "high-frequency" portion of local transmission facilities,
which makes it easier and less expensive for competing carriers to offer
advanced services.

   These network access regulations are currently the subject of further FCC
rulemaking proposals and therefore, potentially subject to revisions,
petitions for reconsideration at the FCC and appeals in federal courts. The
uncertainties caused by these proceedings may cause potential customers to
delay purchasing our products and services. In addition, the outcomes of
related regulatory proceedings may cause potential customers to deploy less
than all of the high-speed data and broadband services for which our software
is designed, or to delay the widespread introduction of these services. For
example, these regulations and other developing laws, regulations and policies
may cause carriers to elect to provide high-speed data and broadband services
through a structurally separate affiliate, which could negatively affect
demand for our products and services.

   Legislation also has been proposed in Congress that could affect the
regulation of carriers providing high-speed data and broadband services. One
bill, currently before Congress, would, if it became law, grant incumbent
local exchange carriers substantially more flexibility in offering broadband
services. Other bills have been introduced that would provide incentives for
carriers to provide broadband services. We cannot predict whether these bills
will become law, or if any other communications-related legislation will be
introduced that might impact our business.

                                      25
<PAGE>

   Finally, to the extent that they are used for multi-channel video
programming distribution, our customers' networks may, for regulatory
purposes, be deemed to be "cable systems." Under the Communications Act, all
cable systems are required to:

  .  obtain a local franchise;

  .  comply with certain customer service standards;

  .  retransmit certain broadcast television programming;

  .  conform subscriber service and equipment rates to applicable federal
     regulations;

  .  comply with FCC equal employment opportunity rules and policies;

  .  make channel capacity available for public, educational and government
     programming; and

  .  comply with rules concerning the technical operation of cable systems.

   We cannot assure you that the burdens associated with federal cable system
regulation will not prevent or discourage potential customers from purchasing
or using our software and related services. For example, the FCC is currently
considering the adoption of rules that would ensure interactive television
services develop in a competitive fashion.

   State and Local Regulation. State and local authorities also have a role in
regulating the telecommunications and multi-channel video programming
distribution industries. Among other things, state regulatory authorities are
charged with developing and implementing cost-based prices for access to
network elements, and they may, consistent with federal law and policy,
establish additional network elements that must be made available by incumbent
local exchange carriers. At the local level, carriers seeking to install
additional transmission facilities may be required to obtain any of the
following:

  .  street opening and construction permits;

  .  permission to use rights-of-way;

  .  zoning variances; and

  .  other approvals from municipal authorities.

   Further, some state authorities have adopted cable television franchising
rules. Local jurisdictions throughout the United States regulate cable
television systems pursuant to their franchising authority. We cannot assure
you that regulatory developments at the state or local level will not prevent
or discourage our customers from developing or deploying networks capable of
supporting our software.

European Union

   In the European Union, which currently comprises 15 European countries,
including the United Kingdom, the telecommunications and multi-channel video
programming industries are subject to detailed sector-specific regulation.
Various laws, regulations and policies may require our customers to obtain and
be subject to approvals or authorizations in order to make use of our software
and related services within the European Union. For example, in the United
Kingdom, operators of

                                      26
<PAGE>

telecommunication systems and providers of television programming services are
required to obtain licenses under the Telecommunications Act of 1984 and the
Broadcasting Act of 1990, respectively. In addition, the United Kingdom's
Office of Telecommunications, also known as Oftel, has issued two general
authorizations, known as class licenses, which set out the rules which may
apply to our existing and potential customers that control the supply of
multi-channel digital television and other digital services to end users.

   The European Union Regulation on unbundled access to the local loop came
into force on December 18, 2000. Under this regulation, all fixed public
telephone network operators that have been designated by their national
regulatory authority as having significant market power were required to
provide unbundled access to their local loop network by December 31, 2000. For
example, a new condition in the license granted to British Telecommunications
plc pursuant to the Telecommunications Act of 1984, requires it to provide
access to its local loops.

   The European Union Commission and the various national regulatory
authorities of the member countries frequently review the regulatory
environment relating to telecommunications, broadcasting, media and e-commerce
industries. We understand that the general thrust of this review is to make
changes to the regulatory environment with the objective of creating an open
and competitive communications industry. We cannot assure you that these
changes will not result in us, or our customers, being subject to direct
regulation or that future regulation of our existing and potential customers
will not slow sales of our products and services or impede our ability to
compete effectively.

Canada

   Telecommunications and broadcasting services are subject to regulation
under several federal communications statutes, the most important of which are
the 1993 Telecommunications Act (Canada) and the 1991 Broadcasting Act
(Canada). These statutes permit the Canadian Radio-television and
Telecommunications Commission, or CRTC, to regulate certain aspects of the
provision of telecommunications and broadcasting services in Canada.

   The Broadcasting Act. Depending on how they use our products and services,
service providers may be required to obtain a license issued by the CRTC under
the Broadcasting Act if they transmit programs for reception by the public
through devices capable of receiving broadcasting signals. Such devices
include television sets, and in some cases computers and other terminal
equipment. The most common type of broadcasting license required by service
providers that use our products and services is a Broadcasting Distribution
Undertaking License.

   To be eligible to hold a broadcasting license, a service provider must
comply with rules that require certain levels of ownership and control by
Canadians. These constraints should not limit the number of Canadian incumbent
local exchange carriers or competitive local exchange carriers that may wish
to buy our software and related services, since they must already meet similar
Canadian ownership and control rules; however, these constraints may limit the
ability of other service providers to use our software and related services,
since some may not be able to qualify for a broadcasting license under the
Canadian ownership and control rules under the Broadcasting Act.

   The CRTC now licenses competing service providers to operate within the
service areas of incumbent cable television systems. There are two CRTC
licensed Direct-to-Home satellite-based distribution services operating on a
national basis. The CRTC has also licensed, on a regional basis, wireless
digital multi-point multi-channel distribution services. On a local basis,
through June 29, 2001, the CRTC has licensed competitive cable television
systems in rural Nova Scotia, Vancouver and Montreal. In addition, the CRTC
has granted a Broadcasting Distribution Undertaking License to NBTel

                                      27
<PAGE>

to provide services using our software and related services throughout the
Province of New Brunswick and similar licenses to MTT to service the Halifax
Regional Municipality in Nova Scotia and to SaskTel to service various
communities throughout the Province of Saskatchewan.

   The Telecommunications Act. Incumbent local exchange carriers, competitive
local exchange carriers and other providers of non-programming
telecommunication services are subject to regulation by the CRTC under the
Telecommunications Act; however, the CRTC has gradually been forbearing from
regulating many of the services offered by these carriers.

   The CRTC has also taken steps to promote competition in local
telecommunications service markets by issuing a number of decisions and orders
aimed at breaking down barriers to competition in these markets. We believe
that these decisions and orders will have a variety of impacts on service
providers. For example, CRTC regulation requires incumbent local exchange
carriers to offer their competitors cost-based access to some network
elements, enabling their competitors to provide competing services. We cannot
predict the effect these decisions and orders will have on our business.

Intellectual Property

   Our ability to compete is dependent in part upon our ability to protect our
intellectual property. We currently do not have patents or trademark
registrations protecting our products and other intellectual property, other
than a Canadian trademark registration for a stylized version of the word
"Imagic." To date, we have relied on trade secret and copyright law, as well
as confidentiality and licensing agreements, to establish and protect our
rights in our technology. Our current policy requires our officers, employees
and consultants to execute confidentiality agreements upon the commencement of
an employment or other relationship with us. These agreements typically
provide that all confidential information developed or made known to the
individual during the course of the individual's relationship with us is to be
kept confidential and not disclosed to third-parties except in specific
circumstances. In the case of employees, the agreements provide that all
technology that is conceived by the individual during the course of employment
with us is our exclusive property. Despite these efforts, it may be possible
for a third-party to obtain or use our technology without our authorization or
to develop similar technology through reverse engineering or other means.

   In June 1998, we filed a provisional patent application in the United
States in respect of aspects of our software products, which we formalized in
an application made under the Patent Co-Operation Treaty in June 1999. On
September 19, 2000, we filed a continuation-in-part application in the United
States with respect to the event-capturing component of the administration
system software within DTV Manager. Our event capturing software enables a
telephone company or other service provider to define, capture, store and
process all activities on its service network in real time. On September 28,
2000, we filed a continuation-in-part application in the United States with
respect to our pcVu software product. On September 29, 2000, we filed a
continuation-in-part application in the United States with respect to aspects
of the functionality of the proposed Virtual VCR enhancement to our DTV
Manager software. We cannot assure you that we will receive any of the patents
for which we have applied to date or will apply for in the future. Further, we
cannot assure you that the claims in any patents issued to us will be adequate
to prevent third-parties from using or developing non-infringing, competing
products which could materially adversely affect our business.

   We have several pending trademark applications covering some of our
important trademarks, logos and slogans in the United States, Canada and the
European Union, including: IMAGICTV; DTV MANAGER; the "Eye" Design, including
a stylized design with the word "ImagicTV"; and PCVU in Canada.


                                      28
<PAGE>

   See "Risk Factors--Because much of our success and value lies in our
ownership and use of intellectual property, our failure to protect our
intellectual property may negatively affect us" in "Item 3. Key Information."

Developments in Fiscal 2002

   In November 2001, we implemented a significant reorganization strategy,
which resulted in the termination of approximately 40 % of our workforce. This
was the culmination of a series of cost controlling measures started during
the fourth quarter of fiscal 2001.

   In February 2002, the Board of Directors appointed Jeffrey White as our
Chief Financial Officer. Mr. White has been with the Company for three years,
previously serving as its Director of Finance and Controller.

   In May 2002, the Board of Directors appointed Gerald Pond as our new Chief
Executive Officer. Mr. Pond has served as a member of the Company's Board of
Directors since January 1998.

   Concurrent with the appointment of Mr. Pond as Chief Executive Officer was
the shift in responsibilities for Marcel LeBrun, who had been President and
Chief Executive Officer from January 1998 to May 2002. Mr LeBrun remains in
his duties as President and assumes the additional responsibilities of Chief
Operating Officer.

C. Organizational Structure

   ImagicTV was incorporated under the Canada Business Corporations Act on
December 24, 1997 under the name iMagicTV Inc. On June 30, 1998 we amended our
articles to change our name to ImagicTV Inc. and to make certain revisions to
the terms of our share capital. Our articles were further amended on November
27, 2000 to convert each of our outstanding Class A, Class B and Class C
Common Shares into a single new class of common shares, to create a class of
preferred shares, issuable in series and, after giving effect to the
reclassification, split each new common share on a 1.1636-for-1 basis.

   iMagicTV (US), Inc. is a wholly owned subsidiary of ImagicTV and was
incorporated under the laws of the State of Delaware on November 17, 1999.
iMagicTV (UK) Limited is a wholly owned subsidiary of ImagicTV and was
incorporated under the laws of England on January 5, 2000 under the name
"Sinord 140 Limited". Its articles were subsequently amended to change its
name to its present name. ImagicTV is also registered for business in
Singapore.

D. Property, Plants and Equipment

  Our corporate headquarters and executive offices are located in Saint John,
  New Brunswick,

   Canada, where we occupy approximately 25,000 square feet of space, of which
we sublease approximately 17,000 square feet from NBTel for approximately
$222,000 per year. The lease on the space from NBTel is month-to-month, and
the lease on the remaining space expires in April 2005. We also lease sales
and marketing offices in Cambridge, England, Singapore and Research Triangle
Park, North Carolina.


                                      29
<PAGE>

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A. and B. Operating Results and Liquidity and Capital Resources

                     MANAGEMENT'S DISCUSSION AND ANALYSIS

   The following discussion and analysis should be read together with our
annual audited consolidated financial statements and the accompanying notes
included in this document as of and for the fiscal years ending February 28,
2002, February 28, 2001 and February 29, 2000. See "Item 18. Financial
Statements." All financial information is presented in U.S. dollars unless
otherwise noted.

   Some of the statements set forth in this report are forward-looking
statements relating to our future results of operations. Our actual results
may vary materially from the results anticipated by these statements. Please
see "Special Note Regarding Forward-Looking Statements."

Overview

   We are a provider of infrastructure software products and services that
enable telephone companies and other service providers to deliver multi-
channel digital television and interactive media services to their
subscribers' televisions and personal computers over broadband networks. Our
customers include primarily incumbent local exchange carriers and competitive
local exchange carriers.

   We were incorporated under the Canada Business Corporations Act in December
1997 upon the initiative of NBTel Inc., the incumbent local exchange carrier
in New Brunswick, Canada, and a subsidiary of Aliant Inc., our largest
shareholder. We began operations in January 1998 by acquiring technology
relating to digital broadcasting from NBTel and entering into a research and
development arrangement funded by NBTel and a subsidiary of Celtic House
International, another of our largest shareholders, pursuant to which we
further enhanced the acquired technology. We delivered the initial version of
our primary software product, DTV Manager, to NBTel in December 1998 for
technical trials. In the fall of 1999, after further development, we delivered
the production version of DTV Manager to NBTel and Kingston Vision, an
affiliate of the incumbent local exchange carrier in East Yorkshire, England,
and shortly thereafter both NBTel and Kingston Vision deployed multi-channel
digital television services to their subscribers using our DTV Manager
software. DTV Manager is now in its fourth generation.

   Our customers currently have approximately 12,900 subscribers receiving
multi-channel digital television services enabled by ImagicTV's DTV Manager in
Canada and the United Kingdom.

   We presently have eight customers in North America, Europe and Asia and
currently generate revenues from each of these. Of these customers, four
telephone companies have licensed DTV Manager for commercial deployment and
four other telephone companies have entered into trial license agreements. In
addition, we have installed DTV Manager for limited testing purposes on
networks of ten other service providers in North America, Europe and Asia. We
have not generated any revenues from these test installations.


                                      30
<PAGE>

Recent Developments

Reorganization

   The telecommunications industry has experienced a significant decrease in
its capital spending programs. During 1999 and 2000, the industry had rapid
growth in their infrastructure, primarily with the rollout of DSL along with
commercial deployments of the same. With the downturn in the economy that took
place during the calendar year 2001, much of these capital expenditures have
been curtailed and the industry, as a whole, is being cautious with the
introduction of new services at this time. In the fourth quarter of our fiscal
year 2001, we began to slow any increase in staffing levels and implement cost
containment measures in response to these industry developments. As the 2002
fiscal year progressed, it became apparent that our customers would be
delaying their decisions to proceed with the commercial launch of video
services that would include our software. As a result, in November 2001, we
implemented a comprehensive restructuring plan, which resulted in a reduction
in the number of our employees from 209 to 133. As of February 28, 2002 we had
131 employees. We have introduced new processes and tools to ensure our
operational effectiveness, despite our decreased staff.

Nasdaq

   On March 6, 2002, we received a letter from The Nasdaq National Market
notifying us that for the previous 30 consecutive trading days the price of
our common shares had closed below the $1.00 minimum per share closing bid
price requirement for continued inclusion on The Nasdaq National Market. If we
are not able to demonstrate compliance with the $1.00 minimum requirement by
June 4, 2002, Nasdaq will provide written notification that our common shares
are being delisted.

   If we determine that we will not satisfy the $1.00 minimum closing bid
price requirement for continued inclusion in The Nasdaq National Market by
June 4, 2002, we intend to apply to transfer our common shares to The Nasdaq
SmallCap Market where we can maintain our trading symbol and expect to have
the same liquidity afforded by The Nasdaq National Market. To transfer, we
must satisfy the continued inclusion requirements for The Nasdaq SmallCap
Market, which makes available an extended grace period until at least
September 3, 2002, for attaining compliance with the minimum $1.00 bid price
requirement. If we remain non-compliant in the $1.00 minimum closing bid price
requirement, but are compliant with its other continued listing
qualifications, we may qualify for an additional 180 day grace period beyond
September 3, 2002, to attain compliance with the $1.00 minimum closing bid
price requirement. If we submit a transfer application and pay the applicable
listing fees by June 4, 2002, initiation of the delisting proceedings will be
stayed pending the staff's review of the transfer application.

   There is a risk that our application to transfer to The Nasdaq SmallCap
Market may be denied. If our application is denied, we will have the ability
to appeal the delisting action; however, on appeal, management will be
required to present a compelling case to the Listing Qualifications Panel as
to why the delisting should not proceed.

   We are currently in compliance with all listing requirements on The Toronto
Stock Exchange and expect to remain so in the foreseeable future.

   The following discussion and analysis relates to our consolidated financial
statements which are stated in U.S. dollars and have been prepared in
accordance with Canadian GAAP. As applied to our current consolidated
financial statements, these principles conform in all material respects with
U.S. GAAP, except as disclosed in Note 12 to our consolidated financial
statements, included elsewhere in this annual report. See "Item 18. Financial
Statements."

                                      31
<PAGE>

CRITICAL ACCOUNTING POLICIES

   We periodically review our financial reporting and disclosure practices and
accounting policies to ensure that our financial reporting and disclosure
system provided accurate and transparent information relative to current
economic and business environment. As part of the process, we have reviewed
our selection, application and communication of critical accounting policies
and financial disclosures. We note that we have determined that our critical
accounting policies relating to our core ongoing business activities are
primarily those that relate to revenue recognition. Other important accounting
policies are described in Note 1 to our consolidated financial statements,
which we encourage you to read.

Sources of Revenues and Revenue Recognition Policy

   Typically, there are several phases that our customers go through prior to
proceeding with a commercial launch with ImagicTV. The first phase is the lab
trial where we typically do not generate royalty or license revenues. It is
during this time that a customer evaluates the technology as it is installed
on its own network, for internal purposes only. We provide technical
assistance and consulting services for these evaluations as necessary.

   The second phase generally involves a market trial, during which the
service is provided to a limited number of "subscribers" who agree to test the
service. During the market trial a service provider assesses its market and
product and tries to fine-tune its offerings and services. We expect to
recognize primarily professional services revenues during market trials
because they are significant undertakings during which time our customers
typically engage us in technical and other consulting services. This is the
final phase prior to moving to a commercial deployment.

   The final phase is commercial deployment of digital television and other
interactive media services. Commercial license agreements are entered into at
the start of this phase and include license fees, subscriber royalty fees and
ongoing annual maintenance fees. The current trend has been for us to offer a
lower upfront incremental license fee based on the total number of households
passed by the service provider. This license fee is structured typically to be
paid over the length of the contract to lower the cost of entry into the
market for our customers. We also offer our customers the option to pay
onetime subscriber royalties in increments or they may elect to pay ongoing
subscriber royalties. Different revenue arrangements provide for different
payment arrangements for competitive business reasons.

   In the past, our license agreements provided for an initial license fee and
a one-time subscriber-based royalty fee. We currently have two customers under
this type of arrangement. In early 2000, we began structuring our license
agreements to include both an initial license fee, based on the number of
households located in the geographic area under the license, and an on-going
monthly subscriber-based royalty fee. We expect future license agreements to
be flexible, for competitive reasons, and may use either type of subscriber
royalty fee arrangement.

   Services revenues are comprised of professional services and annual
maintenance and technical support services related to the implementation and
integration of our software products. Annual maintenance and technical support
revenues are typically equal to a percentage of our customers' initial license
fees. Services revenue from professional services to licensees can be based on
a time-and-materials framework or a fixed contract for a complete project
or installation.

   Equipment revenues are comprised of sales of digital set-top boxes resold
by us to our customers at little or no mark-up above our cost. We have not
sold set-top boxes directly to our customers since the


                                      32
<PAGE>

fiscal year ended February 28, 2001 and do not expect any significant revenues
from this activity in the future.

  The following table sets forth percentage of revenues by type for the
  fiscal years reflected:

<TABLE>
<CAPTION>
                                                                   Fiscal Year
                                                                  ----------------
                                                                  2000  2001  2002
       % Revenue by Type                                          ----  ----  ----
       <S>                                                        <C>   <C>   <C>
       License fees..............................................  66%   53%   15%
       Royalty fees..............................................  --    14%   28%
       Services..................................................  19%   20%   57%
       Equipment.................................................  15%   13%   --
</TABLE>

   The following table sets forth percentage of revenues by geography for the
fiscal years reflected:

<TABLE>
<CAPTION>
                                                                   Fiscal Year
                                                                  ----------------
                                                                  2000  2001  2002
       % Revenue by Geography                                     ----  ----  ----
       <S>                                                        <C>   <C>   <C>
       Canada....................................................  65%   42%   50%
       United States.............................................  --    41%   30%
       Europe....................................................  35%   17%   16%
       Asia......................................................  --    --     4%
</TABLE>

   The following table sets forth percentage of revenues by customer,
excluding equipment revenue for the fiscal years reflected:

<TABLE>
<CAPTION>
                                                                   Fiscal Year
                                                                  ----------------
       % Revenue by Customer                                      2000  2001  2002
       --EXCLUDING EQUIPMENT                                      ----  ----  ----
       <S>                                                        <C>   <C>   <C>
       NBTel / Aliant............................................  35%   19%   30%
       SaskTel...................................................  15%   --    17%
       CenturyTel................................................  --    20%   17%
       Nortel Networks...........................................  --    12%   --
       Boardwalk Equities........................................  --    10%   --
       Kingston Vision...........................................  36%   --    --
       Other (less than 10%).....................................  14%   39%   36%
</TABLE>

   We did not recognize any equipment sales in fiscal 2002. In fiscal 2001,
however, Aliant, CenturyTel, Nortel and Boardwalk Equities accounted for
approximately 28%, 18%, 10% and 10%, respectively, of our total revenues,
including equipment. In fiscal 2000 NBTel, Kingston Vision and SaskTel
accounted for 38%, 31% and 16%, respectively, of our total revenues, including
equipment sales.

   We recognize software licensing revenues in accordance with all applicable
accounting regulations, including the American Institute of Certified Public
Accountants Statement of Position ("SOP") 97-2, "Software Revenue
Recognition", and SOP 98-9, "Modification of SOP 97-2 with respect to Certain
Transactions" and Section 3400 of the Canadian Institute of Chartered
Accountants Handbook.


                                      33
<PAGE>

   Following the requirements of SOP 97-2, we recognize license revenues when
all of the following conditions are met:

  .  we have signed a license agreement with the customer;

  .  we have delivered the software product to the customer;

  .  the amount of the fees to be paid by the customer is fixed or
     determinable; and

  .  we believe that collection of these fees is probable.

   We generally negotiate formal license agreements with our customers. Each
of our commercial license agreements includes provisions for us to receive
both an up-front license fee and royalties. Generally, service providers pay
these royalty fees either in the form of a non refundable one-time royalty
payment for a pre-set number of subscribers, a one-time per subscriber
activation royalty payment or a monthly royalty fee based upon the number of
active subscribers at the end of each month. Non refundable one-time royalty
payments for a fixed number of subscribers are recorded as revenue when it is
determined that the software has been delivered and accepted, the collection
of the amount is probable and we have no further obligations related to the
provision of the royalty license. One-time royalty activation payments are
recognized quarterly based on the net increase in the number of subscribers at
the end of each quarter. Monthly royalty fees are recognized monthly based on
the number of active subscribers at the end of each month.

   We often negotiate license agreements that allow for the payment of the
initial license fee to be made in future instalments over a period of less
than a year. Revenues recognized in advance of the instalments being due are
recorded as an instalment receivable in the balance sheet.

   Maintenance and technical support revenues are recognized evenly over the
applicable service period, which is usually one year. Revenues derived from
professional services are recognized upon performance of the related services.

   Revenues derived from license agreements containing multiple deliverables,
such as product licenses, maintenance and technical support and other
services, are allocated among the various deliverables based on the fair value
of each deliverable based on vendor-specific objective evidence of fair value.
For arrangements where we cannot establish vendor-specific objective evidence
of fair value for the delivered license portion of the arrangement, we use the
residual method to recognize revenue. Under the residual method, for
arrangements where we can establish vendor-specific objective evidence for all
undelivered elements, which are typically service and maintenance, we allocate
that value to the revenue relating to the undelivered elements and record the
remaining value of the contract as license revenue.

   In fiscal 2002, we generated approximately 50% of our revenues in U.S.
dollars, with the balance primarily in Canadian dollars and incurred
approximately 67% of our expenses in Canadian dollars, with the balance in
U.S. dollars and other currencies. We expect that a majority of our revenues
will be generated in U.S. dollars for the foreseeable future and that most of
our expenses, including labour costs as well as capital and operating
expenditures, will continue to be denominated in Canadian dollars. If the
Canadian dollar appreciates against the U.S. dollar, our results of operations
could be materially adversely affected.


                                      34
<PAGE>

Results of Operations

For fiscal years ended February 28, 2002, February 28, 2001 and February 29,
2000.

Revenues

  The following table sets forth revenues for the periods reflected:

<TABLE>
<CAPTION>
                              For the years ended        2001 v. 2000      2002 v. 2001
                         ----------------------------- ----------------- ------------------
                         29-Feb-00 28-Feb-01 28-Feb-02 $ Change % Change $ Change  % Change
                         --------- --------- --------- -------- -------- --------  --------
                              (in thousands of U.S. dollars, other than percentages)
<S>                      <C>       <C>       <C>       <C>      <C>      <C>       <C>
Revenues:
 License fees...........  $1,384    $4,770    $  631    $3,386    245%   $(4,139)     (87%)
 Royalty fees...........      --     1,288     1,197     1,288     --        (91)      (7%)
 Services...............     393     1,791     2,387     1,398    356%       596       33%
 Equipment..............     321     1,150        --       829    258%    (1,150)    (100%)
                          ------    ------    ------    ------    ---    -------     ----
Total revenues..........  $2,098    $8,999    $4,215    $6,901    329%   $(4,784)     (53%)
                          ======    ======    ======    ======    ===    =======     ====
</TABLE>

   Excluding equipment sales, the decrease from fiscal 2001 to fiscal 2002 was
$3.6 million. The decrease in revenues for fiscal 2002 was the result of the
general slowdown in the telecommunication sector during which our customers
have delayed their transition from market trial to commercial deployment,
which is the point at which we typically earn a significant portion of our
license revenues. We expect services to continue to be a significant source of
revenue.

   Aliant (NBTel and MTT), SaskTel and CenturyTel accounted for approximately
30%, 17% and 17% of our revenue for fiscal 2002. For fiscal 2001, Aliant,
CenturyTel, Nortel and Boardwalk Equities accounted for approximately 28%,
18%, 10% and 10%, respectively, of our total revenues. NBTel, Kingston Vision
and SaskTel accounted for 38%, 31% and 16%, respectively, of our total
revenues for fiscal 2000. Excluding equipment sales, the comparable
percentages for fiscal 2001 are Aliant 19%, CenturyTel 20%, Nortel 12% and
Boardwalk Equities 10% and the comparable percentages for fiscal 2000 are
NBTel 35%, Kingston Vision 36% and SaskTel 15%.

   LicenseFees. Our license fees decreased from fiscal 2001 to fiscal 2002,
primarily because we did not sign any new commercial license agreements during
fiscal 2002. The license fees recognized during fiscal 2002 relate to revenue
recognized under contracts that were executed in fiscal 2001 for which the
recognition criteria were not achieved until fiscal 2002.

   The increase from fiscal 2000 to fiscal 2001 was due to the recognition of
license fee revenues of approximately $4.8 million from 11 customers.

   Royalty Fees. Royalty fees were comparable for the fiscal years 2002 and
2001 and were primarily impacted by large one-time royalty payments from
Aliant for approximately $1.0 million and $1.2 million, respectively. We do
not expect to receive any significant royalty payments from Aliant in fiscal
2003 as they have pre-paid royalty fees for a significant number of
subscribers. The balance of the royalty fees reported for fiscal 2002 and 2001
is primarily from Kingston Vision's commercial service. We expect that our
royalty fees revenue will fluctuate in fiscal 2003 and beyond as our current
and future customers may choose to pay either one-time upfront fees or ongoing
monthly royalty fees.

   The increase from fiscal 2000 to fiscal 2001 was due to the recognition of
royalty fee revenues of approximately $1.3 million consisting of $1.2 million
in one-time subscriber based royalties from Aliant and $39,000 in on-going
monthly subscriber based royalties from Kingston Vision.

                                      35
<PAGE>

   Services. Services revenue generated under maintenance contracts increased
to $876,000 in fiscal 2002 from $610,000 in fiscal 2001. We expect that
revenues generated under maintenance contracts will increase as we enter into
new commercial licenses and as our current customers renew their annual
maintenance contracts. The remainder of the services revenue was generated
from professional services supplied to our customers as they pursued market
trials of our product. We expect that services revenue will be a significant
portion of our revenue in the short term as the number of new commercial
licenses is not expected to increase significantly in fiscal 2003.

   Services revenues increased to $1.8 million for fiscal 2001 from $393,000
for fiscal 2000. During fiscal year 2001 we recognized approximately $900,000
of the services revenues for consulting and implementation services provided
to one of our customers. The remainder of these services revenues came from
maintenance and technical support services that we provide to our customers
under the terms of their license agreements with us.

   Equipment. We received no revenue from equipment sales for fiscal 2002 and
do not expect any appreciable amount of equipment revenue in the future as we
ceased selling equipment to our customers in fiscal 2002. Our customers
currently purchase equipment directly from manufacturers and they are expected
to do so in the future. Equipment was previously sold at a pass-through cost,
or with a minimal mark-up, to our customers.

   Equipment revenues increased to $1.2 million for fiscal 2001 from $321,000
for fiscal 2000. This increase was due to the recognition in fiscal 2001 of
$1.0 million of equipment revenues from sales of set-top boxes to Aliant under
a set-top box supply agreement.

Cost of Revenues

   Cost of services revenues include compensation, travel and other related
expenses for our maintenance and technical support services and professional
services departments, along with allocated facilities expenses. To date, the
cost of license fee revenues has been insignificant. Cost of license fees
includes royalties paid to third-party software providers whose products are
embedded in our software products. Sun Microsystems has been our principal
supplier of third-party software. Sun Microsystems granted us a non-exclusive
license to incorporate into and distribute with DTV Manager certain of its
Java-based system software until November 2000 and the agreement has been
renewed annually since that time. Pursuant to the license, we pay variable
royalties to Sun Microsystems on a per subscriber basis, depending on the
total number of our customers' subscribers, and on a per network server basis,
depending on the total number of servers operating DTV Manager.

   Cost of equipment revenue includes the cost of set-top boxes purchased for
resale. Our customers currently purchase equipment directly from the
manufacturer and as such, we no longer incur these costs.


                                      36
<PAGE>

   The following table sets forth the cost of revenues for the periods
reflected:

<TABLE>
<CAPTION>
                              For the years ended         2001 v. 2000      2002 v. 2001
                         ------------------------------ ----------------- ------------------
                         29-Feb-00 28-Feb- 01 28-Feb-02 $ Change % Change $ Change  % Change
                         --------- ---------- --------- -------- -------- --------  --------
                               (in thousands of U.S. dollars, other than percentages)
<S>                      <C>       <C>        <C>       <C>      <C>      <C>       <C>
Cost of revenues:
  Services..............   $657      $2,379    $2,603    $1,722    262%   $   224        9%
  Equipment.............    331       1,068        --       737    223%    (1,068)    (100%)
                           ----      ------    ------    ------    ---    -------     ----
Total cost of revenues..   $988      $3,447    $2,603    $2,459    249%   $  (844)     (24%)
                           ====      ======    ======    ======    ===    =======     ====
</TABLE>

   The decrease in cost of revenue from fiscal 2001 to fiscal 2002 was
primarily due to our discontinuance of reselling set top boxes to our
customers as they now purchase them directly from the supplier. This will not
have an impact on our future margins as we resold the set top boxes at no or
very low margins. The cost of services increased marginally year over year as
our services revenue increased. We do not expect that in the near term the
services margin will be consistent as our existing services team must be
maintained in order to service our current customer needs for professional
services and maintenance support as well as to support our sales efforts.
Costs incurred within the service department that are directly attributable to
sales efforts are recorded as sales and marketing expenses.

   Cost of revenues increased from $988,000 for fiscal 2000 to $3.4 million
for fiscal 2001. This increase, excluding the $737,000 increase related to
equipment costs, reflected an increase in personnel in our customer service
and professional services departments to support our increased customer base
from nine employees as of February 29, 2000 to 25 employees as at February 28,
2001.

Operating Expenses

   The following table sets forth operating expenses for the periods
reflected:

<TABLE>
<CAPTION>
                              For the years ended         2001 v. 2000      2002 v. 2001
                         ------------------------------ ----------------- -----------------
                         29-Feb-00 28-Feb- 01 28-Feb-02 $ Change % Change $ Change % Change
                         --------- ---------- --------- -------- -------- -------- --------
                               (in thousands of U.S. dollars, other than percentages)
<S>                      <C>       <C>        <C>       <C>      <C>      <C>      <C>
Operating expenses:
  Sales and marketing...  $2,325    $ 7,763    $ 8,928  $ 5,438    234%    $1,165     15%
  Research and
   development..........   4,084      7,967      7,151    3,883     95%      (816)   (10%)
  General and
   administrative.......     827      2,815      4,582    1,988    240%     1,767     63%
  Restructuring expense.      --         --      1,162       --     --      1,162     --
                          ------    -------    -------  -------    ---     ------    ---
Total operating
 expenses...............  $7,236    $18,545    $21,823  $11,309    156%    $3,278     18%
                          ======    =======    =======  =======    ===     ======    ===
</TABLE>

   Total operating expenses increased by 18% from fiscal 2001 to fiscal 2002.
Our November 2001 restructuring resulted in a one time $1.2 million charge,
which included expenses for severance packages, re-employment consulting,
accelerated depreciation for headcount related capital expenses (i.e. computer
and other equipment) and closed office space.

   Sales and Marketing. Sales and marketing expenses consist primarily of
personnel and related costs for our direct sales force, technical sales
support staff, marketing staff and business development


                                      37
<PAGE>

staff, costs associated with marketing programs, including tradeshows, public
relations and marketing materials and allocated facilities costs.

  The following table sets forth the sales and marketing expenses for the
  periods reflected:

<TABLE>
<CAPTION>
                              For the years ended        2001 v. 2000      2002 v. 2001
                         ----------------------------- ----------------- -----------------
                         29-Feb-00 28-Feb-01 28-Feb-02 $ Change % Change $ Change % Change
                         --------- --------- --------- -------- -------- -------- --------
                              (in thousands of U.S. dollars, other than percentages)
<S>                      <C>       <C>       <C>       <C>      <C>      <C>      <C>
Sales and marketing.....  $2,325    $7,763    $8,928    $5,438    234%    $1,165    15%
</TABLE>

   The increase in sales and marketing from fiscal 2001 to fiscal 2002 was
primarily attributable to the increased size of the sales and marketing
department and related travel and headcount related expenses, compared to that
over the course of the previous fiscal year. Although we reduced the staff
levels from 54 employees at February 28, 2001 to 30 employees at February 28,
2002, we did not receive a half year's benefit of these reductions in our
expenses as many of these employees were not employed for the full year in
fiscal 2001. We expect to realize the full impact of these cost reductions in
fiscal 2003. We have mitigated the effects of the staff reductions by more
narrowly focusing on those activities which we feel have the greatest
potential for near-term revenue opportunities.

   Sales and marketing expenses increased to $7.8 million for fiscal 2001 from
$2.3 million for fiscal 2000. This increase was primarily due to the addition
of sales and marketing personnel, as well as increased travel and related
expenses. Our marketing department increased to 38 employees as of February
28, 2001 from 20 employees as of February 29, 2000. Our sales department
increased to 16 employees as of February 28, 2001 from six employees as of
February 29, 2000. These increases in staffing levels were the result of
efforts to expand our direct sales force coverage area and increase our
marketing activities.

   Research and Development. Research and development expenses consist
primarily of salary and other related costs for personnel, training,
independent consultants and facilities and technology expenses. Technology
expenses include license and support fees for development software, the cost
of tools and supplies and third-party support fees. We believe that continued
investment in research and development is critical to assist our customers in
achieving successful commercial deployments.

  The following table sets forth the research and development expenses for
  the periods reflected:

<TABLE>
<CAPTION>
                              For the years ended        2001 v. 2000      2002 v. 2001
                         ----------------------------- ----------------- -----------------
                         29-Feb-00 28-Feb-01 28-Feb-02 $ Change % Change $ Change % Change
                         --------- --------- --------- -------- -------- -------- --------
                              (in thousands of U.S. dollars, other than percentages)
<S>                      <C>       <C>       <C>       <C>      <C>      <C>      <C>
Research and
 development............  $ 4,084   $ 7,967   $ 7,151  $ 3,883    95%    $ (816)   (10%)
</TABLE>

   Research and development expenses, which consist primarily of salary and
related costs, decreased from fiscal 2001 to fiscal 2002 as a result of lower
costs incurred in the second half of fiscal 2002 subsequent to our November
2001 restructuring. The restructuring resulted in a decrease in the level of
staffing from 111 employees at February 28, 2001 to 63 employees at February
28, 2002. As a result of the staff reduction, our product development efforts
have been focused on those products that show the greatest potential for near-
term revenue opportunities.

   Research and development expenses increased to $8.0 million for fiscal 2001
from $4.1 million for fiscal 2000. This increase reflects an increase in
personnel in our research and development

                                      38
<PAGE>

department to 111 employees as of February 28, 2001 from 60 as of February 29,
2000 as we accelerated our efforts to develop new products and services.

   General and Administrative. General and administrative expenses include
compensation for corporate personnel and other expenses, including
professional fees, travel and facilities, net of allocations to our customer
service, research and development and sales and marketing departments. Our
general and administration department includes a portion of our executive
office, as well as finance, human resources and corporate operations staff.

  The following table sets forth the general and administrative expenses for
  the periods reflected:

<TABLE>
<CAPTION>
                              For the years ended        2001 v. 2000      2002 v. 2001
                         ----------------------------- ----------------- -----------------
                         29-Feb-00 28-Feb-01 28-Feb-02 $ Change % Change $ Change % Change
                         --------- --------- --------- -------- -------- -------- --------
                              (in thousands of U.S. dollars, other than percentages)
<S>                      <C>       <C>       <C>       <C>      <C>      <C>      <C>
General and
 administrative.........   $827     $2,815    $4,582    $1,988    240%    $1,767     63%
</TABLE>

   The increase in general and administrative expenses from fiscal 2001 to
fiscal 2002 resulted from increases in all areas including salary costs, costs
related to being a public company and other charges. Our salary costs
increased by approximately $489,000 year over year but are expected to be
lower in the future on an annualized basis after taking into account the staff
reduction in each of the general and administrative departments from 26 to 16
employees year over year as a result of the November restructuring. Additional
increases are attributable to costs associated with being a public company for
the full year such as insurance costs, which increased by approximately
$300,000 from the previous fiscal year, and increased investor relations
activities, professional fees for audit and legal services and director's
fees. We also incurred a bad debt expense of $856,000 related to two customers
and a charge of $144,000 for the closure of our Dallas office.

   General and administrative expenses increased to $2.8 million for fiscal
2001 from $827,000 for fiscal 2000. Our corporate staffing increased to 26
employees as of February 28, 2001 from 15 employees as of February 29, 2000,
principally to support our increased corporate activities related to becoming
a public company. We also incurred additional expenses to support our
international expansion.

   Stock-based compensation. Stock-based compensation expenses have been
allocated to the operating expense items based on the nature of the work
performed by the employee to whom the options were granted. Stock based-
compensation expense represents the difference between the exercise price of
options granted and the deemed fair value, for financial reporting purposes,
of our common shares on the date of their respective granting. This stock-
based compensation expense is being amortized on a straight-line basis over
the vesting period of the options which is generally four years. The expense
is largely attributable to amortisation of deferred stock-based compensation
related to options granted between May 2000 and August 2000.

   Stock-based compensation expenses declined to $317,000 in fiscal 2002 from
$550,000 for fiscal 2001. The reduction primarily relates to the reversal of
deferred stock compensation on non-vested options that was expensed prior to
an employee's termination. As the deferred stock-based compensation remaining
to be amortized over the future vesting periods is $393,000, we do not expect
this charge to be significant in future periods.

   Stock-based compensation expenses were $550,000 for fiscal 2001. We did not
record any stock-based compensation expense for fiscal 2000.


                                      39
<PAGE>

Other Income (Expense), Net

   Interest income increased to $1.7 million in fiscal 2002 from $1.1 million
in the previous year. The increase is attributable to the higher daily average
balance of cash and cash equivalents available to invest during the current
year compared to the prior year. We expect interest income to be lower in the
future as our funds available for investment are reduced through operating
losses. We do not hedge our exposure to foreign currency risk at this time. As
a result, we incurred a foreign exchange gain in fiscal 2001 of $426,000 and a
loss of $28,000 in fiscal 2002 primarily pertaining to movements between the
Canadian and U.S. exchange rate.

   Other income increased to $1.6 million for fiscal 2001 from $524,000 for
fiscal 2000. Interest income made up $1.1 million of other income for fiscal
2001 as compared to $121,000 for fiscal 2000. This increase in interest income
is primarily due to the investment of excess funds received from our private
placements in December 1999 and September and October 2000 and our November
2000 initial public offering. Other income for fiscal 2000 also included
income of $434,000 for forgiveness of debt.


                                      40
<PAGE>

Quarterly Results of Operations

   The following table sets forth certain unaudited consolidated statements of
operations data for each of the eight most recent quarters ended February 28,
2002. This information has been derived from our unaudited consolidated
financial statements that, in the opinion of our management, have been
prepared on a basis consistent with the audited consolidated financial
statements contained elsewhere in this annual report and, in the opinion of
our management, includes all adjustments, consisting only of normal recurring
adjustments, necessary for fair presentation of our financial position and
results of operations for those periods. These operating results are not
necessarily indicative of results for any future period. You should not rely
on them to predict our future performance.

<TABLE>
<CAPTION>
                         May 31,  Aug. 31,  Nov. 30,  Feb. 28,  May 31,  Aug. 31,  Nov. 30,  Feb. 28,
Quarter Ended             2000      2000      2000      2001     2001      2001      2001      2002
-------------            -------  --------  --------  --------  -------  --------  --------  --------
                               (in thousands of U.S. dollars, except per share amounts)
<S>                      <C>      <C>       <C>       <C>       <C>      <C>       <C>       <C>
Consolidated Statement
 of Operations Data:
Revenues:
 License fees........... $   512  $ 1,543   $ 1,662   $ 1,053   $   522  $    --   $    --   $   109
 Royalty fees...........      23       47       142     1,076        82       37        39     1,039
 Services...............     137      200       357     1,097     1,046      766       298       277
 Equipment..............      59    1,048         4        39        --       --        --        --
                         -------  -------   -------   -------   -------  -------   -------   -------
Total revenues..........     731    2,838     2,165     3,265     1,650      803       337     1,425
                         -------  -------   -------   -------   -------  -------   -------   -------
Cost of revenues:
 Services...............     318      360       624     1,077       810      801       557       435
 Equipment..............      58      972         4        34        --       --        --        --
                         -------  -------   -------   -------   -------  -------   -------   -------
Total cost of revenues..     376    1,332       628     1,111       810      801       557       435
                         -------  -------   -------   -------   -------  -------   -------   -------
Gross profit (loss).....     355    1,506     1,537     2,154       840        2      (220)      990
                         -------  -------   -------   -------   -------  -------   -------   -------
Operating expenses:
 Sales and marketing....   1,242    1,510     2,066     2,945     3,024    2,499     2,157     1,245
 Research and
 development............   1,537    1,653     2,444     2,333     2,251    1,853     1,622     1,425
 General and
 administrative.........     349      606       842     1,018     1,545    1,318       974       745
 Restructuring expense..      --       --        --        --        --       --     1,162        --
                         -------  -------   -------   -------   -------  -------   -------   -------
Total operating
 expenses...............   3,128    3,769     5,352     6,296     6,820    5,670     5,915     3,415
                         -------  -------   -------   -------   -------  -------   -------   -------
Loss from operations....  (2,773)  (2,263)   (3,815)   (4,142)   (5,980)  (5,668)   (6,135)   (2,425)
Other income, net.......      99       17       605       838       681      544       274       127
                         -------  -------   -------   -------   -------  -------   -------   -------
Loss before provision
 for income taxes.......  (2,674)  (2,246)   (3,210)   (3,304)   (5,299)  (5,124)   (5,861)   (2,298)
Provision for income
 taxes..................     (11)     (19)       (7)      (13)     (139)      (9)      (32)       59
                         -------  -------   -------   -------   -------  -------   -------   -------
Net loss--in accordance
 with Canadian and
 U.S. GAAP.............. $(2,685) $(2,265)  $(3,217)  $(3,317)  $(5,438) $(5,133)  $(5,893)  $(2,239)
                         =======  =======   =======   =======   =======  =======   =======   =======
Basic and diluted net
 loss per share--in
 accordance with
 Canadian and U.S. GAAP. $ (0.15) $ (0.13)  $ (0.16)  $ (0.13)  $ (0.22) $ (0.21)  $ (0.24)  $ (0.09)
                         =======  =======   =======   =======   =======  =======   =======   =======
Weighted average number
 of shares used in
 computing basic and
 diluted net loss
 per share..............  17,552   17,556    19,586    24,593    24,596   24,599    24,599    24,632
                         =======  =======   =======   =======   =======  =======   =======   =======
</TABLE>

Note: Certain prior period quarters have been reclassified to comply with
current financial presentation.

Liquidity and Capital Resources

   From our inception, we have financed our operations primarily through the
issuance of common equity, long-term debt and revenues from our operations.
Through February 28, 2002, we had received net proceeds of $84.4 million from
the issuance of common equity, approximately 83% of which was raised in fiscal
2001. As of February 28, 2002 we had cash equivalents of approximately $45.6
million and short-term investments of approximately $359,000 compared to cash
equivalents of $46.4 million and short-term investments of $14.3 million as of
February 28, 2001. As of February 28, 2002, we had an accumulated deficit of
approximately $39.0 million, increased from the accumulated deficit of $20.3
million on February 28, 2001.

                                      41
<PAGE>

   Our operating activities for fiscal 2002 used cash in the amount of $13.4
million compared to $12.1 million for fiscal 2001 and $3.8 million in fiscal
2000. The cash utilized during these periods was primarily to fund our
research and development and sales and marketing efforts.

   Our cash used in investing activities, before the purchase and/or sale of
temporary investments, was $1.2 million for fiscal 2002, $3.0 million for
fiscal 2001 and $992,000 for fiscal 2000. Cash used in investing activities
reflects purchases of computer equipment, office furniture and equipment and
leasehold improvements. We anticipate that our expenditures will remain
relatively flat in the future.

   Our cash used in financing activities for fiscal 2002 was $164,000,
$144,000 of which was used for the repayment of debt related to a loan
obtained from the Province of New Brunswick. There were also $20,000 in
additional initial public offering expenses that were recorded during fiscal
2002. In fiscal 2001 we generated $70.0 million from financing activities
through our private and initial public offerings and $10.6 million for fiscal
2000, consisting of $8.8 million from the issuance of common shares and
proceeds from long-term debt of $1.8 million.

   We expect that our future short-term obligations will be less than those of
fiscal 2002 due to the decrease in fixed operating expenses resulting from our
November 2001 restructuring. Our long-term debt consists of the above
mentioned loan from the Province of New Brunswick, the total amount of which
was approximately $1.8 million, which is repayable in equal instalments of
1.5% of total license fee revenues for the previous fiscal year, interest free
until February 25, 2006, at which point it converts to an interest bearing
loan at a rate of 6.3% per annum on any outstanding balance. We do not have
any other debt obligations.

   In the current marketplace the timing of the generation of revenue is an
uncertainty and is dependent upon our customers' decisions to move forward
with a commercial deployment of our solution and the timing related to that
decision. To provide the most conservative estimate, which assumes revenue is
at zero or a very nominal amount, we anticipate that we have sufficient cash
resources to fund operations for approximately the next 24 months from and
after February 28, 2002. If our expenses vary greatly from those that are
currently expected, we may need to raise additional capital to fund its
operations prior to the end of this 24 month period. In addition, if revenues
are not timely generated to the extent necessary to fund operations beyond
such 24 month period, we may also be required to raise additional capital to
fund our operations. We may attempt to obtain this additional capital through
the sale of debt or equity securities or borrowings under secured or unsecured
loan arrangements. We can provide no assurance that such capital or financing,
if necessary, will be available in a timely manner or on satisfactory terms.

Industry Risk

   The telecommunications industry, in the past 18 months, has experienced
significant economic pressure on revenues, earnings and return on investment.
In response, telecommunications companies have made significant reductions in
capital spending in many areas of their business including new and emerging
services. As a result, we have experienced a longer sales cycle as our
customers continue to delay their move from market trials to commercial
deployments. This has impacted our ability to earn license revenues which are
primarily earned from our customers' commercial deployments.

   Because the pressure on revenues for telecommunications companies is so
great, we expect that telephone companies will increase market trials in the
next 12 months to explore a new avenue of generating additional revenues over
existing infrastructure. If the current economic conditions continue, however,
our customers could continue to delay their move from the market trial stage
to commercial deployment until such time as the industry economics improve.
Accordingly, our license fee and royalty

                                      42
<PAGE>

fee revenues may be significantly delayed, may be less than previously
anticipated or may not significantly materialize if customers or potential
customers direct their capital spending in areas other than video deployment.

Impact of Interest Rate Exposure

   As of February 28, 2002, we had approximately $45.6 million in cash and
cash equivalents and short-term investments of approximately $359,000. A
significant portion of the cash earns interest at variable rates. Although a
portion of our short-term investments consists of fixed-rate instruments, the
average term is shorter than prior period investment holdings, as short-term
yield rates are currently in excess of longer-term rates. As a result, our
interest income is sensitive to changes in the level of prevailing interest
rates. Interest rates declined in fiscal 2002 and as a result we anticipate
our average yield earned on surplus funds in fiscal 2003 to be lower than
yields earned in fiscal 2002. We do not anticipate this situation to have any
short-term material adverse impact on our cash position or financial
condition.

Impact of Foreign Exchange Rate Exposure

   We continue to expect the majority of our revenues will be earned in U.S.
dollars, and that a significant portion of our operating expenses and capital
expenditures will be in Canadian dollars. Changes in the value of the Canadian
dollar relative to the U.S. dollar may result in currency translation gains or
losses, which could affect our operating results. We also deal in other
foreign currencies; however, we anticipate changes in the exchange rates of
these currencies will not have a material impact on our operating results.
While we do not hedge our foreign exchange rate exposure with financial
derivative instruments, we do maintain a portion of our short-term investment
portfolio in Canadian dollar denominated instruments.

C. Research and Development, Patents and Licenses, etc.

   See "Business Overview-Technology and Research and Development" in "Item 4.
Information on the Company."

D. Trend Information

   See "Management's Discussion and Analysis--Recent Developments" in "Item 5.
Operating and Financial Review and Prospects."

                                      43
<PAGE>

ITEM 6.DIRECTORS AND EXECUTIVE OFFICERS

A.Directors and Management

  Each of our directors is elected by the shareholders to serve until the
  next annual meeting of shareholders or until a successor is elected or
  appointed. Our executive officers are appointed annually to serve at the
  discretion of the Board of Directors. The association of certain directors
  to our major shareholders is disclosed in the notes to the table in "Share
  Ownership" in "Item 6. Directors and Executive Officers." The following
  table sets forth certain information about our directors and executive
  officers, as of May 14, 2002.

<TABLE>
<CAPTION>
   Name                      Age Position
   ----                      --- --------
   <S>                       <C> <C>
   Gerald L. Pond..........   57 Chief Executive Officer and Director
   Marcel LeBrun...........   32 President, Chief Operating Officer and Director
   Peter G.
    Jollymore(2)(3)........   61 Chairman of the Board of Directors
   Jeffrey White...........   33 Chief Financial Officer
   Nigel Bealing...........   39 Vice President of Sales, Europe, Middle East and Africa
   Norman Bier.............   41 Vice President of Sales, North and South America
   Allan Cameron...........   48 Vice President of Technology
   Pierre-Jean Chalon......   41 Vice President of Sales, Asia Pacific
   Dany DeGrace............   35 Vice President of Customer Solutions
   Gregory Allemann(2)(3)..   55 Director
   Joe C. Culp(1)(2).......   68 Director
   Carey Diamond(1)(3).....   47 Director
   Timothy Hember..........   42 Director
   Dr. Terence H. Matthews.   57 Director
   Robert E. Neal(1).......   47 Director
   Patrick Smith(1)........   56 Director
</TABLE>
  Notes:
  (1) Member of audit committee
  (2) Member of human resources committee
  (3) Member of governance committee

  The following is a summary of the background of each director and executive
  officer:

   Gerald L. Pond. Mr. Pond was appointed Chief Executive Officer of ImagicTV
in May 2002 and has served as a member of its Board of Directors of the
Corporation since January 1998. From March 1999 to December 2001, Mr. Pond
served as Executive Vice President of Aliant and from November 1994 to March
1999, he served as President and Chief Executive Officer of Bruncor Inc.
("Bruncor") and NBTel. He is currently serving on the Board of Directors of
Assumption Life, a mutual insurance company. Mr. Pond has a Bachelor of Arts
in Psychology from the University of New Brunswick.

   Marcel LeBrun. Mr. LeBrun co-founded ImagicTV and is currently serving as
President and Chief Operating Officer. He served as President and Chief
Executive Officer from January 1998 to May 2002. From June 1992 to December
1997, Mr. LeBrun held various positions at NBTel, including

                                      44
<PAGE>

   Managing Director of E-Business Services and other senior technical,
marketing and strategic business planning positions. Mr. LeBrun has a Bachelor
of Science in Electrical and Computer Engineering from the University of New
Brunswick.

   Peter G. Jollymore. Mr. Jollymore has been Chairman of the Board of
ImagicTV since January 1998. From 1967 until his retirement in December 1998,
Mr. Jollymore served in various positions at NBTel from design engineer to
Vice President of NBTel and its holding company, Bruncor. He serves on the
Board of Directors of the Business Development Bank of Canada and Callistro
Multimedia Inc., a computer software company producing video-on-demand
applications. He has a Bachelor of Science in Engineering from Mount Allison
University and a Bachelor of Engineering from the Technical University of Nova
Scotia.

   Jeffrey White. Mr. White has served as Chief Financial Officer of ImagicTV
since February 2002 and was Senior Director of Finance of ImagicTV from August
1999 to February 2002. From February 1996 to August 1999, he was Controller
for Genesys Telecommunications Laboratories, Inc., a wholly owned subsidiary
of Alcatel that provides universal queue contact centre solutions for customer
relationship management. He has a Bachelor of Business Administration from St.
Francis Xavier University of Nova Scotia and is a Chartered Accountant. He
resides in Saint John, New Brunswick.

   Nigel Bealing. Mr. Bealing has served as Vice President of Sales for
Europe, Middle East and Africa of ImagicTV since April 2001 and was European
Sales Manager of ImagicTV from October 2000 to April 2001. From October 1996
to October 2000, Mr. Bealing held various senior positions, including
Director--Northern Europe and European Sales Manager, at Optibase Europe Ltd.,
a company that provides broadband digital video-networking solutions and MPEG-
based digital video content. He resides in Berkshire, England.

   Norman Bier. Mr. Bier has served as Vice President of Sales for North and
South America of ImagicTV since April 2001 and served as Assistant Vice
President of Sales--U.S. of ImagicTV from October 2000 to April 2001 and as
General Manager--Eastern U.S. of ImagicTV from December 1999 to October 2000.
From January 1999 to December 1999, Mr. Bier was Vice President and General
Manager of Tel-Link LLC, a competitive local exchange carrier. From November
1994 to January 1998, he served as Vice President of an outsourcing billing
services unit at BellSouth Telecommunications. Mr. Bier resides in Cumming,
Georgia.

   Allan Cameron. Mr. Cameron co-founded ImagicTV and has served as Vice
President of Technology since January 1998. From May 1978 to December 1997,
Mr. Cameron held various positions, including strategic and technical planning
positions, at NBTel, where, among other things, he worked on the creation of
NBTel's Beacon/VideoActive? initiative, a deployment of broadband access
capabilities using coaxial cable. Mr. Cameron has a Bachelor of Science in
Engineering and a Master of Science in BioEngineering from the University of
New Brunswick. Mr. Cameron resides in Saint John, New Brunswick.

   Pierre-Jean Chalon. Mr. Chalon has served as Vice President of Sales for
Asia Pacific of ImagicTV since April 2001. From December 1996 to January 2001,
Mr. Chalon was Managing Director of Asia Pacific at CS Telecom, a manufacturer
of corporate networks and carrier access networks. He has a Master of Science
from the Institut National des Telecommunications in Evry, France. Mr. Chalon
resides in Singapore.

   Dany DeGrace. Ms. DeGrace has served as Vice President of Customer
Solutions of ImagicTV since February 2001 and was Senior Director of
Engineering of ImagicTV from June 1998 to February 2001. From April 1995 to
June 1998, Ms. DeGrace was a technical architect at Datacor/ISM, an IT

                                      45
<PAGE>

outsourcing company. She has a Bachelor of Scientific Computer Analysis from
the University of Moncton. Ms. DeGrace resides in Saint John, New Brunswick.

   Gregory Allemann. Since March 2001, Mr. Allemann has served as Vice
President of Marketing and Sales for WebOffice, Inc., a privately held
communications infrastructure company. Mr. Allemann is also President of
Allemann Associates, a consulting firm for the communications industry. In
2000, Mr. Allemann retired from SBC Communications ("SBC") after a 30-year
career in which he held a variety of positions in technology research, network
planning, network operations, product development, market planning and
procurement. During his last eight years with SBC, Mr. Allemann was Vice
President and Executive Director of Broadband Infrastructure and Services for
SBC's R&D subsidiary, SBC Technology Resources, Inc. He has served and chaired
the Texas Telecommunications Engineering Consortium and the Advisory Board of
the University of Texas Electrical Engineering Department.

   Joe C. Culp. Mr. Culp was elected as a director of ImagicTV in August 1999.
Since 1990, he has served as President of Culp Communications Associates, a
management consulting firm for the telecommunications industry. Mr. Culp has
served as President of Lightnet, a fiber optic telecommunications carrier that
Southern New England Telephone Company (now SBC Corporation) and CSX
Corporation owned. He has also served as President of the Telecom Group of
Rockwell International, a provider of electronic controls and
telecommunications equipment. Mr. Culp currently serves on the Board of
Directors of two privately held telecommunications companies. He has served on
the Advisory Board of the telecommunications group of the University of Texas,
Arlington and the University of Arkansas. He has a Bachelor of Science in
Electrical Engineering from the University of Arkansas. Mr. Culp resides in
Austin, Texas.

   Carey Diamond. Since 1996, he has served as President and Chief Executive
Officer of Whitecastle, a private investment company in Canada and as managing
director of its venture capital division Whitecap Venture Partners. From 1989
to 1996, Mr. Diamond served as Executive Vice President of Whitecastle. He
currently serves on the Board of Directors of Alterna Technologies Group Inc.,
Photonami Inc., Texar Corporation and Whitecastle, including its affiliate
companies. Mr. Diamond has a law degree from Osgoode Hall Law School, a
Bachelor of Arts in Economics from the University of Western Ontario and is a
member of the Law Society of Upper Canada.

   Timothy Hember. Since April 2001, Mr. Hember has served as Vice President
of Technology and Development for Alcatel, a company that designs, develops
and builds communications networks. From September 1999 to April 2001, he
served as Vice President of IPVPN Products for Alcatel. Mr. Hember founded
TimeStep Corporation, a virtual private network equipment company, in January
1994 and served as President and Chief Executive Officer of TimeStep from its
inception to September 1999. He currently serves on the Board of Directors of
Bridgewater Consultants, Inc., a privately held software development and
professional services firm. Mr. Hember has a Bachelor of Science in Electrical
Engineering from the University of Waterloo.

   Dr. Terence H. Matthews. Since June 2000, he has served as Chairman and
Chief Executive Officer of March Networks Corp., a networked video
applications company. Dr. Matthews founded Newbridge Networks Corporation, a
company that designs, manufactures, markets and services wide area network
solutions, in March 1986 and served as Chairman of the Board and Chief
Executive Officer of Newbridge from its inception to May 2000. Dr. Matthews
also co-founded Mitel Corporation in 1972 and returned to the company in
February 2001 as Chairman of Mitel Networks, a company focused on IP telephony
and convergence platforms. He is the principal of Celtic House. Dr. Matthews
holds an honours degree in electronics from the University of Wales, Swansea
and is a Fellow of the Institute of Electrical Engineers and of the Royal
Academy of Engineering. He has been awarded honorary doctorates by

                                      46
<PAGE>

several universities, including the University of Wales, Glamorgan, Swansea
and Carleton University in Ottawa.

   Robert E. Neal. Mr. Neal was elected as a director of ImagicTV in June
1999. Since June 2000, he has served as President of Innovatia Inc., a company
within the Aliant emerging business group that focuses on the development and
sale of Internet-based technology. Mr. Neal joined NBTel in 1979 and since
that time has held various positions with NBTel and its affiliates, including
Vice President from September 1998 to February 2000. Mr. Neal resides in
Quispamsis, New Brunswick.

   Patrick Smith. From July 1996 to July 2001, Mr. Smith served as Senior Vice
President of Systems Integration and Technology Planning of Sprint, a global
communications company. He served on the Board of Directors of Call-Net
Enterprises Inc., a telecommunications company operating in Canada as Sprint
and Crosskeys Inc., a publicly traded software company. Mr. Smith currently
sits on the board of three privately held software development companies.

B. Compensation

Compensation of Named Executive Officers

   The following table sets forth the compensation paid to Marcel LeBrun,
Nigel Bealing, Norman Bier, Allan Cameron, Marjean Henderson and Gerry Verner
(the "Named Executive Officers") for each of our three most recently completed
fiscal years. The Named Executive Officers are the only persons for whom
executive compensation disclosure is required under applicable Canadian
securities laws. We have not adopted any long-term incentive plans.

    Summary Compensation Table for the Fiscal Year Ended February 28, 2002

<TABLE>
<CAPTION>
                                                            Long-Term
                                Annual Compensation       Compensation
                           ------------------------------ -------------
                                                             Awards
                                           Other Annual    Securities      All Other
Name and Principal         Salary  Bonus  Compensation(1) Under Options Compensation(2)
Position              Year   ($)    ($)         ($)            (#)            ($)
------------------    ---- ------- ------ --------------- ------------- ---------------
<S>                   <C>  <C>     <C>    <C>             <C>           <C>
Marcel LeBrun,        2002 220,000 61,200     12,200              --        12,600
President and Chief   2001 163,400 50,200     12,700              --         8,900
Operating Officer(3)  2000  81,300     --      2,150         186,176         4,900
Nigel Bealing,        2002 115,000     --     12,400          50,000        17,000
Vice President of     2001  37,600     --      3,700          29,090        20,100
Europe, Middle East   2000      --     --         --              --            --
and Africa(4)
Norman Bier,          2002 134,200     --     11,700          25,000        77,100
Vice President of     2001 105,800     --         --          11,636        99,300
Sales for North and   2000  26,800     --         --           29,09        12,000
South America
Allan Cameron,        2002 110,000 30,600     12,200              --         6,300
Vice President of     2001  94,700     --     12,700              --         6,300
Technology            2000  73,100     --      2,150         162,904         4,400
Marjean Henderson,    2002 210,000 34,200     13,100              --        10,500
Chief Financial       2001 117,100     --      7,630         197,812            --
Officer(5)            2000      --     --         --              --            --
</TABLE>


                                      47
<PAGE>

<TABLE>
<CAPTION>
                                                               Long-Term
                                   Annual Compensation       Compensation
                              ------------------------------ -------------
                                                                Awards
                                              Other Annual    Securities      All Other
Name and Principal            Salary  Bonus  Compensation(1) Under Options Compensation(2)
Position                 Year   ($)    ($)         ($)            (#)            ($)
------------------       ---- ------- ------ --------------- ------------- ---------------
<S>                      <C>  <C>     <C>    <C>             <C>           <C>
Gerry Verner,            2002 110,000 30,600     12,200              --         6,300
Vice President of        2001  94,000 13,400     12,700              --         6,300
Marketing and            2000  63,700     --      2,150         104,724         4,000
Business Development(6)
</TABLE>
Notes:
(1)The amounts disclosed in this column include a car allowance paid to each
  of the Named Executive Officers.
(2)The amounts disclosed in this column for 2002 include:
  i) payments made by the Corporation as matching registered retirement
     savings and pension plan contributions to those made by the executive
     officers: Mr. LeBrun, $12,600; Mr. Bealing, $3,700; Mr. Bier, $7,800;
     Mr. Cameron, $6,300; Ms. Henderson, $10,500 and Mr. Verner, $6,300; and
  ii) commissions paid to: Mr. Bealing, $13,300 and Mr. Bier, $69,300.
(3)Mr. LeBrun was President and Chief Executive Officer until May 2002. On May
  7, 2002, Mr. Pond became Chief Executive Officer and Mr. LeBrun was
  appointed to his current position.
(4)Mr. Bealing joined ImagicTV in October 2000 and has served as an executive
  officer since March 2001.
(5)Ms. Henderson joined ImagicTV in July 2001 and her employment with ImagicTV
  ceased on February 14, 2002.
(6)Mr. Verner's employment with ImagicTV ceased on November 30, 2001.

   The following table sets forth individual grants of share options during
the fiscal year ended February 28, 2002 to the Named Executive Officers:

         Option Grants during the Fiscal Year ended February 28, 2002

<TABLE>
<CAPTION>
                                                               Market Value
                                     % of Total                  of Shares
                         Shares       Options                   Underlying
                          Under      Granted to   Exercise or   Options at
                         Options    Employees in  Base Price   Date of Grant Expiration
Name                     Granted    Fiscal Year  ($ per Share) ($ per Share)    Date
----                     -------    ------------ ------------- ------------- ----------
<S>                      <C>        <C>          <C>           <C>           <C>
Marcel LeBrun...........     --           --            --            --           --
Nigel Bealing........... 50,000(1)       9.7%        $1.15         $1.15      4/30/08
Norman Bier............. 25,000(1)      4.85%        $1.15         $1.15      4/30/08
Allan Cameron...........     --           --            --            --           --
Marjean Henderson.......     --           --            --            --           --
Gerry Verner............     --           --            --            --           --
</TABLE>
Note:
(1) Options granted on April 30, 2001 and vest at a rate of 25% of total
    options granted on each anniversary of the date of grant.

                                      48
<PAGE>

   Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values

   The officers named in the summary compensation table did not exercise any
options during the fiscal year ended February 28, 2002. The following table
sets forth the estimated fair market value as of February 28, 2002 of the
exercisable and unexercisable options held by these officers:

<TABLE>
<CAPTION>
                                 Number of Common
                                 Shares Underlying       Value of Unexercised
                                Unexercised Options     In-The-Money Options at
                              at Fiscal Year End (#)    Fiscal Year End ($)(1)
                             ------------------------- -------------------------
            Name             Exercisable Unexercisable Exercisable Unexercisable
            ----             ----------- ------------- ----------- -------------
<S>                          <C>         <C>           <C>         <C>
Marcel LeBrun...............   209,448      93,088       $24,785         --
Nigel Bealing...............     7,273      71,817            --         --
Norman Bier.................    17,455      48,271            --         --
Allan Cameron...............   191,994      81,452       $21,003         --
Marjean Henderson...........    49,453          --            --         --
Gerry Verner................   122,178          --            --         --
</TABLE>
Note:
/(1)/The value of an "in-the-money" option represents the difference between
     the aggregate estimated fair market value of the Common Shares issuable
     upon exercise of the option and the aggregate exercise price of the
     option. The fair market value of the Common Shares at the close of
     business on February 28, 2002 was $0.97 as quoted on the Nasdaq National
     Market.

Compensation of Directors

   Effective May 30, 2001, the Corporation adopted a new compensation
structure for independent directors. Upon his or her appointment to the Board
of Directors, each independent director will be granted options to purchase
25,000 Common Shares at an exercise price equal to the closing price of Common
Shares on The Toronto Stock Exchange (the "TSE") on the day immediately prior
to the date of grant. These options are to vest over three years at a rate of
1/36 per month from the date of grant with an expiration date of seven years
from the date of grant. Annually, each independent director and Peter
Jollymore, upon confirmation of their appointment for the following year at
the annual meeting of shareholders, will be granted options to purchase 10,000
Common Shares at an exercise price equal to the closing price of Common Shares
on the TSE on the day immediately prior to the date of grant. These options,
which are to be granted 72 hours after the annual meeting of shareholders,
will vest 12 months from the date of grant and will have an expiration date of
seven years from the date of grant. Annually, 72 hours after the annual
meeting of shareholders, each independent director who is a chairman of a
committee of the Board of Directors and not a member of management of the
Corporation will receive options to purchase an additional 5,000 Common Shares
at an exercise price equal to the closing price of Common Shares on the TSE on
the day immediately prior to the date of grant, such options to vest 12 months
from the date of grant and to an expiration date of seven years from the date
of grant. Each independent director receives a payment of $1,000 per day, per
meeting attended in person, including travel time.

   The non-independent directors of the Corporation, consisting of Carey
Diamond, Timothy Hember, Peter Jollymore, Marcel LeBrun, Dr. Terence Matthews,
Robert Neal and Gerald Pond, do not

                                      49
<PAGE>

receive compensation for serving as directors of the Corporation other than
reimbursement for expenses incurred in attending meetings.

   The Corporation also adopted a new compensation structure for the Chairman
of the Board on December 18, 2001. On such date, the Chairman of the Board
received an annual salary of $25,000 and 10,000 options to be granted 72 hours
after the annual meeting of shareholders. These options are to vest 12 months
from the date of grant with an expiration date of seven years from the date of
grant.

   The following independent directors received payments and options to
purchase Common Shares pursuant to the Corporation's stock option plan in the
fiscal year ended February 28, 2002 as compensation for acting as directors:

<TABLE>
<CAPTION>
                                  Common Shares
                         Payments Under Options Exercise Price
Name of Director         Received    Granted     ($ per share) Date of Grant Expiration Date
----------------         -------- ------------- -------------- ------------- ---------------
<S>                      <C>      <C>           <C>            <C>           <C>
Gregory Allemann........ $17,000     25,000         $1.22         5/30/01        5/30/08
Joe Culp................ $12,000     15,000         $0.73          8/3/01         8/3/08
Peter Jollymore.........      --     15,000         $0.73          8/3/01         8/3/08
Patrick Smith........... $ 9,000     25,000         $0.62        11/20/01       11/20/08
</TABLE>

Directors' and Officers' Liability Insurance

   The Corporation maintains liability insurance for directors and officers of
the Corporation. The policy does not distinguish between the liability
insurance for its directors and officers, the coverage being the same for both
groups. The premium for the 12 month period ending November 21, 2002 is
$485,000, all of which is borne by the Corporation. The policy limit is
$20,000,000 with a $250,000 retention for securities claims and a $150,000
retention for non-securities claims. The individual directors and officers of
the Corporation are insured against losses arising from claims against them
for certain of their acts, errors or omissions in such capacity. The
Corporation is insured against losses arising out of any liability to
indemnify a director or officer.

Employment Agreements

   Each of the Named Executive Officers and the Chief Executive Officer,
Gerald Pond (the "Officers"), has entered into an employment agreement with
us.

   Pursuant to these agreements, the annual base salary for each Officer is as
follows: Mr. Pond, C$340,000; Mr. LeBrun, $220,000; Mr. Bealing, $115,000; Mr.
Bier, $135,000 and Mr. Cameron, $110,000. Mr. Verner's employment was
terminated on November 30, 2001 and Ms. Henderson's employment was terminated
on February 14, 2002. These base salaries are subject to review by our Board
of Directors in its discretion. Some Officers are entitled to an annual bonus,
up to a maximum of 70% of his or her annual base salary, as determined by our
Board of Directors in its discretion based upon target profit and revenue
performance levels and upon individual performance. In addition, pursuant to
the terms of the employment agreements with each of the Officers, he or she is
subject to non-competition provisions during his or her employment for 8 to 12
months thereafter and to confidentiality restrictions. Furthermore, Mr. Pond
was granted 300,000 stock options on commencement of his employment with the

                                      50
<PAGE>

Corporation and is eligible to receive an additional 100,000 stock options on
the first anniversary of his commencement date.

   With respect to each of the Officers, the employment agreement provides
that in the event of termination without cause, the Officer is entitled to
monthly severance payments equal to his or her respective base salary for a
period from zero to twelve months, continued benefits coverage for up to one
year and a pro rata portion of any earned bonus and to exercise vested options
and any unvested options that otherwise would have vested in the up to 12
month period following the date of termination. In the event of termination
for cause, the Officer is entitled to receive his or her respective salary and
bonus through the date of termination and to exercise vested options for which
the Officer had provided notice of exercise prior to the date of termination.

   In the event of a change of control of ImagicTV, which is defined as the
acquisition by a person of 51% or more of our outstanding voting shares, some
of the employment agreements with the Officers provide that the Corporation
may terminate the employment of the Officer. Certain Officers have the right
to terminate his or her employment in the event of a change of control.
Certain Officers are also entitled to a severance payment equal to his or her
respective accrued base salary and the pro-rated portion of any earned bonus.
In addition, certain Officers have the right, on termination, to exercise,
within 90 to 120 days, any options granted to that Officer, regardless of the
vesting date.

C.Board Practices

   Our Board of Directors is currently comprised of ten persons. At the annual
and special meeting of shareholders to be held on June 27, 2002, the
shareholders will be asked to elect nine directors. In accordance with the
provisions of the Canada Business Corporations Act, our directors are
authorized from time to time to increase the size of the Board of Directors,
and to fix the number of directors, up to a maximum of 12 persons as currently
provided under our articles, without the prior consent of the shareholders.

Board Committees

   Our Board of Directors has established an audit committee, a human
resources committee and a corporate governance committee. All of the
committees of our Board of Directors were appointed on February 3, 2000.

Audit Committee

   ImagicTV is required by applicable law to have an audit committee (the
"Committee") consisting of at least three directors, a majority of whom must
be independent, non-executive directors. The Committee currently has four
members: Joe Culp, Chairman, Carey Diamond, Robert Neal and Patrick Smith. Joe
Culp and Robert Neal will not be standing for re-election, and as such, the
membership of the Committee will change subsequent to the annual and special
meeting. The Committee acts under a written charter which is reviewed for
adequacy at least annually. Members of the Committee are not professionally
engaged in the practice of accounting or auditing, and are not experts in
either of those fields or in auditor independence.

   The Committee is responsible for, among other things: (i) recommending the
annual appointment of the Corporation's auditors; (ii) reviewing the
independence of the Corporation's auditors; (iii) reviewing and approving
interim and annual financial statements with management and the Corporation's
auditors; (iv) assessing accounting principles used by the Corporation in
financial reporting; and (v) reviewing the adequacy of the Corporation's
internal control procedures.

                                      51
<PAGE>

   In performance of the Committee's oversight function, the Committee has
reviewed and discussed the Financial Statements with management and KPMG LLP
("KPMG"), ImagicTV's auditors. Management and KPMG have represented to the
Committee that the Financial Statements were fairly stated in accordance with
generally accepted accounting principles. The Committee discussed with KPMG
matters covered by applicable accounting standards and principles.

   The Committee received the letter and written disclosures from KPMG
required pursuant to applicable accounting standards and principles and has
discussed with KPMG their independence from the Corporation and management.
The Committee also considered whether the non-audit services provided by KPMG
to the Corporation are compatible with maintaining the auditors' independence.

   The Committee discussed with KPMG the overall scope and plans for their
audit. The Committee met with KPMG, with and without management present, to
discuss the results of their examinations, their evaluations of ImagicTV's
internal controls, and the overall quality of ImagicTV's financial reporting.

   Based on the reviews and discussions referred to above, in reliance on
management and KPMG, and subject to the limitations of its role, the Committee
recommended to the Board of Directors, and the Board of Directors approved the
Financial Statements, the delivery of such statements to Shareholders, the
inclusion of such statements in the Corporation's Annual Report for the year
ended February 28, 2002, for filing with the Securities and Exchange
Commission and as its Annual Information Form with the securities regulatory
authorities in the applicable provinces and territories in Canada.

Corporate Governance Committee

   The Corporate Governance Committee consists of Carey Diamond, Chairman,
Peter Jollymore and Gregory Allemann. The committee's mandate is to develop
and monitor our approach to corporate governance issues, establish procedures
for the identification of new nominees to our Board of Directors, develop and
implement orientation procedures for new directors and assess the
effectiveness of our board and its committees.

Human Resources Committee

   Pursuant to the 2000 Share Option Plan, the Human Resources Committee (the
"HR Committee") must be comprised of at least two non-employee directors. The
HR Committee currently consists of Gregory Allemann, Chairman, Peter Jollymore
and Joe Culp. Joe Culp will not be standing for reelection, and as such, the
membership of the HR Committee will change subsequent to the annual and
special meeting. The HR Committee's mandate is to establish salaries,
incentives, and other forms of compensation for our directors, executive
officers, employees, and consultants. The HR Committee also administers the
Corporation's other benefit plans.

D.Employees

   As of February 28, 2002, we employed approximately 131 full-time employees,
excluding temporary personnel and consultants. We are not subject to any
collective bargaining agreements and believe our relationship with our
employees is good.

   In November 2001 the Company undertook a restructuring plan where the
number of employees changed from 209 on November 13, 2001 to 133 on November
14, 2001. Please see "Recent Developments--Reorganization" in "Item 5.
Operating and Financial Reviews and Prospects" for details.

                                      52
<PAGE>

E.Share Ownership

   The following table sets forth certain information concerning the ownership
of common shares and options to purchase common shares of ImagicTV at May 14,
2002 by each director and each of the Named Executive Officers. Each of the
directors and Named Executive Officers listed on the following table directly
holds less than one percent of our common shares and the directors and
executive officers, as a group directly, hold less than one percent of the
common shares. See "Major Shareholders" in "Item 7. Major Shareholders and
Related Party Transactions" for information as to the share ownership of our
major shareholders with whom some of our directors are affiliated.

<TABLE>
<CAPTION>
                                                           Options
                                             -----------------------------------
                                   Common    Number  Exercise
Name                               Shares    Granted  Price      Expiry Date
----                               ------    ------- -------- ------------------
<S>                                <C>       <C>     <C>      <C>
Gerald L. Pond.................... 43,338    300,000  $ 1.30  May 7, 2009
Marcel LeBrun..................... 17,545    116,360  $ 0.54  January 5, 2005
                                             69, 816  $ 0.86  April 13, 2006
                                             116,360  $ 1.47  December 17, 2006
Peter G. Jollymore................ 27,702     29,090  $ 1.47  August 10, 2007
                                              15,000  $ 0.73  August 3, 2008
Nigel Bealing.....................     --     29,090  $ 7.05  December 13, 2007
                                              50,000  $ 1.15  April 30, 2008
Norman Bier.......................    500     29,090  $ 1.07  December 1, 2006
                                              11,636  $11.17  September 13, 2007
                                              25,000  $ 1.15  April 30, 2008
Allan Cameron..................... 36,999    110,542  $ 0.54  January 5, 2005
                                              46,544  $ 0.86  April 13, 2006
                                             116,360  $ 1.47  December 17, 2006
Marjean Henderson.................     --         --      --  --
Gerry Verner...................... 31,389     69,816  $ 0.86   November 30, 2002
                                              52,362  $ 1.47  November 30, 2002
Gregory Allemann..................     --     25,000  $ 1.22  May 30, 2008
Joe C. Culp....................... 22,273     11,636  $ 1.47  March 23, 2007
                                              11,636  $ 1.47  August 10, 2007
                                              15,000  $ 0.73  August 3, 2008
Carey Diamond.....................     --(1)      --      --  --
Timothy Hember....................     --(2)      --      --  --
Dr. Terence H. Matthews...........     --(3)      --      --  --
Robert E. Neal....................  7,819(4)      --      --  --
Patrick Smith.....................     --     25,000  $ 0.62  November 20, 2008
</TABLE>

                                      53
<PAGE>

Notes:
(1) Whitecastle beneficially owns 2,464,927 Common Shares. Mr. Diamond is the
    President and Chief Executive Officer of Whitecastle.
(2) Alcatel beneficially owns 3,986,856 Common Shares. Mr. Hember is the Vice
    President of Technology and Development of Alcatel.
(3) Celtic House beneficially owns 2,454,676 Common Shares. Dr. Matthews is
    the principal of Celtic House.
(4) This excludes 7,209,749 Common Shares beneficially owned by Aliant. Mr.
    Neal is an officer of a subsidiary of Aliant.

Option Plans

   We currently maintain two share option plans. Each is intended to attract,
retain and motivate employees, officers and directors of, and consultants to,
our Company. The HR Committee of our Board of Directors administers the option
plans. The HR Committee determines, among other things, the term, vesting
periods and the price of options granted under the plan. As of May 14, 2002,
options to purchase 2,999,820 shares at a weighted average exercise price of
$1.65 per share have been granted under the plans.

Employee Share Option Plan

   We adopted our initial share option plan in February 1998 and amended it on
December 17, 1999. It provides for the grant of options to employees, officers
and directors of, and consultants to, our company. Options granted to
employees generally have the following terms: (1) all options granted under
the plan have a maximum term of seven years; (2) the exercise price per share
for each option is determined by the price of the shares at the closing of The
Toronto Stock Exchange on the day before the date of grant; (3) if we
terminate an option holder's employment without cause, the vested portion of
any grant will remain exercisable for the lesser of 60 days or the balance of
the option term; (4) in the event we terminate an option holder's employment
for cause, any option held by such option holder shall thereupon immediately
terminate, whether exercisable or not; (5) if the option holder dies, the
vested options may be exercised for a period of one year or the balance of the
term, whichever is shorter; (6) in the event the option holder retires, the
option holder may exercise vested options for 60 days or the balance of the
option term, whichever is shorter; (7) in the event of disability, the option
holder has six months or the balance of the option term, whichever is shorter,
to exercise vested options; and (8) unvested options will expire upon
termination of employment for any reason. The terms of the options granted to
the officers referred to under the heading "Compensation -- Employment
Agreements" are described in that section.

2000 Share Option Plan

   Our Board of Directors approved our 2000 Share Option Plan on November 9,
2000, and our shareholders approved it thereafter. This new plan does not
affect options granted under the initial plan. The HR committee of our Board
of Directors administers the new plan and determines, among other things, the
eligibility of persons to participate in the plan, vesting periods and other
attributes of individual options. The 2000 Share Option Plan provides for the
grant of options to employees, officers and directors of, and consultants to,
ImagicTV and its affiliates. Both incentive share options and non-qualified
share options are available to U.S. residents.

   Options held by any person under the new plan together with any other
options granted to that person may not at any time exceed 5% of the aggregate
number of our common shares outstanding from time to time. The maximum number
of shares issuable under the new plan is 1,879,185, subject to necessary
approvals. The options granted under the new plan have a maximum term of ten
years and an

                                      54
<PAGE>

exercise price no less than the fair market value of our common shares at the
closing of The Toronto Stock Exchange on the day before the date of grant, or
110% of fair market value in the case of an incentive stock option granted to
an employee who owns common shares having more than 10% of the votes
outstanding. Under the new plan, if a change of control of our company should
occur, our Board of Directors will be permitted, without any action or consent
required on the part of any option holder to, among other things accelerate
the vesting of all options so that they become immediately exercisable.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.Major Shareholders

   The following table provides information regarding the beneficial ownership
of our common shares as of May 14, 2002 for each person or entity who is known
to us to own beneficially more than 5% of our outstanding common shares. As
used in the table, "beneficial ownership" means the sole or shared power to
vote or direct the voting or to dispose or direct the disposition of any
security. A person is deemed to be the beneficial owner of securities that can
be acquired within 60 days from the date of this annual report. Common shares
subject to options, warrants or rights that are currently exercisable or
exercisable within 60 days are deemed outstanding for computing the ownership
percentage of the person holding these options, warrants or rights, but are
not deemed outstanding for computing the ownership percentage of any other
person. The amounts and percentages are based upon 24,678,063 common shares
outstanding as of May 14, 2002.

<TABLE>
<CAPTION>
                                                        Number of    Percentage
                                                          Shares     of Shares
                                                       Beneficially Beneficially
Name of Beneficial Owner                                 Owned(1)     Owned(2)
------------------------                               ------------ ------------
<S>                                                    <C>          <C>
Aliant Inc. ("Aliant")
 (held through Aliant Horizons Inc.)..................  7,209,749      29.22%
Compagnie Financiere Alcatel
 (held through its subsidiary, Alcatel Canada Inc.)...  3,986,856      16.16%
Whitecastle Investments Limited
 ("Whitecastle")......................................  2,464,927       9.99%
Celtic House International ("Celtic House")
 (held through 3841553 Canada Inc.)...................  2,454,675       9.95%
</TABLE>

Notes:
(1) Number of shares beneficially owned by Aliant, Alcatel Canada Inc.
    ("Alcatel") and Celtic House obtained from shareholder list provided by
    the Corporation's transfer agent, as at May 14, 2002. Whitecastle share
    information provided by Whitecastle.
(2) Based on 24,678,063 common shares outstanding on May 14, 2002.

   As of the close of business on May 14, 2002, CDS & Co. as nominee on behalf
of The Canadian Depository for Securities Limited ("CDS") was the registered
holder of 7,189,740 Common Shares representing approximately 29.13% of the
outstanding Common Shares and Cede & Co as nominee on behalf of The Depository
Trust Company ("DTC") was the registered holder of 3,154,038 Common Shares
representing approximately 12.78% of the outstanding Common Shares. It is,
however, management's understanding that the Common Shares registered in the
name of CDS or DTC are held by various brokers and other parties on behalf of
clients and others (including certain of the principal holders named above).

                                      55
<PAGE>

   Except as disclosed above, as at May 14, 2002, the current directors and
officers of the Corporation as a group owns directly or indirectly or
exercised control or direction over a total of 179,448 Common Shares
representing approximately 0.73% of the issued and outstanding Common Shares.

   The voting rights of our major shareholders do not differ from the voting
rights of holders of our shares who are not major shareholders.

   As of the close of business on May 14, 2002, our registrar and transfer
agent reported that there were 24,678,063 common shares issued and
outstanding. Of those common shares issued and outstanding, 21,223,520 common
shares were registered to Canadian residents (78 holders of record) and the
remaining 3,454,543 common shares were registered to United States residents
(seven holders of record). No common shares were registered to residents of
other foreign countries.

   To the best of our knowledge, our company is not directly or indirectly
owned or controlled by another corporation, by any foreign government or by
any other natural or legal person.

   There are no arrangements known to us, the operation of which may at a
subsequent date result in a change of control of our company.

B.Related Party Transactions

   The following describes the significant transactions entered into between
us and our directors, executive officers, shareholders, and affiliates of the
shareholders in the fiscal year ended February 28, 2002. All future
transactions between any of these parties and us will be subject to approval
by a majority of the non-employee members of the board.

Technology Agreements

   On April 16, 1999, we entered into a licensing agreement with NBTel.
Pursuant to this agreement, NBTel received a perpetual, non-exclusive license
to use DTV Manager in the Province of New Brunswick for cash consideration of
C$500,000 and future one-time per subscriber payments decreasing from C$150 to
C$80 based on the number of active NBTel subscribers to DTV Manager in New
Brunswick. In addition, the license agreement provides for the annual payment
of fees for maintenance and technical support services in an amount equal to
20% of the total license fees, including the initial fee and cumulative
subscriber royalties. If requested by NBTel we have agreed to provide
consulting and training services at then current rates.

   On December 16, 1999, NBTel assigned the license agreement to Aliant, and
the license agreement was amended to include a license for our pcVu software
product and to expand the geographic territory of the license to the Provinces
of Nova Scotia, Prince Edward Island and Newfoundland on an exclusive basis.
In connection with the assignment and amendment, Aliant agreed to pay us cash
consideration amounting to C$900,000, of which C$500,000 was recognized as
revenue upon delivery of our pcVu software in February 2000, C$200,000 was
recognized as revenue when it became due on January 31, 2001, and the
remaining C$200,000 was recognized as revenue when it became due on January
31, 2002. As of February 28, 2002, the final payment of C$200,000 was
outstanding. Under the amended agreement, the future one-time per subscriber
payments based on the number of subscribers also applies to subscribers in
Nova Scotia, Prince Edward Island and Newfoundland. In accordance with the
amended agreement, MTT, the incumbent local exchange carrier in the Province
of Nova Scotia and a subsidiary of Aliant, has licensed and has commercially
deployed DTV Manager.


                                      56
<PAGE>

   On January 16, 2001, the license agreement was further amended to include a
sale of 40,000 subscriber-based licenses for C$3.2 million. C$1.6 million was
recognized in February 2001 as it became due and C$1.6 million was recognized
in February 2002 when it became due. As of February 28, 2002, all payments
were received.

   In the year-ended February 28, 2002, we recorded revenues from Aliant
totalling $109,000 in license fees, $1.0 million in one-time per subscriber
royalty payments, and $174,000 in services revenues.

   In addition, we have supplied NBTel and Aliant with set-top boxes at little
or no mark-up above our cost. We received revenues of $462,000 in fiscal 1999,
$180,000 in fiscal 2000, $1.0 million in fiscal 2001 and zero in fiscal 2002
from the sales of set-top boxes to NBTel and Aliant.

   In November 1999, we entered into a license agreement with Newbridge
Networks Corporation ("Newbridge"), which was then one of our principal
shareholders and is now Alcatel Canada Ltd. Pursuant to this agreement,
Newbridge received a license to use DTV Manager for internal testing purposes
at six technical laboratories. The license also permitted Newbridge to use DTV
Manager in sales and marketing demonstrations of its hardware products. In
exchange for the license, we received switching equipment from Newbridge that
enables the prioritized transmission of voice, Internet and television data in
high-speed, networked environments. We have used this equipment for research
and development purposes. The transaction was recorded at the fair value of
the equipment, which amounted to $102,000. In connection with the transaction,
we recorded license fee revenues for the same amount. In February 2000, we
amended the license agreement to provide Newbridge with the opportunity to
purchase additional twelve-month site licenses for demonstration purposes. As
of February 28, 2001 we had received aggregate cash consideration of C$40,000
for these additional licenses and $17,000 for a 90-day trial license. We have
supplied Newbridge with set-top boxes for laboratory test installations at
little or no mark-up above our cost. We received $23,000 in fiscal 2000,
$17,000 in fiscal 2001 and nil in fiscal 2002 from the sales of set-top boxes
to Newbridge.

Financings, Loans and Inter-Company Arrangements

   During the year ended February 28, 2000, the Minister of Economic
Development, Tourism and Culture for the Province of New Brunswick, through an
application filed by Newbridge, indirectly granted us a repayable government
assistance loan in the amount of C$2.6 million and a forgivable loan in the
amount of C$640,000, to assist us in creating research and development
employment in the Province of New Brunswick. The forgivable loan was fully
forgiven and recognized in the statement of operations as forgiveness of debt.
The repayable loan is repayable in annual instalments equal to 1.5% of the
license fee revenues of the immediately preceding year, and the balance, if
any, is due on February 25, 2006. The repayable loan is interest-free until
February 25, 2006 and, if not paid at that date, thereafter will bear interest
at 6.3% per annum. As of February 28, 2002, we have repaid C$145,000 of the
principal of the repayable loan.

   In September 2000, we issued warrants to purchase Common Shares to four of
our principal shareholders at the time and one other shareholder for an
aggregate purchase price of $10,000,000. These warrants were automatically
exercised in October 2000. In accordance with the terms of the warrants, each
warrantholder was entitled to receive upon completion of a sale of Common
Shares to outside investors, for no additional consideration, a number of
shares per warrant which reflected the price paid per Common Share by outside
investors. As a result of the October 2000 sale of Common Shares to America
Online, Inc. and Cisco Systems, Inc. at $11.00 per share, 1.11 Common Shares
per warrant were issued upon exercise of the warrants. This resulted in the
issuance of the following numbers of Common Shares to these four principal
shareholders: 205,157 to Alcatel, 371,001 to Aliant, 126,312 to Celtic House
and 137,727 to Whitecastle.

                                      57
<PAGE>

Leases

   The Corporation subleases a portion of its principal executive offices from
NBTel. Of the approximately 25,000 square feet that ImagicTV occupies at its
principal executive offices, it subleases approximately 17,000 square feet
from NBTel at a cost of approximately $222,000 per year. The lease on such
facility is month-to-month.

C. Interests of Experts and Counsel

  Not applicable.

ITEM 8. FINANCIAL INFORMATION

A. Consolidated Statements and Other Financial Information

   For our consolidated financial statements, see "Item 18. Financial
Statements."

   Export sales constitute a significant portion of our total sales volume.
The total volume of export sales from Canada for the fiscal year ended
February 28, 2002 was approximately $2.1 million representing 50% of our total
sales.

   There are currently no outstanding material legal proceedings to which we
are a party or any of our properties is subject, nor do we know of any
material threatened or contemplated proceedings against us.

   We have never declared or paid any cash dividends on our common shares. At
present, we expect to retain future earnings, if any, for use in the operation
and expansion of our business. We do not anticipate that we will pay cash
dividends in the foreseeable future. Any future determination to pay dividends
will be at the discretion of our Board of Directors and will depend upon our
results of operations, capital requirements and other factors as our Board of
Directors considers relevant.

B. Significant Changes

  Since February 28, 2002, there have been no significant changes in our
  financial condition or results of operations.

                                      58
<PAGE>

ITEM 9. THE OFFER AND LISTING

A. Offer and Listing Details

  The common shares are registered shares. CIBC Mellon Trust Company acts as
  transfer agent in

   Canada and ChaseMellon Shareholder Services, L.L.C. acts as transfer agent
in the U.S. We first offered our shares through an initial public offering
conducted in November 2000. See "Markets" in "Item 9. The Offer and Listing."
The following tables show for the periods indicated the high and low closing
market prices for trading taking place on both the Nasdaq National Market
("Nasdaq") and the Toronto Stock Exchange ("TSE"):

<TABLE>
<CAPTION>
                                             Year Ended February 28, 2002
                                         --------------------------------------
                                              Nasdaq               TSE
                                         ----------------  --------------------
                                         (in U.S. dollars) (in Canadian dollars)
<S>                                      <C>               <C>
Share Market Prices
High....................................      $2.88               $4.49
Low.....................................       0.47                0.74
</TABLE>

<TABLE>
<CAPTION>
                                                   Nasdaq
                         -----------------------------------------------------------
                                                Quarter Ended
                         -----------------------------------------------------------
                         30-Nov-00 28-Feb-01 31-May-01 31-Aug-01 30-Nov-01 28-Feb-02
                         --------- --------- --------- --------- --------- ---------
                                              (in U.S. dollars)
<S>                      <C>       <C>       <C>       <C>       <C>       <C>
Share Market Prices
High....................  $ 9.00    $ 7.56     $2.88     $1.22     $0.79     $1.06
Low.....................    6.75      2.00      1.18      0.62      0.47      0.74
<CAPTION>
                                                     TSE
                         -----------------------------------------------------------
                                                Quarter Ended
                         -----------------------------------------------------------
                         30-Nov-00 28-Feb-01 31-May-01 31-Aug-01 30-Nov-01 28-Feb-02
                         --------- --------- --------- --------- --------- ---------
                                            (in Canadian dollars)
<S>                      <C>       <C>       <C>       <C>       <C>       <C>
Share Market Prices
High....................  $14.00    $11.30     $4.49     $1.87     $1.25     $1.74
Low.....................   10.15      3.05      1.75      0.90      0.74      1.18
<CAPTION>
                                                   Nasdaq
                         -----------------------------------------------------------
                                                 Month Ended
                         -----------------------------------------------------------
                         30-Nov-01 31-Dec-01 31-Jan-02 28-Feb-02 31-Mar-02 30-Apr-02
                         --------- --------- --------- --------- --------- ---------
                                              (in U.S. dollars)
<S>                      <C>       <C>       <C>       <C>       <C>       <C>
Share Market Prices
High....................  $ 0.79    $ 1.02     $1.06     $0.97     $0.97     $1.03
Low.....................    0.52      0.74      0.88      0.82      0.81      0.78
<CAPTION>
                                                     TSE
                         -----------------------------------------------------------
                                                 Month Ended
                         -----------------------------------------------------------
                         30-Nov-01 31-Dec-01 31-Jan-02 28-Feb-02 31-Mar-02 30-Apr-02
                         --------- --------- --------- --------- --------- ---------
<S>                      <C>       <C>       <C>       <C>       <C>       <C>
                                                                (in Canadian dollars)
Share Market Prices
High....................  $ 1.25    $ 1.57     $1.74     $1.55     $1.57     $1.65
Low.....................    0.84      1.18      1.34      1.33      1.25      1.25
</TABLE>
Note: The period ending November 30, 2000 began with the inception of our
shares trading after our initial public offering on November 21, 2000.

                                      59
<PAGE>

B. Plan of Distribution

  Not applicable.

C. Markets

   Our common shares are listed on The Nasdaq National Market under the symbol
"IMTV" and on

   The Toronto Stock Exchange under the symbol "IMT."

   On March 6, 2002, we received a letter from Nasdaq notifying us that for
the last 30 consecutive trading days the price of our common shares had closed
below the $1.00 minimum per share closing bid price requirement for continued
inclusion on The Nasdaq National Market. If we are not able to demonstrate
compliance with the $1.00 minimum closing bid price requirement by June 4,
2002, Nasdaq will provide written notification that our common shares are
being delisted.

   If we determine that we will not satisfy the $1.00 minimum bid price
requirement for continued inclusion in The Nasdaq National Market by June 4,
2002, we intend to apply to transfer the common shares to The Nasdaq SmallCap
Market where we can maintain our trading symbol and expect to have the same
liquidity afforded by The Nasdaq National Market. To transfer, we must satisfy
the continued inclusion requirements for The Nasdaq SmallCap Market, which
makes available an extended grace period until at least September 3, 2002, for
attaining compliance with the $1.00 minimum closing bid price requirement. We
also may qualify for an additional 180 day grace period beyond September 3,
2002, to attain compliance with the $1.00 bid price requirement. If we submit
a transfer application and pay the applicable listing fees by June 4, 2002,
initiation of the delisting proceedings will be stayed pending the staff's
review of the transfer application.

   There is a risk that our application to transfer to The Nasdaq SmallCap
Market may be denied. If our application is denied, we will have the ability
to appeal the delisting action; however, on appeal, management will be
required to present a compelling case to the Listing Qualifications Panel as
to why the delisting should not proceed.

   We are currently in compliance with all listing requirements on The Toronto
Stock Exchange and expect to remain so in the foreseeable future.

D. Selling Shareholders

  Not applicable.

E. Dilution

  Not applicable.

F. Expenses of the Issue

  Not applicable.

ITEM 10. ADDITIONAL INFORMATION

A. Share Capital

  Not applicable.

                                      60
<PAGE>

B. Memorandum and Articles of Association

  (a) Directors

   There are currently no provisions in the bylaws or articles of
incorporation with respect to the voting power, borrowing ability, mandatory
retirement age, or share ownership requirement for directors. See "Item 6.
Directors and Executive Officers" for further information about the Board of
Directors powers.

  (b) Share Classes

   Holders of common shares are entitled to receive dividends if, as and when
declared by the Board of Directors. The Board of Directors may declare
dividends on the common shares to the exclusion of any other class of shares.
Holders of common shares are entitled to receive notice of and attend all
annual and special meetings of shareholders and to one vote for each share
held.

   Holders of preferred shares will receive the rights and privileges and be
subject to the restrictions and conditions as determined by the Board of
Directors at the time of issuance.

  (c) Change in Shareholder Rights

   Under the Canada Business Corporations Act, a special resolution passed by
the holders of a majority of not less than two-thirds of the common shares
represented in person or by proxy at a duly called meeting of shareholders or
signed by all shareholders is necessary to change the rights attributable to
the common shares.

  (d) Meetings

   Annual general meetings will be called no later than 15 months after the
holding of the preceding annual meeting. The Board of Directors may call a
special meeting of shareholders at any time.

   The annual and special meeting of holders of common shares of ImagicTV Inc.
will be held at the Saint John Trade & Convention Centre, One Market Square,
Saint John, New Brunswick E2L 4Z6 on Thursday, June 27, 2002 at 10:00 a.m.,
Atlantic time.

   The Board of Directors has fixed the close of business on Tuesday, May 21,
2002 as the record date for the determination of the Shareholders entitled to
receive notice of, and to vote at, the meeting.

  (e) Limitations on Ownership

   There are no provisions in the bylaws or articles of incorporation of the
Company regarding limitations on the right to own securities.

  (f) Change of Control

   There are no provisions in the bylaws or articles of incorporation that
would have the effect of delaying, deferring or preventing a change of control
of ImagicTV.

                                      61
<PAGE>

  (g) Ownership Threshold

   There are no provisions in the bylaws or articles of incorporation
governing the ownership threshold above which shareholder ownership must be
disclosed.

C. Material Contracts

  See "Related Party Transactions" in "Item 7. Major Shareholders and Related
  Party Transactions."

D. Exchange Controls

   There are currently no exchange controls that have a material effect on the
import or export of capital or the remittance of dividends, interest or other
payments to non-resident holders of our securities.

E. Taxation

Certain Canadian and United States Income Tax Considerations

United States Holders

   The following summary discusses the material Canadian federal income tax
and U.S. federal income consequences generally applicable to the acquisition,
ownership and disposition of shares by a U.S. Holder (as defined below):

  .  that is resident in the United States and is not resident in Canada for
     the purpose of the Canada-United States Income Tax Convention (the
     "Treaty");

  .  that otherwise qualifies for full benefits under the Treaty; and

  .  whose shares are not, for purposes of the Treaty, effectively connected
     with a permanent establishment or fixed base in Canada.

   As used herein, a "U.S. Holder" means a beneficial owner of shares that is,
for U.S. federal income tax purposes:

  .  a citizen or individual resident of the United States;

  .  a corporation, including an entity treated as a corporation for the
     United States federal income tax purposes, organized in or under the
     laws of the United States or any state thereof (including the District
     of Columbia);

  .  an estate the income of which is subject to U.S. federal income taxation
     regardless of its source; or

  .  a trust if, in general, the trust is subject to the primary supervision
     of a court within the United States and the control of one or more
     United States persons as described in section 7701(a)(30) of the U.S.
     Internal Revenue Code of 1986, as amended (the "U.S. Internal Revenue
     Code").

                                      62
<PAGE>

   This summary is based on U.S. and Canadian federal income tax law,
regulations, administrative pronouncements and court decisions, all as of the
date of this annual report and all of which are subject to change or differing
interpretation, possibly with retroactive effect as more fully described
below.

   This summary does not purport to address all aspects of Canadian federal
income and U.S. federal income taxation that may be relevant to a U.S. Holder,
and does not take into account the U.S. federal income tax consequences to
U.S. Holders that may be subject to special rules (including, but not limited
to, tax-exempt entities, U.S. expatriates, financial institutions, insurance
companies, broker-dealers, traders in securities, investors liable for
alternative minimum tax, investors that own (directly, indirectly or by
attribution) 10% or more of our voting shares, investors that hold shares as
part of a straddle, hedging, conversion or integrated transaction, or
investors whose functional currency is not the U.S. dollar). If a partnership
(including an entity treated as a partnership for federal income tax purposes)
holds shares, the United States federal income tax treatment will generally
depend on the status of the partner and the activities of the partnership.
Furthermore, this summary does not address U.S. state, local or other (such as
U.S. estate or gift) or Canadian provincial or territorial tax consequences of
the acquisition, ownership and disposition of shares. Holders of shares should
consult their own tax advisers as to the particular Canadian federal,
provincial and territorial tax and U.S. federal, state and local income and
other tax consequences to them of the acquisition, ownership and disposition
of shares. The summary that follows is generally limited to U.S. Holders that
hold the shares as capital assets for U.S. and Canadian federal income tax
purposes. A share will generally be considered to be a capital asset to a U.S.
Holder (for Canadian tax purposes) unless the holder holds it as inventory in
the course of carrying on a business or acquired it in a transaction or
transactions considered to be an adventure in the nature of a trade.

   In addition, the following summary of Canadian federal income tax
considerations applies only to a U.S. Holder who, for purposes of the Income
Tax Act (Canada) (the "Canadian Act") and at all relevant times, is not
resident or deemed to be resident in Canada, deals at arm's length with
ImagicTV, does not use or hold, and is not deemed to use or hold, the shares
in, or in the course of carrying on, a business or providing independent
personal services in Canada, does not carry on an insurance business in Canada
and elsewhere, and who, for purposes of the Treaty and at all relevant times,
does not own (or is not treated as owning) 10% or more of the outstanding
voting shares of ImagicTV.

Canadian Federal Income Tax Considerations

   This portion of the summary is based upon the current provisions of the
Canadian Act, and the regulations thereunder and an understanding of the
current published administrative practices and policies of the Canada Customs
and Revenue Agency. The summary also takes into account all specific proposals
to amend the Canadian Act and the regulations publicly announced prior to the
date of this annual report (the "Proposed Amendments"), and, while we cannot
assure you that the Proposed Amendments will be enacted as announced, or at
all, this summary assumes that the Proposed Amendments will be enacted
substantially as proposed. This summary does not otherwise take into account
or anticipate any changes in law, whether by way of legislative, judicial or
governmental decision, action or interpretation.

Canadian Federal Taxation of Dividends on Shares

   Dividends, including deemed dividends and stock dividends, paid or credited
on shares owned by a U.S. Holder will be subject to Canadian withholding tax
under the Canadian Act at a rate of 25% on the gross amount of the dividends.
The rate of withholding tax generally is reduced under the Treaty to 15% where
the U.S. Holder is the beneficial owner of the dividends. Under the Treaty,
dividends paid or credited to a U.S. Holder that is a United States tax-exempt
organization as described in Article XXI of the Treaty, other than such
dividends that constitute income from carrying on a trade or business, will

                                      63
<PAGE>

generally not be subject to Canadian withholding tax, although such entities
may be subject to administrative procedures to confirm their eligibility to
such exemption.

   Under the Canadian Act, dividends may be deemed to be paid in certain
circumstances. For example, when a corporation redeems or purchases for
cancellation shares of its capital stock, a dividend will be deemed to be paid
in an amount equal to the amount by which the amount paid exceeds the "paid-up
capital" (as defined in the Canadian Act) of the shares so redeemed or
purchased for cancellation. The "paid-up capital" of the shares owned by a
U.S. Holder may be less than the holder's cost of such shares by reason of,
for example, the averaging of the paid-up capital with that of shares of such
class already issued and outstanding. The paid-up capital attributable to each
share will be relevant to the holder of that share in connection with a
purchase for cancellation of that share or upon the winding-up of ImagicTV.

Canadian Federal Taxation on Sale or Other Disposition of Shares

   A gain realized by a U.S. Holder on a disposition or deemed disposition of
shares generally will not be subject to tax under the Canadian Act unless the
shares constitute taxable Canadian property within the meaning of the Canadian
Act. Shares generally will not be taxable Canadian property to a U.S. Holder
if the shares are listed on a prescribed stock exchange at the time of
disposition unless, at any time within the 60-month period immediately
preceding the disposition, the U.S. Holder, persons with whom the U.S. Holder
did not deal at arm's length or the U.S. Holder together with persons with
whom the U.S. Holder did not deal at arm's length owned or had an interest in
or option to acquire 25% or more of the issued shares of any class or series
of ImagicTV's shares. The shares will constitute taxable Canadian property to
a U.S. Holder if at the time of their disposition the shares are not listed on
The Toronto Stock Exchange or another prescribed stock exchange (in this
event, a U.S. Holder would have to comply with notification requirements under
the Canadian Act in respect of the disposition of the shares).

   Even if the shares constitute or are deemed to constitute taxable Canadian
property to a particular U.S. Holder, an exemption from tax under the Canadian
Act may be available under the terms of the Treaty.

United States Federal Income Tax Considerations

Taxation of Dividends

   Subject to the discussion below under "Passive Foreign Investment Company
Considerations," for U.S. federal income tax purposes, a U.S. Holder will
generally include in gross income the amount of a distribution paid by us,
unreduced by the applicable Canadian withholding tax, to the extent paid out
of our current or accumulated earnings and profits (as determined for U.S.
federal income tax purposes), as ordinary dividend income when the
distribution is actually or constructively received by the U.S. Holder. The
dividend will not be eligible for the dividends-received deduction generally
allowed to U.S. corporations in respect of dividends received from other U.S.
corporations. If the dividend distribution is paid in Canadian dollars, the
amount of the dividend includible in the income of a U.S. Holder will be the
U.S. dollar value of the dividend, determined at the spot Canadian dollar/U.S.
dollar rate on the date the dividend is includible in the income of the U.S.
Holder, regardless of whether the payment is in fact converted into U.S.
dollars. A U.S. Holder will have a basis in any Canadian dollar distributed by
us equal to the U.S. dollar value of the Canadian dollar on the date it is
actually or constructively received by the U.S. Holder. Generally, any gain or
loss resulting from currency exchange fluctuations during the period from the
date the dividend payment is includible in income to the date the payment is
converted into U.S. dollars will be treated as ordinary income or loss. Such
gain or loss will generally be income from sources within the United States
for foreign tax credit limitation purposes. Distributions in excess of our
current and accumulated earnings and profits, as determined for U.S. federal
income tax purposes,

                                      64
<PAGE>

will be treated as a non-taxable return of capital to the extent of the U.S.
Holder's tax basis in the shares and thereafter as capital gain.

   A U.S. Holder may, subject to certain limitations, be eligible to claim as
a credit or deduction, for purposes of computing its U.S. federal income tax
liability, the Canadian withholding tax paid in respect of dividends from us.
Dividends from us will generally constitute foreign-source income and will
generally be classified as "passive income" or, in the case of certain U.S.
Holders, "financial services income" for purposes of determining the U.S.
foreign tax credit limitation. The calculation of foreign tax credits and, in
the case of a U.S. Holder that elects to deduct foreign taxes, the
availability of deductions, involves the application of complex rules that
depend on a U.S. Holder's particular circumstances. U.S. Holders should
consult their own tax advisers regarding the availability of foreign tax
credits and deductions for such Canadian withholding tax.

Taxation of Capital Gains

   A U.S. Holder will, upon the sale, exchange or other taxable disposition of
a share, recognize a gain or loss for U.S. federal income tax purposes in an
amount equal to the difference between the U.S. dollar value of the amount
realized and the U.S. Holder's tax basis, determined in U.S. dollars, in the
share. In general, such gain or loss will be treated as arising from sources
within the United States for U.S. federal income tax purposes, unless it is
attributable to an office or other fixed place of business maintained by the
U.S. Holder outside the United States and certain other conditions are
satisfied.

   Subject to the discussion below, under "Passive Foreign Investment Company
Considerations," the gain or loss recognized upon the sale of a share will be
a capital gain or loss. The maximum non-corporate U.S. federal income tax rate
on net capital gains is currently 20% for capital assets held for more than
one year. Net capital gains on the sale of capital assets held for one year or
less are subject to U.S. federal income tax at ordinary income tax rates. For
a corporate U.S. Holder, all capital gains are currently taxed at the same
rate as ordinary income. The deductibility of capital losses is subject to
limitations.

   Any tax imposed by Canada directly on the gain from such a sale or other
disposition would generally be eligible for the U.S. foreign tax credit;
however, if such gain were not treated as arising from sources outside the
United States, the U.S. Holder might not be able to use the credit otherwise
available because of the U.S. foreign tax credit limitation rules. The rules
relating to the determination of the U.S. foreign tax credit are complex and
U.S. Holders should consult their own tax advisers with respect to these
rules.

   A U.S. Holder that purchases shares with previously owned foreign currency
generally will recognize ordinary income or loss in an amount equal to any
difference between the U.S. Holder's tax basis in the foreign currency and the
U.S. dollar value of the foreign currency at the spot rate on the date the
shares are purchased. The U.S. Holder's basis in the shares generally will be
equal to the U.S. dollar value of the foreign currency at the spot rate on the
date of the purchase (or, if the shares are traded on an established
securities market, in the case of cash basis and electing accrual basis
taxpayers, the settlement date). A U.S. Holder that receives foreign currency
upon sale or other disposition of the shares will realize an amount equal to
the U.S. dollar value of the foreign currency on the date of the sale or other
disposition (or, if the shares are traded on an established securities market,
in the case of cash basis and electing accrual basis taxpayers, the settlement
date). A U.S. Holder will have a tax basis in the foreign currency received
equal to the U.S. dollar amount realized. Any gain or loss realized by a U.S.
Holder upon a subsequent disposition of foreign currency (including upon an
exchange for U.S. dollars) will be ordinary income or loss.

                                      65
<PAGE>

Passive Foreign Investment Company Considerations

   We believe, based on our income, assets and activities, that we should not
be treated as a passive foreign investment company for U.S. federal income tax
purposes for our taxable year ended February 28, 2002 or any preceding taxable
year. However, an actual determination of passive foreign investment company
status is fundamentally factual in nature and it is possible that we could
nonetheless be treated as a passive foreign investment company for U.S.
federal income tax purposes for such taxable year or preceding taxable years.
Further, there can be no assurance that we will not be or become a passive
foreign investment company in the future.

   In general terms, we will be a passive foreign investment company with
respect to a taxable year if either:

  .  75% or more of our gross income in such taxable year is passive income;
     or

  .  the average quarterly percentage of the value of our assets that produce
     or are held for the production of passive income is at least 50%.

   For this purpose, if we own (directly or indirectly) at least 25% (by
value) of the stock of another corporation, we will be treated as if we had
directly received our proportionate share of the gross income of the other
corporation and as if we directly owned our proportionate share of the assets
of the other corporation. In addition, the IRS has indicated that cash
balances, even if held as working capital, are considered to be assets that
produce passive income.

   If we were classified as a passive foreign investment company at any time
during the period in which a U.S. holder owned shares, unless the U.S. Holder
timely made one of specific available elections, a special tax regime would
apply to both:

  .  any "excess distribution," which would be such U.S. Holder's share of
     distributions on the shares in any year that are greater than 125% of
     the average annual distributions on the shares received by the U.S.
     Holder in the three preceding years or the U.S. Holder's holding period
     for the shares, if shorter; and

  .  any gain realized on the sale or other disposition of the shares held by
     the U.S. Holder.

   Under this regime, any excess distribution and any gain so realized would
be treated as ordinary income and would be subject to tax as if:

  .  the excess distribution or gain had been realized ratably over the U.S.
     Holder's holding period;

  .  the excess distribution or gain allocable to prior taxable years in
     which we were classified as a passive foreign investment company had
     been subject to tax at the highest applicable tax rate; and

  .  the interest charge generally applicable to underpayment of tax had been
     imposed on the taxes deemed to have been payable in each of those years
     in which we were classified as a passive foreign investment company.

   In addition, the estate of an individual U.S. Holder who dies while owning
shares may not be eligible to step up the tax basis of the shares.

                                      66
<PAGE>

   If we are classified as a passive foreign investment company during any
taxable year in which a U.S. holder holds shares, we will continue to be
treated as a passive foreign investment company with respect to such shares in
subsequent taxable years notwithstanding our failure to meet either of the
passive foreign investment company tests in such subsequent years, unless the
U.S. Holder elects to "purge" our passive foreign investment company status by
treating the shares as disposed of in a taxable transaction under the excess
distribution rules described above.

   The foregoing rules with respect to distributions and dispositions may be
avoided if a U.S. Holder is eligible for and timely makes a valid "mark-to-
market" election. If a mark-to-market election is made, the U.S. Holder will,
in general, include as ordinary income each year the excess, if any, of the
fair market value of its shares for that year (measured at the close of the
U.S. Holder's taxable year) over its adjusted tax basis in the shares. The
U.S. Holder will also be allowed an ordinary loss each year of the excess, if
any, of its adjusted tax basis over the fair market value of its shares, but
only to the extent of the net amount of previously included mark-to-market
income as a result of the mark-to-market election. The U.S. Holder's tax basis
in the shares will be adjusted to reflect these income or loss amounts. The
mark-to-market election is made on a shareholder-by-shareholder basis and,
once made, can only be revoked with the consent of the Internal Revenue
Service. Assuming the shares are regularly traded, the mark-to-market election
would be available with respect to the shares.

   Each U.S. Holder is urged to consult its own tax adviser concerning the
potential application of the passive foreign investment company rules to the
U.S. Holder's ownership and disposition of shares.

U.S. Backup Withholding and Information Reporting

   In general, information reporting requirements will apply to dividends in
respect of the shares and the proceeds received on the sale or disposition of
the shares paid within the United States, and in certain cases outside of the
United States, to a U.S. Holder unless the U.S. Holder is an exempt recipient,
such as a corporation, and backup withholding may apply to such amounts if the
U.S. Holder fails to provide an accurate taxpayer identification number or to
report interest and dividends required to be shown on its federal income tax
returns. The amount of any backup withholding from a payment to a U.S. Holder
will be allowed as a credit against the U.S. Holder's U.S. federal income tax
liability.

F. Dividends and Paying Agents

   As noted in "Consolidated Statements and Other Financial Information" in
"Item 8. Financial Information," we have never declared or paid dividends and
do not anticipate paying cash dividends in the foreseeable future.

G. Statement by Experts

  Not applicable.

H. Documents on Display

   We are a reporting company under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Since we are a "foreign private issuer" as
defined in the Exchange Act, we are exempt from the provisions of the Exchange
Act which prescribe the furnishing and content of proxy statements to
shareholders and relating to short swing profits reporting and liability.

   You may review a copy of this annual report, including exhibits and
schedules filed with it, at the SEC's public reference facility in Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.

                                      67
<PAGE>

20549. You may also obtain copies of such materials from the Public Reference
Section of the SEC, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. You may call the SEC at 1-800-
SEC-0330 for further information on the public reference rooms. The SEC
maintains a web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC.

   You may read and copy any reports, statements or other information that we
file with the SEC at the addresses indicated above, and you may also access
them electronically at the web site set forth above. These SEC filings are
also available to the public from commercial document retrieval services.

   We are required to file reports and other information with the securities
commission in all provinces of Canada. You are invited to read and copy any
reports, statements or other information, other than confidential filings,
that we file with the provincial securities commissions at their public
reference rooms. These filings are also electronically available from the
Canadian System for Electronic Document Analysis and Retrieval (SEDAR)
(http://www.sedar.com), the Canadian equivalent of the SEC's electronic
document gathering and retrieval system (EDGAR).

   Copies of any documents referred to in this annual filing and filed with
the SEC can be obtained without charge by contacting our Corporate Secretary,
c/o ImagicTV Inc., One Brunswick Square, 14th Floor, Saint John, New
Brunswick, Canada, telephone number: (506) 631-3000. In order to obtain timely
delivery of these documents, you must request this information no later than
seven business days before the date on which you would like to receive the
documents

I. Subsidiary Information

  Not applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   With respect to quantitative information about market risk, we currently do
not use derivative instruments. With respect to qualitative information, see
"Management's Discussion and Analysis--Impact of Foreign Exchange Rate
Exposure and Impact of Interest Rate Exposure" in "Item 5. Operating and
Financial Review and Prospects."

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

  Not applicable.

                                      68
<PAGE>

                                    PART II

ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

   Not applicable.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
         PROCEEDS

A.Use of Proceeds

   We completed our initial public offering pursuant to a registration
statement on Form F-1 (File

   No. 333-48452) which was declared effective by the SEC on November 20,
2000. The managing underwriters of the syndicate were Merrill Lynch & Co.,
Chase H & Q and CIBC World Markets. Prior to our initial public offering we
had approximately $22.4 million in cash and cash equivalents. We had $68.6
million in cash and cash equivalents on hand following our initial public
offering and our September and October private placements. The net proceeds
from our initial public offering were $46.2 million. As of May 14, 2002 we had
used approximately $25.2 million of these proceeds for sales and marketing
activities, research and development and for working capital and general
corporate purposes, including severance and other costs related to our
November 2001 restructuring. We expect to continue to use the proceeds in this
way in the future. Pending this use, the proceeds invested in short-term,
interest-bearing, investment-grade securities, certificates of deposit or
direct or guaranteed obligations of Canada or the United States. See
"Developments in Fiscal 2001" in "Item 4. Information on the Company" for
further details.

ITEM 15.[RESERVED]

ITEM 16.[RESERVED]

                                   PART III

ITEM 17.FINANCIAL STATEMENTS

   We have responded to Item 18 in lieu of responding to this Item.

                                      69
<PAGE>

ITEM 18.FINANCIAL STATEMENTS

                 INDEPENDENT AUDITORS' REPORT TO SHAREHOLDERS

   We have audited the consolidated balance sheets of ImagicTV Inc. as at
February 28, 2002 and February 28, 2001, and the consolidated statements of
operations, shareholders' equity and cash flows for the years ended February
28, 2002, February 28, 2001 and February 29, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.

   With respect to the consolidated financial statements for the years ended
February 28, 2002, and February 28, 2001, we conducted our audits in
accordance with Canadian generally accepted auditing standards and United
States generally accepted auditing standards. With respect to the consolidated
financial statements for the year ended February 29, 2000, we conducted our
audit in accordance with Canadian generally accepted auditing standards. Those
standards require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation.

   In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at February
28, 2002 and February 28, 2001 and the results of its operations and its cash
flows for the years ended February 28, 2002, February 28, 2001 and February
29, 2000 in accordance with Canadian generally accepted accounting principles.

[LOGO]

Chartered Accountants

Toronto, Canada

March 25, 2002

                                      70
<PAGE>

                                 ImagicTV Inc.
                          Consolidated Balance Sheets
            [In thousands of U.S. dollars, except number of shares]

<TABLE>
<CAPTION>
                                                       February 28, February 28,
                                                           2001         2002
                                                       ------------ ------------
<S>                                                    <C>          <C>
Assets
Current assets:
  Cash and cash equivalents (note 2)..................   $ 46,414     $ 45,641
  Short-term investments (note 2).....................     14,346          359
  Accounts receivable, trade..........................      4,240          305
  Accounts receivable, trade--related parties.........      1,440          143
  Instalment receivables..............................        705           --
  Inventory...........................................        295           --
  Prepaid expenses, deposits and other receivables....      1,436          904
                                                         --------     --------
Total current assets..................................     68,876       47,352
                                                         --------     --------
Capital assets (note 3)...............................      2,970        2,133
                                                         --------     --------
Total assets..........................................   $ 71,846     $ 49,485
                                                         ========     ========
Liabilities and Shareholders' Equity
Current liabilities:
  Accounts payable....................................   $  1,055     $    667
  Accrued liabilities.................................      2,973          793
  Payable to related parties..........................        850          290
  Deferred revenue....................................      1,119          437
  Current portion of long-term debt (note 4)..........         72            9
                                                         --------     --------
Total current liabilities.............................      6,069        2,196
                                                         --------     --------
Long-term debt (note 4)...............................      1,577        1,496
                                                         --------     --------
Shareholders' equity (note 5):
  Authorized:
    Unlimited common shares, no par value
    Unlimited preferred shares, no par value
  Issued and outstanding:
    24,669,336 Common Shares
     (February 28, 2001--24,592,624)..................     87,678       85,698
    Nil preferred.....................................         --           --
  Deferred stock-based compensation...................     (2,670)        (393)
  Accumulated deficit.................................    (20,282)     (38,986)
  Cumulative currency translation adjustments.........       (526)        (526)
                                                         --------     --------
Total shareholders' equity............................     64,200       45,793
                                                         --------     --------
Total liabilities and shareholders' equity............   $ 71,846     $ 49,485
                                                         ========     ========
</TABLE>
See accompanying notes to the consolidated financial statements

Signed on behalf of the Board of Directors

[LOGO]                                  [LOGO]
Peter G. Jollymore, Chairman            Carey Diamond, Director

                                       71
<PAGE>

                                 ImagicTV Inc.
                     Consolidated Statements of Operations
            [In thousands of U.S. dollars, except per share amounts]

<TABLE>
<CAPTION>
                                           Year ended   Year ended   Year ended
                                          February 29, February 28, February 28,
                                              2000         2001         2002
                                          ------------ ------------ ------------
<S>                                       <C>          <C>          <C>
Revenues:
  License fees..........................    $ 1,384      $  4,770     $    631
  Royalty fees..........................         --         1,288        1,197
  Services..............................        393         1,791        2,387
  Equipment.............................        321         1,150           --
                                            -------      --------     --------
Total revenues..........................      2,098         8,999        4,215
                                            -------      --------     --------
Cost of revenues:
  Services..............................        657         2,379        2,603
  Equipment.............................        331         1,068           --
                                            -------      --------     --------
Total cost of revenues..................        988         3,447        2,603
                                            -------      --------     --------
Gross profit............................      1,110         5,552        1,612
                                            -------      --------     --------
Operating expenses:
  Sales and marketing...................      2,325         7,763        8,928
  Research and development..............      4,084         7,967        7,151
  General and administrative............        827         2,815        4,582
  Restructuring expense.................         --            --        1,162
                                            -------      --------     --------
Total operating expenses................      7,236        18,545       21,823
                                            -------      --------     --------
Loss from operations....................     (6,126)      (12,993)     (20,211)
Interest income, net....................        121         1,133        1,656
Forgivable government assistance (note
 4).....................................        434            --           --
Foreign exchange gain (loss)............        (31)          426          (28)
                                            -------      --------     --------
Loss before provision for income taxes..     (5,602)      (11,434)     (18,583)
Provision for income taxes (note 7).....        (44)          (24)        (121)
                                            -------      --------     --------
Net loss................................    $(5,646)     $(11,458)    $(18,704)
                                            =======      ========     ========
Basic and diluted net loss per share
 (note 10)..............................    $ (0.40)     $  (0.58)    $  (0.76)
                                            =======      ========     ========
Weighted average number of shares used
 in computing basic and diluted net loss
 per share (000s).......................     13,968        19,796       24,606
</TABLE>

See accompanying notes to the consolidated financial statements

                                       72
<PAGE>

                                 ImagicTV Inc.

                Consolidated Statements of Shareholders' Equity
                         (In thousands of U.S. dollars)

<TABLE>
<CAPTION>
                                         Deferred Stock-             Cumulative
                         Common Shares        Based                   Currency       Total
                         --------------  Compensation on Accumulated Translation Shareholders'
                         Number Amount    Stock Options    Deficit   Adjustment     Equity
                         ------ -------  --------------- ----------- ----------- -------------
<S>                      <C>    <C>      <C>             <C>         <C>         <C>
Balances, February 28,
 1999................... 11,131 $ 5,658      $   --       $ (3,178)     $  13       $ 2,493
 Net loss...............     --      --          --         (5,646)        --        (5,646)
 Reporting currency
 translation
 adjustments............     --      --          --             --         28            28
 Issuance of shares for
 cash...................  6,418   8,831          --             --         --         8,831
                         ------ -------      ------       --------      -----       -------
Balances, February 29,
 2000................... 17,549  14,489          --         (8,824)        41         5,706
 Net loss...............     --      --          --        (11,458)        --       (11,458)
 Amortization of
 deferred stock-based
 compensation...........     --      --         550             --         --           550
 Deferred stock-based
 compensation...........     --   3,220      (3,220)            --         --            --
 Reporting currency
 translation
 adjustments............     --      --          --             --       (567)         (567)
 Issuance of shares for
 cash...................  7,044  69,969          --             --         --        69,969
                         ------ -------      ------       --------      -----       -------
Balances, February 28,
 2001................... 24,593  87,678      (2,670)       (20,282)      (526)       64,200
 Net loss...............     --      --          --        (18,704)        --       (18,704)
 Amortization of
 deferred stock-based
 compensation...........     --      --         317             --         --           317
 Deferred stock-based
 compensation...........     --  (1,960)      1,960             --         --            --
 Issuance of shares for
 cash...................     76     (20)         --             --         --           (20)
                         ------ -------      ------       --------      -----       -------
Balances, February 28,
 2002................... 24,669 $85,698      $ (393)      $(38,986)     $(526)      $45,793
                         ====== =======      ======       ========      =====       =======
</TABLE>

See accompanying notes to consolidated financial statements

                                       73
<PAGE>

                                 ImagicTV Inc.
                     Consolidated Statements of Cash Flows
                         (In thousands of U.S. dollars)

<TABLE>
<CAPTION>
                                          Year Ended   Year Ended   Year Ended
                                         February 29, February 28, February 28,
                                             2000         2001         2002
                                         ------------ ------------ ------------
<S>                                      <C>          <C>          <C>
Cash flows from operating activities:
  Net loss..............................   $(5,646)     $(11,458)    $(18,704)
  Items not involving cash:
    Depreciation and amortization.......       483         1,169        1,864
    Non-monetary transaction (note
     9(b))..............................      (102)           --           --
    Stock-based compensation............        --           550          317
    Write-down of capital assets on
     restructuring......................        --            --          211
  Change in operating assets and
   liabilities:
    Accounts receivable, trade..........    (1,160)       (2,893)       3,935
    Accounts receivable, trade--related
     parties............................      (312)         (748)       1,297
    Instalment receivables..............        --          (979)         705
    Inventory...........................       234          (302)         295
    Prepaid expenses, deposits, and
     other receivables..................     1,052        (1,281)         532
    Accounts payable and accrued
     liabilities........................       289         3,510       (2,568)
    Due to related parties..............       286           556         (560)
    Deferred revenue and customer
     deposits...........................     1,099          (238)        (683)
                                           -------      --------     --------
  Cash used in operating activities.....    (3,777)      (12,114)     (13,359)
                                           -------      --------     --------
Cash flows from investing activities:
  Purchases of capital assets...........      (992)       (2,964)      (1,237)
  Sale (purchase) of short-term
   investments, net.....................        --       (14,346)      13,987
                                           -------      --------     --------
  Cash from (used in) investing
   activities...........................      (992)      (17,310)      12,750
                                           -------      --------     --------
Cash flows from financing activities:
  Issuance of common shares, net of
   share issue costs....................     8,831        69,969          (20)
  Proceeds (repayment) of long-term
   debt.................................     1,763           (20)        (144)
                                           -------      --------     --------
  Cash from (used in) financing
   activities...........................    10,594        69,949         (164)
                                           -------      --------     --------
Effect of foreign currency exchange
 adjustments............................       (32)         (507)          --
                                           -------      --------     --------
Increase (decrease) in cash and cash
 equivalents............................     5,793        40,018         (773)
Cash and cash equivalents, beginning of
 year...................................       603         6,396       46,414
                                           -------      --------     --------
Cash and cash equivalents, end of year..   $ 6,396      $ 46,414     $ 45,641
                                           =======      ========     ========
Supplemental cash flow information:
  Cash paid for taxes...................   $    44      $     37     $    125
  Cash received for interest............   $    --      $    697     $  2,052
</TABLE>

See accompanying notes to consolidated financial statements

                                       74
<PAGE>

                                 ImagicTV Inc.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        (in thousands of U.S. dollars)

ImagicTV Inc. was incorporated on December 24, 1997 and commenced operations
on January 5, 1998. ImagicTV develops and licenses infrastructure software
products and provides related services that enable telephone companies and
other service providers to deliver multi-channel digital television and
interactive media services to their subscribers' televisions and personal
computers over a broadband network.

1.Significant accounting policies:

   These financial statements are stated in U.S. dollars, except as otherwise
noted. They have been prepared in accordance with accounting principles
generally accepted in Canada which, except as disclosed in note 12, conform in
all material respects with accounting principles generally accepted in the
U.S.

  (a)Consolidation:

      These consolidated financial statements include the accounts of
    ImagicTV Inc. and its wholly owned subsidiaries, iMagicTV (US), Inc.,
    and iMagicTV (UK) Limited. All intercompany transactions and balances
    are eliminated on consolidation.

  (b)Currency translation:

      The functional currency of ImagicTV is the U.S. dollar. Transactions
    of the Canadian parent company and fully integrated foreign subsidiaries
    which are denominated in currencies other than the U.S. dollar are
    translated into U.S. dollars using the temporal method. Exchange gains
    and losses arising from these transactions are included in the results
    of operations for the year. Transactions of foreign subsidiaries which
    are considered self-sustaining, and therefore the functional currency is
    the local currency, are translated using the current rate method and
    resulting exchange gains and losses are recorded as Cumulative Currency
    Translation Adjustments in Shareholders' Equity.

  (c)Use of estimates:

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

  (d)Cash and cash equivalents and short-term investments:

      All highly liquid investments, with an original term to maturity of
    three months or less at the time of purchase, are classified as cash
    equivalents. Investments with a term to maturity of more than three
    months but less than one year are classified as short-term investments.

  (e)Inventory:

      Inventory is recorded at the lower of cost, determined on an average
    cost basis, and net realisable value.

                                      75
<PAGE>

                                 ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

  (f)Capital assets:

      Capital assets are stated at cost, net of accumulated depreciation and
    amortisation, and, other than leasehold improvements, are depreciated
    over their estimated useful lives. Leasehold improvements are recorded
    at cost and are amortized over the lesser of their useful lives or the
    term of the related lease. Expenditures for maintenance and repairs have
    been charged to the statements of operations as incurred.

    Depreciation and amortisation are computed using the straight-line
    method as follows:

<TABLE>
 <C>                                           <S>
                Computer hardware              2 years
                Office furniture and equipment 5 years
                Leasehold improvements         Term of lease
                Software licenses              2 years
</TABLE>

      ImagicTV regularly reviews the carrying values of its capital assets
    by comparing the carrying amount of the asset to the expected
    undiscounted future cash flows to be generated by the asset. If the
    carrying value exceeds the undiscounted future cash flows, a write-down
    is charged to the statement of operations for the excess. During the
    year-end February 28, 2002, ImagicTV recorded a write-down of capital
    assets as part of the restructuring plan discussed in note 6.

  (g)Revenue recognition:

      ImagicTV's revenues are derived primarily from license fees (which
    include installation), royalty fees and service elements. Service
    elements, which include maintenance and technical support, training,
    consulting and other services, are not essential to the functionality of
    ImagicTV's licensed products.

      In cases where ImagicTV sells a multi-element arrangement, the fees
    are allocated to the elements based on ImagicTV-specific objective
    evidence of each element's fair value. Vendor-specific objective
    evidence used in determining the fair value of license revenues is based
    on the price charged by ImagicTV when the same element is sold
    separately to a customer of a similar size and nature. Vendor-specific
    objective evidence used in determining the fair value of training,
    consulting and other services is based on the standard daily rates per
    diem for the type of service being provided multiplied by the estimated
    time to complete the task. Vendor-specific objective evidence used in
    determining the fair value of maintenance and technical support is based
    on the annual renewal rates. Fees related to the delivery of multi-
    element arrangements are non-refundable.

      For arrangements where ImagicTV cannot establish vendor-specific
    objective evidence of fair value for the delivered license portion of
    the arrangement, ImagicTV uses the residual method to recognize revenue.
    Under the residual method, for arrangements where ImagicTV can establish
    vendor-specific objective evidence for all undelivered elements, which
    are typically service and maintenance, ImagicTV allocates that value to
    the revenue relating to the undelivered elements and records the
    remaining value of the contract as license revenue.

                                      76
<PAGE>

                                 ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

      Revenues from product elements consist primarily of license and
    royalty fees. Up front licence fees are recognized when a contract with
    a customer has been executed, delivery and acceptance of the software
    have occurred, the license fee is fixed and determinable, and collection
    of the related receivable is deemed probable by management. Royalty fees
    are either in the form of a non-refundable one-time royalty payment for
    a preset number of subscribers, a one-time per subscriber activation
    royalty payment or a monthly royalty fee based upon the number of active
    subscribers at the end of each month. Non refundable one-time royalty
    payments for a fixed number of subscribers are recorded as revenue when
    it is determined that the software has been delivered and accepted, the
    collection of the amount is probable and ImagicTV has no further
    obligations related to the provision of the royalty license. One-time
    royalty activation payments are recognized quarterly based on the net
    increase in the number of subscribers at the end of each quarter.
    Monthly royalty fees are recognized monthly based on the number of
    active subscribers at the end of each month.

      Service revenues from training, consulting and other services are
    recognized when the services are performed. Losses on professional
    services contracts, if any, are recognized at the time such losses are
    identified.

      Maintenance and technical support revenues paid in advance are non-
    refundable and are recognized ratably over the terms of the agreements,
    which are typically 12 months.

      Product, service and equipment revenues that have been prepaid but do
    not yet qualify for recognition as revenue under ImagicTV's revenue
    recognition policy are reflected as deferred revenues on ImagicTV's
    balance sheet.

      Product revenues that have been recognized as revenues under
    ImagicTV's revenue recognition policy but for which the cash proceeds
    are not yet due are reflected as instalment receivables. Instalment
    receivables primarily represent future instalment payments on license
    fee revenue, which are due within 12 months from the balance sheet date.

  (h)Research and development expenses:

      Costs related to research, design and development of software products
    are charged to research and development expenses as incurred. Software
    development costs are capitalized beginning when a product's
    technological feasibility has been established, which generally occurs
    upon completion of a working model, and ending when a product is
    available for general release to customers. To date, completing a
    working model of ImagicTV's product and the general release of the
    product have substantially coincided. As a result, ImagicTV has not
    capitalized any software development costs since such costs have not
    been significant.

  (i)Investment tax credits:

      ImagicTV is entitled to Canadian federal and provincial investment tax
    credits which are earned as a percentage of eligible research and
    development expenditures incurred in each taxation year. Investment tax
    credits are available to be applied against future tax liabilities,
    subject to a 10-year carry-forward period. Investment tax credits are
    accounted for as a reduction of the related expenditure for items of a
    current nature and a reduction of the related asset cost for items of a
    long-term nature, provided that ImagicTV has reasonable assurance that
    the tax credits will be realized. To date, no investment tax credits
    have been recognized.

                                      77
<PAGE>

                                 ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

(j) Income taxes:

  Income taxes are accounted for under the asset and liability method of
  accounting for income taxes. Under the asset and liability method, future
  tax assets and liabilities are recognized for the future tax consequences
  attributable to differences between the financial statement carrying
  amounts of existing assets and liabilities and their respective tax basis
  and operating loss and tax credit carryforwards. Future tax assets and
  liabilities are measured using enacted or substantively enacted tax rates
  expected to apply when the asset is realized or the liability is settled.
  The effect on future tax assets and liabilities of a change in tax rates is
  recognized in income in the period that substantive enactment or enactment
  occurs. A substantive enacted rate is only used when the proposed tax rate
  change is specified in sufficient detail to be understood and applied in
  practice and has been drafted and tabled in legislative or regulatory form
  with the appropriate governing bodies.

(k) Stock-based compensation:

  ImagicTV uses the intrinsic value method to account for its stock-based
  employee compensation plan. As such, deferred stock-based compensation is
  recorded if it is determined that, on the date of grant, the fair market
  value of the underlying common share exceeds the exercise price per share.
  Deferred stock-based compensation is recognized as an expense over the
  vesting period of the option. Stock options granted to consultants and
  other non-employees are accounted for using the fair value method. Under
  this method, options granted are recognized at their fair value as services
  are performed and options are earned.

(l) Fair value:

  Financial instruments consist of cash and cash equivalents, short-term
  investments, accounts receivable, trade accounts receivable for trade-
  related parties, instalment receivables, accounts payable, payable to
  related parties and accrued liabilities. The carrying values for these
  financial instruments approximate their fair values due to the relatively
  short periods to maturity of the instruments. In addition, the carrying
  value of long-term debt obligation approximates its fair values. ImagicTV
  determines the fair value of its financial instruments based on quoted
  market values or discounted cash flow analyses for instruments having
  similar terms and financing characteristics.

(m) Concentration of credit risk:

  Financial instruments that potentially expose ImagicTV to concentrations of
  credit risk consist primarily of cash and cash equivalents, short-term
  investments, accounts receivable trade and instalment receivables. Cash and
  cash equivalents consist primarily of deposits with major commercial banks
  and highly liquid investments, the maturities of which are three months or
  less from the date of purchase. ImagicTV performs periodic credit
  evaluations of the financial condition of its customers.

   Short-term investments consist primarily of high-grade fixed income
securities with maturities of more than three months but less than one year.

   At February 28, 2002, 96% of the accounts receivable were concentrated with
two customers. At February 28, 2001, 77% of the accounts receivable were
concentrated with five customers. Allowances are maintained for potential
credit losses consistent with the credit risk of specific customers.

                                      78
<PAGE>

                                 ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

2. Cash and cash equivalents and short-term investments:

   All short-term debt securities are classified as held to maturity because
ImagicTV has the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at amortized cost, adjusted
for amortisation of premiums and accretion discounts to maturity. ImagicTV
owns no short-term investments that are considered to be trading securities
nor available for sale securities.

   The components of cash and cash equivalents and short-term investments are
summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                       February 28, February 28,
                                                           2001         2002
                                                       ------------ ------------
<S>                                                    <C>          <C>
Cash and cash equivalents:
 Cash.................................................   $ 1,332      $ 1,891
 Corporate commercial paper...........................        --        1,051
 Short-term debt securities...........................    45,082       42,699
                                                         -------      -------
 Net book value.......................................   $46,414      $45,641
                                                         =======      =======
Short-term investments:
 Corporate commercial paper...........................   $14,116      $    --
 Term deposit.........................................       230          359
                                                         -------      -------
Net book value........................................   $14,346      $   359
                                                         =======      =======
</TABLE>

3. Capital assets:

<TABLE>
<CAPTION>
                                                       February 28, February 28,
                                                           2001         2002
                                                       ------------ ------------
<S>                                                    <C>          <C>
Computer hardware.....................................    $2,156       $2,177
Office furniture and equipment........................     1,419        1,299
Leasehold improvements................................       300          419
Software licenses.....................................       427          751
                                                          ------       ------
                                                           4,302        4,646
Less: accumulated depreciation and amortisation.......     1,332        2,513
                                                          ------       ------
Net book value........................................    $2,970       $2,133
                                                          ======       ======
</TABLE>

                                      79
<PAGE>

                                 ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

4. Long-term debt:

   During the year ended February 29, 2000, ImagicTV, through an application
filed by Newbridge Networks Corporation (now Alcatel Canada Ltd.) (an ImagicTV
shareholder), was granted a government assistance loan ("Repayable Loan") in
the amount of $1,766,000 and a forgivable loan ("Forgivable Loan") in the
amount of $434,000 by the Government of the Province of New Brunswick, Canada,
to assist ImagicTV in creating research and development employment in New
Brunswick. The Forgivable Loan was fully forgiven as advanced and recognized
in the statement of operations as forgivable government assistance. The
Repayable Loan is unsecured and repayable in annual instalments equal to 1.5%
of the license fee revenues of the immediately preceding year, and the
balance, if any, is due on February 25, 2006. The Repayable Loan is interest-
free until February 25, 2006 and, if not paid at that date, thereafter will
bear interest at 6.3% per annum. In addition, the Repayable Loan is subject to
accelerated repayment if the total number of full-time employees employed in
the Province of New Brunswick falls below 92 at any time during the year ended
February 28, 2002. As at February 28, 2002, the number of full-time employees
employed in the Province of New Brunswick, being approximately 106, exceeded
the prescribed amounts.

5. Shareholders' equity:

  (a) Description of shares:

    Common Shares

    Each outstanding common share is entitled to one vote at shareholder
    meetings and is entitled to receive dividends if, as, and when declared
    by the Board of Directors. Subject to the rights of holders of shares of
    any class-ranking senior to the common shares, holders of common shares
    are entitled to receive the remaining property or assets of ImagicTV in
    the event of liquidation, dissolution or winding-up. The common shares
    have no pre-emptive, redemption or conversion rights.

    Preferred Shares

    The Board of Directors has the authority, without further action by the
    shareholders, to issue an unlimited number of preferred shares in one or
    more series. These preferred shares may be entitled to dividend and
    liquidation preferences over the common shares. The board will be able
    to fix the designations, powers, preferences, privileges and relative,
    participating, optional or special rights of any preferred shares
    issued, including any qualifications, limitations or restrictions.
    Special rights which may be granted to a series of preferred shares may
    include dividend rights, conversion rights, voting rights, terms of
    redemption and liquidation preferences, any of which may be superior to
    the rights of the common shares.

  (b) Common share issuances:

    (i)   On December 17, 1999, ImagicTV issued 3,808,146 common shares to a
          group of investors for cash consideration, net of costs, of
          $6,144,000.

    (ii)  During the year ended February 29, 2000, ImagicTV issued an
          aggregate of 791,694 common shares to employees for total cash
          consideration, net of costs, of $1,011,000.

                                      80
<PAGE>

                                 ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

    (iii)  During the year ended February 29, 2000, pursuant to the Pre-
           emptive Rights granted to the shareholders of ImagicTV in the
           Shareholders' Agreement, the Company issued 1,818,261 common
           shares for cash consideration of $1,676,000.

    (iv)   In July 2000, ImagicTV's Board of Directors authorized a private
           placement of up to $25,000,000, of which $10,000,000 was reserved
           for specified existing shareholders. On September 19, 2000,
           ImagicTV issued warrants to purchase common shares to five
           existing shareholders for a total cash consideration of
           $10,000,000. In October 2000, in connection with the additional
           private placements described in (v) below, the share purchase
           warrants were converted into 909,061 common shares.

    (v)    In October 2000, ImagicTV issued 272,719 common shares to America
           Online, Inc. for aggregate proceeds of $3,000,000 and 1,090,875
           common shares to Cisco Systems, Inc. for aggregate proceeds
           of $12,000,000.

    (vi)   On November 21, 2000, ImagicTV completed its initial public
           offering of 4,750,000 common shares for net proceeds of
           $46,200,000. In connection with the initial public offering, all
           of ImagicTV's outstanding Class A common shares, Class B common
           shares and Class C common shares were converted into a single new
           class of common shares on a one-for-one basis. In addition,
           ImagicTV effected a share split on a 1.1636-for-1 basis. ImagicTV
           also created a class of preferred shares issuable in series, none
           of which have been issued. ImagicTV's share capital and earnings
           (loss) per share have been restated on a retroactive basis to
           give effect to the conversion of the shares to a single new class
           of common shares and the share split.

    (vii)  During the year ended February 28, 2001 ImagicTV issued 21,382
           common shares to employees on the exercise of options for cash
           consideration of $18,000.

    (viii) During the year ended February 28, 2002 ImagicTV issued 76,712
           common shares to employees on the exercise of options for cash
           consideration of $54,000.

  (c) Stock option plan:

    On December 17, 1999, ImagicTV established a Share Option Plan (the
    "1999 Plan"). The 1999 Plan allows for the granting of options to
    acquire common shares to employees, consultants and directors of
    ImagicTV and its affiliates. Options granted under the 1999 Plan have a
    maximum term of seven years and an exercise price per share of no less
    than the fair market value of the common shares as determined by the
    Board of Directors on the date of the option grant. The options vest
    annually over four years. ImagicTV has reserved 3,511,825 common shares,
    for issuance under the 1999 Plan, provided that the Board of Directors
    has the right to increase the number of shares reserved.

    ImagicTV's Board of Directors adopted a new share option plan on
    November 9, 2000 (the "2000 Plan"). The 2000 Plan does not affect
    options granted under its 1998 or 1999 Plans. No new options will be
    granted under the 1998 or 1999 Plans. The compensation committee of
    ImagicTV's Board of Directors administers the 2000 Plan and determines,
    among other things, the persons eligible to participate in the 2000 Plan
    and the vesting periods and other attributes of individual options. The
    2000 Plan provides for the grant of options to employees, officers and
    directors of, and consultants to, ImagicTV and its affiliates.

                                      81
<PAGE>

                                 ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

   Options held by any person under the 2000 Plan, together with any new
options granted to that person, may not at any time exceed 5% of the aggregate
number of our common shares outstanding from time to time. The maximum number
of shares issuable under the 2000 Plan is 1,879,185. The options granted under
the 2000 Plan will have a maximum term of 10 years and an exercise price no
less than the fair market value of ImagicTV's common shares on the date of the
grant, or 110% of fair market value in the case of an incentive stock option
granted to an employee who owns common shares having more than 10% of the
combined voting power of the shares outstanding.

   A summary of the status of ImagicTV's options as of February 28, 2002 is as
follows:

<TABLE>
<CAPTION>
                                            Weighted
          Range of         Number      Average Remaining          Number of
       Exercise Prices   of Options Contractual Life (Years) Options Exercisable
       ---------------   ---------- ------------------------ -------------------
       <S>               <C>        <C>                      <C>
       $ 0.54--$ 0.62      558,984            3.39                  466,160
       $ 0.73--$ 0.95      762,252            4.78                  362,978
       $ 1.07--$ 2.80    1,193,040            5.36                  423,053
       $ 7.04--$ 11.17     210,599            5.67                   53,883
       ---------------   ---------            ----                ---------
            Total        2,724,875            4.82                1,306,074
       ===============   =========            ====                =========
</TABLE>

   The following table summarizes options issued:

<TABLE>
<CAPTION>
                              February 29, 2000          February 28, 2001          February 28, 2002
                          -------------------------- -------------------------- --------------------------
                                         Weighted                   Weighted                   Weighted
                            Number       Average       Number       Average       Number       Average
                          of Options  Exercise Price of Options  Exercise Price of Options  Exercise Price
                          ----------  -------------- ----------  -------------- ----------  --------------
<S>                       <C>         <C>            <C>         <C>            <C>         <C>
Outstanding, beginning
 of period..............    849,428       $0.64      2,188,155       $0.96       3,565,339      $2.02
Granted.................  1,399,234        1.21      1,588,903        3.51         515,611       1.00
Cancelled...............    (60,507)       0.91       (190,337)       2.30      (1,279,363)      2.30
Exercised...............         --          --        (21,382)       0.80         (76,712)      0.71
                          ---------       -----      ---------       -----      ----------      -----
Outstanding, end of
 period.................  2,188,155       $0.96      3,565,339       $2.02       2,724,875      $1.93
                          =========       =====      =========       =====      ==========      =====
Options exercisable, end
 of period..............    295,205       $0.63        804,960       $0.82       1,306,074      $1.24
                          =========       =====      =========       =====      ==========      =====
</TABLE>

   To February 28, 2002, all stock options have been granted to employees,
officers and directors of ImagicTV. For the year ended February 28, 2002,
ImagicTV recorded nil deferred stock-based compensation (February 28, 2001--
$3,220,000; February 29, 2000--nil) relating to options issued to employees.
During the year ended February 28, 2002, ImagicTV recorded a recovery of
deferred stock-based compensation of $1,960,000 (February 28, 2001--nil;
February 29, 2000--nil) representing the net book value of options that were
cancelled and not fully vested under ImagicTV's option plan. Amortisation of
deferred stock-based compensation of $317,000 has been recorded as an
operating expense for the year ended February 28, 2002 (February 28, 2001--
$550,000; February 29, 2000--nil).

                                      82
<PAGE>

                                 ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)
6. Restructuring charge:

   In response to the continued slowdown in capital spending in the
telecommunications industry and the resulting decrease in ImagicTV's expected
revenues, ImagicTV has undertaken measures to streamline operations. On
November 14, 2001, ImagicTV adopted a restructuring plan, which reduced the
number of global employees, reduced discretionary marketing expenses, and
introduced new tools and processes to increase development productivity and
improve efficiencies in our software demonstration and installation
activities. As a result of these efforts, ImagicTV recorded a restructuring
charge of $1,162,000 in the year ended February 28, 2002, which included
severance related costs for 76 employees and the write-down of excess capital
assets to their net recoverable amounts.

   The following table summarizes the charges:

<TABLE>
<CAPTION>
                                                     Cumulative
                                                      drawdown       Provision
                                      Year Ended  -----------------  balance at
                                     February 28,   Cash   Non-cash February 28,
                                         2002     Payments Charges      2002
                                     ------------ -------- -------- ------------
<S>                                  <C>          <C>      <C>      <C>
Restructuring charge:
 Severance..........................    $  909      $775     $ --       $134
 Stock-based compensation charges...        42        --       42         --
 Write-down of capital assets.......       211        --      211         --
                                        ------      ----     ----       ----
Total charge........................    $1,162      $775     $253       $134
                                        ======      ====     ====       ====
</TABLE>

7. Income taxes:

   The provision for income taxes differs from the amount computed by applying
the statutory income tax rate to loss before provision for income taxes. The
sources and tax effects of the differences are as follows (in thousands):

<TABLE>
<CAPTION>
                                                     Fiscal Year Ended
                                            -----------------------------------
                                            29-Feb-2000 28-Feb-2001 28-Feb-2002
                                            ----------- ----------- -----------
<S>                                         <C>         <C>         <C>
Statutory rate applied to loss before
 provision for income taxes................   $(2,583)    $(5,157)    $(8,195)
Adjustments resulting from:
 Change in enacted rates...................        --          --       2,858
 Lower tax rates in other countries........        --          --         (58)
 Stock-based compensation not deducted for
  tax......................................        --         249         140
 Large corporation tax.....................        44          24           7
 Other.....................................        62          62          35
                                              -------     -------     -------
Sub-total..................................    (2,477)     (4,822)     (5,213)
Change in valuation allowance..............     2,521       4,846       5,092
                                              -------     -------     -------
Income taxes...............................   $    44     $    24     $   121
                                              =======     =======     =======
</TABLE>

                                      83
<PAGE>

                                 ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

   Significant components of ImagicTV's deferred tax assets are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                                 As at
                                                        -----------------------
                                                        28-Feb-2001 28-Feb-2002
                                                        ----------- -----------
<S>                                                     <C>         <C>
 Research and development expenses deferred for income
  tax purposes.........................................   $ 3,911     $ 4,582
 Net operating losses carried forward..................     4,674       9,685
 Share issue costs.....................................     2,419       1,568
 Reserves..............................................        --          32
 Fixed assets..........................................      (229)         --
                                                          -------     -------
Deferred tax assets....................................    10,775      15,867
Less valuation allowance...............................   (10,775)    (15,867)
                                                          =======     =======
Total..................................................   $    --     $    --
                                                          =======     =======
</TABLE>

   In addition to the above, to the extent that ImagicTV is able to utilize
the research and development expenses that have been deferred for income tax
purposes to reduce taxable income, ImagicTV will have available investment tax
credits of approximately $2,829,000 as at February 28, 2002 and $2,251,000 as
at February 28, 2001 that would be available to reduce income taxes otherwise
payable and which begin expiring in 2010.

   In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realisation of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers projected future taxable income, uncertainties related to the
industry in which ImagicTV operates, and tax planning strategies in making
this assessment. In order to fully realize the deferred tax assets, ImagicTV
will need to generate future taxable income of approximately $42,000,000 prior
to the expiration of the net operating losses carried forward. Due to the
uncertainties related to the industry in which ImagicTV operates and the
uncertainty of generating taxable income prior to the expiration of losses
carried forward, the tax benefit of the above carryforward amounts have been
completely offset by a valuation allowance.

   In accordance with income tax law in Canada, research and development
expenses may be deducted in periods subsequent to the period incurred. The
amounts set out in the table above represent research and development expenses
in the consolidated statement of operations that will be deductible in future
years for income tax purposes.

   As of February 28, 2002, ImagicTV had approximately $25,465,000 of
operating losses carried forward available to reduce future years' taxable
income in Canada. These losses and deductions expire as follows: 2005--
$42,000; 2006--$853,000; 2007--$2,760,000; 2008--$6,180,000; and 2009 -
$15,630,000.

8. Segmented information:

   ImagicTV operates in a single reportable operating segment, that is, to
provide software products to telecommunications companies and other service
providers that enable the delivery of digital broadcast television services to
residential subscribers over high-speed Internet Protocol networks. The single
reportable operating segment derives its revenues from the sale of software
and related services. As of

                                      84
<PAGE>

                                 ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

   February 28, 2002, substantially all assets related to ImagicTV's
operations were located in Canada. Revenues are attributable to geographic
location based on the location of the customer, as follows (in thousands):

<TABLE>
<CAPTION>
                                                    Fiscal Year Ended
                                          --------------------------------------
                                          February 29, February 28, February 28,
                                              2000         2001         2002
                                          ------------ ------------ ------------
<S>                                       <C>          <C>          <C>
Revenue by geographic location:
 Canada..................................   $ 1,362       $3,757       $2,128
 United States...........................        --        3,699        1,273
 Europe..................................       736        1,543          651
 Asia Pacific............................        --           --          163
                                            -------       ------       ------
                                            $ 2,098       $8,999       $4,215
                                            =======       ======       ======
</TABLE>

   For the year ended February 28, 2002, Aliant Inc. accounted for
approximately 30% of the total revenues. In addition, two other customers,
Saskatchewan Telecommunications and CenturyTel Service Group, LLC accounted
for 17% and 17%, respectively, of the total revenues. In the year ended
February 28, 2001, Aliant Inc. accounted for approximately 28% of total
revenues. In addition, three other customers, CenturyTel Service Group, LLC,
Nortel Networks Inc. and Boardwalk Equities accounted for 18%, 10% and 10%,
respectively, of total revenues. In the year ended February 29, 2000, Aliant
Inc. (formerly NBTel) accounted for 38% of total revenues. In addition, two
other customers, Kingston Vision and Saskatchewan Telecommunications accounted
for 31% and 16%, respectively, of total revenues.

9. Related-party transactions:

  The nature of the related-party transactions is summarized below:

  (a) NBTel and Aliant Inc.:

      On April 16, 1999, ImagicTV entered into a licensing agreement with
      NBTel, whereby NBTel received a perpetual, non-exclusive license to use
      ImagicTV's product in the Province of New Brunswick for cash
      consideration of C$500,000 ($334,000), and future one-time royalty
      payments based on the number of NBTel subscribers to the service. On
      December 16, 1999, the NBTel license agreement was assigned to Aliant
      Inc. (the parent company of NBTel) and was amended to include a license
      for the pcVu product and to expand the geographic territory of the
      license to include the Provinces of Nova Scotia, Prince Edward Island
      and Newfoundland on an exclusive basis in these provinces. ImagicTV
      received consideration amounting to C$900,000 ($610,000) payable as to
      C$500,000 on January 31, 2000 and C$200,000 payable on each of January
      31, 2001 and 2002. On January 16, 2001, the license agreement was
      further amended to include a sale of 40,000 subscriber-based license
      fees for C$3,200,000, payable in non-refundable instalments of
      C$1,600,000 on January 16, 2001 and C$1,600,000 on February 28, 2002.

      The initial license agreement dated April 16, 1999 included multiple
      elements including the delivery of DTV Manager version 1.0 and DTV
      Manager version 2.0, installation and maintenance and support. For
      accounting purposes, the entire non-refundable

                                      85
<PAGE>

                                 ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

      cash consideration was allocated to the various elements based on the
      specific evidence of their values. DTV Manager version 1.0 was
      delivered shortly after the execution of the agreement. DTV Manager
      version 2.0 was not available for delivery at that time. The license
      fee revenue was deferred until November 1999, the date at which
      ImagicTV delivered and installed DTV Manager version 2.0. The
      maintenance fee is being recognized on a straight-line basis over the
      term of the maintenance contract. The future one-time royalty payments
      based on net new subscribers are recognized as earned.

      Of the additional C$900,000 in consideration to be received in
      connection with the Aliant Inc. amendment, C$500,000 was recognized as
      revenue upon the delivery of pcVu in February 2000, C$200,000 was
      recognized as revenue when it became due on January 31, 2001 and the
      remaining C$200,000 was recognized as revenue when it became due on
      January 31, 2002. As of February 28, 2002, the final payment of
      C$200,000 was outstanding.

      Of the C$3,200,000 for the sale of 40,000 subscriber based licence
      fees, C$1,600,000 was recognized in February 2001 as it became due and
      C$1,600,000 was recognized in February 2002 when it became due. As of
      February 28, 2002, all payments were received.

      ImagicTV also sells set-top boxes, at little or no mark-up, to NBTel
      and Aliant for distribution to their subscribers. Revenue related to
      the sale of set-top boxes to NBTel amounted to $180,000 for the year
      ended February 29, 2000, $1,039,000 for the year ended February 28,
      2001, and nil for the year ended February 28, 2002.

      ImagicTV reimburses NBTel for certain operating expenses incurred on
      its behalf, including premises rent, communications, and corporate
      services.

  (b) Newbridge Networks Corporation (now Alcatel Canada Ltd.):

      In November 1999, ImagicTV entered into an agreement with a
      shareholder, Newbridge Networks Corporation ("Newbridge"), whereby
      Newbridge received a license to use ImagicTV's product for
      demonstration purposes in exchange for equipment supplied by Newbridge.
      The transaction was recorded at the fair value of the equipment
      received from Newbridge amounting to $102,000. In connection with this
      transaction, ImagicTV recorded license revenues in the same amount.

      In February 2000, ImagicTV entered into an amendment to the above
      agreement, which provided Newbridge with additional licences to use
      ImagicTV's product for demonstration purposes. The term of the
      additional site licences were one year, expiring on February 7, 2001.
      As of February 28, 2001, ImagicTV sold additional licenses to Newbridge
      for aggregate cash consideration of $40,000.

      In June 2000, ImagicTV provided Newbridge with a 90-day trial license
      for $17,000 that was used for demonstration purposes.

      ImagicTV has also supplied Newbridge with set-top boxes at little or no
      mark-up above cost.

  (c) America Online, Inc. and CISCO Systems Inc.:

      In October 2000, ImagicTV entered into a memorandum of understanding
      with America Online agreeing to provide America Online with up to
      $3,000,000 in research and

                                      86
<PAGE>

                                 ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

  development services, calculated at ImagicTV's commercial rates for
  consulting and development services and based on pricing and other terms no
  less favourable than that received by any third-party. Of this amount,
  ImagicTV is obligated to expend $500,000 to conduct investigative research
  and development to be specified by the parties.

  The obligation to perform the remaining $2,500,000 in services for
  continued research and development is contingent upon America Online
  entering into a trial or commercial license with ImagicTV for its software.
  To date, ImagicTV had not entered into any licensing arrangements or
  agreements with America Online. The memorandum of understanding does not
  contain any contractual commitment that would require ImagicTV to license
  its software to America Online. America Online and ImagicTV are to
  negotiate in good faith the ownership and licensing rights of the
  intellectual property resulting from any research and development
  activities. At the date of these financial statements, ImagicTV had not
  entered into any agreements in this regard with America Online.

  The common shares issued to America Online (note 5(v)) do not contain any
  terms or conditions, including any put or redemption rights, that would
  cause ImagicTV to repay or refund any of the proceeds received for the
  common shares sold to America Online. Moreover, there are no contractual
  commitments that would require ImagicTV to pay or refund America Online any
  cash or other consideration if ImagicTV failed to perform under the
  memorandum of understanding or if America Online failed to take advantage
  of ImagicTV's commitment to provide services under the memorandum of
  understanding.

  In connection with ImagicTV's private placement to Cisco Systems, it
  granted Cisco Systems a right of first negotiation. Pursuant to this right
  of first negotiation, if ImagicTV's Board of Directors receives a bona fide
  offer to acquire ImagicTV or all or substantially all of ImagicTV's assets
  from any of three specified entities, or if ImagicTV's Board of Directors
  votes to initiate a sale to any of these three specified entities of 25% or
  more of ImagicTV's total voting equity or all or substantially all of
  ImagicTV's assets, ImagicTV must, within 24 hours, give Cisco Systems
  notice of the terms of the sale proposal. After ImagicTV delivers this
  notice, Cisco Systems will have ten days to submit a proposal to ImagicTV's
  Board of Directors to acquire ImagicTV at a price to be set out in the
  proposal. Accordingly, under the limited circumstances described above,
  Cisco Systems has been granted an option to make an offer to acquire
  ImagicTV. If ImagicTV's Board of Directors decides to pursue Cisco Systems'
  proposal, ImagicTV has agreed to negotiate in good faith exclusively with
  Cisco Systems for a period of ten days. However, (a) if Cisco Systems does
  not submit a proposal within ten days of receipt of ImagicTV's notice, (b)
  if Cisco Systems' proposal is not pursued by ImagicTV's Board of Directors
  or (c) if Cisco Systems and ImagicTV fail to mutually agree on the terms of
  a transaction, then the right of first negotiation expires as to that
  proposal, and ImagicTV can negotiate and enter into a definitive agreement
  with the entity that made the initial proposal. Further, this right of
  first negotiation terminates (1) in the event that Cisco Systems owns less
  than 50% of the common shares it purchased on October 6, 2000 or (2) upon
  the date of the closing of the acquisition of all or substantially all of
  ImagicTV's assets or an acquisition of ImagicTV by another entity in which
  the holders of ImagicTV's outstanding voting equity immediately prior to
  the transaction own, immediately after the transaction, securities
  representing less than 50% of the voting equity of the surviving entity.

                                      87
<PAGE>

                                 ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

(d) Innovatia Inc.:

    In December 2000, ImagicTV entered into an agreement with Innovatia Inc.,
    a wholly owned subsidiary of Aliant Inc. According to this agreement,
    Innovatia was to provide ImagicTV with consulting services by utilizing
    Innovatia's Living Lab environment to assist in the development, marketing
    and sale of ImagicTV products and create an environment in the Living Lab
    for ImagicTV to test new services in a production environment. ImagicTV's
    commitment was to pay C$50,000 per month from December 2000 to May 2001
    with the option to renew for a further 6 months. For the year ended
    February 28, 2001, ImagicTV recorded an expense of C$150,000 in relation
    to this agreement.

    During the year ended February 28, 2002, ImagicTV elected to renew the
    agreement for a further six months, extending it to November 30, 2001. For
    the year ended February 28, 2002, ImagicTV recorded an expense of
    C$450,000 in relation to this agreement.

    The following table summarizes the related party transactions and balances
    (in thousands):

<TABLE>
<CAPTION>
                                                    Fiscal Year Ended
                                          --------------------------------------
                                          February 29, February 28, February 28,
                                              2000         2001         2002
                                          ------------ ------------ ------------
   <S>                                    <C>          <C>          <C>
   Related party transactions:
   Revenues License fees.................     $671        $ 116        $ 109
   Royalty fees..........................       --        1,249        1,001
   Services..............................      110          168          299
   Equipment.............................      205        1,052           --
   Operating expenses....................      469          805        1,029
   Interest income.......................       87           --           --
</TABLE>

<TABLE>
<CAPTION>
                                                               As of
                                                   -----------------------------
                                                   February 28, February 28,
                                                       2001         2002
                                                   ------------ ------------
   <S>                                             <C>          <C>          <C>
   Related party balances:
   Accounts receivable, trade.....................    $1,440        $143
   Deferred revenues..............................        27         219
   Accounts payable...............................       850         290
</TABLE>

                                      88
<PAGE>

                                 ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

10. Loss per share:

   Loss per share has been calculated based on the weighted average number of
common shares outstanding. Due to the net loss for all periods presented, all
potential common shares outstanding are considered anti-dilutive and are
excluded from the calculation of diluted loss per share. Common shares
issuable on the exercise of share options, that could potentially dilute basic
loss per share in the future, based on the treasury stock method, amounted to
344,000 for the period ended February 28, 2002 (1,649,000--February 28, 2001;
442,000--February 29, 2000).

11. Commitments:

   Future minimum lease payments under non-cancellable operating leases for
premises are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                     As at
                                                               February 28, 2002
                                                               -----------------
<S>                                                            <C>
2003..........................................................       $767
2004..........................................................        554
2005..........................................................        560
2006..........................................................        412
2007..........................................................         --
2008 and thereafter...........................................         --
</TABLE>

   Included in the lease commitments above are amounts related to an operating
lease with a shareholder, NBTel, for office premises. The lease expired on
February 28, 2001 and ImagicTV exercised its renewal option of one year.
Rental expense under this lease amounted to $290,000 for the year ended
February 28, 2002, $250,000 for the year ended February 28, 2001, and $270,000
for the year ended February 29, 2000.

12. Canadian and U.S. accounting policy differences:

   The consolidated financial statements of ImagicTV have been prepared in
accordance with generally accepted accounting principles ("GAAP") as applied
in Canada. There are no material measurement differences between Canadian GAAP
and U.S. GAAP that apply to the consolidated financial statements. Additional
disclosures required under U.S. GAAP include the following:

  (a) Other disclosures:

      Included in accrued liabilities at February 28, 2002 are accrued
      vacation pay expenses of $144,000. At February 28, 2001 vacation pay
      expenses of $302,000 and initial public offering costs of $1,401,000
      were included in accrued liabilities.

      Included in general and administrative operating expenses for the year
      ended February 28, 2002 is $856,000 of bad debt expense (nil for the
      year ended February 28, 2001, nil for the year ended February 29,
      2000).

                                      89
<PAGE>

                                 ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

  (b) Recent accounting pronouncements:

      In July 2001, the Financial Accounting Standards Board ("FASB") issued
      Statement of Financial Accounting Standard ("SFAS") No. 141, "Business
      Combinations". SFAS No. 141 requires that all business combinations be
      accounted for under the purchase method for business combinations
      initiated after June 30, 2001 for which the date of acquisition is July
      1, 2001 or later. Use of the pooling-of-interests method is no longer
      permitted. In July 2001, the FASB issued SFAS No. 142, "Goodwill and
      Other Intangible Assets". SFAS No. 142 requires that goodwill no longer
      be amortized to earnings, but instead be periodically reviewed for
      impairment. SFAS No. 142 must be adopted starting with fiscal years
      beginning after December 15, 2001. In August 2001, the Accounting
      Standards Board ("AcSB") issued Handbook Section 1581, "Business
      Combinations", and Handbook Section 3062, "Goodwill and Other
      Intangible Assets", which are consistent with SFAS No. 141 and SFAS No.
      142, respectively, except for certain remaining generally accepted
      accounting principles differences, including the accounting for
      purchased in-process research and development. The impact of adopting
      the provision of SFAS No. 141, No. 142 and Section 1581 and 3062 will
      not have any effect on ImagicTV's financial statements as ImagicTV has
      not completed any business combinations since inception.

      In October 2001, the FASB issued SFAS No. 144, "Accounting for the
      Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses
      significant issues relating to the implementation of SFAS No. 121,
      "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
      Assets to be Disposed of", and develops a single accounting method
      under which long-lived assets that are to be disposed of by sale are
      measured at the lower of book value or fair value less cost to sell.
      Additionally, SFAS No. 144 expands the scope of discontinued operations
      to include all components of an entity with operations that (i) can be
      distinguished from the rest of the entity and (ii) will be eliminated
      from the ongoing operations of the entity in a disposal transaction.
      SFAS No. 144 is effective for financial statements issued for fiscal
      years beginning after December 15, 2001 and its provisions are to be
      applied prospectively. ImagicTV is currently assessing the impact of
      SFAS No. 144 on its financial position and results of operations.

      In December 2001, the AcSB issued Handbook Section 3870 "Stock-Based
      Compensation and Other Stock-Based Payments". Section 3870 establishes
      standards for the recognition, measurement, and disclosure of stock-
      based compensation and other stock-based payments made in exchange for
      goods and services provided by employees and non-employees. It applies
      to transactions in which shares of common stock, stock options, or
      other equity instruments are granted or liabilities incurred based on
      the price of common stock or other equity instruments. ImagicTV's
      current accounting policy as it relates to stock-based compensation
      complies with the US GAAP. ImagicTV's current account policy is an
      acceptable method of accounting for stock-based compensation and other
      stock-based payments under Section 3870 and therefore ImagicTV does not
      believe that the adoption of this standard will have a material impact
      on its financial position or results of operations.

                                      90
<PAGE>

                                 ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

  (c) SFAS 123 pro forma information:

        SFAS No. 123, "Employee Stock Compensation" encourages, but does not
      require, the recording of compensation costs related to stock options
      granted to employees to be valued at fair value. For companies choosing
      not to adopt the fair value measurement for stock-based compensation,
      the pronouncement requires the disclosure of pro forma net income and
      net income (loss) per share information as if ImagicTV had accounted
      for its stock options issued under the fair value method. ImagicTV has
      elected not to adopt the recording of compensation cost for employee
      stock options at fair value and, accordingly, a summary of the pro
      forma impact on the statement of operations granted to employees is
      presented in the table below (in thousands of dollars, except per share
      amounts):

<TABLE>
<CAPTION>
                                                       Fiscal Year Ended
                                                   ----------------------------
                                                   February  February  February
                                                   29, 2000  28, 2001  28, 2002
                                                   --------  --------  --------
       <S>                                         <C>       <C>       <C>
       Net loss................................... $(5,646)  $(11,458) $(18,704)
       Compensation expense related to the fair
        value of stock options....................     (69)     (160)      (163)
                                                   -------   --------  --------
       Pro forma net loss......................... $(5,715)  $(11,618) $(18,867)
                                                   =======   ========  ========
       Pro forma net loss per share............... $ (0.41)  $  (0.59) $  (0.77)
                                                   =======   ========  ========
</TABLE>

        The fair value of each option granted prior to ImagicTV becoming a
      publicly traded company in November 2000 have been estimated at the
      date of grant using the minimum value method and by applying the
      following assumptions: weighted average risk-free interest rate of
      5.88% for the year ended February 28, 2001, and 5.76% for the year
      ended February 29, 2000; a dividend yield of 0%; and expected terms
      equal to the option vesting period.

        The fair value of each option granted between the date ImagicTV
      became a publicly traded company and February 28, 2002 has been
      estimated at the date of grant using the Black-Scholes option pricing
      model with the following assumptions used: dividend yield of 0%,
      expected volatility of 130% for the period ended February 28, 2002
      (109% for the year ended February 28, 2001), risk-free rate of return
      of 2.5% for the period ended February 28, 2002 (5.88% for the year
      ended February 28, 2001) and expected terms equal to the option vesting
      period.

        ImagicTV has assumed no forfeiture rate, as adjustments for actual
      forfeitures are made in the year they occur. The weighted average grant
      date fair value of options issued was $0.84, $0.37 and $0.19 for the
      years ended February 28, 2002, February 28, 2001, and February 29,
      2000, respectively.

  (d) Comprehensive Income:

        In June 1997, the Financial Accounting Standards Board issued SFAS
      No. 130, "Reporting Comprehensive Income" (SFAS No. 130), which
      establishes standards for reporting and presentation of comprehensive
      income. This standard defines comprehensive income as the changes in
      equity of an enterprise, except those resulting from shareholder
      transactions. For the years ended February 29, 2000 and February 28,
      2001 the difference

                                      91
<PAGE>

                                 ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

between net loss and comprehensive loss arises solely from reporting currency
translation adjustments. As a result, total comprehensive loss amounted to
$5,618,000 for the year ended February 29, 2000 and $12,025,000 for the year
ended February 28, 2001. For the year ended February 28, 2002, there is no
difference between net loss and comprehensive loss.

                                      92
<PAGE>

ITEM 19.EXHIBITS

   Documents filed as exhibits to this annual report:

   1.1 Articles of Incorporation of ImagicTV Inc. filed December 24, 1997 (as
amended on June 30, 1998 and November 27, 2000) (incorporated by reference to
Exhibit 3.1 to our registration statement on Form F-1 (Registration No. 33-
48452) (the "Registration Statement")).

   1.2 Bylaws of ImagicTV Inc. (incorporated by reference to Exhibit 3.4 to
the Registration Statement).

   4.1 Employee Share Option Plan (incorporated by reference to Exhibit 10.1
of the Registration Statement).

   4.2 Form of Share Option Agreement with respect to the Employee Share
Option Plan (incorporated by reference to Exhibit 10.2 of the Registration
Statement).

   4.3 Form of 2000 Share Option Plan (incorporated by reference to Exhibit
10.3 of the Registration Statement).

   4.4 Loan Agreement between Newbridge Networks Corporation and ImagicTV Inc.
(incorporated by reference to Exhibit 10.4 of the Registration Statement).

   4.5 Technology Transfer Agreement, dated January 1, 1998, between ImagicTV
Inc. and The New Brunswick Telephone Company, Ltd. (incorporated by reference
to Exhibit 10.5 of the Registration Statement).

   4.6 Technology Transfer Option Agreement, dated January 5, 1998, between
ImagicTV Inc., 506048 N.B. Ltd. and The New Brunswick Telephone Company, Ltd.
(incorporated by reference to Exhibit 10.6 of the Registration Statement).

   4.7 Development Agreement, dated January 5, 1998, between ImagicTV Inc.,
506048 N.B. Ltd and the New Brunswick Telephone Company, Ltd. (incorporated by
reference to Exhibit 10.7 of the Registration Statement).

   4.8 Licensing Agreement, dated April 19, 1999, between ImagicTV and The New
Brunswick Telephone Company, Ltd., together with a Novation and Amendment
Agreement to Licensing Agreement and Set-Top Box Supply and Software Licensing
Agreement, dated December 16, 1999, between ImagicTV Inc., NBTel and Aliant
Telecom Inc. (incorporated by reference to Exhibit 10.8 of the Registration
Statement).

   4.9 Executive Employment Agreement, dated July 26, 2000, between iMagicTV
and Marcel LeBrun (incorporated by reference to Exhibit 10.9 of the
Registration Statement).

   4.10 Executive Employment Agreement, dated July 14, 2000, between ImagicTV
and Marjean Henderson (incorporated by reference to Exhibit 10.10 of the
Registration Statement).

   4.11 Executive Employment Agreement, dated July 26, 2000, between ImagicTV
and Allan Cameron (incorporated by reference to Exhibit 10.11 of the
Registration Statement).

                                      93
<PAGE>

   4.12 Executive Employment Agreement, dated July 26, 2000, between ImagicTV
and Gerry Verner (incorporated by reference to Exhibit 10.13 of the
Registration Statement).

   4.13 Form of Management Option Agreement (incorporated by reference to
Exhibit 10.14 of the Registration Statement).

   4.14 Share Subscription Agreement, as amended, made as of September 29,
2000, between ImagicTV Inc. and America Online, Inc. (incorporated by
reference to Exhibit 10.15 of the Registration Statement).

   4.15 Share Subscription Agreement, as amended, made as of September 29,
2000, between ImagicTV Inc. and Cisco Systems, Inc., including separate Board
Observation Rights and Right of First Negotiation Letter, made as of the same
date (incorporated by reference to Exhibit 10.16 of the Registration
Statement).

   4.16 Form of Share Purchase Warrant (incorporated by reference to Exhibit
10.17 of the Registration Statement).

   4.17 Executive Employment Agreement, dated May 25, 2001, between ImagicTV and
Nigel Bealing.

   4.18 Executive Employment Agreement, dated March 1, 2001, between ImagicTV
and Norm Bier.

   4.19 Executive Employment Agreement, dated May 7, 2002, between ImagicTV
and Gerald Pond.

   8.0 Subsidiaries of ImagicTV Inc. (incorporated by reference to Exhibit
21.1 to the Registration Statement).

  10.1 Consent of KPMG LLP.

                                   SIGNATURE

   The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.

Dated: May 14, 2002

ImagicTV Inc.

Per: /s/ Jeffrey White
  Jeffrey White, Chief Financial Officer

                                      94
<PAGE>

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
 Number                         Description of Document
 ------                         -----------------------
 <C>    <S>
 1.1    Articles of Incorporation of ImagicTV Inc. filed December 24, 1997 (as
        amended on June 30, 1998 and November 27, 2000) (incorporated by
        reference to Exhibit 3.1 to our registration statement on Form F-1
        (Registration No. 33-48452) (the "Registration Statement")).
 1.2    Bylaws of ImagicTV Inc. (incorporated by reference to Exhibit 3.4 to
        the Registration Statement).
 4.1    Employee Share Option Plan (incorporated by reference to Exhibit 10.1
        of the Registration Statement).
 4.2    Form of Share Option Agreement with respect to the Employee Share
        Option Plan (incorporated by reference to Exhibit 10.2 of the
        Registration Statement).
 4.3    Form of 2000 Share Option Plan (incorporated by reference to Exhibit
        10.3 of the Registration Statement).
 4.4    Loan between Newbridge Networks Corporation and ImagicTV Inc.
        (incorporated by reference to Exhibit 10.4 of the Registration
        Statement).
 4.5    Technology Transfer Agreement, dated January 1, 1998, between ImagicTV
        Inc. and The New Brunswick Telephone Company, Ltd. (incorporated by
        reference to Exhibit 10.5 of the Registration Statement).
 4.6    Technology Transfer Option Agreement, dated January 5, 1998, between
        ImagicTV Inc., 506048 N.B. Ltd. And The New Brunswick Telephone
        Company, Ltd. (incorporated by reference to Exhibit 10.6 of the
        Registration Statement).
 4.7    Development Agreement, dated January 5, 1998, between ImagicTV Inc.,
        506048 N.B. Ltd and the New Brunswick Telephone Company, Ltd.
        (incorporated by reference to Exhibit 10.7 of the Registration
        Statement).
 4.8    Licensing Agreement, dated April 19, 1999, between ImagicTV and The New
        Brunswick Telephone Company, Ltd., together with a Novation and
        Amendment Agreement to Licensing Agreement and Set-Top Box Supply and
        Software Licensing Agreement, dated December 16, 1999, between ImagicTV
        Inc., NBTel and Aliant Telecom Inc. (incorporated by reference to
        Exhibit 10.8 of the Registration Statement).
 4.9    Executive Employment Agreement, dated July 26, 2000, between iMagicTV
        and Marcel LeBrun (incorporated by reference to Exhibit 10.9 of the
        Registration Statement).
 4.10   Executive Employment Agreement, dated July 14, 2000, between ImagicTV
        and Marjean Henderson (incorporated by reference to Exhibit 10.10 of
        the Registration Statement).
 4.11   Executive Employment Agreement, dated July 26, 2000, between ImagicTV
        and Allan Cameron (incorporated by reference to Exhibit 10.11 of the
        Registration Statement).
 4.12   Executive Employment Agreement, dated July 26, 2000, between ImagicTV
        and Gerry Verner (incorporated by reference to Exhibit 10.13 of the
        Registration Statement).
 4.13   Form of Management Option Agreement (incorporated by reference to
        Exhibit 10.14 of the RegistrationStatement).
 4.14   Share Subscription Agreement, as amended, made as of September 29,
        2000, between ImagicTV Inc. and America Online, Inc. (incorporated by
        reference to Exhibit 10.15 of the Registration Statement).
 4.15   Share Subscription Agreement, as amended, made as of September 29,
        2000, between ImagicTV Inc. and Cisco Systems, Inc., including separate
        Board Observation Rights and Right of First Negotiation Letter, made as
        of the same date (incorporated by reference to Exhibit 10.16 of the
        Registration Statement).
 4.16   Form of Share Purchase Warrant (incorporated by reference to Exhibit
        10.17 of the Registration Statement).
 4.17   Executive Employment Agreement, dated May 25, 2001, between ImagicTV
        and Nigel Bealing.
 4.18   Executive Employment Agreement, dated March 1, 2001, between ImagicTV
        and Norm Bier.
 4.19   Executive Employment Agreement, dated May 7, 2002, between ImagicTV and
        Gerald Pond.
 8.0    Subsidiaries of ImagicTV Inc. (incorporated by reference to Exhibit
        21.1 to the Registration Statement).
 10.1   Consent of KPMG LLP.
</TABLE>

                                       i
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{"company-data": {"conformed-name": "IMAGICTV INC", "cik": "0001123713", "assigned-sic": "7373", "fiscal-year-end": "0228"}, "filing-values": {"form-type": "20-F", "act": "34", "file-number": "000-31943", "film-number": "02660234"}, "business-address": {"street1": "ONE BRUNSWICK SQUARE", "street2": "14TH FLOOR, NEW BRUNSWICK, CANADA", "phone": "5066313000"}}
As filed with the Securities and Exchange Commission on May 22, 2002

               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                                   FORM 20-F

[  ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE
     SECURITIES EXCHANGE ACT OF 1934

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934 FOR THE FISCAL YEAR ENDED FEBRUARY 28, 2002

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

   For the transition period from     to

   Commission file number:          0-31943
                           -----------------------
                                 ImagicTV Inc.
                   ---------------------------------------
            (Exact name of Registrant as specified in its charter)

                                Not applicable
                   ---------------------------------------
                (Translation of Registrant's name into English)

                                    Canada
                   ---------------------------------------
                (Jurisdiction of incorporation or organization)

                 One Brunswick Square, 14th Floor, Saint John,
                         New Brunswick, Canada E2L 3Y2
                   ---------------------------------------
                   (Address of principal executive offices)

   Securities registered or to be registered pursuant to Section 12(b) of
      the Act.

                                     None
                   ---------------------------------------
   Securities registered or to be registered pursuant to Section 12(g) of
      the Act.

                          Common shares, no par value
                   ---------------------------------------
   Securities for which there is a reporting obligation pursuant to Section
       15(d) of the Act.

                                     None
                   ---------------------------------------
   Indicate the number of outstanding shares of each of the issuer's classes
   of capital or common stock as of the close of the period covered by the
   annual report.

               24,669,336 Common Shares as of February 28, 2002
                   ---------------------------------------

    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 which financial statement item the registrant has
elected to follow.

                         Item 17  [   ]Item 18  [ X ]
TABLE OF CONTENTS
Page
                                                                           ----
Part I...................................................................   1
    ITEM 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.......    1
    ITEM 2.  OFFER STATISTICS AND EXPECTED TIMETABLE.....................    1
    ITEM 3.  KEY INFORMATION.............................................    1
             A.Selected Financial Data...................................    1
             B.Capitalization and Indebtedness...........................    3
             C.Reasons for the Offer and Use of Proceeds.................    3
             D.Risk Factors..............................................    3
    ITEM 4.  INFORMATION ON THE COMPANY..................................   13
             A.History and Development of the Company....................   13
             B.Business Overview.........................................   14
             C.Organizational Structure..................................   29
             D.Property, Plants and Equipment............................   29
    ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS................   30
             A.and B. Operating Results and Liquidity and Capital
             Resources...................................................   30
             C.Research and Development, Patents and Licenses, etc.......   43
             D.Trend Information.........................................   43
    ITEM 6.  DIRECTORS AND EXECUTIVE OFFICERS............................   44
             A.Directors and Management..................................   44
             B.Compensation..............................................   47
             C.Board Practices...........................................   51
             D.Employees.................................................   52
             E.Share Ownership...........................................   53
    ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS...........   55
             A.Major Shareholders........................................   55
             B.Related Party Transactions................................   56
             C.Interests of Experts and Counsel..........................   58
    ITEM 8.  FINANCIAL INFORMATION                                          58
             A.Consolidated Statements and Other Financial Information...   58
             B.Significant Changes.......................................   58
    ITEM 9.  THE OFFER AND LISTING.......................................   59
             A.Offer and Listing Details.................................   59
             B.Plan of Distribution......................................   60
             C.Markets...................................................   60
             D.Selling Shareholders......................................   60
             E.Dilution..................................................   60
             F.Expenses of the Issue.....................................   60
    ITEM 10. ADDITIONAL INFORMATION......................................   60
             A.Share Capital.............................................   60
             B.Memorandum and Articles of Association....................   61
             C.Material Contracts........................................   62
             D.Exchange Controls.........................................   62
             E.Taxation..................................................   62
             F.Dividends and Paying Agents...............................   67
             G.Statement by Experts......................................   67
             H.Documents on Display......................................   67
i
I.Subsidiary Information.....................................   68
    ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...   68
    ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.......   68
 Part II...................................................................  69
    ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                 69
    ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERSAND     69
             USE OF PROCEEDS..............................................
             A.Use of Proceeds............................................   69
    ITEM 15. [RESERVED]...................................................   69
    ITEM 16. [RESERVED]...................................................   69
 Part III..................................................................  69
    ITEM 17. FINANCIAL STATEMENTS.........................................   69
    ITEM 18. FINANCIAL STATEMENTS.........................................   70
    ITEM 19. EXHIBITS.....................................................   93
    INDEX TO EXHIBITS......................................................   I
ii
PART I

   In this annual report, "ImagicTV," "the Company," "we," "us" and "our"
refer to ImagicTV Inc. and its subsidiaries.

   All financial information presented in this annual report is expressed in
U.S. dollars, except where indicated to the contrary. References to "$" or
"U.S.$" are to U.S. dollars and references to "C$" are to Canadian dollars.

   Unless we indicate otherwise, all information in this annual report is
stated as of May 14, 2002.

               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

   This annual report contains forward-looking statements. These statements
include statements under the headings "Risk Factors" in "Item 3. Key
Information," "Business Overview" in "Item 4. Information on the Company,"
"Management's Discussion and Analysis" in "Item 5. Operating and Financial
Review and Prospects" and "Use of Proceeds" in "Item 14. Material
Modifications to the Rights of Security Holders and Use of Proceeds" and
elsewhere in this annual report regarding conditions in the telecommunications
industry, our goals and business strategy, our business model and plans, our
efforts to develop and enhance our products, our expected sources of revenue,
our future costs and losses, our capital requirements and the outlook for our
business. When used in this document, the words "will," "plan," "anticipate,"
"expect," "intend," "believe" and similar expressions are intended to identify
forward-looking statements. Such statements reflect our current views with
respect to future events, are based on information currently available to us
and are subject to certain risks, uncertainties and assumptions, including
those matters specifically discussed in "Risk Factors" in "Item 3. Key
Information." These and other factors could cause our actual results,
performance or achievements to differ materially from any future results,
performance or achievements that may be expressed or implied by such forward-
looking statements. These factors should be considered carefully, and readers
should not place undue reliance on the forward-looking statements. We do not
undertake any obligation to update this forward-looking information.

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

  Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

  Not applicable.

ITEM 3. KEY INFORMATION

A. Selected Financial Data

   You should read the following selected consolidated financial data together
with the financial information set forth under the heading "Management's
Discussion and Analysis" in "Item 5. Operating and Financial Review and
Prospects" and our consolidated financial statements and the related notes
included in "Item 18. Financial Statements."

   The consolidated statement of operations data for the fiscal years ended
February 29, 2000, February 28, 2001 and February 28, 2002 and the
consolidated balance sheet data as of February 28, 2001

                                       1
and February 28, 2002 are derived from, and are qualified by reference to, our
consolidated financial statements which have been audited by KPMG LLP,
Chartered Accountants, and are included elsewhere in this annual report. The
consolidated financial statements are reported in U.S. dollars and are
prepared in accordance with Canadian GAAP. Differences between Canadian GAAP
and U.S. GAAP are described in note 12 to the consolidated financial
statements. The consolidated statement of operations data for the period from
December 24, 1997 (inception) to February 28, 1998 and for the year ended
February 28, 1999 and the consolidated balance sheet data as of February 28,
1998, February 28, 1999 and February 29, 2000 are derived from audited
financial statements not included in this annual report. The historical
results below are not necessarily indicative of the results to be expected for
any future period.
Fiscal Year Ended
                         ---------------------------------------------------------------------
                         December 24, 1997
                          (inception) to   February 28, February 29, February 28, February 28,
                         February 28, 1998     1999         2000         2001         2002
                         ----------------- ------------ ------------ ------------ ------------
                               (in thousands of U.S. dollars, except per share amounts)
Consolidated Statement
 of Operations Data:
Revenues:
 License fees...........      $   --         $    --      $ 1,384      $  4,770     $    631
 Royalty fees...........          --              --           --         1,288        1,197
 Services...............          --              14          393         1,791        2,387
 Equipment..............          --             465          321         1,150           --
                              ------         -------      -------      --------     --------
Total revenues..........          --             479        2,098         8,999        4,215
                              ------         -------      -------      --------     --------
Cost of revenues:
 Services...............          --              --          657         2,379        2,603
 Equipment..............          --             604          331         1,068           --
                              ------         -------      -------      --------     --------
Total cost of revenues..          --             604          988         3,447        2,603
                              ------         -------      -------      --------     --------
Gross profit (loss).....          --            (125)       1,110         5,552        1,612
                              ------         -------      -------      --------     --------
Operating expenses:
 Sales and marketing....          18             543        2,325         7,763        8,928
 Research and
 development............          66           2,014        4,084         7,967        7,151
 General and
 administrative.........          26             344          827         2,815        4,582
 Restructuring expense..          --              --           --            --        1,162
                              ------         -------      -------      --------     --------
Total operating
 expenses...............         110           2,901        7,236        18,545       21,823
                              ------         -------      -------      --------     --------
Loss from operations....        (110)         (3,026)      (6,126)      (12,993)     (20,211)
Other income (expense),
 net....................          --             (25)         524         1,559        1,628
                              ------         -------      -------      --------     --------
Loss before provision
 for income taxes.......        (110)         (3,051)      (5,602)      (11,434)     (18,583)
Provision for income
 taxes..................          --             (17)         (44)          (24)        (121)
Net loss--in accordance
 with Canadian and U.S.
 GAAP...................      $ (110)        $(3,068)     $(5,646)     $(11,458)    $(18,704)
                              ======         =======      =======      ========     ========
Basic and diluted net
 loss per share--in
 accordance with
 Canadian and U.S. GAAP.      $(0.05)        $ (0.57)     $ (0.40)     $  (0.58)    $  (0.76)
                              ======         =======      =======      ========     ========
Weighted average number
 of shares used in
 computing basic and
 diluted net loss per
 share..................       2,331           5,336       13,968        19,796       24,606
                              ======         =======      =======      ========     ========
As At
                         ----------------------------------------------------------------
                         February 28, February 28, February 29, February 28, February 28,
                             1998         1999         2000         2001         2002
                         ------------ ------------ ------------ ------------ ------------
                                          (in thousands of U.S. dollars)
Consolidated Balance
 Sheet Data:
Cash and cash
 equivalents............     $245        $ 603        $6,396      $46,414      $45,641
Short-term investments..       --           --            --       14,346          359
Working capital.........     (139)       1,852         6,154       62,807       45,156
Total assets............      289        3,153         9,859       71,846       49,485
Long-term debt..........       --           --         1,737        1,577        1,496
Total shareholders'
 equity.................     (109)       2,493         5,706       64,200       45,793
2
B. Capitalization and Indebtedness

   Not applicable.

C. Reasons for the Offer and Use of Proceeds

   Not applicable.

D. Risk Factors

   An investment in our common shares involves a high degree of risk and
should be considered speculative. If any of the following risks occur, our
business, operating results and financial condition could be seriously harmed
and you could lose all or part of your investment. Further, if we fail to meet
the expectations of the public market in any given period, the market price of
our common shares could decline.

Risks Related to Our Financial Condition

   Our limited operating history and the fact that our business is essentially
dependent on one product, our DTV Manager software, makes our business and
prospects difficult to evaluate.

   We have a limited operating history which makes the prospects for our
business difficult to evaluate. We began our operations in January 1998 and
did not release a product until December 1998. Our present operations consist
of (1) licensing our DTV Manager software, as well as our pcVu software and
Movie Manager software which work in conjunction with DTV Manager, to
telephone companies and other service providers, (2) providing related
services and (3) further developing our software products. As such, our
business is essentially dependent on our success in developing DTV Manager
software and licensing it to service providers. There is no significant
historical basis to assess how we will respond to competitive, economic and
technological challenges and a rapidly developing marketplace. If we fail to
meet any of these challenges, or otherwise fail to successfully develop and
license our DTV Manager software or any successor software, our operating
results could suffer and you could lose all or part of your investment.

   We incurred net losses since inception, including a net loss of $18.7
million for the fiscal year ended February 28, 2002. We expect to continue to
incur losses for the foreseeable future, and we may never achieve or sustain
profitability.

   Since our inception, we have not had a profitable quarter. We incurred net
losses of approximately $11.5 million for fiscal year ended February 28, 2001
and $18.7 million for the fiscal year ended February 28, 2002. As of
February 28, 2002, we had an accumulated deficit of approximately $39.0
million. We expect to incur significant operating expenses over the next
several years. As a result of these expenditures, we expect to incur
additional losses for the foreseeable future, and we may never become
profitable.

   To achieve profitability, we must generate and sustain substantially
increased revenues and control future expense levels. We forecast our future
expense levels based on our operating plans and on estimates of future
revenues. We may find it necessary to accelerate expenditures relating to our
sales and marketing efforts or otherwise increase our financial commitment to
the development of our products and services based on circumstances in the
marketplace. If our revenues grow at a slower rate than we anticipate, or if
our spending levels exceed our expectations or cannot be adjusted to reflect
slower

                                       3
revenue growth, we may not achieve or sustain profitability. If we fail to
become profitable, the value of your investment in our common shares could be
significantly reduced.

   Our software may require a service provider to dramatically change its
established business practices. This may extend the time required to complete
a commercial license agreement, resulting in significant fluctuations in our
quarterly operating results that could cause our share price to decline.

   We believe that the purchase of our DTV Manager and Movie Manager software
and our related services involves a significant commitment of capital and
other resources by a telephone company or other service provider. In many
cases, the service provider's decision to offer services based on our software
products may require a service provider to change its established business
practices, to conduct its business in new ways and potentially make
substantial upgrades to its infrastructure. As a result, we must educate
service providers on the use and benefits of our software products, which can
require us to commit significant time and resources without necessarily
resulting in revenues.

   The time required to complete a license on a commercial basis can be
significant. As a result, we accept significant fluctuations in our quarterly
operating results that could cause our share price to decline.

   Service providers generally must consider a wide range of other issues
before committing to purchase our software products. Many potential customers
enter into trial license agreements with us in order to use our software
products on a trial basis. The success of these trials often determines
whether or not the potential customer licenses our software on a commercial
basis. Further, the telecommunications industry is experiencing a significant
reduction in capital spending which will likely result in a delay in the
substantial capital commitments associated with the commercial deployment of
our software. Potential customers may also need to obtain approval at a number
of management levels and one or more regulatory approvals, which may delay a
decision to purchase our software products.

   As a result of the foregoing, the time from an initial product
demonstration to a customer to the entering into of a commercial license with
the customer may be significant. In the past, our sales cycle has ranged from
six to 18 months and, in some instances, has been significantly longer. This
lengthy sales cycle limits our ability to forecast the timing and amount of
specific sales in a particular quarter and will likely continue to cause
significant fluctuations in our quarterly operating results. Because of these
fluctuations, we believe that neither our past performance nor period-to-
period comparisons of our operating results are, or will be, a reliable
indication of our future performance. If our operating results for a
particular period fail to meet analyst and investor expectations that are
based on our past performance or on period-to-period comparisons of our
operating results, our share price could decline.

   The failure of our common shares to maintain a minimum per share bid price
of $1.00 may subject our common shares to delisting proceedings under the
rules of The Nasdaq National Market. If our common shares are delisted, our
stockholders may experience substantially decreased liquidity in their shares,
the market price of our stock will likely decline and our ability to obtain
financing may be adversely affected.

   Our common shares are traded on The Nasdaq National Market. For continued
listing, Nasdaq requires a share to maintain at least a $1.00 minimum closing
bid price.

   On March 6, 2002, we received a letter from Nasdaq notifying us that for
the preceding 30 consecutive trading days the price of our common shares had
closed below the minimum $1.00 per share requirement for continued inclusion
on The Nasdaq National Market. We have until June 4, 2002 to

                                       4
regain compliance. To regain compliance, the bid price of our common shares
must close at $1.00 per share or more for a minimum of ten consecutive trading
days. If compliance cannot be demonstrated by June 4, 2002, Nasdaq will
provide written notification that our common shares will be delisted.

   If we determine that we will not satisfy the $1.00 minimum bid price
requirement for continued inclusion on The Nasdaq National Market by June 4,
2002, we intend to apply to transfer the common shares to The Nasdaq SmallCap
Market. To transfer, we must satisfy the continued inclusion requirements for
the Nasdaq SmallCap Market, which makes available an extended grace period
until at least September 3, 2002, for attaining compliance with the minimum
$1.00 bid price requirement. We also may qualify for an additional 180-day
grace period beyond September 3, 2002, to attain compliance with the $1.00 bid
price requirement. If we submit a transfer application and pay the applicable
listing fees by June 4, 2002, initiation of the delisting proceedings will be
stayed pending the Nasdaq staff's review of the transfer application. Even if
we do elect to transfer our common shares to the Nasdaq SmallCap Market, we
can provide no assurances the application will be accepted or that we will be
able to satisfy the continued listing requirements of the Nasdaq SmallCap
Market.

   If our application to transfer to The Nasdaq SmallCap Market is denied and
we receive a delisting notification, we will have the ability to appeal the
delisting determination to a Listing Qualifications Panel; however, we can
make no assurances that if a hearing is conducted, we will receive a
favourable determination for the continued listing of our common shares.

   If The Nasdaq National Market delists our common shares and we are unable
to transfer our common shares to The Nasdaq SmallCap Market, you may find it
more difficult to dispose of your shares or obtain accurate quotations as to
the share's market value in the United States, and the market price of our
common shares will likely decline further. The failure of our common shares to
be listed on The Nasdaq National Market or The Nasdaq SmallCap Market also may
adversely affect our ability to raise capital through the issuance of
securities or otherwise obtain financing.

If we cannot raise needed additional capital in the future, our business could
suffer.

   Our expenses currently significantly exceed our revenues. We expect that
our cash position, as of February 28, 2002 will be sufficient to meet our
working capital requirements for approximately the next 24 months. In the
longer term, if our revenues do not increase substantially within this time
period we may need to raise additional capital, which may not be available on
terms acceptable to us, if at all. If we cannot raise necessary additional
capital on acceptable terms, we may not be able to increase sales, develop or
enhance our products and services, take advantage of future opportunities or
respond to competitive pressures or unanticipated requirements, any of which
could cause our business to suffer and adversely affect our financial
condition.

Risks Related to Our Business and Industry

   If service providers do not successfully deploy broadband technologies and
services, a market for our software products will not develop. Recent
reluctance of service providers to make significant capital investments may
heighten this issue.

   Our software products can only be implemented over a broadband network.
Telephone companies and other service providers have only recently begun
offering broadband services such as xDSL, which refers to the different
protocols that fall under the digital subscriber line (DSL) umbrella of
broadband technologies. DSL is a technology for pushing a relatively large
number of bits through wiring that is typical for "last mile" telephone
connections. If a significant number of service providers decide not to offer
broadband services, the market for our software products will not grow as we
anticipate.

                                       5
Sales of our software products largely depend on the increased use and
widespread adoption of broadband services and the ability of service providers
to market and sell broadband services, such as high-speed Internet access and
multi-channel digital television services, to residential subscribers.

   The telecommunications industry has suffered a significant slowdown in the
last 18 months, which is expected to continue for at least the next 12 months,
and there may be a reduction in the number of our potential customers due to
industry consolidation, financial difficulties or other factors. Even if
service providers decide to deploy broadband services, this deployment may not
be successful. Service providers have delayed deployments in the past and may
delay deployments in the future. Factors that could cause a service provider
not to deploy, to delay deployment of or to fail to successfully deploy the
broadband services for which our software products are designed include
the following:

  .  the financial difficulty suffered by many service providers, including
     incumbent local exchange carriers and other telephony providers;

  .  regulatory prohibitions, restrictions, uncertainties and delays;

  .  reduction in capital spending within the telecommunications industry;

  .  the quality of the service provider's network infrastructure and cost of
     infrastructure upgrades and maintenance;

  .  the inexperience of the service provider in providing broadband services
     and the lack of sufficient technical expertise and personnel to install
     products and implement services effectively; and

  .  the inability of the service provider to predict return on its
     investment in broadband-capable infrastructure and equipment.

   Unless service providers successfully deploy the infrastructure required to
provide broadband services to their subscribers, who are the ultimate
consumers of services based upon our software products, their networks will
not be capable of supporting our software products. If that deployment does
not occur, a market for our software products will not develop, and we will
not be able to achieve our business objectives or reverse our history of
losses.

If service providers fail to deploy services based upon our software products
throughout their service areas, our business will not grow.

   We generate revenues from initial license fees charged to our customers
based on the number of homes passed in a geographic area under license, and
from ongoing royalty fees charged to customers on a per subscriber basis. As a
result, our growth and future success depend substantially on our ability to
attract new customers and to convince these customers to deploy services based
upon our software products to their subscribers throughout their service
areas. We believe that many service providers will be unwilling to commit to
broad deployment of services based on our products until they have completed
trials of our software products as well as those of our competitors. Our
ability to sell our software products will depend principally on how
successfully we can demonstrate to service providers that:

  .  our software products are reliable and capable of delivering service to
     a large number of subscribers without degradation of quality;

                                       6
.  subscribers will purchase multi-channel digital television and
     interactive media services based on our software products at prices and
     in quantities that will justify the service provider's investment in our
     software products, related services and any necessary infrastructure
     upgrades;

  .  our software products will remain compatible with evolving industry
     standards and technology; and

  .  our software products will enable the service provider to sell new
     services to existing and new subscribers.

   We have licensed our software products to eight customers in North America,
Europe and Asia. Of these customers, three telephone companies have launched
commercial services to subscribers, one additional telephone company has
licensed DTV Manager for commercial deployment, and four other telephone
companies have entered into a trial license agreement. In addition, we have
installed DTV Manager for limited testing purposes on networks of ten other
service providers in North America, Europe and Asia. None of our customers are
contractually obligated to deploy, market or promote services based on our
software products, nor are any of our customers contractually required to
achieve any specific introduction schedule. Accordingly, even if a service
provider initiates a consumer trial of services based on our software
products, the service provider is under no obligation to continue its
relationship with us or to launch a full-scale deployment of services based on
our software products in the geographic area under license or more broadly
through its service territories. If service providers determine that services
based on our software products are not viable as a business proposition or if
they determine that the services do not meet their business or operational
strategies, they may stop using our software products to provide those
services. If we are unable to sell our software products and services to a
substantial number of additional service providers or if our existing and any
new customers fail to broadly deploy services based on our software products,
our growth prospects and revenues will suffer.

If our customers are unable to attract and retain subscribers, our revenues
will suffer.

   Our customers' subscribers are the ultimate consumers of multi-channel
digital television and interactive media services based upon our software
products. We expect to derive a substantial portion of our future revenues
from royalties charged to our customers on a per subscriber basis.
Accordingly, our revenues will depend to a significant extent upon the number
of subscribers to whom our customers deliver multi-channel digital television
and interactive media services based upon our software products. The extent to
which our customers attract and retain subscribers will depend on, among other
things, their ability to effectively configure and package, competitively
price and effectively market their service offerings.

   Also, many of our customers will face competition from companies that offer
multi-channel digital television and interactive media services through
alternative technologies that are incompatible with our software products.
These alternative technologies include coaxial cable, fixed wireless and
satellite technologies. Cable operators, in particular, are currently
deploying products that are capable of delivering voice, Internet and
television services over coaxial cable.

   We cannot assure you that our customers will succeed in attracting and
retaining a meaningful subscriber base that purchases services delivered
through our software products. If our customers are unable to attract and
retain a significant number of subscribers, our revenues will suffer, and we
may never become profitable.

                                       7
Competitive products may reduce demand for our software products and thus
reduce the value of your investment in our common shares.

   We compete directly with Myrio Corporation, Minerva Networks, Inc.,
Thirdspace Living Limited and Orca Communications, which provide products and
services that are competitive with all or part of our software products and
related services. In addition, Liberate Technologies, an indirect competitor,
provides technology and services relating to interactive television.
Competition in the market for software products that enable the delivery of
multi-channel digital television or interactive media services is significant
and will likely persist and intensify over time. We cannot predict that we
will obtain or maintain the market share or pricing levels that we need to
become and remain profitable. By using the same standards upon which our
software products are based, a competitor with sufficient resources could
design and market a similar product that competes directly with our software
products. Some of our competitors may develop some or all of the interactive
media services that we intend to develop and may sell these services to
service providers for deployment separately or in conjunction with our
software products. This could have a significant effect on our ability to
expand the range of our product offerings over time.

   Many of our existing and potential competitors have longer operating
histories, larger customer bases, greater brand name recognition and
significantly greater financial, technical, sales, marketing and other
resources than we have. If we are unable to continuously improve our software
products or if we cannot generate effective responses to our competitors'
products, pricing strategies, advertising campaigns, strategic partnerships
and other initiatives, sales of our products and our profit margins may
suffer, and we may never become profitable.

Three customers generated 64% of our revenues in fiscal 2002, and we expect to
continue to rely on a limited number of customers for a significant portion of
our revenues for the foreseeable future.

   In fiscal years 1999, 2000 and 2001, we derived a significant portion of
our revenues from a limited number of customers. Since our target customer
base is primarily telephone companies and other service providers, excluding
cable and satellite network operators, we expect to continue to derive a
significant portion of our revenues from a limited customer base. In fiscal
1999, NBTel Inc. ("NBTel"), a subsidiary of Aliant, our largest shareholder,
accounted for 97% of our revenues. For fiscal 2000, NBTel, Kingston Vision, a
subsidiary of Kingston Communications (Hull) plc, the incumbent local exchange
carrier in East Yorkshire, England and SaskTel, the incumbent local exchange
carrier in the Province of Saskatchewan, each accounted for more than 10% of
our revenues and together accounted for 85% of our revenues. For fiscal 2001,
Aliant, CenturyTel, a provider of integrated communication services in 20
states in the U.S., and Boardwalk Equities, an operator of multiple dwelling
units in Canada, each accounted for approximately 10% or more of our revenues
and together accounted for approximately 55% of our revenues. For fiscal 2002,
Aliant, Sasktel and CenturyTel each accounted for more than 10% of our
revenues and together accounted for approximately 64% of our revenues. In
particular, for fiscal 2002, Aliant accounted for 30% of our total revenues.
For further information on our sources of revenue, see "Management's
Discussion and Analysis--Overview" in "Item 5. Operating and Financial Review
and Prospects." If new customers from our limited base of potential customers
do not license our software or if our existing and any new customers are not
successful in selling services based upon our software products to a
significant number of subscribers, we may never become profitable.

                                       8
We have a large portion of our common shares held by a small number of our
shareholders. This concentration can affect shareholder votes and cause our
share price to be volatile in the public trading market.

   A large portion of our common shares is held by a small number of
shareholders. As a result, these shareholders are able to influence the
outcome of shareholder votes on various matters, including the election of
directors and extraordinary corporate transactions, including business
combinations. In addition, the occurrence of sales of a large number of our
common shares, or the perception that these sales could occur, may affect our
share price and could impair our ability to obtain capital through an offering
of equity securities. Furthermore, the current ratios of ownership of our
common shares reduce the public float and liquidity of our common shares which
can in turn affect the market price of our common shares.

The failure of interactive television to gain broad market acceptance could
limit our potential growth and revenues.

   Our DTV Manager software enables service providers to deliver interactive
media services in addition to multi-channel digital television services. Some
of our anticipated growth depends, among other things, on the broad acceptance
of interactive television by industry participants, including broadcast and
pay-television networks and manufacturers of televisions and set-top boxes,
and their ability to successfully market interactive television to viewers and
advertisers. Interactive television is a relatively new and emerging business,
and we cannot guarantee that it will attract widespread demand or acceptance
in any of our markets. There have been several well-financed, high profile
attempts in the United States to develop and deploy systems in the broad
category of interactive television. None of these attempts has resulted in
large-scale deployment, and many key industry participants have avoided
participating in interactive television. If interactive television fails to
gain market acceptance, subscriber growth may be adversely affected and our
ability to generate revenues may be restricted.

If we fail to introduce new functionality in our products or if our new
products are unsuccessful, our growth prospects will be limited. We also may
not recover revenues in the amounts we expend for research and development
costs.

   We generate revenues from one-time license fees, royalties payable by
service providers on a per subscriber basis and fees for related maintenance
and professional services. In order to generate long-term revenue growth and
become profitable, we believe we must continue to add new functionality to our
products. In many instances, this new functionality may require the use of new
technologies and/or adherence to new industry standards. To meet this
challenge, we must obtain key contributions from programmers, product
planners, technical architects and other internal staff. We must also obtain
proper information from the marketplace, including our customers and industry
analysts. Our failure to meet this challenge in any way could limit our growth
prospects. We cannot assure you that any costs that we expend for research and
development will result in the generation of any revenues by us.

If we fail to develop and maintain relationships with industry participants,
our business could suffer.

   We rely and expect to continue to rely upon non-exclusive relationships
with a number of major participants in the telecommunications, computer and
software industries to ensure the interoperability of our software with their
hardware and software, such as network and encoder equipment, set-top boxes
and database software systems, and to market and jointly promote the sale of
our products with their products. Generally, our arrangements and formal
agreements with these industry participants are short-term or terminable on
short notice. Further, other industry relationships remain informal. We
typically do not

                                       9
receive any monetary compensation, in the form of revenues, referral fees or
otherwise, under these arrangements, and we typically do not directly generate
revenues from these arrangements. If the nature of these relationships changed
significantly, or if these relationships failed to evolve in ways consistent
with our business plan, our software products would still operate with their
third-party hardware and software, but our ability to market and sell our
software products could suffer.

If we fail to hire and retain personnel with the necessary skills and
knowledge, the implementation of our business plan could slow and/or our
growth could halt.

   Competition for highly skilled technical, sales, marketing and support
personnel is intense because there are a limited number of people available
with the necessary technical skills, knowledge of the telecommunications
industry and understanding of the market. Any failure to attract, assimilate,
train or retain qualified personnel to fulfil our current or future needs
could slow implementation of our business plan or halt our growth.

   Our future success depends upon the continued services of our executive
officers who have critical industry experience and relationships that we rely
on to implement our business plan. Our key executive officers are Gerald Pond,
Chief Executive Officer, Marcel LeBrun, President and Chief Operating Officer,
Allan Cameron, Vice President of Technology and Jeffrey White, Chief Financial
Officer. The loss of the services of any of these individuals could delay the
development and introduction of, and negatively impact our ability to sell,
our software products and related services.

Currency exchange rate fluctuations could adversely affect our financial
results.

   Fluctuations in foreign exchange rates may affect our results of
operations, which in turn may adversely affect reported earnings and the
comparability of period-to-period results of operations. As our operations are
currently based in Canada, a significant portion of our expenses is in
Canadian dollars. However, a substantial part of our revenues is currently
generated in U.S. dollars, and we expect that a majority of our revenues for
the foreseeable future will be generated in U.S. dollars. If the Canadian
dollar appreciates against the U.S. dollar, our results of operations could be
materially adversely affected. Also, changes in foreign exchange rates may
affect the relative prices at which foreign competitors and we sell products
in the same market.

Risks Related to Our Technology

If our software cannot support and manage a substantial number of users,
demand for our products and services will decline significantly.

   Our software relies on the large-scale use of Internet Protocol and, more
specifically, Internet Protocol multicast technology. Our customers'
commercial deployments to date have shown that our software can support the
concurrent delivery of multi-channel digital television and interactive media
services to approximately 10,500 subscribers. While we believe that our
software, through the use of Internet Protocol multicast technology, can
support delivery of multi-channel digital television and interactive media
services to a significantly larger number of customers without significant
redesign or expense, there is currently no large scale customer deployment of
our software products to support our belief. If our software's reliance on
Internet Protocol multicast technology significantly limits the ability of our
customers to serve their desired subscriber base, demand for our software
products and related services will decline, our ability to generate revenues
will suffer and we may incur significant costs.

                                      10
If suppliers do not continue to manufacture and make available products that
support our software, we may be unable to meet the demands of service
providers.

   Although we have designed our software so that it can be adapted to work on
a number of different hardware and software platforms, we must modify our
software each time we adapt it to a new platform. At this time, our software
operates only on the following server, database and set-top box platforms:

  .  a Sun Microsystems server platform;

  .  an Oracle Corporation database platform; and

  .  a Pace Micro Technology plc ("Pace") or Thomson Consumer Electronics
     Inc. ("Thomson") set-top box platform.

   If the availability of these products becomes limited, or if the cost of
these products increases, we may be unable to meet, in a timely and cost-
effective manner, demand for software that runs on alternative servers,
databases and set-top boxes. Moreover, although we believe that we can adapt
our software to operate on other servers, databases and set-top box platforms,
we would have to incur additional costs to do so and cannot assure you that
our software products would operate successfully in actual deployment on any
of these other platforms. If we fail to satisfy our customers' demands, they
may cease doing business with us and our revenue will suffer.

Rapid technological advances or the adoption of new standards could impair our
ability to deliver our products to service providers in a timely manner. As a
result, our revenues would suffer.

   Our success depends in large part on our ability to keep our software
current and compatible with evolving technologies and standards. Unexpected
changes in technology or standards could disrupt the development of our
software products and prevent us from meeting deadlines for the delivery of
our software products. If we are unable to keep pace with technological
advancements and adapt our software to new standards in a timely manner, we
may lose customers and our revenue will suffer.

The occurrence of any defects, errors or failures in our software could result
in delays in installation and loss of customers.

   Our software is complex and may contain undetected defects, errors or
failures. These problems have occurred in our software in the past. Additional
problems may occur in our software in the future, which could result in the
loss of, or delay in, market acceptance of our software products. In addition,
we have limited experience with commercial deployment, and we expect
additional defects, errors and failures as our business expands from trials to
commercial deployment of our software product with customers. These problems
could result in a loss of sales and additional costs and liabilities to us,
including loss of our existing customers.

If our technology is responsible for the failure of any service provider to
deliver services to subscribers, our reputation and viability could be
seriously damaged.

   We expect that most service providers that purchase our software products
will deliver multi-channel digital television and interactive media services
in conjunction with voice and Internet services. If our software is
responsible, or appears to be responsible, for a failure to deliver voice,
Internet or television, a likely result would be severe customer service or
public relations problems that could seriously damage our reputation and
viability.

                                      11
Risks Related to Legal Uncertainties

Because much of our potential success and value lies in our ownership and use
of intellectual property, our failure to protect our intellectual property
could negatively affect us.

   Our ability to compete effectively is dependent in large part upon the
maintenance and protection of our intellectual property. We currently do not
have patents or trademark registrations protecting our products and other
intellectual property other than a Canadian trademark registration for a
stylized form of the word "ImagicTV." To date, we have relied on trade secret
and copyright law, as well as confidentiality procedures and licensing
arrangements, to establish and protect our rights to our technology. We
typically enter into confidentiality or license agreements with our employees,
consultants, customers, strategic partners and vendors in an effort to control
access to and distribution of our software, documentation and other
proprietary information. Despite these precautions, it may be possible for a
third-party to copy or otherwise obtain and use our proprietary technology
without authorization. Policing unauthorized use of our intellectual property
is difficult. The steps we are taking may not prevent misappropriation of our
intellectual property, and the agreements we enter into may not be
enforceable. In addition, effective intellectual property protection may be
unavailable or limited in some jurisdictions outside Canada and the United
States. Litigation may be necessary in the future to enforce or protect our
intellectual property rights or to determine the validity and scope of the
proprietary rights of others. That litigation could cause us to incur
substantial costs and divert resources away from our daily business, which in
turn could have a material adverse affect on our business.

We may be subject to damaging and disruptive intellectual property litigation.

   The software development and interactive television businesses are very
litigious. We may be subject to intellectual property litigation that could:

  .  be time-consuming and expensive;

  .  divert attention and resources away from our daily business;

  .  impede or prevent delivery of our products and services; and

  .  require us to pay significant royalties, licensing fees and damages.

   Although we are not aware that any of our software products or related
services infringe any published patents or registered trademarks, and although
we have not been served notice of any potential infringement, we may be
subject to infringement claims in the future. Because patent applications are
kept confidential for a period of time after filing, applications may have
been filed that, if issued as patents, could relate to our products or
services.

   Parties making claims of infringement may be able to obtain injunctive or
other equitable relief that could effectively block our ability to provide our
products and services in Canada, the United States and other jurisdictions,
potentially resulting in us being required to pay substantial damages. In the
event of a successful claim of infringement, our customers and we may need to
obtain one or more licenses from third-parties, which may not be available at
a reasonable cost, if at all. The defence of any lawsuit could result in time-
consuming and expensive litigation, regardless of the merits of such claims,
as well as resulting damages, license fees, royalty payments and restrictions
on our ability to provide our products or services, any of which could harm
our business.

                                      12
Laws and government regulation and policies in various jurisdictions may
restrict the willingness or ability of service providers to license our
software product and deliver multi-channel digital television and interactive
media services to subscribers.

   Service providers in jurisdictions where we currently do business and where
we intend to do business in the future operate in heavily regulated
industries. Although we, in providing our products and services, are not now
directly subject to significant regulation, our existing and potential
customers are subject to laws, regulations and policies, including licensing
and permit requirements, zoning restrictions, laws regulating the provisioning
of television services, copyright laws which may be interpreted or amended to
restrict the capture and "time shifting" of television programming and foreign
share ownership restrictions, that could adversely affect their willingness or
ability to:

  .  invest in technology necessary for our software to operate; or

  .  offer multi-channel digital television and interactive media services to
     subscribers.

   As a result, these laws, regulations and policies may impede sales of our
software products and related services. For a more thorough discussion of the
regulatory issues that may affect our business, see "Business Overview--
Regulation of Service Providers" in "Item 4. Information on the Company."

If we are treated as a passive foreign investment company for U.S. federal
income tax purposes, our U.S. shareholders may be subject to an unfavourable
tax regime.

   While we believe, based on our income, assets and activities, that we
should not be a passive foreign investment company for our taxable year ended
February 28, 2002, it is possible that we will nonetheless be treated as a
passive foreign investment company for U.S. federal income tax purposes for
such taxable year or for later taxable years. If we are classified as such, a
special tax regime would apply to "excess distributions" with respect to
shares held by a U.S. shareholder and gain realized in the disposition of
shares held by a U.S. shareholder, unless the U.S. shareholder timely makes an
election available under applicable law. For a more thorough discussion of the
passive foreign investment company rules, see "Certain Canadian and United
States Income Tax Considerations--United States Federal Income Tax
Considerations--Passive Foreign Investment Company Considerations" in "Item
10. Additional Information."

   You should rely only on the information contained in this annual report. We
have not authorized any other person to provide different information. The
information appearing in this annual report is as of May 14, 2002. Our
business, financial condition, results of operations and prospects may have
changed since that date.

ITEM 4. INFORMATION ON THE COMPANY

A.History and Development of the Company

  See "Organizational Structure" in "Item 4. Information on the Company."

   Our principal executive officers are located at One Brunswick Square, 14th
Floor, Saint John, New Brunswick E2L 3Y2, Canada. Our agent for service in the
United States is CT Corporation System, located at 111 Eighth Avenue, 13th
Floor, New York, New York 10011, whose telephone number is (212) 590-9200.

                                      13
B.Business Overview

   We develop and license infrastructure software products and provide related
services that enable telephone companies and other service providers to
deliver multi-channel digital television and interactive media services to
their subscribers' televisions and personal computers over a broadband or
high-speed communications network. Our software is based on open, Internet-
based standards for software and networking and is designed to work in
conjunction with industry standard third-party hardware and software. Service
providers can implement our software in conjunction with industry standard
third-party hardware and software over existing copper phone lines using xDSL
technology, including ADSL and various broadband access technologies such as
fiber to the home and broadband wireless technologies.

   Our customers include incumbent local exchange carriers and other telephony
providers. We also offer our software products and related services to
providers of broadband transmission services such as power and utility
companies and Internet service providers.

   We believe telephone companies and other service providers are seeking
solutions that will allow them to deliver multi-channel digital television
services and other revenue generating applications bundled with their existing
voice and Internet service offerings and thus to compete with cable and
satellite television operators in the emerging market for integrated voice,
Internet and television services. By implementing our primary software
product, DTV Manager, over existing broadband networks and by acquiring and
installing additional equipment as subscribers activate service, we believe
that service providers can cost-effectively offer their subscribers the
following services through televisions and personal computers:

  .  Digital television with unlimited channel capacity; and

  .  interactive media services, such as:

    .  Internet-on-television, including e-mail and Web access;

    .  video-on-demand;

    .  self-service pay-per-view;

    .  an interactive program guide; and

    .  a customizable television portal that provides access to various
       available services, including television stations, web sites, digital
       music channels and e-commerce sites.

   Our DTV Manager software also enables service providers to manage
subscriber accounts through service provisioning, customized package offerings
and integrated voice, Internet and television billing.

The ImagicTV Solution

   Our software enables telephone companies and other service providers to
deploy multi-channel digital television and interactive media services over a
broadband network. It is designed to work in conjunction with industry
standard third-party hardware and software and to integrate with the service
provider's existing network and systems. Our software takes advantage of
advancements in communications transmission technology, Internet Protocol
networking standards and video and audio

                                      14
compression technologies. To implement our software, the service provider's
network must comply with various Internet-based standards for software and
networking.

   Third-party hardware and software are required to utilize our software
products. At this time, our software operates on a Sun Microsystems server
platform, an Oracle database platform and a Pace or Thomson set-top box
platform. Required video encoder equipment is available from Harmonics
Software Inc. We are currently upgrading the set-top box components of DTV
Manager to operate on a Next Level Communications, Inc. set-top box platform.
We anticipate further modification of our software in the future so that it
will operate on other servers, databases and set-top box platforms.
Furthermore, our software products are designed to operate over standard
network equipment deployed by our customers, which consists of hardware
products from a variety of vendors, including Alcatel, Cisco Systems, Inc.,
Innovia Telecom, Lucent Technologies Inc. and Next Level Communications.

   Our software products are designed to support multiple televisions and
personal computers in the home. The number of televisions and personal
computers in a home that our software can support will depend upon the
capacity of the broadband network and the type of video compression employed
by the service provider. For example, using current ADSL technology at
transmission rates of six megabits per second and with data compression
allowing video transmission at a rate of 3.5 megabits per second, our software
can support one television and one personal computer over a single line to the
home. By further compressing data to allow video transmission at a rate of 2.5
megabits per second, the service provider can simultaneously support service
to two televisions and a personal computer over the same line. With faster
technologies such as VDSL and fiber to the home, where and when available, the
service provider can use our software to support additional devices in the
home. In each case, a subscriber can also use the same line to simultaneously
access telephone and high-speed Internet services while using our software
products to access television services.

Products and Services

   Our software products currently consist of DTV Manager, pcVu, Movie Manager
and the iMagicTV Developer Network (IDN) which are offered together with our
related professional services and maintenance and technical support services.

DTV Manager

   DTV Manager, our primary product, is a suite of software that integrates,
supports and manages the hardware and software components of the service
provider's network to enable the service provider to deliver multi-channel
digital television and interactive media services from its head office to its
subscribers' homes. DTV Manager software falls into three broad categories:
viewer component software, administration system software and operations
system software.

   Viewer Component Software. The viewer component software supports set-top
boxes in a subscriber's home and allows the subscriber, through the use of a
standard television remote control, a wireless keyboard or other device, to
browse through a television portal or an interactive program guide, to make
on-screen selections of video-on-demand programming and television, pay-per-
view and Web channels, and to view information banners that appear at the top
of the television screen when new channels are selected. The interactive
program guide and the television portal are features of the viewer component
software that a service provider can customize to brand its service offering
and incorporate local content. The interactive program guide includes up to
seven days of information on channel content, which a service provider may
update on a regular basis. The television portal also provides access to
interactive channels which, for example, may offer online shopping, online
banking, Web browsing, video-on-demand and other services. The viewer
component software is stored in memory on

                                      15
the set-top box. Without any action required by the subscriber, a service
provider can make changes to the viewer component software by remotely
distributing software updates over the service provider's network to the
subscriber's set-top box.

   Administration System Software. The administration system software allows
service providers to maintain information about subscribers, including the
subscriber's profile, class of service, passwords and usage. It supports
workstations at a service provider's head office, where the service provider's
administrative personnel can use subscriber information to define and
configure subscriber accounts and programming packages. Administration system
software also allows a service provider's administrative personnel to manage
individual subscriber accounts, for example, by blocking particular television
channels pursuant to a subscriber's requests.

   Operations System Software. The operations system software facilitates the
service provider's management of the content delivered to subscribers. The
operations system software consists of a variety of components resident on
servers at the service provider's head office and at the subscriber's premises
on a set-top box or PC. These components allow the service provider to track
and collect subscriber usage data, to deliver television programming
information to set-top boxes, to initialize and support the set-top boxes and
to run a business support system and a network management system. Through the
operations system, a service provider can also customize programming packages.

pcVu

   pcVu works in conjunction with DTV Manager and allows a subscriber to
receive multi-channel digital television services on a personal computer. It
includes a software-based tuner resident on the personal computer and does not
require additional hardware in the personal computer. pcVu is designed to
deliver high quality digital broadcast television signals so that, to the
subscriber, there is no visible distinction between a broadcast delivered over
a television and a broadcast delivered over a personal computer. The pcVu
software is designed to allow a subscriber to watch television while
simultaneously using his or her Web browser and other standard software
packages.

Movie Manager

   Movie Manager works in conjunction with DTV Manager to allow subscribers to
access DVD quality video content on demand. It provides VCR style control to
the subscriber through the use of the set-top box remote control. With Movie
Manager, the service provider can manage the delivery of the content and
customize its business application for video rentals by the subscriber.

iMagicTV Developer Network (IDN)

   The iMagicTV Developer Network is an Independent Software Vendor (ISV)
program. Its purpose is to help developers create applications that extend
ImagicTV software solutions. Its members have access to a complete set of
application development resources, including a developer's toolkit, a
developmental environment, training and support. In addition, our customers
can use IDN is to develop their own solution on top of our platform.

Services

   Professional Services. We provide professional services that a service
provider may need in conjunction with the introduction of a DTV Manager
service offering. For example, we offer project management services, which
assist the service provider in defining its subscribers' needs and creating an
implementation plan. We also offer ongoing program management services,
including operational

                                      16
planning, marketing strategy and portal design and customization. In addition,
we assist service providers in identifying and negotiating agreements with
potential hardware, software and content providers.

   Maintenance and Technical Support Services. We provide comprehensive
technical support services that include training, installation, configuration,
maintenance and support services. We assist customers in the design of their
networks, the selection of hardware and software components and the
integration of our software with their existing systems. We also offer a
training course for all new customers prior to receiving and installing a
system. In addition, we provide direct on-site or telephone support. We also
maintain an Internet-based management interface to our equipment to assist
with diagnostics.

Benefits of Our Software

   Our software products and related services are designed to provide numerous
potential benefits to service providers and enable service providers to
deliver various benefits to their subscribers.

Benefits to the Service Provider

   Our software is designed to provide the following benefits to service
providers:

  .  Integrated Bundled Services to Subscribers. Service providers can offer
     subscribers multi-channel digital television and interactive media
     services, through the television and the personal computer, in
     conjunction with voice and high-speed Internet services. This offers a
     service provider the potential opportunity to increase its revenue
     stream from existing subscribers and to increase its subscriber base.

  .  Uses Existing Infrastructure. Service providers can take advantage of
     existing broadband networks, including xDSL, fiber optic and wireless
     broadband access technologies, to implement DTV Manager. As a result, we
     believe that service providers can quickly and cost-effectively design
     and implement our software products. Subsequent investments in
     technology are variable and directly related to the number of
     subscribers the service provider activates or anticipates activating.

  .  Flexible Technology Architecture. Our software products are based on
     open, Internet-based standards and are designed to work in conjunction
     with industry standard, third-party hardware and software. Our software
     can simultaneously support xDSL, fiber optic and wireless broadband
     technologies on a single network so that a service provider can continue
     to use our software throughout its network upgrade process.

  .  Scalability. Our software products take advantage of Internet Protocol
     multicast technology and are designed to enable a service provider to
     simultaneously serve a large number of subscribers from a single server
     without degradation of service and without any changes to our software.
     Our infrastructure software is based on industry leading scalability
     products.

  .  Ability to Fully Manage Network Remotely. Using features of DTV Manager,
     a service provider can remotely perform diagnostics and reboot set-top
     boxes in subscribers' homes. DTV Manager keeps track of a variety of
     information related to subscriber usage and maintains error-log files so
     that the service provider can troubleshoot problems from its premises.

                                      17
.  Ability to Deliver Integrated Television Portal. An important element of
     DTV Manager is its ability to enable our customers to integrate a Web-
     based portal page with the services they offer. A service provider can
     customize its portal with local content and seek to generate additional
     revenue by selling space to advertisers, such as e-commerce companies
     and local subscriber area merchants.

  .  Customized Services and Pricing. Service providers can brand their
     service offerings and customize them to particular subscribers or groups
     of subscribers by offering a variety of program packages. Service
     providers can also structure a variety of subscriber payment packages
     based on subscription, pay-per-view and other pricing models.

  .  Unlimited Channel Capacity and Enhanced Media Services. Our software can
     support an unlimited number of channels and allows for the delivery of
     video-on-demand, digital music, Internet content and web sites as
     separate channels in addition to broadcast television channels.

  .  Customized Revenue Generating Applications. Using the tools and
     application program interfaces available under the IDN, our customers
     have the ability to quickly build customized applications to potentially
     increase their average revenue per subscriber.

  .  Integration with Existing Systems. DTV Manager is designed to integrate
     with a service provider's existing accounting, marketing and network
     management software systems. For example, DTV Manager's integration with
     existing billing systems allows, subject to regulatory restrictions, a
     service provider to deliver one bill to a subscriber for voice, Internet
     and television services.

Benefits to the Subscriber

   With our software, service providers can deliver the following benefits to
their subscribers:

  .  Multi-channel Digital Television. Subscribers can access multi-channel
     digital television through standard televisions and personal computers.

  .  Feature-Rich Interactive Program Guide. An interactive program guide
     allows subscribers to view present and future programming information
     and to make on-screen selections of television shows, pay-per-view
     programs, web sites and other content. Subscribers can also use the
     interactive program guide to access a parental control feature that
     enables them to select and block access to channels.

  .  Always on Internet-on-Television. Our software allows for "always on"
     Internet access through the television. With browser software resident
     in set-top boxes and "always on" Internet access, subscribers can be one
     click away from the Internet at all times. Subscribers can browse the
     Web and can send and receive e-mail using the set-top's remote control
     or wireless keyboard.

  .  New Programming and Entertainment Options. The subscriber may access a
     host of enhanced services, including video-on-demand, e-commerce,
     digital music, Web channels and self-serve pay-per-view, without
     requiring equipment changes or service calls.

                                      18
.  Convenient Service Offering Package. Subscribers can receive voice,
     Internet and television services through one service provider and can
     pay for these services on a single bill, if offered.

Strategy

   Our goal is to become the leading developer and provider of software
products and related services that enable telephone companies and other
service providers to deliver cost-effectively and manage multi-channel digital
television and interactive media services. Our strategy includes the following
key objectives:

  .  Expand Our Sales and Marketing Efforts. We intend to establish market
     leadership by continuing to focus on the successful and wide scale
     deployment of our software with our current customers and by expanding
     our customer base.

  .  Continue to Build Our Global Presence. Currently we have sales offices
     in Canada, the United States, the United Kingdom and Singapore. We plan
     to continue our presence in North America, Western Europe and in select
     countries in Asia, where we intend to establish sales and service
     centres.

  .  Develop and Expand Our Industry Relationships. We currently have sales,
     marketing and development relationships with several vendors. We believe
     that forging and expanding relationships with key vendors is critical to
     a broad deployment of our products and services and for the further
     development of our software products.

  .  Continue to Enhance Our Products and Develop New Applications. We intend
     to continue investing in research and development, focusing our spending
     on product enhancements and new applications that are designed to enable
     service providers to generate additional revenues, or reduce costs.

  .  Adhere to Industry Standards. We believe that adherence to industry
     standards and development principles strengthens our market position.
     Accordingly, we support these standards and development principles
     throughout our product line. This approach is designed to enable service
     providers to integrate our software products with their existing
     infrastructure on a cost-effective basis.

Technology

Implementation Architecture

   Our software products work with network, head-end and set-top box
components and operate on network architecture that is based on Internet
Protocol and other standard protocols. Head-end equipment is located at the
service provider's premises and consists of digital video equipment and a
server suite. Digital video equipment gathers, processes and distributes
video, and typically includes satellite dishes and receiver units, encoders
and Internet Protocol gateways. The server suite stores and powers DTV Manager
software, standard Web server software and standard database software. Set-top
boxes run DTV Manager client software, provide support for the MPEG and
Internet Protocol multicast technology used in our software and include a Web
browser for integrated Internet capability.

   Three key technologies support our implementation architecture: MPEG,
Internet Protocol multicast and broadband transmission.

                                      19
.  MPEG is our main data standard and supports the delivery of high quality
     video and audio over an Internet Protocol network;

  .  Internet Protocol multicast, our data transmission standard, supports
     the efficient delivery of generic data such as video and audio, as well
     as software and set-top configuration data throughout the network
     delivering large amounts of data over a network efficiently because the
     server can broadcast one message to many recipients simultaneously; and

  .  Broadband communications technology provides the speed and capacity
     necessary to deliver multiple data streams, including video channels,
     over a single medium such as twisted pair copper wire or fiber optic
     cable.

   To enhance the capabilities of their existing twisted pair copper wire,
service providers can deploy an xDSL-based architecture, including DSL access
multiplexers and xDSL modems. Generally, DSL access multiplexers connect
broadband lines in the service provider's transport network, or backbone, to
xDSL lines in the service provider's access network. In addition, DSL access
multiplexers separate high-speed data from voice data, putting high-speed data
on the network and low-speed voice data on the conventional phone system. DSL
access multiplexers are located in the service provider's central office or
remote switching centre. xDSL modems connect a set-top box or personal
computer in the home to the xDSL lines in the access network. When MPEG video
is delivered to the set-top box through the xDSL modem, the set-top box
decodes the MPEG video and sends it to the television. In some cases, the xDSL
modem is built into the set-top box.

How Video is Delivered Over an Internet Protocol Network

   Typically, video is distributed from the service provider's head-end to
subscribers in three steps:

  .  Video Capture. Satellite dishes and receiver units capture digital
     television signals in the form of MPEG streams.

  .  Video Conversion. Video encoders or other similar devices convert the
     MPEG streams into Internet Protocol-compliant video streams.

  .  Video Multicasting. Video encoders and network components transmit
     Internet Protocol-compliant video streams over the network to the home.

   At the home, when subscribers use a remote control or wireless keyboard,
this action triggers the set-top box to issue a request to join the
corresponding Internet Protocol multicast address where the corresponding
channel can be found. In response to the request, the server adds the
subscriber to the Internet Protocol multicast address and sends the related
channel data to the set-top box.

Research and Development

   Our research and development efforts focus on the continued development and
enhancement of our existing products and services as well as the development
of new applications and services. These efforts are based on input both from
our customers and from our research and development staff.

   We are currently engaged in the development of the following new products
which we expect to offer as enhancements or "add ons" to DTV Manager:

                                      20
.  Virtual VCR. This service would enable subscribers to store and replay
     digital broadcast television and other video content on an "on-demand"
     basis without a video cassette recorder.

  .  Rich Media Applications. This service would enable service providers to
     deliver a pre-packaged bundle of interactive broadband channels to
     subscribers with imbedded interactive e-commerce applications linked to
     third-parties. One example is a channel offering a movie and pizza
     package that subscribers can order through their television. We expect
     that two-way channel services would often be co-branded with retail and
     consumer brands.

   Other on-going research and development efforts include:

  .  developing the next release of DTV Manager to provide additional
     enhancements and features based upon input we have received from service
     providers;

  .  upgrading the viewer component of DTV Manager to enable it to operate on
     the next generations of set-top boxes from Pace, Thomson, and to operate
     for the first time on Next Level Communications' set-top box;

  .  creating a version of our electronic program guide, which provides for
     the presentation, display and design of the guide and data in HTML
     format;

  .  development of a distributed video on demand architecture to allow for a
     more efficient and effective management of video assets; and

  .  enhancement of our DTV Manager infrastructure software to continue
     adopting industry leading standards such as JAVA 2 Enterprise Editor,
     "J2EE," development standard using tools such as BEA infrastructure
     platforms.

   In October 2000, we entered into a memorandum of understanding with America
Online, Inc. to develop custom applications related to the interoperability of
our software with America Online's services. Under the terms of the memorandum
of understanding, we agreed to work with America Online on investigative
research and development, particularly in the delivery of advertising to
selected subscriber groups, and obligated ourselves to provide $500,000 of
research and development services in this regard. We further agreed that, if
America Online licenses our DTV Manager software on a trial basis or for
commercial deployment, we will be contractually obligated to provide an
additional $2.5 million of continued research and development services
relating to these and other custom applications. As of May 14, 2002 we have
not commenced the initial research and development work with America Online
and as such have not incurred any of these costs. See "Item 18. Financial
Statements" "Notes to Consolidated Financial Statements" Note 9(c) for
additional details of our agreement with America Online.

Customers

   We have licensed our software products to eight customers in North America,
Europe and Asia and currently generate revenues from all of these customers.
Of these customers, four telephone companies have licensed DTV Manager for
commercial deployment and four other telephone companies have entered into
trial license agreements. In addition, we have installed DTV Manager for
limited testing purposes on the networks of ten other service providers in
North America, Europe and Asia. Our license agreements, with those customers
who have licensed for commercial deployment, generally grant a long-term or
perpetual license to use our software products within a specified territory,
sometimes on an

                                      21
exclusive basis. While our license agreements generally give limited
termination rights to the customer, some of the early commercial license
agreements we entered into, which are applicable to two of our customers, are
terminable by the customer at its option by advance notice to us. None of our
customers, however, are contractually obligated to deploy, market or promote
services based on our software, nor are any of our customers contractually
required to achieve any specific subscriber introduction schedule. For further
information with regard to the risk that our customers will not deploy
services based upon our software to their subscribers, see "Risk Factors--If
service providers fail to deploy services based upon our software products
throughout their service areas, our business will not grow" in "Item 3. Key
Information."

   These license agreements also generally provide for the payment of an
initial license fee, fixed per subscriber royalty fees, typically calculated
on a monthly basis, and fees for maintenance and technical support services.
Because we negotiate our license agreements on an individual basis, the type
of agreement, the amount, timing and other payment terms of initial license
fees, royalty fees and annual fees for maintenance and technical support
services typically differ from one customer to another. In addition, we plan
to charge separate initial license fees and ongoing royalty fees for any new
products that we may introduce.

   Our customers are located in Canada, the United States, Europe and Asia.
The following table identifies, as of May 14, 2002 some of our currently
licensed customers. For additional information on our customers please read
"Item 5. Operating Results and Liquidity and Capital Resources."
Customer Name   Description and Geographic Area
   -------------   -------------------------------
Kingston Vision A subsidiary of Kingston Communications (Hull) plc, the
                   incumbent local exchange carrier in East Yorkshire, England.
   NBTel           The incumbent local exchange carrier in the Province of New
                   Brunswick and a subsidiary of Aliant Telecom Inc.
   CenturyTel      CenturyTel Service Group, L.L.C., a provider of integrated
                   communications services in 20 U.S. states.
   MTT             The incumbent local exchange carrier in the Province of Nova
                   Scotia and a subsidiary of Aliant Telecom Inc.
   SaskTel         Saskatchewan Telecommunications, the incumbent local
                   exchange carrier in the Province of Saskatchewan.
   SingTel         Singapore Telecommunications Ltd., the incumbent local
                   exchange carrier in Singapore.
   Telenor         Telenor AS, Research and Development Establishment, the
                   incumbent local exchange carrier in Norway.
Industry Relationships

   We believe that our success depends, among other things, on our ability to:

  .  market our software products and services to a substantial number of
     customers, and thereby build a large potential royalty base;

                                      22
.  ensure the interoperability of our software with hardware and software
from third-party vendors; and

   .  develop new products and services to enhance our software products.

   In order to achieve better these goals, we have entered into non-exclusive
agreements or understandings with a number of participants in the
telecommunications, computer, software and interactive media industries,
including:

  .  network and encoder equipment providers, such as Advanced Fibre
     Communications, Inc., Alcatel, Cisco Systems, Harmonic Software, Nortel
     Networks, Viagate Technologies Inc. and Optibase Ltd.;

  .  server hardware and software providers, such as Oracle and Sun
     Microsystems;

  .  set-top box manufacturers, such as Motorola, Pace and Thomson; and

  .  content and interactive media service providers and broadcasters, such
     as America Online and Atom Shockwave.

   Generally, our agreements and understandings with these industry
participants are short-term or terminable on short notice, and neither
generate revenues from the participant nor require us to pay any fee to the
participant other than out-of-pocket expenses. In addition, in the case of
joint marketing arrangements, we generally do not pay or receive referral
fees, and our obligations are generally limited to marketing and promotion
related activities. We also have and may continue to pursue informal industry
relationships with other third-parties.

Sales and Marketing

   We currently sell our software products and services through a direct sales
force and channel partners. As of May 14, 2002, our sales force consisted of
seven employees supported by a staff of 27 system integrators, sales engineers
and technical support specialists. Sales representatives are paid a salary
plus an incentive bonus based on sales. Direct sales professionals are located
in Saint John, New Brunswick; Halifax, Nova Scotia; Atlanta, Georgia;
Cambridge, England; Paris, France and Singapore. We use our direct sales force
to target service providers we believe provide the highest potential for
service deployment.

   To complement our direct sales efforts, we participate in trade shows in
North America and Europe and engage in joint marketing and sales with vendors
and other market participants with whom we have relationships. We belong to
related industry associations, and our representatives also speak at
telecommunications, e-commerce and multimedia events. In addition, we have
installed our DTV Manager software in customer demonstration centres of
various strategic equipment and software vendors, including Thomson, Sun
Microsystems and Alcatel, which are accessible to our potential customers.

                                      23
Competition

   We face competition from a number of companies in the market for multi-
channel digital television and interactive media services. Our direct
competitors, Myrio Corporation, Minerva Networks, Thirdspace and Orca
Communications provide products that are sold to telephone companies and other
service providers and are competitive with all or part of our products. An
indirect competitor, Liberate Technologies, provides technology and services
related to interactive television. We also expect additional competition from
other established and emerging companies. We expect competition to persist and
intensify as the market for digital interactive television over broadband
further develops.

   We believe that the success of companies seeking to develop software that
provides telephone companies and other service providers with the ability to
deliver multi-channel digital television and interactive media services will
depend on the following factors:

  .  the ability to provide a complete solution for the delivery and
     management of digital interactive television;

  .  technology that is standards-based and non-proprietary, and is designed
     to work in conjunction with industry standard, third-party hardware and
     software;

  .  the quality and reliability of product offerings;

  .  the price and value of product offerings;

  .  the quality of customer service; and

  .  the ability to provide a deployed customer reference.

   We anticipate that a significant part of our future revenues will be
derived from subscriber-based royalty fees. These royalties will be wholly
dependent on our customers' success in attracting and retaining subscribers.
Our existing and potential customers compete for subscribers with many
different companies that offer video, audio, programming, entertainment,
Internet and voice services, such as cable television companies and direct
broadcast satellite service providers. Cable companies such as Cox
Communications, AT&T and AOL Time Warner Inc. in the United States and Rogers
Communications and Shaw Communications in Canada offer digital television and,
in some cases, limited interactive media and video-on-demand services to their
subscribers. Direct-to-home satellite television services such as DIRECTV,
Inc. in the United States, Bell Expressvu Inc. in Canada and British Sky
Broadcasting Group plc in the United Kingdom also offer digital television
and, in a limited number of cases, interactive and video-on-demand media
services. If existing and potential customers offer personal television
services using our Virtual VCR product currently under development, their
services will compete for subscribers with products and services provided by
TiVo, Inc. Many of these competitors have greater brand recognition, a larger
subscriber base and more significant financial, technical and other resources
than our customers. These competitors may also undertake more extensive
marketing campaigns than our customers and may adopt more aggressive pricing
policies.

   Advances in communications technology, as well as changes in the
marketplace and the regulatory and legislative environment, are constantly
occurring. We cannot predict the effect that ongoing or future developments
might have on the video programming distribution industry generally, our
customers or our Company.

                                      24
Regulation of Service Providers

Overview

   Although, in providing our products and services, we are not now subject to
significant regulation, our existing and potential customers operate in
heavily regulated industries. Our existing customers are located in the United
States, various member countries of the European Union and Canada. The
paragraphs below summarize various regulatory matters within these
jurisdictions.

United States

   In the United States, the telecommunications and multi-channel video
programming distribution industries are subject to extensive regulation at the
federal, state and local levels. At the federal level, the Federal
Communications Commission, or FCC, regulates the interstate, mixed
intrastate/interstate and international aspects of the telecommunications
industries pursuant to its authority under the Communications Act of 1934, as
amended. Under the Communications Act, state authorities retain jurisdiction
to regulate intrastate telecommunications. Local authorities, pursuant to
their general zoning and police powers, regulate the distinctly local aspects
of telecommunications services, such as tower siting and infrastructure
placement. Federal, state and local authorities also share responsibility for
regulating the provision of multi-channel video programming distribution
services.

   Federal Regulation. Several FCC regulatory policies may affect the way in
which our customers can or choose to offer integrated voice, data and video
services. For example, federal law requires incumbent local exchange carriers
to offer their competitors cost-based access to certain network elements,
which elements comprise many of the significant facilities, features and
capabilities of their networks, in order to enable their competitors to
provide competing services. Although at this time incumbent local exchange
carriers in most cases are not required to provide unbundled access to high-
speed data switching equipment, they are required to offer high-speed data
services to their competitors for resale. Further, the FCC has required the
unbundling of the "high-frequency" portion of local transmission facilities,
which makes it easier and less expensive for competing carriers to offer
advanced services.

   These network access regulations are currently the subject of further FCC
rulemaking proposals and therefore, potentially subject to revisions,
petitions for reconsideration at the FCC and appeals in federal courts. The
uncertainties caused by these proceedings may cause potential customers to
delay purchasing our products and services. In addition, the outcomes of
related regulatory proceedings may cause potential customers to deploy less
than all of the high-speed data and broadband services for which our software
is designed, or to delay the widespread introduction of these services. For
example, these regulations and other developing laws, regulations and policies
may cause carriers to elect to provide high-speed data and broadband services
through a structurally separate affiliate, which could negatively affect
demand for our products and services.

   Legislation also has been proposed in Congress that could affect the
regulation of carriers providing high-speed data and broadband services. One
bill, currently before Congress, would, if it became law, grant incumbent
local exchange carriers substantially more flexibility in offering broadband
services. Other bills have been introduced that would provide incentives for
carriers to provide broadband services. We cannot predict whether these bills
will become law, or if any other communications-related legislation will be
introduced that might impact our business.

                                      25
Finally, to the extent that they are used for multi-channel video
programming distribution, our customers' networks may, for regulatory
purposes, be deemed to be "cable systems." Under the Communications Act, all
cable systems are required to:

  .  obtain a local franchise;

  .  comply with certain customer service standards;

  .  retransmit certain broadcast television programming;

  .  conform subscriber service and equipment rates to applicable federal
     regulations;

  .  comply with FCC equal employment opportunity rules and policies;

  .  make channel capacity available for public, educational and government
     programming; and

  .  comply with rules concerning the technical operation of cable systems.

   We cannot assure you that the burdens associated with federal cable system
regulation will not prevent or discourage potential customers from purchasing
or using our software and related services. For example, the FCC is currently
considering the adoption of rules that would ensure interactive television
services develop in a competitive fashion.

   State and Local Regulation. State and local authorities also have a role in
regulating the telecommunications and multi-channel video programming
distribution industries. Among other things, state regulatory authorities are
charged with developing and implementing cost-based prices for access to
network elements, and they may, consistent with federal law and policy,
establish additional network elements that must be made available by incumbent
local exchange carriers. At the local level, carriers seeking to install
additional transmission facilities may be required to obtain any of the
following:

  .  street opening and construction permits;

  .  permission to use rights-of-way;

  .  zoning variances; and

  .  other approvals from municipal authorities.

   Further, some state authorities have adopted cable television franchising
rules. Local jurisdictions throughout the United States regulate cable
television systems pursuant to their franchising authority. We cannot assure
you that regulatory developments at the state or local level will not prevent
or discourage our customers from developing or deploying networks capable of
supporting our software.

European Union

   In the European Union, which currently comprises 15 European countries,
including the United Kingdom, the telecommunications and multi-channel video
programming industries are subject to detailed sector-specific regulation.
Various laws, regulations and policies may require our customers to obtain and
be subject to approvals or authorizations in order to make use of our software
and related services within the European Union. For example, in the United
Kingdom, operators of

                                      26
telecommunication systems and providers of television programming services are
required to obtain licenses under the Telecommunications Act of 1984 and the
Broadcasting Act of 1990, respectively. In addition, the United Kingdom's
Office of Telecommunications, also known as Oftel, has issued two general
authorizations, known as class licenses, which set out the rules which may
apply to our existing and potential customers that control the supply of
multi-channel digital television and other digital services to end users.

   The European Union Regulation on unbundled access to the local loop came
into force on December 18, 2000. Under this regulation, all fixed public
telephone network operators that have been designated by their national
regulatory authority as having significant market power were required to
provide unbundled access to their local loop network by December 31, 2000. For
example, a new condition in the license granted to British Telecommunications
plc pursuant to the Telecommunications Act of 1984, requires it to provide
access to its local loops.

   The European Union Commission and the various national regulatory
authorities of the member countries frequently review the regulatory
environment relating to telecommunications, broadcasting, media and e-commerce
industries. We understand that the general thrust of this review is to make
changes to the regulatory environment with the objective of creating an open
and competitive communications industry. We cannot assure you that these
changes will not result in us, or our customers, being subject to direct
regulation or that future regulation of our existing and potential customers
will not slow sales of our products and services or impede our ability to
compete effectively.

Canada

   Telecommunications and broadcasting services are subject to regulation
under several federal communications statutes, the most important of which are
the 1993 Telecommunications Act (Canada) and the 1991 Broadcasting Act
(Canada). These statutes permit the Canadian Radio-television and
Telecommunications Commission, or CRTC, to regulate certain aspects of the
provision of telecommunications and broadcasting services in Canada.

   The Broadcasting Act. Depending on how they use our products and services,
service providers may be required to obtain a license issued by the CRTC under
the Broadcasting Act if they transmit programs for reception by the public
through devices capable of receiving broadcasting signals. Such devices
include television sets, and in some cases computers and other terminal
equipment. The most common type of broadcasting license required by service
providers that use our products and services is a Broadcasting Distribution
Undertaking License.

   To be eligible to hold a broadcasting license, a service provider must
comply with rules that require certain levels of ownership and control by
Canadians. These constraints should not limit the number of Canadian incumbent
local exchange carriers or competitive local exchange carriers that may wish
to buy our software and related services, since they must already meet similar
Canadian ownership and control rules; however, these constraints may limit the
ability of other service providers to use our software and related services,
since some may not be able to qualify for a broadcasting license under the
Canadian ownership and control rules under the Broadcasting Act.

   The CRTC now licenses competing service providers to operate within the
service areas of incumbent cable television systems. There are two CRTC
licensed Direct-to-Home satellite-based distribution services operating on a
national basis. The CRTC has also licensed, on a regional basis, wireless
digital multi-point multi-channel distribution services. On a local basis,
through June 29, 2001, the CRTC has licensed competitive cable television
systems in rural Nova Scotia, Vancouver and Montreal. In addition, the CRTC
has granted a Broadcasting Distribution Undertaking License to NBTel

                                      27
to provide services using our software and related services throughout the
Province of New Brunswick and similar licenses to MTT to service the Halifax
Regional Municipality in Nova Scotia and to SaskTel to service various
communities throughout the Province of Saskatchewan.

   The Telecommunications Act. Incumbent local exchange carriers, competitive
local exchange carriers and other providers of non-programming
telecommunication services are subject to regulation by the CRTC under the
Telecommunications Act; however, the CRTC has gradually been forbearing from
regulating many of the services offered by these carriers.

   The CRTC has also taken steps to promote competition in local
telecommunications service markets by issuing a number of decisions and orders
aimed at breaking down barriers to competition in these markets. We believe
that these decisions and orders will have a variety of impacts on service
providers. For example, CRTC regulation requires incumbent local exchange
carriers to offer their competitors cost-based access to some network
elements, enabling their competitors to provide competing services. We cannot
predict the effect these decisions and orders will have on our business.

Intellectual Property

   Our ability to compete is dependent in part upon our ability to protect our
intellectual property. We currently do not have patents or trademark
registrations protecting our products and other intellectual property, other
than a Canadian trademark registration for a stylized version of the word
"Imagic." To date, we have relied on trade secret and copyright law, as well
as confidentiality and licensing agreements, to establish and protect our
rights in our technology. Our current policy requires our officers, employees
and consultants to execute confidentiality agreements upon the commencement of
an employment or other relationship with us. These agreements typically
provide that all confidential information developed or made known to the
individual during the course of the individual's relationship with us is to be
kept confidential and not disclosed to third-parties except in specific
circumstances. In the case of employees, the agreements provide that all
technology that is conceived by the individual during the course of employment
with us is our exclusive property. Despite these efforts, it may be possible
for a third-party to obtain or use our technology without our authorization or
to develop similar technology through reverse engineering or other means.

   In June 1998, we filed a provisional patent application in the United
States in respect of aspects of our software products, which we formalized in
an application made under the Patent Co-Operation Treaty in June 1999. On
September 19, 2000, we filed a continuation-in-part application in the United
States with respect to the event-capturing component of the administration
system software within DTV Manager. Our event capturing software enables a
telephone company or other service provider to define, capture, store and
process all activities on its service network in real time. On September 28,
2000, we filed a continuation-in-part application in the United States with
respect to our pcVu software product. On September 29, 2000, we filed a
continuation-in-part application in the United States with respect to aspects
of the functionality of the proposed Virtual VCR enhancement to our DTV
Manager software. We cannot assure you that we will receive any of the patents
for which we have applied to date or will apply for in the future. Further, we
cannot assure you that the claims in any patents issued to us will be adequate
to prevent third-parties from using or developing non-infringing, competing
products which could materially adversely affect our business.

   We have several pending trademark applications covering some of our
important trademarks, logos and slogans in the United States, Canada and the
European Union, including: IMAGICTV; DTV MANAGER; the "Eye" Design, including
a stylized design with the word "ImagicTV"; and PCVU in Canada.

                                      28
See "Risk Factors--Because much of our success and value lies in our
ownership and use of intellectual property, our failure to protect our
intellectual property may negatively affect us" in "Item 3. Key Information."

Developments in Fiscal 2002

   In November 2001, we implemented a significant reorganization strategy,
which resulted in the termination of approximately 40 % of our workforce. This
was the culmination of a series of cost controlling measures started during
the fourth quarter of fiscal 2001.

   In February 2002, the Board of Directors appointed Jeffrey White as our
Chief Financial Officer. Mr. White has been with the Company for three years,
previously serving as its Director of Finance and Controller.

   In May 2002, the Board of Directors appointed Gerald Pond as our new Chief
Executive Officer. Mr. Pond has served as a member of the Company's Board of
Directors since January 1998.

   Concurrent with the appointment of Mr. Pond as Chief Executive Officer was
the shift in responsibilities for Marcel LeBrun, who had been President and
Chief Executive Officer from January 1998 to May 2002. Mr LeBrun remains in
his duties as President and assumes the additional responsibilities of Chief
Operating Officer.

C. Organizational Structure

   ImagicTV was incorporated under the Canada Business Corporations Act on
December 24, 1997 under the name iMagicTV Inc. On June 30, 1998 we amended our
articles to change our name to ImagicTV Inc. and to make certain revisions to
the terms of our share capital. Our articles were further amended on November
27, 2000 to convert each of our outstanding Class A, Class B and Class C
Common Shares into a single new class of common shares, to create a class of
preferred shares, issuable in series and, after giving effect to the
reclassification, split each new common share on a 1.1636-for-1 basis.

   iMagicTV (US), Inc. is a wholly owned subsidiary of ImagicTV and was
incorporated under the laws of the State of Delaware on November 17, 1999.
iMagicTV (UK) Limited is a wholly owned subsidiary of ImagicTV and was
incorporated under the laws of England on January 5, 2000 under the name
"Sinord 140 Limited". Its articles were subsequently amended to change its
name to its present name. ImagicTV is also registered for business in
Singapore.

D. Property, Plants and Equipment

  Our corporate headquarters and executive offices are located in Saint John,
  New Brunswick,

   Canada, where we occupy approximately 25,000 square feet of space, of which
we sublease approximately 17,000 square feet from NBTel for approximately
$222,000 per year. The lease on the space from NBTel is month-to-month, and
the lease on the remaining space expires in April 2005. We also lease sales
and marketing offices in Cambridge, England, Singapore and Research Triangle
Park, North Carolina.

                                      29
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A. and B. Operating Results and Liquidity and Capital Resources

                     MANAGEMENT'S DISCUSSION AND ANALYSIS

   The following discussion and analysis should be read together with our
annual audited consolidated financial statements and the accompanying notes
included in this document as of and for the fiscal years ending February 28,
2002, February 28, 2001 and February 29, 2000. See "Item 18. Financial
Statements." All financial information is presented in U.S. dollars unless
otherwise noted.

   Some of the statements set forth in this report are forward-looking
statements relating to our future results of operations. Our actual results
may vary materially from the results anticipated by these statements. Please
see "Special Note Regarding Forward-Looking Statements."

Overview

   We are a provider of infrastructure software products and services that
enable telephone companies and other service providers to deliver multi-
channel digital television and interactive media services to their
subscribers' televisions and personal computers over broadband networks. Our
customers include primarily incumbent local exchange carriers and competitive
local exchange carriers.

   We were incorporated under the Canada Business Corporations Act in December
1997 upon the initiative of NBTel Inc., the incumbent local exchange carrier
in New Brunswick, Canada, and a subsidiary of Aliant Inc., our largest
shareholder. We began operations in January 1998 by acquiring technology
relating to digital broadcasting from NBTel and entering into a research and
development arrangement funded by NBTel and a subsidiary of Celtic House
International, another of our largest shareholders, pursuant to which we
further enhanced the acquired technology. We delivered the initial version of
our primary software product, DTV Manager, to NBTel in December 1998 for
technical trials. In the fall of 1999, after further development, we delivered
the production version of DTV Manager to NBTel and Kingston Vision, an
affiliate of the incumbent local exchange carrier in East Yorkshire, England,
and shortly thereafter both NBTel and Kingston Vision deployed multi-channel
digital television services to their subscribers using our DTV Manager
software. DTV Manager is now in its fourth generation.

   Our customers currently have approximately 12,900 subscribers receiving
multi-channel digital television services enabled by ImagicTV's DTV Manager in
Canada and the United Kingdom.

   We presently have eight customers in North America, Europe and Asia and
currently generate revenues from each of these. Of these customers, four
telephone companies have licensed DTV Manager for commercial deployment and
four other telephone companies have entered into trial license agreements. In
addition, we have installed DTV Manager for limited testing purposes on
networks of ten other service providers in North America, Europe and Asia. We
have not generated any revenues from these test installations.

                                      30
Recent Developments

Reorganization

   The telecommunications industry has experienced a significant decrease in
its capital spending programs. During 1999 and 2000, the industry had rapid
growth in their infrastructure, primarily with the rollout of DSL along with
commercial deployments of the same. With the downturn in the economy that took
place during the calendar year 2001, much of these capital expenditures have
been curtailed and the industry, as a whole, is being cautious with the
introduction of new services at this time. In the fourth quarter of our fiscal
year 2001, we began to slow any increase in staffing levels and implement cost
containment measures in response to these industry developments. As the 2002
fiscal year progressed, it became apparent that our customers would be
delaying their decisions to proceed with the commercial launch of video
services that would include our software. As a result, in November 2001, we
implemented a comprehensive restructuring plan, which resulted in a reduction
in the number of our employees from 209 to 133. As of February 28, 2002 we had
131 employees. We have introduced new processes and tools to ensure our
operational effectiveness, despite our decreased staff.

Nasdaq

   On March 6, 2002, we received a letter from The Nasdaq National Market
notifying us that for the previous 30 consecutive trading days the price of
our common shares had closed below the $1.00 minimum per share closing bid
price requirement for continued inclusion on The Nasdaq National Market. If we
are not able to demonstrate compliance with the $1.00 minimum requirement by
June 4, 2002, Nasdaq will provide written notification that our common shares
are being delisted.

   If we determine that we will not satisfy the $1.00 minimum closing bid
price requirement for continued inclusion in The Nasdaq National Market by
June 4, 2002, we intend to apply to transfer our common shares to The Nasdaq
SmallCap Market where we can maintain our trading symbol and expect to have
the same liquidity afforded by The Nasdaq National Market. To transfer, we
must satisfy the continued inclusion requirements for The Nasdaq SmallCap
Market, which makes available an extended grace period until at least
September 3, 2002, for attaining compliance with the minimum $1.00 bid price
requirement. If we remain non-compliant in the $1.00 minimum closing bid price
requirement, but are compliant with its other continued listing
qualifications, we may qualify for an additional 180 day grace period beyond
September 3, 2002, to attain compliance with the $1.00 minimum closing bid
price requirement. If we submit a transfer application and pay the applicable
listing fees by June 4, 2002, initiation of the delisting proceedings will be
stayed pending the staff's review of the transfer application.

   There is a risk that our application to transfer to The Nasdaq SmallCap
Market may be denied. If our application is denied, we will have the ability
to appeal the delisting action; however, on appeal, management will be
required to present a compelling case to the Listing Qualifications Panel as
to why the delisting should not proceed.

   We are currently in compliance with all listing requirements on The Toronto
Stock Exchange and expect to remain so in the foreseeable future.

   The following discussion and analysis relates to our consolidated financial
statements which are stated in U.S. dollars and have been prepared in
accordance with Canadian GAAP. As applied to our current consolidated
financial statements, these principles conform in all material respects with
U.S. GAAP, except as disclosed in Note 12 to our consolidated financial
statements, included elsewhere in this annual report. See "Item 18. Financial
Statements."

                                      31
CRITICAL ACCOUNTING POLICIES

   We periodically review our financial reporting and disclosure practices and
accounting policies to ensure that our financial reporting and disclosure
system provided accurate and transparent information relative to current
economic and business environment. As part of the process, we have reviewed
our selection, application and communication of critical accounting policies
and financial disclosures. We note that we have determined that our critical
accounting policies relating to our core ongoing business activities are
primarily those that relate to revenue recognition. Other important accounting
policies are described in Note 1 to our consolidated financial statements,
which we encourage you to read.

Sources of Revenues and Revenue Recognition Policy

   Typically, there are several phases that our customers go through prior to
proceeding with a commercial launch with ImagicTV. The first phase is the lab
trial where we typically do not generate royalty or license revenues. It is
during this time that a customer evaluates the technology as it is installed
on its own network, for internal purposes only. We provide technical
assistance and consulting services for these evaluations as necessary.

   The second phase generally involves a market trial, during which the
service is provided to a limited number of "subscribers" who agree to test the
service. During the market trial a service provider assesses its market and
product and tries to fine-tune its offerings and services. We expect to
recognize primarily professional services revenues during market trials
because they are significant undertakings during which time our customers
typically engage us in technical and other consulting services. This is the
final phase prior to moving to a commercial deployment.

   The final phase is commercial deployment of digital television and other
interactive media services. Commercial license agreements are entered into at
the start of this phase and include license fees, subscriber royalty fees and
ongoing annual maintenance fees. The current trend has been for us to offer a
lower upfront incremental license fee based on the total number of households
passed by the service provider. This license fee is structured typically to be
paid over the length of the contract to lower the cost of entry into the
market for our customers. We also offer our customers the option to pay
onetime subscriber royalties in increments or they may elect to pay ongoing
subscriber royalties. Different revenue arrangements provide for different
payment arrangements for competitive business reasons.

   In the past, our license agreements provided for an initial license fee and
a one-time subscriber-based royalty fee. We currently have two customers under
this type of arrangement. In early 2000, we began structuring our license
agreements to include both an initial license fee, based on the number of
households located in the geographic area under the license, and an on-going
monthly subscriber-based royalty fee. We expect future license agreements to
be flexible, for competitive reasons, and may use either type of subscriber
royalty fee arrangement.

   Services revenues are comprised of professional services and annual
maintenance and technical support services related to the implementation and
integration of our software products. Annual maintenance and technical support
revenues are typically equal to a percentage of our customers' initial license
fees. Services revenue from professional services to licensees can be based on
a time-and-materials framework or a fixed contract for a complete project
or installation.

   Equipment revenues are comprised of sales of digital set-top boxes resold
by us to our customers at little or no mark-up above our cost. We have not
sold set-top boxes directly to our customers since the

                                      32
fiscal year ended February 28, 2001 and do not expect any significant revenues
from this activity in the future.

  The following table sets forth percentage of revenues by type for the
  fiscal years reflected:
Fiscal Year
                                                                  ----------------
                                                                  2000  2001  2002
       % Revenue by Type                                          ----  ----  ----
License fees..............................................  66%   53%   15%
       Royalty fees..............................................  --    14%   28%
       Services..................................................  19%   20%   57%
       Equipment.................................................  15%   13%   --
The following table sets forth percentage of revenues by geography for the
fiscal years reflected:
Fiscal Year
                                                                  ----------------
                                                                  2000  2001  2002
       % Revenue by Geography                                     ----  ----  ----
Canada....................................................  65%   42%   50%
       United States.............................................  --    41%   30%
       Europe....................................................  35%   17%   16%
       Asia......................................................  --    --     4%
The following table sets forth percentage of revenues by customer,
excluding equipment revenue for the fiscal years reflected:
Fiscal Year
                                                                  ----------------
       % Revenue by Customer                                      2000  2001  2002
       --EXCLUDING EQUIPMENT                                      ----  ----  ----
NBTel / Aliant............................................  35%   19%   30%
       SaskTel...................................................  15%   --    17%
       CenturyTel................................................  --    20%   17%
       Nortel Networks...........................................  --    12%   --
       Boardwalk Equities........................................  --    10%   --
       Kingston Vision...........................................  36%   --    --
       Other (less than 10%).....................................  14%   39%   36%
We did not recognize any equipment sales in fiscal 2002. In fiscal 2001,
however, Aliant, CenturyTel, Nortel and Boardwalk Equities accounted for
approximately 28%, 18%, 10% and 10%, respectively, of our total revenues,
including equipment. In fiscal 2000 NBTel, Kingston Vision and SaskTel
accounted for 38%, 31% and 16%, respectively, of our total revenues, including
equipment sales.

   We recognize software licensing revenues in accordance with all applicable
accounting regulations, including the American Institute of Certified Public
Accountants Statement of Position ("SOP") 97-2, "Software Revenue
Recognition", and SOP 98-9, "Modification of SOP 97-2 with respect to Certain
Transactions" and Section 3400 of the Canadian Institute of Chartered
Accountants Handbook.

                                      33
Following the requirements of SOP 97-2, we recognize license revenues when
all of the following conditions are met:

  .  we have signed a license agreement with the customer;

  .  we have delivered the software product to the customer;

  .  the amount of the fees to be paid by the customer is fixed or
     determinable; and

  .  we believe that collection of these fees is probable.

   We generally negotiate formal license agreements with our customers. Each
of our commercial license agreements includes provisions for us to receive
both an up-front license fee and royalties. Generally, service providers pay
these royalty fees either in the form of a non refundable one-time royalty
payment for a pre-set number of subscribers, a one-time per subscriber
activation royalty payment or a monthly royalty fee based upon the number of
active subscribers at the end of each month. Non refundable one-time royalty
payments for a fixed number of subscribers are recorded as revenue when it is
determined that the software has been delivered and accepted, the collection
of the amount is probable and we have no further obligations related to the
provision of the royalty license. One-time royalty activation payments are
recognized quarterly based on the net increase in the number of subscribers at
the end of each quarter. Monthly royalty fees are recognized monthly based on
the number of active subscribers at the end of each month.

   We often negotiate license agreements that allow for the payment of the
initial license fee to be made in future instalments over a period of less
than a year. Revenues recognized in advance of the instalments being due are
recorded as an instalment receivable in the balance sheet.

   Maintenance and technical support revenues are recognized evenly over the
applicable service period, which is usually one year. Revenues derived from
professional services are recognized upon performance of the related services.

   Revenues derived from license agreements containing multiple deliverables,
such as product licenses, maintenance and technical support and other
services, are allocated among the various deliverables based on the fair value
of each deliverable based on vendor-specific objective evidence of fair value.
For arrangements where we cannot establish vendor-specific objective evidence
of fair value for the delivered license portion of the arrangement, we use the
residual method to recognize revenue. Under the residual method, for
arrangements where we can establish vendor-specific objective evidence for all
undelivered elements, which are typically service and maintenance, we allocate
that value to the revenue relating to the undelivered elements and record the
remaining value of the contract as license revenue.

   In fiscal 2002, we generated approximately 50% of our revenues in U.S.
dollars, with the balance primarily in Canadian dollars and incurred
approximately 67% of our expenses in Canadian dollars, with the balance in
U.S. dollars and other currencies. We expect that a majority of our revenues
will be generated in U.S. dollars for the foreseeable future and that most of
our expenses, including labour costs as well as capital and operating
expenditures, will continue to be denominated in Canadian dollars. If the
Canadian dollar appreciates against the U.S. dollar, our results of operations
could be materially adversely affected.

                                      34
Results of Operations

For fiscal years ended February 28, 2002, February 28, 2001 and February 29,
2000.

Revenues

  The following table sets forth revenues for the periods reflected:
For the years ended        2001 v. 2000      2002 v. 2001
                         ----------------------------- ----------------- ------------------
                         29-Feb-00 28-Feb-01 28-Feb-02 $ Change % Change $ Change  % Change
                         --------- --------- --------- -------- -------- --------  --------
                              (in thousands of U.S. dollars, other than percentages)
Revenues:
 License fees...........  $1,384    $4,770    $  631    $3,386    245%   $(4,139)     (87%)
 Royalty fees...........      --     1,288     1,197     1,288     --        (91)      (7%)
 Services...............     393     1,791     2,387     1,398    356%       596       33%
 Equipment..............     321     1,150        --       829    258%    (1,150)    (100%)
                          ------    ------    ------    ------    ---    -------     ----
Total revenues..........  $2,098    $8,999    $4,215    $6,901    329%   $(4,784)     (53%)
                          ======    ======    ======    ======    ===    =======     ====
Excluding equipment sales, the decrease from fiscal 2001 to fiscal 2002 was
$3.6 million. The decrease in revenues for fiscal 2002 was the result of the
general slowdown in the telecommunication sector during which our customers
have delayed their transition from market trial to commercial deployment,
which is the point at which we typically earn a significant portion of our
license revenues. We expect services to continue to be a significant source of
revenue.

   Aliant (NBTel and MTT), SaskTel and CenturyTel accounted for approximately
30%, 17% and 17% of our revenue for fiscal 2002. For fiscal 2001, Aliant,
CenturyTel, Nortel and Boardwalk Equities accounted for approximately 28%,
18%, 10% and 10%, respectively, of our total revenues. NBTel, Kingston Vision
and SaskTel accounted for 38%, 31% and 16%, respectively, of our total
revenues for fiscal 2000. Excluding equipment sales, the comparable
percentages for fiscal 2001 are Aliant 19%, CenturyTel 20%, Nortel 12% and
Boardwalk Equities 10% and the comparable percentages for fiscal 2000 are
NBTel 35%, Kingston Vision 36% and SaskTel 15%.

   LicenseFees. Our license fees decreased from fiscal 2001 to fiscal 2002,
primarily because we did not sign any new commercial license agreements during
fiscal 2002. The license fees recognized during fiscal 2002 relate to revenue
recognized under contracts that were executed in fiscal 2001 for which the
recognition criteria were not achieved until fiscal 2002.

   The increase from fiscal 2000 to fiscal 2001 was due to the recognition of
license fee revenues of approximately $4.8 million from 11 customers.

   Royalty Fees. Royalty fees were comparable for the fiscal years 2002 and
2001 and were primarily impacted by large one-time royalty payments from
Aliant for approximately $1.0 million and $1.2 million, respectively. We do
not expect to receive any significant royalty payments from Aliant in fiscal
2003 as they have pre-paid royalty fees for a significant number of
subscribers. The balance of the royalty fees reported for fiscal 2002 and 2001
is primarily from Kingston Vision's commercial service. We expect that our
royalty fees revenue will fluctuate in fiscal 2003 and beyond as our current
and future customers may choose to pay either one-time upfront fees or ongoing
monthly royalty fees.

   The increase from fiscal 2000 to fiscal 2001 was due to the recognition of
royalty fee revenues of approximately $1.3 million consisting of $1.2 million
in one-time subscriber based royalties from Aliant and $39,000 in on-going
monthly subscriber based royalties from Kingston Vision.

                                      35
Services. Services revenue generated under maintenance contracts increased
to $876,000 in fiscal 2002 from $610,000 in fiscal 2001. We expect that
revenues generated under maintenance contracts will increase as we enter into
new commercial licenses and as our current customers renew their annual
maintenance contracts. The remainder of the services revenue was generated
from professional services supplied to our customers as they pursued market
trials of our product. We expect that services revenue will be a significant
portion of our revenue in the short term as the number of new commercial
licenses is not expected to increase significantly in fiscal 2003.

   Services revenues increased to $1.8 million for fiscal 2001 from $393,000
for fiscal 2000. During fiscal year 2001 we recognized approximately $900,000
of the services revenues for consulting and implementation services provided
to one of our customers. The remainder of these services revenues came from
maintenance and technical support services that we provide to our customers
under the terms of their license agreements with us.

   Equipment. We received no revenue from equipment sales for fiscal 2002 and
do not expect any appreciable amount of equipment revenue in the future as we
ceased selling equipment to our customers in fiscal 2002. Our customers
currently purchase equipment directly from manufacturers and they are expected
to do so in the future. Equipment was previously sold at a pass-through cost,
or with a minimal mark-up, to our customers.

   Equipment revenues increased to $1.2 million for fiscal 2001 from $321,000
for fiscal 2000. This increase was due to the recognition in fiscal 2001 of
$1.0 million of equipment revenues from sales of set-top boxes to Aliant under
a set-top box supply agreement.

Cost of Revenues

   Cost of services revenues include compensation, travel and other related
expenses for our maintenance and technical support services and professional
services departments, along with allocated facilities expenses. To date, the
cost of license fee revenues has been insignificant. Cost of license fees
includes royalties paid to third-party software providers whose products are
embedded in our software products. Sun Microsystems has been our principal
supplier of third-party software. Sun Microsystems granted us a non-exclusive
license to incorporate into and distribute with DTV Manager certain of its
Java-based system software until November 2000 and the agreement has been
renewed annually since that time. Pursuant to the license, we pay variable
royalties to Sun Microsystems on a per subscriber basis, depending on the
total number of our customers' subscribers, and on a per network server basis,
depending on the total number of servers operating DTV Manager.

   Cost of equipment revenue includes the cost of set-top boxes purchased for
resale. Our customers currently purchase equipment directly from the
manufacturer and as such, we no longer incur these costs.

                                      36
The following table sets forth the cost of revenues for the periods
reflected:
For the years ended         2001 v. 2000      2002 v. 2001
                         ------------------------------ ----------------- ------------------
                         29-Feb-00 28-Feb- 01 28-Feb-02 $ Change % Change $ Change  % Change
                         --------- ---------- --------- -------- -------- --------  --------
                               (in thousands of U.S. dollars, other than percentages)
Cost of revenues:
  Services..............   $657      $2,379    $2,603    $1,722    262%   $   224        9%
  Equipment.............    331       1,068        --       737    223%    (1,068)    (100%)
                           ----      ------    ------    ------    ---    -------     ----
Total cost of revenues..   $988      $3,447    $2,603    $2,459    249%   $  (844)     (24%)
                           ====      ======    ======    ======    ===    =======     ====
The decrease in cost of revenue from fiscal 2001 to fiscal 2002 was
primarily due to our discontinuance of reselling set top boxes to our
customers as they now purchase them directly from the supplier. This will not
have an impact on our future margins as we resold the set top boxes at no or
very low margins. The cost of services increased marginally year over year as
our services revenue increased. We do not expect that in the near term the
services margin will be consistent as our existing services team must be
maintained in order to service our current customer needs for professional
services and maintenance support as well as to support our sales efforts.
Costs incurred within the service department that are directly attributable to
sales efforts are recorded as sales and marketing expenses.

   Cost of revenues increased from $988,000 for fiscal 2000 to $3.4 million
for fiscal 2001. This increase, excluding the $737,000 increase related to
equipment costs, reflected an increase in personnel in our customer service
and professional services departments to support our increased customer base
from nine employees as of February 29, 2000 to 25 employees as at February 28,
2001.

Operating Expenses

   The following table sets forth operating expenses for the periods
reflected:
For the years ended         2001 v. 2000      2002 v. 2001
                         ------------------------------ ----------------- -----------------
                         29-Feb-00 28-Feb- 01 28-Feb-02 $ Change % Change $ Change % Change
                         --------- ---------- --------- -------- -------- -------- --------
                               (in thousands of U.S. dollars, other than percentages)
Operating expenses:
  Sales and marketing...  $2,325    $ 7,763    $ 8,928  $ 5,438    234%    $1,165     15%
  Research and
   development..........   4,084      7,967      7,151    3,883     95%      (816)   (10%)
  General and
   administrative.......     827      2,815      4,582    1,988    240%     1,767     63%
  Restructuring expense.      --         --      1,162       --     --      1,162     --
                          ------    -------    -------  -------    ---     ------    ---
Total operating
 expenses...............  $7,236    $18,545    $21,823  $11,309    156%    $3,278     18%
                          ======    =======    =======  =======    ===     ======    ===
Total operating expenses increased by 18% from fiscal 2001 to fiscal 2002.
Our November 2001 restructuring resulted in a one time $1.2 million charge,
which included expenses for severance packages, re-employment consulting,
accelerated depreciation for headcount related capital expenses (i.e. computer
and other equipment) and closed office space.

   Sales and Marketing. Sales and marketing expenses consist primarily of
personnel and related costs for our direct sales force, technical sales
support staff, marketing staff and business development

                                      37
staff, costs associated with marketing programs, including tradeshows, public
relations and marketing materials and allocated facilities costs.

  The following table sets forth the sales and marketing expenses for the
  periods reflected:
For the years ended        2001 v. 2000      2002 v. 2001
                         ----------------------------- ----------------- -----------------
                         29-Feb-00 28-Feb-01 28-Feb-02 $ Change % Change $ Change % Change
                         --------- --------- --------- -------- -------- -------- --------
                              (in thousands of U.S. dollars, other than percentages)
Sales and marketing.....  $2,325    $7,763    $8,928    $5,438    234%    $1,165    15%
The increase in sales and marketing from fiscal 2001 to fiscal 2002 was
primarily attributable to the increased size of the sales and marketing
department and related travel and headcount related expenses, compared to that
over the course of the previous fiscal year. Although we reduced the staff
levels from 54 employees at February 28, 2001 to 30 employees at February 28,
2002, we did not receive a half year's benefit of these reductions in our
expenses as many of these employees were not employed for the full year in
fiscal 2001. We expect to realize the full impact of these cost reductions in
fiscal 2003. We have mitigated the effects of the staff reductions by more
narrowly focusing on those activities which we feel have the greatest
potential for near-term revenue opportunities.

   Sales and marketing expenses increased to $7.8 million for fiscal 2001 from
$2.3 million for fiscal 2000. This increase was primarily due to the addition
of sales and marketing personnel, as well as increased travel and related
expenses. Our marketing department increased to 38 employees as of February
28, 2001 from 20 employees as of February 29, 2000. Our sales department
increased to 16 employees as of February 28, 2001 from six employees as of
February 29, 2000. These increases in staffing levels were the result of
efforts to expand our direct sales force coverage area and increase our
marketing activities.

   Research and Development. Research and development expenses consist
primarily of salary and other related costs for personnel, training,
independent consultants and facilities and technology expenses. Technology
expenses include license and support fees for development software, the cost
of tools and supplies and third-party support fees. We believe that continued
investment in research and development is critical to assist our customers in
achieving successful commercial deployments.

  The following table sets forth the research and development expenses for
  the periods reflected:
For the years ended        2001 v. 2000      2002 v. 2001
                         ----------------------------- ----------------- -----------------
                         29-Feb-00 28-Feb-01 28-Feb-02 $ Change % Change $ Change % Change
                         --------- --------- --------- -------- -------- -------- --------
                              (in thousands of U.S. dollars, other than percentages)
Research and
 development............  $ 4,084   $ 7,967   $ 7,151  $ 3,883    95%    $ (816)   (10%)
Research and development expenses, which consist primarily of salary and
related costs, decreased from fiscal 2001 to fiscal 2002 as a result of lower
costs incurred in the second half of fiscal 2002 subsequent to our November
2001 restructuring. The restructuring resulted in a decrease in the level of
staffing from 111 employees at February 28, 2001 to 63 employees at February
28, 2002. As a result of the staff reduction, our product development efforts
have been focused on those products that show the greatest potential for near-
term revenue opportunities.

   Research and development expenses increased to $8.0 million for fiscal 2001
from $4.1 million for fiscal 2000. This increase reflects an increase in
personnel in our research and development

                                      38
department to 111 employees as of February 28, 2001 from 60 as of February 29,
2000 as we accelerated our efforts to develop new products and services.

   General and Administrative. General and administrative expenses include
compensation for corporate personnel and other expenses, including
professional fees, travel and facilities, net of allocations to our customer
service, research and development and sales and marketing departments. Our
general and administration department includes a portion of our executive
office, as well as finance, human resources and corporate operations staff.

  The following table sets forth the general and administrative expenses for
  the periods reflected:
For the years ended        2001 v. 2000      2002 v. 2001
                         ----------------------------- ----------------- -----------------
                         29-Feb-00 28-Feb-01 28-Feb-02 $ Change % Change $ Change % Change
                         --------- --------- --------- -------- -------- -------- --------
                              (in thousands of U.S. dollars, other than percentages)
General and
 administrative.........   $827     $2,815    $4,582    $1,988    240%    $1,767     63%
The increase in general and administrative expenses from fiscal 2001 to
fiscal 2002 resulted from increases in all areas including salary costs, costs
related to being a public company and other charges. Our salary costs
increased by approximately $489,000 year over year but are expected to be
lower in the future on an annualized basis after taking into account the staff
reduction in each of the general and administrative departments from 26 to 16
employees year over year as a result of the November restructuring. Additional
increases are attributable to costs associated with being a public company for
the full year such as insurance costs, which increased by approximately
$300,000 from the previous fiscal year, and increased investor relations
activities, professional fees for audit and legal services and director's
fees. We also incurred a bad debt expense of $856,000 related to two customers
and a charge of $144,000 for the closure of our Dallas office.

   General and administrative expenses increased to $2.8 million for fiscal
2001 from $827,000 for fiscal 2000. Our corporate staffing increased to 26
employees as of February 28, 2001 from 15 employees as of February 29, 2000,
principally to support our increased corporate activities related to becoming
a public company. We also incurred additional expenses to support our
international expansion.

   Stock-based compensation. Stock-based compensation expenses have been
allocated to the operating expense items based on the nature of the work
performed by the employee to whom the options were granted. Stock based-
compensation expense represents the difference between the exercise price of
options granted and the deemed fair value, for financial reporting purposes,
of our common shares on the date of their respective granting. This stock-
based compensation expense is being amortized on a straight-line basis over
the vesting period of the options which is generally four years. The expense
is largely attributable to amortisation of deferred stock-based compensation
related to options granted between May 2000 and August 2000.

   Stock-based compensation expenses declined to $317,000 in fiscal 2002 from
$550,000 for fiscal 2001. The reduction primarily relates to the reversal of
deferred stock compensation on non-vested options that was expensed prior to
an employee's termination. As the deferred stock-based compensation remaining
to be amortized over the future vesting periods is $393,000, we do not expect
this charge to be significant in future periods.

   Stock-based compensation expenses were $550,000 for fiscal 2001. We did not
record any stock-based compensation expense for fiscal 2000.

                                      39
Other Income (Expense), Net

   Interest income increased to $1.7 million in fiscal 2002 from $1.1 million
in the previous year. The increase is attributable to the higher daily average
balance of cash and cash equivalents available to invest during the current
year compared to the prior year. We expect interest income to be lower in the
future as our funds available for investment are reduced through operating
losses. We do not hedge our exposure to foreign currency risk at this time. As
a result, we incurred a foreign exchange gain in fiscal 2001 of $426,000 and a
loss of $28,000 in fiscal 2002 primarily pertaining to movements between the
Canadian and U.S. exchange rate.

   Other income increased to $1.6 million for fiscal 2001 from $524,000 for
fiscal 2000. Interest income made up $1.1 million of other income for fiscal
2001 as compared to $121,000 for fiscal 2000. This increase in interest income
is primarily due to the investment of excess funds received from our private
placements in December 1999 and September and October 2000 and our November
2000 initial public offering. Other income for fiscal 2000 also included
income of $434,000 for forgiveness of debt.

                                      40
Quarterly Results of Operations

   The following table sets forth certain unaudited consolidated statements of
operations data for each of the eight most recent quarters ended February 28,
2002. This information has been derived from our unaudited consolidated
financial statements that, in the opinion of our management, have been
prepared on a basis consistent with the audited consolidated financial
statements contained elsewhere in this annual report and, in the opinion of
our management, includes all adjustments, consisting only of normal recurring
adjustments, necessary for fair presentation of our financial position and
results of operations for those periods. These operating results are not
necessarily indicative of results for any future period. You should not rely
on them to predict our future performance.
May 31,  Aug. 31,  Nov. 30,  Feb. 28,  May 31,  Aug. 31,  Nov. 30,  Feb. 28,
Quarter Ended             2000      2000      2000      2001     2001      2001      2001      2002
-------------            -------  --------  --------  --------  -------  --------  --------  --------
                               (in thousands of U.S. dollars, except per share amounts)
Consolidated Statement
 of Operations Data:
Revenues:
 License fees........... $   512  $ 1,543   $ 1,662   $ 1,053   $   522  $    --   $    --   $   109
 Royalty fees...........      23       47       142     1,076        82       37        39     1,039
 Services...............     137      200       357     1,097     1,046      766       298       277
 Equipment..............      59    1,048         4        39        --       --        --        --
                         -------  -------   -------   -------   -------  -------   -------   -------
Total revenues..........     731    2,838     2,165     3,265     1,650      803       337     1,425
                         -------  -------   -------   -------   -------  -------   -------   -------
Cost of revenues:
 Services...............     318      360       624     1,077       810      801       557       435
 Equipment..............      58      972         4        34        --       --        --        --
                         -------  -------   -------   -------   -------  -------   -------   -------
Total cost of revenues..     376    1,332       628     1,111       810      801       557       435
                         -------  -------   -------   -------   -------  -------   -------   -------
Gross profit (loss).....     355    1,506     1,537     2,154       840        2      (220)      990
                         -------  -------   -------   -------   -------  -------   -------   -------
Operating expenses:
 Sales and marketing....   1,242    1,510     2,066     2,945     3,024    2,499     2,157     1,245
 Research and
 development............   1,537    1,653     2,444     2,333     2,251    1,853     1,622     1,425
 General and
 administrative.........     349      606       842     1,018     1,545    1,318       974       745
 Restructuring expense..      --       --        --        --        --       --     1,162        --
                         -------  -------   -------   -------   -------  -------   -------   -------
Total operating
 expenses...............   3,128    3,769     5,352     6,296     6,820    5,670     5,915     3,415
                         -------  -------   -------   -------   -------  -------   -------   -------
Loss from operations....  (2,773)  (2,263)   (3,815)   (4,142)   (5,980)  (5,668)   (6,135)   (2,425)
Other income, net.......      99       17       605       838       681      544       274       127
                         -------  -------   -------   -------   -------  -------   -------   -------
Loss before provision
 for income taxes.......  (2,674)  (2,246)   (3,210)   (3,304)   (5,299)  (5,124)   (5,861)   (2,298)
Provision for income
 taxes..................     (11)     (19)       (7)      (13)     (139)      (9)      (32)       59
                         -------  -------   -------   -------   -------  -------   -------   -------
Net loss--in accordance
 with Canadian and
 U.S. GAAP.............. $(2,685) $(2,265)  $(3,217)  $(3,317)  $(5,438) $(5,133)  $(5,893)  $(2,239)
                         =======  =======   =======   =======   =======  =======   =======   =======
Basic and diluted net
 loss per share--in
 accordance with
 Canadian and U.S. GAAP. $ (0.15) $ (0.13)  $ (0.16)  $ (0.13)  $ (0.22) $ (0.21)  $ (0.24)  $ (0.09)
                         =======  =======   =======   =======   =======  =======   =======   =======
Weighted average number
 of shares used in
 computing basic and
 diluted net loss
 per share..............  17,552   17,556    19,586    24,593    24,596   24,599    24,599    24,632
                         =======  =======   =======   =======   =======  =======   =======   =======
Note: Certain prior period quarters have been reclassified to comply with
current financial presentation.

Liquidity and Capital Resources

   From our inception, we have financed our operations primarily through the
issuance of common equity, long-term debt and revenues from our operations.
Through February 28, 2002, we had received net proceeds of $84.4 million from
the issuance of common equity, approximately 83% of which was raised in fiscal
2001. As of February 28, 2002 we had cash equivalents of approximately $45.6
million and short-term investments of approximately $359,000 compared to cash
equivalents of $46.4 million and short-term investments of $14.3 million as of
February 28, 2001. As of February 28, 2002, we had an accumulated deficit of
approximately $39.0 million, increased from the accumulated deficit of $20.3
million on February 28, 2001.

                                      41
Our operating activities for fiscal 2002 used cash in the amount of $13.4
million compared to $12.1 million for fiscal 2001 and $3.8 million in fiscal
2000. The cash utilized during these periods was primarily to fund our
research and development and sales and marketing efforts.

   Our cash used in investing activities, before the purchase and/or sale of
temporary investments, was $1.2 million for fiscal 2002, $3.0 million for
fiscal 2001 and $992,000 for fiscal 2000. Cash used in investing activities
reflects purchases of computer equipment, office furniture and equipment and
leasehold improvements. We anticipate that our expenditures will remain
relatively flat in the future.

   Our cash used in financing activities for fiscal 2002 was $164,000,
$144,000 of which was used for the repayment of debt related to a loan
obtained from the Province of New Brunswick. There were also $20,000 in
additional initial public offering expenses that were recorded during fiscal
2002. In fiscal 2001 we generated $70.0 million from financing activities
through our private and initial public offerings and $10.6 million for fiscal
2000, consisting of $8.8 million from the issuance of common shares and
proceeds from long-term debt of $1.8 million.

   We expect that our future short-term obligations will be less than those of
fiscal 2002 due to the decrease in fixed operating expenses resulting from our
November 2001 restructuring. Our long-term debt consists of the above
mentioned loan from the Province of New Brunswick, the total amount of which
was approximately $1.8 million, which is repayable in equal instalments of
1.5% of total license fee revenues for the previous fiscal year, interest free
until February 25, 2006, at which point it converts to an interest bearing
loan at a rate of 6.3% per annum on any outstanding balance. We do not have
any other debt obligations.

   In the current marketplace the timing of the generation of revenue is an
uncertainty and is dependent upon our customers' decisions to move forward
with a commercial deployment of our solution and the timing related to that
decision. To provide the most conservative estimate, which assumes revenue is
at zero or a very nominal amount, we anticipate that we have sufficient cash
resources to fund operations for approximately the next 24 months from and
after February 28, 2002. If our expenses vary greatly from those that are
currently expected, we may need to raise additional capital to fund its
operations prior to the end of this 24 month period. In addition, if revenues
are not timely generated to the extent necessary to fund operations beyond
such 24 month period, we may also be required to raise additional capital to
fund our operations. We may attempt to obtain this additional capital through
the sale of debt or equity securities or borrowings under secured or unsecured
loan arrangements. We can provide no assurance that such capital or financing,
if necessary, will be available in a timely manner or on satisfactory terms.

Industry Risk

   The telecommunications industry, in the past 18 months, has experienced
significant economic pressure on revenues, earnings and return on investment.
In response, telecommunications companies have made significant reductions in
capital spending in many areas of their business including new and emerging
services. As a result, we have experienced a longer sales cycle as our
customers continue to delay their move from market trials to commercial
deployments. This has impacted our ability to earn license revenues which are
primarily earned from our customers' commercial deployments.

   Because the pressure on revenues for telecommunications companies is so
great, we expect that telephone companies will increase market trials in the
next 12 months to explore a new avenue of generating additional revenues over
existing infrastructure. If the current economic conditions continue, however,
our customers could continue to delay their move from the market trial stage
to commercial deployment until such time as the industry economics improve.
Accordingly, our license fee and royalty

                                      42
fee revenues may be significantly delayed, may be less than previously
anticipated or may not significantly materialize if customers or potential
customers direct their capital spending in areas other than video deployment.

Impact of Interest Rate Exposure

   As of February 28, 2002, we had approximately $45.6 million in cash and
cash equivalents and short-term investments of approximately $359,000. A
significant portion of the cash earns interest at variable rates. Although a
portion of our short-term investments consists of fixed-rate instruments, the
average term is shorter than prior period investment holdings, as short-term
yield rates are currently in excess of longer-term rates. As a result, our
interest income is sensitive to changes in the level of prevailing interest
rates. Interest rates declined in fiscal 2002 and as a result we anticipate
our average yield earned on surplus funds in fiscal 2003 to be lower than
yields earned in fiscal 2002. We do not anticipate this situation to have any
short-term material adverse impact on our cash position or financial
condition.

Impact of Foreign Exchange Rate Exposure

   We continue to expect the majority of our revenues will be earned in U.S.
dollars, and that a significant portion of our operating expenses and capital
expenditures will be in Canadian dollars. Changes in the value of the Canadian
dollar relative to the U.S. dollar may result in currency translation gains or
losses, which could affect our operating results. We also deal in other
foreign currencies; however, we anticipate changes in the exchange rates of
these currencies will not have a material impact on our operating results.
While we do not hedge our foreign exchange rate exposure with financial
derivative instruments, we do maintain a portion of our short-term investment
portfolio in Canadian dollar denominated instruments.

C. Research and Development, Patents and Licenses, etc.

   See "Business Overview-Technology and Research and Development" in "Item 4.
Information on the Company."

D. Trend Information

   See "Management's Discussion and Analysis--Recent Developments" in "Item 5.
Operating and Financial Review and Prospects."

                                      43
ITEM 6.DIRECTORS AND EXECUTIVE OFFICERS

A.Directors and Management

  Each of our directors is elected by the shareholders to serve until the
  next annual meeting of shareholders or until a successor is elected or
  appointed. Our executive officers are appointed annually to serve at the
  discretion of the Board of Directors. The association of certain directors
  to our major shareholders is disclosed in the notes to the table in "Share
  Ownership" in "Item 6. Directors and Executive Officers." The following
  table sets forth certain information about our directors and executive
  officers, as of May 14, 2002.
Name                      Age Position
   ----                      --- --------
Gerald L. Pond..........   57 Chief Executive Officer and Director
   Marcel LeBrun...........   32 President, Chief Operating Officer and Director
   Peter G.
    Jollymore(2)(3)........   61 Chairman of the Board of Directors
   Jeffrey White...........   33 Chief Financial Officer
   Nigel Bealing...........   39 Vice President of Sales, Europe, Middle East and Africa
   Norman Bier.............   41 Vice President of Sales, North and South America
   Allan Cameron...........   48 Vice President of Technology
   Pierre-Jean Chalon......   41 Vice President of Sales, Asia Pacific
   Dany DeGrace............   35 Vice President of Customer Solutions
   Gregory Allemann(2)(3)..   55 Director
   Joe C. Culp(1)(2).......   68 Director
   Carey Diamond(1)(3).....   47 Director
   Timothy Hember..........   42 Director
   Dr. Terence H. Matthews.   57 Director
   Robert E. Neal(1).......   47 Director
   Patrick Smith(1)........   56 Director
Notes:
  (1) Member of audit committee
  (2) Member of human resources committee
  (3) Member of governance committee

  The following is a summary of the background of each director and executive
  officer:

   Gerald L. Pond. Mr. Pond was appointed Chief Executive Officer of ImagicTV
in May 2002 and has served as a member of its Board of Directors of the
Corporation since January 1998. From March 1999 to December 2001, Mr. Pond
served as Executive Vice President of Aliant and from November 1994 to March
1999, he served as President and Chief Executive Officer of Bruncor Inc.
("Bruncor") and NBTel. He is currently serving on the Board of Directors of
Assumption Life, a mutual insurance company. Mr. Pond has a Bachelor of Arts
in Psychology from the University of New Brunswick.

   Marcel LeBrun. Mr. LeBrun co-founded ImagicTV and is currently serving as
President and Chief Operating Officer. He served as President and Chief
Executive Officer from January 1998 to May 2002. From June 1992 to December
1997, Mr. LeBrun held various positions at NBTel, including

                                      44
Managing Director of E-Business Services and other senior technical,
marketing and strategic business planning positions. Mr. LeBrun has a Bachelor
of Science in Electrical and Computer Engineering from the University of New
Brunswick.

   Peter G. Jollymore. Mr. Jollymore has been Chairman of the Board of
ImagicTV since January 1998. From 1967 until his retirement in December 1998,
Mr. Jollymore served in various positions at NBTel from design engineer to
Vice President of NBTel and its holding company, Bruncor. He serves on the
Board of Directors of the Business Development Bank of Canada and Callistro
Multimedia Inc., a computer software company producing video-on-demand
applications. He has a Bachelor of Science in Engineering from Mount Allison
University and a Bachelor of Engineering from the Technical University of Nova
Scotia.

   Jeffrey White. Mr. White has served as Chief Financial Officer of ImagicTV
since February 2002 and was Senior Director of Finance of ImagicTV from August
1999 to February 2002. From February 1996 to August 1999, he was Controller
for Genesys Telecommunications Laboratories, Inc., a wholly owned subsidiary
of Alcatel that provides universal queue contact centre solutions for customer
relationship management. He has a Bachelor of Business Administration from St.
Francis Xavier University of Nova Scotia and is a Chartered Accountant. He
resides in Saint John, New Brunswick.

   Nigel Bealing. Mr. Bealing has served as Vice President of Sales for
Europe, Middle East and Africa of ImagicTV since April 2001 and was European
Sales Manager of ImagicTV from October 2000 to April 2001. From October 1996
to October 2000, Mr. Bealing held various senior positions, including
Director--Northern Europe and European Sales Manager, at Optibase Europe Ltd.,
a company that provides broadband digital video-networking solutions and MPEG-
based digital video content. He resides in Berkshire, England.

   Norman Bier. Mr. Bier has served as Vice President of Sales for North and
South America of ImagicTV since April 2001 and served as Assistant Vice
President of Sales--U.S. of ImagicTV from October 2000 to April 2001 and as
General Manager--Eastern U.S. of ImagicTV from December 1999 to October 2000.
From January 1999 to December 1999, Mr. Bier was Vice President and General
Manager of Tel-Link LLC, a competitive local exchange carrier. From November
1994 to January 1998, he served as Vice President of an outsourcing billing
services unit at BellSouth Telecommunications. Mr. Bier resides in Cumming,
Georgia.

   Allan Cameron. Mr. Cameron co-founded ImagicTV and has served as Vice
President of Technology since January 1998. From May 1978 to December 1997,
Mr. Cameron held various positions, including strategic and technical planning
positions, at NBTel, where, among other things, he worked on the creation of
NBTel's Beacon/VideoActive? initiative, a deployment of broadband access
capabilities using coaxial cable. Mr. Cameron has a Bachelor of Science in
Engineering and a Master of Science in BioEngineering from the University of
New Brunswick. Mr. Cameron resides in Saint John, New Brunswick.

   Pierre-Jean Chalon. Mr. Chalon has served as Vice President of Sales for
Asia Pacific of ImagicTV since April 2001. From December 1996 to January 2001,
Mr. Chalon was Managing Director of Asia Pacific at CS Telecom, a manufacturer
of corporate networks and carrier access networks. He has a Master of Science
from the Institut National des Telecommunications in Evry, France. Mr. Chalon
resides in Singapore.

   Dany DeGrace. Ms. DeGrace has served as Vice President of Customer
Solutions of ImagicTV since February 2001 and was Senior Director of
Engineering of ImagicTV from June 1998 to February 2001. From April 1995 to
June 1998, Ms. DeGrace was a technical architect at Datacor/ISM, an IT

                                      45
outsourcing company. She has a Bachelor of Scientific Computer Analysis from
the University of Moncton. Ms. DeGrace resides in Saint John, New Brunswick.

   Gregory Allemann. Since March 2001, Mr. Allemann has served as Vice
President of Marketing and Sales for WebOffice, Inc., a privately held
communications infrastructure company. Mr. Allemann is also President of
Allemann Associates, a consulting firm for the communications industry. In
2000, Mr. Allemann retired from SBC Communications ("SBC") after a 30-year
career in which he held a variety of positions in technology research, network
planning, network operations, product development, market planning and
procurement. During his last eight years with SBC, Mr. Allemann was Vice
President and Executive Director of Broadband Infrastructure and Services for
SBC's R&D subsidiary, SBC Technology Resources, Inc. He has served and chaired
the Texas Telecommunications Engineering Consortium and the Advisory Board of
the University of Texas Electrical Engineering Department.

   Joe C. Culp. Mr. Culp was elected as a director of ImagicTV in August 1999.
Since 1990, he has served as President of Culp Communications Associates, a
management consulting firm for the telecommunications industry. Mr. Culp has
served as President of Lightnet, a fiber optic telecommunications carrier that
Southern New England Telephone Company (now SBC Corporation) and CSX
Corporation owned. He has also served as President of the Telecom Group of
Rockwell International, a provider of electronic controls and
telecommunications equipment. Mr. Culp currently serves on the Board of
Directors of two privately held telecommunications companies. He has served on
the Advisory Board of the telecommunications group of the University of Texas,
Arlington and the University of Arkansas. He has a Bachelor of Science in
Electrical Engineering from the University of Arkansas. Mr. Culp resides in
Austin, Texas.

   Carey Diamond. Since 1996, he has served as President and Chief Executive
Officer of Whitecastle, a private investment company in Canada and as managing
director of its venture capital division Whitecap Venture Partners. From 1989
to 1996, Mr. Diamond served as Executive Vice President of Whitecastle. He
currently serves on the Board of Directors of Alterna Technologies Group Inc.,
Photonami Inc., Texar Corporation and Whitecastle, including its affiliate
companies. Mr. Diamond has a law degree from Osgoode Hall Law School, a
Bachelor of Arts in Economics from the University of Western Ontario and is a
member of the Law Society of Upper Canada.

   Timothy Hember. Since April 2001, Mr. Hember has served as Vice President
of Technology and Development for Alcatel, a company that designs, develops
and builds communications networks. From September 1999 to April 2001, he
served as Vice President of IPVPN Products for Alcatel. Mr. Hember founded
TimeStep Corporation, a virtual private network equipment company, in January
1994 and served as President and Chief Executive Officer of TimeStep from its
inception to September 1999. He currently serves on the Board of Directors of
Bridgewater Consultants, Inc., a privately held software development and
professional services firm. Mr. Hember has a Bachelor of Science in Electrical
Engineering from the University of Waterloo.

   Dr. Terence H. Matthews. Since June 2000, he has served as Chairman and
Chief Executive Officer of March Networks Corp., a networked video
applications company. Dr. Matthews founded Newbridge Networks Corporation, a
company that designs, manufactures, markets and services wide area network
solutions, in March 1986 and served as Chairman of the Board and Chief
Executive Officer of Newbridge from its inception to May 2000. Dr. Matthews
also co-founded Mitel Corporation in 1972 and returned to the company in
February 2001 as Chairman of Mitel Networks, a company focused on IP telephony
and convergence platforms. He is the principal of Celtic House. Dr. Matthews
holds an honours degree in electronics from the University of Wales, Swansea
and is a Fellow of the Institute of Electrical Engineers and of the Royal
Academy of Engineering. He has been awarded honorary doctorates by

                                      46
several universities, including the University of Wales, Glamorgan, Swansea
and Carleton University in Ottawa.

   Robert E. Neal. Mr. Neal was elected as a director of ImagicTV in June
1999. Since June 2000, he has served as President of Innovatia Inc., a company
within the Aliant emerging business group that focuses on the development and
sale of Internet-based technology. Mr. Neal joined NBTel in 1979 and since
that time has held various positions with NBTel and its affiliates, including
Vice President from September 1998 to February 2000. Mr. Neal resides in
Quispamsis, New Brunswick.

   Patrick Smith. From July 1996 to July 2001, Mr. Smith served as Senior Vice
President of Systems Integration and Technology Planning of Sprint, a global
communications company. He served on the Board of Directors of Call-Net
Enterprises Inc., a telecommunications company operating in Canada as Sprint
and Crosskeys Inc., a publicly traded software company. Mr. Smith currently
sits on the board of three privately held software development companies.

B. Compensation

Compensation of Named Executive Officers

   The following table sets forth the compensation paid to Marcel LeBrun,
Nigel Bealing, Norman Bier, Allan Cameron, Marjean Henderson and Gerry Verner
(the "Named Executive Officers") for each of our three most recently completed
fiscal years. The Named Executive Officers are the only persons for whom
executive compensation disclosure is required under applicable Canadian
securities laws. We have not adopted any long-term incentive plans.

    Summary Compensation Table for the Fiscal Year Ended February 28, 2002
Long-Term
                                Annual Compensation       Compensation
                           ------------------------------ -------------
                                                             Awards
                                           Other Annual    Securities      All Other
Name and Principal         Salary  Bonus  Compensation(1) Under Options Compensation(2)
Position              Year   ($)    ($)         ($)            (#)            ($)
------------------    ---- ------- ------ --------------- ------------- ---------------
Marcel LeBrun,        2002 220,000 61,200     12,200              --        12,600
President and Chief   2001 163,400 50,200     12,700              --         8,900
Operating Officer(3)  2000  81,300     --      2,150         186,176         4,900
Nigel Bealing,        2002 115,000     --     12,400          50,000        17,000
Vice President of     2001  37,600     --      3,700          29,090        20,100
Europe, Middle East   2000      --     --         --              --            --
and Africa(4)
Norman Bier,          2002 134,200     --     11,700          25,000        77,100
Vice President of     2001 105,800     --         --          11,636        99,300
Sales for North and   2000  26,800     --         --           29,09        12,000
South America
Allan Cameron,        2002 110,000 30,600     12,200              --         6,300
Vice President of     2001  94,700     --     12,700              --         6,300
Technology            2000  73,100     --      2,150         162,904         4,400
Marjean Henderson,    2002 210,000 34,200     13,100              --        10,500
Chief Financial       2001 117,100     --      7,630         197,812            --
Officer(5)            2000      --     --         --              --            --
47
Long-Term
                                   Annual Compensation       Compensation
                              ------------------------------ -------------
                                                                Awards
                                              Other Annual    Securities      All Other
Name and Principal            Salary  Bonus  Compensation(1) Under Options Compensation(2)
Position                 Year   ($)    ($)         ($)            (#)            ($)
------------------       ---- ------- ------ --------------- ------------- ---------------
Gerry Verner,            2002 110,000 30,600     12,200              --         6,300
Vice President of        2001  94,000 13,400     12,700              --         6,300
Marketing and            2000  63,700     --      2,150         104,724         4,000
Business Development(6)
Notes:
(1)The amounts disclosed in this column include a car allowance paid to each
  of the Named Executive Officers.
(2)The amounts disclosed in this column for 2002 include:
  i) payments made by the Corporation as matching registered retirement
     savings and pension plan contributions to those made by the executive
     officers: Mr. LeBrun, $12,600; Mr. Bealing, $3,700; Mr. Bier, $7,800;
     Mr. Cameron, $6,300; Ms. Henderson, $10,500 and Mr. Verner, $6,300; and
  ii) commissions paid to: Mr. Bealing, $13,300 and Mr. Bier, $69,300.
(3)Mr. LeBrun was President and Chief Executive Officer until May 2002. On May
  7, 2002, Mr. Pond became Chief Executive Officer and Mr. LeBrun was
  appointed to his current position.
(4)Mr. Bealing joined ImagicTV in October 2000 and has served as an executive
  officer since March 2001.
(5)Ms. Henderson joined ImagicTV in July 2001 and her employment with ImagicTV
  ceased on February 14, 2002.
(6)Mr. Verner's employment with ImagicTV ceased on November 30, 2001.

   The following table sets forth individual grants of share options during
the fiscal year ended February 28, 2002 to the Named Executive Officers:

         Option Grants during the Fiscal Year ended February 28, 2002
Market Value
                                     % of Total                  of Shares
                         Shares       Options                   Underlying
                          Under      Granted to   Exercise or   Options at
                         Options    Employees in  Base Price   Date of Grant Expiration
Name                     Granted    Fiscal Year  ($ per Share) ($ per Share)    Date
----                     -------    ------------ ------------- ------------- ----------
Marcel LeBrun...........     --           --            --            --           --
Nigel Bealing........... 50,000(1)       9.7%        $1.15         $1.15      4/30/08
Norman Bier............. 25,000(1)      4.85%        $1.15         $1.15      4/30/08
Allan Cameron...........     --           --            --            --           --
Marjean Henderson.......     --           --            --            --           --
Gerry Verner............     --           --            --            --           --
Note:
(1) Options granted on April 30, 2001 and vest at a rate of 25% of total
    options granted on each anniversary of the date of grant.

                                      48
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values

   The officers named in the summary compensation table did not exercise any
options during the fiscal year ended February 28, 2002. The following table
sets forth the estimated fair market value as of February 28, 2002 of the
exercisable and unexercisable options held by these officers:
Number of Common
                                 Shares Underlying       Value of Unexercised
                                Unexercised Options     In-The-Money Options at
                              at Fiscal Year End (#)    Fiscal Year End ($)(1)
                             ------------------------- -------------------------
            Name             Exercisable Unexercisable Exercisable Unexercisable
            ----             ----------- ------------- ----------- -------------
Marcel LeBrun...............   209,448      93,088       $24,785         --
Nigel Bealing...............     7,273      71,817            --         --
Norman Bier.................    17,455      48,271            --         --
Allan Cameron...............   191,994      81,452       $21,003         --
Marjean Henderson...........    49,453          --            --         --
Gerry Verner................   122,178          --            --         --
Note:
/(1)/The value of an "in-the-money" option represents the difference between
     the aggregate estimated fair market value of the Common Shares issuable
     upon exercise of the option and the aggregate exercise price of the
     option. The fair market value of the Common Shares at the close of
     business on February 28, 2002 was $0.97 as quoted on the Nasdaq National
     Market.

Compensation of Directors

   Effective May 30, 2001, the Corporation adopted a new compensation
structure for independent directors. Upon his or her appointment to the Board
of Directors, each independent director will be granted options to purchase
25,000 Common Shares at an exercise price equal to the closing price of Common
Shares on The Toronto Stock Exchange (the "TSE") on the day immediately prior
to the date of grant. These options are to vest over three years at a rate of
1/36 per month from the date of grant with an expiration date of seven years
from the date of grant. Annually, each independent director and Peter
Jollymore, upon confirmation of their appointment for the following year at
the annual meeting of shareholders, will be granted options to purchase 10,000
Common Shares at an exercise price equal to the closing price of Common Shares
on the TSE on the day immediately prior to the date of grant. These options,
which are to be granted 72 hours after the annual meeting of shareholders,
will vest 12 months from the date of grant and will have an expiration date of
seven years from the date of grant. Annually, 72 hours after the annual
meeting of shareholders, each independent director who is a chairman of a
committee of the Board of Directors and not a member of management of the
Corporation will receive options to purchase an additional 5,000 Common Shares
at an exercise price equal to the closing price of Common Shares on the TSE on
the day immediately prior to the date of grant, such options to vest 12 months
from the date of grant and to an expiration date of seven years from the date
of grant. Each independent director receives a payment of $1,000 per day, per
meeting attended in person, including travel time.

   The non-independent directors of the Corporation, consisting of Carey
Diamond, Timothy Hember, Peter Jollymore, Marcel LeBrun, Dr. Terence Matthews,
Robert Neal and Gerald Pond, do not

                                      49
receive compensation for serving as directors of the Corporation other than
reimbursement for expenses incurred in attending meetings.

   The Corporation also adopted a new compensation structure for the Chairman
of the Board on December 18, 2001. On such date, the Chairman of the Board
received an annual salary of $25,000 and 10,000 options to be granted 72 hours
after the annual meeting of shareholders. These options are to vest 12 months
from the date of grant with an expiration date of seven years from the date of
grant.

   The following independent directors received payments and options to
purchase Common Shares pursuant to the Corporation's stock option plan in the
fiscal year ended February 28, 2002 as compensation for acting as directors:
Common Shares
                         Payments Under Options Exercise Price
Name of Director         Received    Granted     ($ per share) Date of Grant Expiration Date
----------------         -------- ------------- -------------- ------------- ---------------
Gregory Allemann........ $17,000     25,000         $1.22         5/30/01        5/30/08
Joe Culp................ $12,000     15,000         $0.73          8/3/01         8/3/08
Peter Jollymore.........      --     15,000         $0.73          8/3/01         8/3/08
Patrick Smith........... $ 9,000     25,000         $0.62        11/20/01       11/20/08
Directors' and Officers' Liability Insurance

   The Corporation maintains liability insurance for directors and officers of
the Corporation. The policy does not distinguish between the liability
insurance for its directors and officers, the coverage being the same for both
groups. The premium for the 12 month period ending November 21, 2002 is
$485,000, all of which is borne by the Corporation. The policy limit is
$20,000,000 with a $250,000 retention for securities claims and a $150,000
retention for non-securities claims. The individual directors and officers of
the Corporation are insured against losses arising from claims against them
for certain of their acts, errors or omissions in such capacity. The
Corporation is insured against losses arising out of any liability to
indemnify a director or officer.

Employment Agreements

   Each of the Named Executive Officers and the Chief Executive Officer,
Gerald Pond (the "Officers"), has entered into an employment agreement with
us.

   Pursuant to these agreements, the annual base salary for each Officer is as
follows: Mr. Pond, C$340,000; Mr. LeBrun, $220,000; Mr. Bealing, $115,000; Mr.
Bier, $135,000 and Mr. Cameron, $110,000. Mr. Verner's employment was
terminated on November 30, 2001 and Ms. Henderson's employment was terminated
on February 14, 2002. These base salaries are subject to review by our Board
of Directors in its discretion. Some Officers are entitled to an annual bonus,
up to a maximum of 70% of his or her annual base salary, as determined by our
Board of Directors in its discretion based upon target profit and revenue
performance levels and upon individual performance. In addition, pursuant to
the terms of the employment agreements with each of the Officers, he or she is
subject to non-competition provisions during his or her employment for 8 to 12
months thereafter and to confidentiality restrictions. Furthermore, Mr. Pond
was granted 300,000 stock options on commencement of his employment with the

                                      50
Corporation and is eligible to receive an additional 100,000 stock options on
the first anniversary of his commencement date.

   With respect to each of the Officers, the employment agreement provides
that in the event of termination without cause, the Officer is entitled to
monthly severance payments equal to his or her respective base salary for a
period from zero to twelve months, continued benefits coverage for up to one
year and a pro rata portion of any earned bonus and to exercise vested options
and any unvested options that otherwise would have vested in the up to 12
month period following the date of termination. In the event of termination
for cause, the Officer is entitled to receive his or her respective salary and
bonus through the date of termination and to exercise vested options for which
the Officer had provided notice of exercise prior to the date of termination.

   In the event of a change of control of ImagicTV, which is defined as the
acquisition by a person of 51% or more of our outstanding voting shares, some
of the employment agreements with the Officers provide that the Corporation
may terminate the employment of the Officer. Certain Officers have the right
to terminate his or her employment in the event of a change of control.
Certain Officers are also entitled to a severance payment equal to his or her
respective accrued base salary and the pro-rated portion of any earned bonus.
In addition, certain Officers have the right, on termination, to exercise,
within 90 to 120 days, any options granted to that Officer, regardless of the
vesting date.

C.Board Practices

   Our Board of Directors is currently comprised of ten persons. At the annual
and special meeting of shareholders to be held on June 27, 2002, the
shareholders will be asked to elect nine directors. In accordance with the
provisions of the Canada Business Corporations Act, our directors are
authorized from time to time to increase the size of the Board of Directors,
and to fix the number of directors, up to a maximum of 12 persons as currently
provided under our articles, without the prior consent of the shareholders.

Board Committees

   Our Board of Directors has established an audit committee, a human
resources committee and a corporate governance committee. All of the
committees of our Board of Directors were appointed on February 3, 2000.

Audit Committee

   ImagicTV is required by applicable law to have an audit committee (the
"Committee") consisting of at least three directors, a majority of whom must
be independent, non-executive directors. The Committee currently has four
members: Joe Culp, Chairman, Carey Diamond, Robert Neal and Patrick Smith. Joe
Culp and Robert Neal will not be standing for re-election, and as such, the
membership of the Committee will change subsequent to the annual and special
meeting. The Committee acts under a written charter which is reviewed for
adequacy at least annually. Members of the Committee are not professionally
engaged in the practice of accounting or auditing, and are not experts in
either of those fields or in auditor independence.

   The Committee is responsible for, among other things: (i) recommending the
annual appointment of the Corporation's auditors; (ii) reviewing the
independence of the Corporation's auditors; (iii) reviewing and approving
interim and annual financial statements with management and the Corporation's
auditors; (iv) assessing accounting principles used by the Corporation in
financial reporting; and (v) reviewing the adequacy of the Corporation's
internal control procedures.

                                      51
In performance of the Committee's oversight function, the Committee has
reviewed and discussed the Financial Statements with management and KPMG LLP
("KPMG"), ImagicTV's auditors. Management and KPMG have represented to the
Committee that the Financial Statements were fairly stated in accordance with
generally accepted accounting principles. The Committee discussed with KPMG
matters covered by applicable accounting standards and principles.

   The Committee received the letter and written disclosures from KPMG
required pursuant to applicable accounting standards and principles and has
discussed with KPMG their independence from the Corporation and management.
The Committee also considered whether the non-audit services provided by KPMG
to the Corporation are compatible with maintaining the auditors' independence.

   The Committee discussed with KPMG the overall scope and plans for their
audit. The Committee met with KPMG, with and without management present, to
discuss the results of their examinations, their evaluations of ImagicTV's
internal controls, and the overall quality of ImagicTV's financial reporting.

   Based on the reviews and discussions referred to above, in reliance on
management and KPMG, and subject to the limitations of its role, the Committee
recommended to the Board of Directors, and the Board of Directors approved the
Financial Statements, the delivery of such statements to Shareholders, the
inclusion of such statements in the Corporation's Annual Report for the year
ended February 28, 2002, for filing with the Securities and Exchange
Commission and as its Annual Information Form with the securities regulatory
authorities in the applicable provinces and territories in Canada.

Corporate Governance Committee

   The Corporate Governance Committee consists of Carey Diamond, Chairman,
Peter Jollymore and Gregory Allemann. The committee's mandate is to develop
and monitor our approach to corporate governance issues, establish procedures
for the identification of new nominees to our Board of Directors, develop and
implement orientation procedures for new directors and assess the
effectiveness of our board and its committees.

Human Resources Committee

   Pursuant to the 2000 Share Option Plan, the Human Resources Committee (the
"HR Committee") must be comprised of at least two non-employee directors. The
HR Committee currently consists of Gregory Allemann, Chairman, Peter Jollymore
and Joe Culp. Joe Culp will not be standing for reelection, and as such, the
membership of the HR Committee will change subsequent to the annual and
special meeting. The HR Committee's mandate is to establish salaries,
incentives, and other forms of compensation for our directors, executive
officers, employees, and consultants. The HR Committee also administers the
Corporation's other benefit plans.

D.Employees

   As of February 28, 2002, we employed approximately 131 full-time employees,
excluding temporary personnel and consultants. We are not subject to any
collective bargaining agreements and believe our relationship with our
employees is good.

   In November 2001 the Company undertook a restructuring plan where the
number of employees changed from 209 on November 13, 2001 to 133 on November
14, 2001. Please see "Recent Developments--Reorganization" in "Item 5.
Operating and Financial Reviews and Prospects" for details.

                                      52
E.Share Ownership

   The following table sets forth certain information concerning the ownership
of common shares and options to purchase common shares of ImagicTV at May 14,
2002 by each director and each of the Named Executive Officers. Each of the
directors and Named Executive Officers listed on the following table directly
holds less than one percent of our common shares and the directors and
executive officers, as a group directly, hold less than one percent of the
common shares. See "Major Shareholders" in "Item 7. Major Shareholders and
Related Party Transactions" for information as to the share ownership of our
major shareholders with whom some of our directors are affiliated.
Options
                                             -----------------------------------
                                   Common    Number  Exercise
Name                               Shares    Granted  Price      Expiry Date
----                               ------    ------- -------- ------------------
Gerald L. Pond.................... 43,338    300,000  $ 1.30  May 7, 2009
Marcel LeBrun..................... 17,545    116,360  $ 0.54  January 5, 2005
                                             69, 816  $ 0.86  April 13, 2006
                                             116,360  $ 1.47  December 17, 2006
Peter G. Jollymore................ 27,702     29,090  $ 1.47  August 10, 2007
                                              15,000  $ 0.73  August 3, 2008
Nigel Bealing.....................     --     29,090  $ 7.05  December 13, 2007
                                              50,000  $ 1.15  April 30, 2008
Norman Bier.......................    500     29,090  $ 1.07  December 1, 2006
                                              11,636  $11.17  September 13, 2007
                                              25,000  $ 1.15  April 30, 2008
Allan Cameron..................... 36,999    110,542  $ 0.54  January 5, 2005
                                              46,544  $ 0.86  April 13, 2006
                                             116,360  $ 1.47  December 17, 2006
Marjean Henderson.................     --         --      --  --
Gerry Verner...................... 31,389     69,816  $ 0.86   November 30, 2002
                                              52,362  $ 1.47  November 30, 2002
Gregory Allemann..................     --     25,000  $ 1.22  May 30, 2008
Joe C. Culp....................... 22,273     11,636  $ 1.47  March 23, 2007
                                              11,636  $ 1.47  August 10, 2007
                                              15,000  $ 0.73  August 3, 2008
Carey Diamond.....................     --(1)      --      --  --
Timothy Hember....................     --(2)      --      --  --
Dr. Terence H. Matthews...........     --(3)      --      --  --
Robert E. Neal....................  7,819(4)      --      --  --
Patrick Smith.....................     --     25,000  $ 0.62  November 20, 2008
53
Notes:
(1) Whitecastle beneficially owns 2,464,927 Common Shares. Mr. Diamond is the
    President and Chief Executive Officer of Whitecastle.
(2) Alcatel beneficially owns 3,986,856 Common Shares. Mr. Hember is the Vice
    President of Technology and Development of Alcatel.
(3) Celtic House beneficially owns 2,454,676 Common Shares. Dr. Matthews is
    the principal of Celtic House.
(4) This excludes 7,209,749 Common Shares beneficially owned by Aliant. Mr.
    Neal is an officer of a subsidiary of Aliant.

Option Plans

   We currently maintain two share option plans. Each is intended to attract,
retain and motivate employees, officers and directors of, and consultants to,
our Company. The HR Committee of our Board of Directors administers the option
plans. The HR Committee determines, among other things, the term, vesting
periods and the price of options granted under the plan. As of May 14, 2002,
options to purchase 2,999,820 shares at a weighted average exercise price of
$1.65 per share have been granted under the plans.

Employee Share Option Plan

   We adopted our initial share option plan in February 1998 and amended it on
December 17, 1999. It provides for the grant of options to employees, officers
and directors of, and consultants to, our company. Options granted to
employees generally have the following terms: (1) all options granted under
the plan have a maximum term of seven years; (2) the exercise price per share
for each option is determined by the price of the shares at the closing of The
Toronto Stock Exchange on the day before the date of grant; (3) if we
terminate an option holder's employment without cause, the vested portion of
any grant will remain exercisable for the lesser of 60 days or the balance of
the option term; (4) in the event we terminate an option holder's employment
for cause, any option held by such option holder shall thereupon immediately
terminate, whether exercisable or not; (5) if the option holder dies, the
vested options may be exercised for a period of one year or the balance of the
term, whichever is shorter; (6) in the event the option holder retires, the
option holder may exercise vested options for 60 days or the balance of the
option term, whichever is shorter; (7) in the event of disability, the option
holder has six months or the balance of the option term, whichever is shorter,
to exercise vested options; and (8) unvested options will expire upon
termination of employment for any reason. The terms of the options granted to
the officers referred to under the heading "Compensation -- Employment
Agreements" are described in that section.

2000 Share Option Plan

   Our Board of Directors approved our 2000 Share Option Plan on November 9,
2000, and our shareholders approved it thereafter. This new plan does not
affect options granted under the initial plan. The HR committee of our Board
of Directors administers the new plan and determines, among other things, the
eligibility of persons to participate in the plan, vesting periods and other
attributes of individual options. The 2000 Share Option Plan provides for the
grant of options to employees, officers and directors of, and consultants to,
ImagicTV and its affiliates. Both incentive share options and non-qualified
share options are available to U.S. residents.

   Options held by any person under the new plan together with any other
options granted to that person may not at any time exceed 5% of the aggregate
number of our common shares outstanding from time to time. The maximum number
of shares issuable under the new plan is 1,879,185, subject to necessary
approvals. The options granted under the new plan have a maximum term of ten
years and an

                                      54
exercise price no less than the fair market value of our common shares at the
closing of The Toronto Stock Exchange on the day before the date of grant, or
110% of fair market value in the case of an incentive stock option granted to
an employee who owns common shares having more than 10% of the votes
outstanding. Under the new plan, if a change of control of our company should
occur, our Board of Directors will be permitted, without any action or consent
required on the part of any option holder to, among other things accelerate
the vesting of all options so that they become immediately exercisable.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.Major Shareholders

   The following table provides information regarding the beneficial ownership
of our common shares as of May 14, 2002 for each person or entity who is known
to us to own beneficially more than 5% of our outstanding common shares. As
used in the table, "beneficial ownership" means the sole or shared power to
vote or direct the voting or to dispose or direct the disposition of any
security. A person is deemed to be the beneficial owner of securities that can
be acquired within 60 days from the date of this annual report. Common shares
subject to options, warrants or rights that are currently exercisable or
exercisable within 60 days are deemed outstanding for computing the ownership
percentage of the person holding these options, warrants or rights, but are
not deemed outstanding for computing the ownership percentage of any other
person. The amounts and percentages are based upon 24,678,063 common shares
outstanding as of May 14, 2002.
Number of    Percentage
                                                          Shares     of Shares
                                                       Beneficially Beneficially
Name of Beneficial Owner                                 Owned(1)     Owned(2)
------------------------                               ------------ ------------
Aliant Inc. ("Aliant")
 (held through Aliant Horizons Inc.)..................  7,209,749      29.22%
Compagnie Financiere Alcatel
 (held through its subsidiary, Alcatel Canada Inc.)...  3,986,856      16.16%
Whitecastle Investments Limited
 ("Whitecastle")......................................  2,464,927       9.99%
Celtic House International ("Celtic House")
 (held through 3841553 Canada Inc.)...................  2,454,675       9.95%
Notes:
(1) Number of shares beneficially owned by Aliant, Alcatel Canada Inc.
    ("Alcatel") and Celtic House obtained from shareholder list provided by
    the Corporation's transfer agent, as at May 14, 2002. Whitecastle share
    information provided by Whitecastle.
(2) Based on 24,678,063 common shares outstanding on May 14, 2002.

   As of the close of business on May 14, 2002, CDS & Co. as nominee on behalf
of The Canadian Depository for Securities Limited ("CDS") was the registered
holder of 7,189,740 Common Shares representing approximately 29.13% of the
outstanding Common Shares and Cede & Co as nominee on behalf of The Depository
Trust Company ("DTC") was the registered holder of 3,154,038 Common Shares
representing approximately 12.78% of the outstanding Common Shares. It is,
however, management's understanding that the Common Shares registered in the
name of CDS or DTC are held by various brokers and other parties on behalf of
clients and others (including certain of the principal holders named above).

                                      55
Except as disclosed above, as at May 14, 2002, the current directors and
officers of the Corporation as a group owns directly or indirectly or
exercised control or direction over a total of 179,448 Common Shares
representing approximately 0.73% of the issued and outstanding Common Shares.

   The voting rights of our major shareholders do not differ from the voting
rights of holders of our shares who are not major shareholders.

   As of the close of business on May 14, 2002, our registrar and transfer
agent reported that there were 24,678,063 common shares issued and
outstanding. Of those common shares issued and outstanding, 21,223,520 common
shares were registered to Canadian residents (78 holders of record) and the
remaining 3,454,543 common shares were registered to United States residents
(seven holders of record). No common shares were registered to residents of
other foreign countries.

   To the best of our knowledge, our company is not directly or indirectly
owned or controlled by another corporation, by any foreign government or by
any other natural or legal person.

   There are no arrangements known to us, the operation of which may at a
subsequent date result in a change of control of our company.

B.Related Party Transactions

   The following describes the significant transactions entered into between
us and our directors, executive officers, shareholders, and affiliates of the
shareholders in the fiscal year ended February 28, 2002. All future
transactions between any of these parties and us will be subject to approval
by a majority of the non-employee members of the board.

Technology Agreements

   On April 16, 1999, we entered into a licensing agreement with NBTel.
Pursuant to this agreement, NBTel received a perpetual, non-exclusive license
to use DTV Manager in the Province of New Brunswick for cash consideration of
C$500,000 and future one-time per subscriber payments decreasing from C$150 to
C$80 based on the number of active NBTel subscribers to DTV Manager in New
Brunswick. In addition, the license agreement provides for the annual payment
of fees for maintenance and technical support services in an amount equal to
20% of the total license fees, including the initial fee and cumulative
subscriber royalties. If requested by NBTel we have agreed to provide
consulting and training services at then current rates.

   On December 16, 1999, NBTel assigned the license agreement to Aliant, and
the license agreement was amended to include a license for our pcVu software
product and to expand the geographic territory of the license to the Provinces
of Nova Scotia, Prince Edward Island and Newfoundland on an exclusive basis.
In connection with the assignment and amendment, Aliant agreed to pay us cash
consideration amounting to C$900,000, of which C$500,000 was recognized as
revenue upon delivery of our pcVu software in February 2000, C$200,000 was
recognized as revenue when it became due on January 31, 2001, and the
remaining C$200,000 was recognized as revenue when it became due on January
31, 2002. As of February 28, 2002, the final payment of C$200,000 was
outstanding. Under the amended agreement, the future one-time per subscriber
payments based on the number of subscribers also applies to subscribers in
Nova Scotia, Prince Edward Island and Newfoundland. In accordance with the
amended agreement, MTT, the incumbent local exchange carrier in the Province
of Nova Scotia and a subsidiary of Aliant, has licensed and has commercially
deployed DTV Manager.

                                      56
On January 16, 2001, the license agreement was further amended to include a
sale of 40,000 subscriber-based licenses for C$3.2 million. C$1.6 million was
recognized in February 2001 as it became due and C$1.6 million was recognized
in February 2002 when it became due. As of February 28, 2002, all payments
were received.

   In the year-ended February 28, 2002, we recorded revenues from Aliant
totalling $109,000 in license fees, $1.0 million in one-time per subscriber
royalty payments, and $174,000 in services revenues.

   In addition, we have supplied NBTel and Aliant with set-top boxes at little
or no mark-up above our cost. We received revenues of $462,000 in fiscal 1999,
$180,000 in fiscal 2000, $1.0 million in fiscal 2001 and zero in fiscal 2002
from the sales of set-top boxes to NBTel and Aliant.

   In November 1999, we entered into a license agreement with Newbridge
Networks Corporation ("Newbridge"), which was then one of our principal
shareholders and is now Alcatel Canada Ltd. Pursuant to this agreement,
Newbridge received a license to use DTV Manager for internal testing purposes
at six technical laboratories. The license also permitted Newbridge to use DTV
Manager in sales and marketing demonstrations of its hardware products. In
exchange for the license, we received switching equipment from Newbridge that
enables the prioritized transmission of voice, Internet and television data in
high-speed, networked environments. We have used this equipment for research
and development purposes. The transaction was recorded at the fair value of
the equipment, which amounted to $102,000. In connection with the transaction,
we recorded license fee revenues for the same amount. In February 2000, we
amended the license agreement to provide Newbridge with the opportunity to
purchase additional twelve-month site licenses for demonstration purposes. As
of February 28, 2001 we had received aggregate cash consideration of C$40,000
for these additional licenses and $17,000 for a 90-day trial license. We have
supplied Newbridge with set-top boxes for laboratory test installations at
little or no mark-up above our cost. We received $23,000 in fiscal 2000,
$17,000 in fiscal 2001 and nil in fiscal 2002 from the sales of set-top boxes
to Newbridge.

Financings, Loans and Inter-Company Arrangements

   During the year ended February 28, 2000, the Minister of Economic
Development, Tourism and Culture for the Province of New Brunswick, through an
application filed by Newbridge, indirectly granted us a repayable government
assistance loan in the amount of C$2.6 million and a forgivable loan in the
amount of C$640,000, to assist us in creating research and development
employment in the Province of New Brunswick. The forgivable loan was fully
forgiven and recognized in the statement of operations as forgiveness of debt.
The repayable loan is repayable in annual instalments equal to 1.5% of the
license fee revenues of the immediately preceding year, and the balance, if
any, is due on February 25, 2006. The repayable loan is interest-free until
February 25, 2006 and, if not paid at that date, thereafter will bear interest
at 6.3% per annum. As of February 28, 2002, we have repaid C$145,000 of the
principal of the repayable loan.

   In September 2000, we issued warrants to purchase Common Shares to four of
our principal shareholders at the time and one other shareholder for an
aggregate purchase price of $10,000,000. These warrants were automatically
exercised in October 2000. In accordance with the terms of the warrants, each
warrantholder was entitled to receive upon completion of a sale of Common
Shares to outside investors, for no additional consideration, a number of
shares per warrant which reflected the price paid per Common Share by outside
investors. As a result of the October 2000 sale of Common Shares to America
Online, Inc. and Cisco Systems, Inc. at $11.00 per share, 1.11 Common Shares
per warrant were issued upon exercise of the warrants. This resulted in the
issuance of the following numbers of Common Shares to these four principal
shareholders: 205,157 to Alcatel, 371,001 to Aliant, 126,312 to Celtic House
and 137,727 to Whitecastle.

                                      57
Leases

   The Corporation subleases a portion of its principal executive offices from
NBTel. Of the approximately 25,000 square feet that ImagicTV occupies at its
principal executive offices, it subleases approximately 17,000 square feet
from NBTel at a cost of approximately $222,000 per year. The lease on such
facility is month-to-month.

C. Interests of Experts and Counsel

  Not applicable.

ITEM 8. FINANCIAL INFORMATION

A. Consolidated Statements and Other Financial Information

   For our consolidated financial statements, see "Item 18. Financial
Statements."

   Export sales constitute a significant portion of our total sales volume.
The total volume of export sales from Canada for the fiscal year ended
February 28, 2002 was approximately $2.1 million representing 50% of our total
sales.

   There are currently no outstanding material legal proceedings to which we
are a party or any of our properties is subject, nor do we know of any
material threatened or contemplated proceedings against us.

   We have never declared or paid any cash dividends on our common shares. At
present, we expect to retain future earnings, if any, for use in the operation
and expansion of our business. We do not anticipate that we will pay cash
dividends in the foreseeable future. Any future determination to pay dividends
will be at the discretion of our Board of Directors and will depend upon our
results of operations, capital requirements and other factors as our Board of
Directors considers relevant.

B. Significant Changes

  Since February 28, 2002, there have been no significant changes in our
  financial condition or results of operations.

                                      58
ITEM 9. THE OFFER AND LISTING

A. Offer and Listing Details

  The common shares are registered shares. CIBC Mellon Trust Company acts as
  transfer agent in

   Canada and ChaseMellon Shareholder Services, L.L.C. acts as transfer agent
in the U.S. We first offered our shares through an initial public offering
conducted in November 2000. See "Markets" in "Item 9. The Offer and Listing."
The following tables show for the periods indicated the high and low closing
market prices for trading taking place on both the Nasdaq National Market
("Nasdaq") and the Toronto Stock Exchange ("TSE"):
Year Ended February 28, 2002
                                         --------------------------------------
                                              Nasdaq               TSE
                                         ----------------  --------------------
                                         (in U.S. dollars) (in Canadian dollars)
Share Market Prices
High....................................      $2.88               $4.49
Low.....................................       0.47                0.74
Nasdaq
                         -----------------------------------------------------------
                                                Quarter Ended
                         -----------------------------------------------------------
                         30-Nov-00 28-Feb-01 31-May-01 31-Aug-01 30-Nov-01 28-Feb-02
                         --------- --------- --------- --------- --------- ---------
                                              (in U.S. dollars)
Share Market Prices
High....................  $ 9.00    $ 7.56     $2.88     $1.22     $0.79     $1.06
Low.....................    6.75      2.00      1.18      0.62      0.47      0.74
TSE
                         -----------------------------------------------------------
                                                Quarter Ended
                         -----------------------------------------------------------
                         30-Nov-00 28-Feb-01 31-May-01 31-Aug-01 30-Nov-01 28-Feb-02
                         --------- --------- --------- --------- --------- ---------
                                            (in Canadian dollars)
Share Market Prices
High....................  $14.00    $11.30     $4.49     $1.87     $1.25     $1.74
Low.....................   10.15      3.05      1.75      0.90      0.74      1.18
Nasdaq
                         -----------------------------------------------------------
                                                 Month Ended
                         -----------------------------------------------------------
                         30-Nov-01 31-Dec-01 31-Jan-02 28-Feb-02 31-Mar-02 30-Apr-02
                         --------- --------- --------- --------- --------- ---------
                                              (in U.S. dollars)
Share Market Prices
High....................  $ 0.79    $ 1.02     $1.06     $0.97     $0.97     $1.03
Low.....................    0.52      0.74      0.88      0.82      0.81      0.78
TSE
                         -----------------------------------------------------------
                                                 Month Ended
                         -----------------------------------------------------------
                         30-Nov-01 31-Dec-01 31-Jan-02 28-Feb-02 31-Mar-02 30-Apr-02
                         --------- --------- --------- --------- --------- ---------
(in Canadian dollars)
Share Market Prices
High....................  $ 1.25    $ 1.57     $1.74     $1.55     $1.57     $1.65
Low.....................    0.84      1.18      1.34      1.33      1.25      1.25
Note: The period ending November 30, 2000 began with the inception of our
shares trading after our initial public offering on November 21, 2000.

                                      59
B. Plan of Distribution

  Not applicable.

C. Markets

   Our common shares are listed on The Nasdaq National Market under the symbol
"IMTV" and on

   The Toronto Stock Exchange under the symbol "IMT."

   On March 6, 2002, we received a letter from Nasdaq notifying us that for
the last 30 consecutive trading days the price of our common shares had closed
below the $1.00 minimum per share closing bid price requirement for continued
inclusion on The Nasdaq National Market. If we are not able to demonstrate
compliance with the $1.00 minimum closing bid price requirement by June 4,
2002, Nasdaq will provide written notification that our common shares are
being delisted.

   If we determine that we will not satisfy the $1.00 minimum bid price
requirement for continued inclusion in The Nasdaq National Market by June 4,
2002, we intend to apply to transfer the common shares to The Nasdaq SmallCap
Market where we can maintain our trading symbol and expect to have the same
liquidity afforded by The Nasdaq National Market. To transfer, we must satisfy
the continued inclusion requirements for The Nasdaq SmallCap Market, which
makes available an extended grace period until at least September 3, 2002, for
attaining compliance with the $1.00 minimum closing bid price requirement. We
also may qualify for an additional 180 day grace period beyond September 3,
2002, to attain compliance with the $1.00 bid price requirement. If we submit
a transfer application and pay the applicable listing fees by June 4, 2002,
initiation of the delisting proceedings will be stayed pending the staff's
review of the transfer application.

   There is a risk that our application to transfer to The Nasdaq SmallCap
Market may be denied. If our application is denied, we will have the ability
to appeal the delisting action; however, on appeal, management will be
required to present a compelling case to the Listing Qualifications Panel as
to why the delisting should not proceed.

   We are currently in compliance with all listing requirements on The Toronto
Stock Exchange and expect to remain so in the foreseeable future.

D. Selling Shareholders

  Not applicable.

E. Dilution

  Not applicable.

F. Expenses of the Issue

  Not applicable.

ITEM 10. ADDITIONAL INFORMATION

A. Share Capital

  Not applicable.

                                      60
B. Memorandum and Articles of Association

  (a) Directors

   There are currently no provisions in the bylaws or articles of
incorporation with respect to the voting power, borrowing ability, mandatory
retirement age, or share ownership requirement for directors. See "Item 6.
Directors and Executive Officers" for further information about the Board of
Directors powers.

  (b) Share Classes

   Holders of common shares are entitled to receive dividends if, as and when
declared by the Board of Directors. The Board of Directors may declare
dividends on the common shares to the exclusion of any other class of shares.
Holders of common shares are entitled to receive notice of and attend all
annual and special meetings of shareholders and to one vote for each share
held.

   Holders of preferred shares will receive the rights and privileges and be
subject to the restrictions and conditions as determined by the Board of
Directors at the time of issuance.

  (c) Change in Shareholder Rights

   Under the Canada Business Corporations Act, a special resolution passed by
the holders of a majority of not less than two-thirds of the common shares
represented in person or by proxy at a duly called meeting of shareholders or
signed by all shareholders is necessary to change the rights attributable to
the common shares.

  (d) Meetings

   Annual general meetings will be called no later than 15 months after the
holding of the preceding annual meeting. The Board of Directors may call a
special meeting of shareholders at any time.

   The annual and special meeting of holders of common shares of ImagicTV Inc.
will be held at the Saint John Trade & Convention Centre, One Market Square,
Saint John, New Brunswick E2L 4Z6 on Thursday, June 27, 2002 at 10:00 a.m.,
Atlantic time.

   The Board of Directors has fixed the close of business on Tuesday, May 21,
2002 as the record date for the determination of the Shareholders entitled to
receive notice of, and to vote at, the meeting.

  (e) Limitations on Ownership

   There are no provisions in the bylaws or articles of incorporation of the
Company regarding limitations on the right to own securities.

  (f) Change of Control

   There are no provisions in the bylaws or articles of incorporation that
would have the effect of delaying, deferring or preventing a change of control
of ImagicTV.

                                      61
(g) Ownership Threshold

   There are no provisions in the bylaws or articles of incorporation
governing the ownership threshold above which shareholder ownership must be
disclosed.

C. Material Contracts

  See "Related Party Transactions" in "Item 7. Major Shareholders and Related
  Party Transactions."

D. Exchange Controls

   There are currently no exchange controls that have a material effect on the
import or export of capital or the remittance of dividends, interest or other
payments to non-resident holders of our securities.

E. Taxation

Certain Canadian and United States Income Tax Considerations

United States Holders

   The following summary discusses the material Canadian federal income tax
and U.S. federal income consequences generally applicable to the acquisition,
ownership and disposition of shares by a U.S. Holder (as defined below):

  .  that is resident in the United States and is not resident in Canada for
     the purpose of the Canada-United States Income Tax Convention (the
     "Treaty");

  .  that otherwise qualifies for full benefits under the Treaty; and

  .  whose shares are not, for purposes of the Treaty, effectively connected
     with a permanent establishment or fixed base in Canada.

   As used herein, a "U.S. Holder" means a beneficial owner of shares that is,
for U.S. federal income tax purposes:

  .  a citizen or individual resident of the United States;

  .  a corporation, including an entity treated as a corporation for the
     United States federal income tax purposes, organized in or under the
     laws of the United States or any state thereof (including the District
     of Columbia);

  .  an estate the income of which is subject to U.S. federal income taxation
     regardless of its source; or

  .  a trust if, in general, the trust is subject to the primary supervision
     of a court within the United States and the control of one or more
     United States persons as described in section 7701(a)(30) of the U.S.
     Internal Revenue Code of 1986, as amended (the "U.S. Internal Revenue
     Code").

                                      62
This summary is based on U.S. and Canadian federal income tax law,
regulations, administrative pronouncements and court decisions, all as of the
date of this annual report and all of which are subject to change or differing
interpretation, possibly with retroactive effect as more fully described
below.

   This summary does not purport to address all aspects of Canadian federal
income and U.S. federal income taxation that may be relevant to a U.S. Holder,
and does not take into account the U.S. federal income tax consequences to
U.S. Holders that may be subject to special rules (including, but not limited
to, tax-exempt entities, U.S. expatriates, financial institutions, insurance
companies, broker-dealers, traders in securities, investors liable for
alternative minimum tax, investors that own (directly, indirectly or by
attribution) 10% or more of our voting shares, investors that hold shares as
part of a straddle, hedging, conversion or integrated transaction, or
investors whose functional currency is not the U.S. dollar). If a partnership
(including an entity treated as a partnership for federal income tax purposes)
holds shares, the United States federal income tax treatment will generally
depend on the status of the partner and the activities of the partnership.
Furthermore, this summary does not address U.S. state, local or other (such as
U.S. estate or gift) or Canadian provincial or territorial tax consequences of
the acquisition, ownership and disposition of shares. Holders of shares should
consult their own tax advisers as to the particular Canadian federal,
provincial and territorial tax and U.S. federal, state and local income and
other tax consequences to them of the acquisition, ownership and disposition
of shares. The summary that follows is generally limited to U.S. Holders that
hold the shares as capital assets for U.S. and Canadian federal income tax
purposes. A share will generally be considered to be a capital asset to a U.S.
Holder (for Canadian tax purposes) unless the holder holds it as inventory in
the course of carrying on a business or acquired it in a transaction or
transactions considered to be an adventure in the nature of a trade.

   In addition, the following summary of Canadian federal income tax
considerations applies only to a U.S. Holder who, for purposes of the Income
Tax Act (Canada) (the "Canadian Act") and at all relevant times, is not
resident or deemed to be resident in Canada, deals at arm's length with
ImagicTV, does not use or hold, and is not deemed to use or hold, the shares
in, or in the course of carrying on, a business or providing independent
personal services in Canada, does not carry on an insurance business in Canada
and elsewhere, and who, for purposes of the Treaty and at all relevant times,
does not own (or is not treated as owning) 10% or more of the outstanding
voting shares of ImagicTV.

Canadian Federal Income Tax Considerations

   This portion of the summary is based upon the current provisions of the
Canadian Act, and the regulations thereunder and an understanding of the
current published administrative practices and policies of the Canada Customs
and Revenue Agency. The summary also takes into account all specific proposals
to amend the Canadian Act and the regulations publicly announced prior to the
date of this annual report (the "Proposed Amendments"), and, while we cannot
assure you that the Proposed Amendments will be enacted as announced, or at
all, this summary assumes that the Proposed Amendments will be enacted
substantially as proposed. This summary does not otherwise take into account
or anticipate any changes in law, whether by way of legislative, judicial or
governmental decision, action or interpretation.

Canadian Federal Taxation of Dividends on Shares

   Dividends, including deemed dividends and stock dividends, paid or credited
on shares owned by a U.S. Holder will be subject to Canadian withholding tax
under the Canadian Act at a rate of 25% on the gross amount of the dividends.
The rate of withholding tax generally is reduced under the Treaty to 15% where
the U.S. Holder is the beneficial owner of the dividends. Under the Treaty,
dividends paid or credited to a U.S. Holder that is a United States tax-exempt
organization as described in Article XXI of the Treaty, other than such
dividends that constitute income from carrying on a trade or business, will

                                      63
generally not be subject to Canadian withholding tax, although such entities
may be subject to administrative procedures to confirm their eligibility to
such exemption.

   Under the Canadian Act, dividends may be deemed to be paid in certain
circumstances. For example, when a corporation redeems or purchases for
cancellation shares of its capital stock, a dividend will be deemed to be paid
in an amount equal to the amount by which the amount paid exceeds the "paid-up
capital" (as defined in the Canadian Act) of the shares so redeemed or
purchased for cancellation. The "paid-up capital" of the shares owned by a
U.S. Holder may be less than the holder's cost of such shares by reason of,
for example, the averaging of the paid-up capital with that of shares of such
class already issued and outstanding. The paid-up capital attributable to each
share will be relevant to the holder of that share in connection with a
purchase for cancellation of that share or upon the winding-up of ImagicTV.

Canadian Federal Taxation on Sale or Other Disposition of Shares

   A gain realized by a U.S. Holder on a disposition or deemed disposition of
shares generally will not be subject to tax under the Canadian Act unless the
shares constitute taxable Canadian property within the meaning of the Canadian
Act. Shares generally will not be taxable Canadian property to a U.S. Holder
if the shares are listed on a prescribed stock exchange at the time of
disposition unless, at any time within the 60-month period immediately
preceding the disposition, the U.S. Holder, persons with whom the U.S. Holder
did not deal at arm's length or the U.S. Holder together with persons with
whom the U.S. Holder did not deal at arm's length owned or had an interest in
or option to acquire 25% or more of the issued shares of any class or series
of ImagicTV's shares. The shares will constitute taxable Canadian property to
a U.S. Holder if at the time of their disposition the shares are not listed on
The Toronto Stock Exchange or another prescribed stock exchange (in this
event, a U.S. Holder would have to comply with notification requirements under
the Canadian Act in respect of the disposition of the shares).

   Even if the shares constitute or are deemed to constitute taxable Canadian
property to a particular U.S. Holder, an exemption from tax under the Canadian
Act may be available under the terms of the Treaty.

United States Federal Income Tax Considerations

Taxation of Dividends

   Subject to the discussion below under "Passive Foreign Investment Company
Considerations," for U.S. federal income tax purposes, a U.S. Holder will
generally include in gross income the amount of a distribution paid by us,
unreduced by the applicable Canadian withholding tax, to the extent paid out
of our current or accumulated earnings and profits (as determined for U.S.
federal income tax purposes), as ordinary dividend income when the
distribution is actually or constructively received by the U.S. Holder. The
dividend will not be eligible for the dividends-received deduction generally
allowed to U.S. corporations in respect of dividends received from other U.S.
corporations. If the dividend distribution is paid in Canadian dollars, the
amount of the dividend includible in the income of a U.S. Holder will be the
U.S. dollar value of the dividend, determined at the spot Canadian dollar/U.S.
dollar rate on the date the dividend is includible in the income of the U.S.
Holder, regardless of whether the payment is in fact converted into U.S.
dollars. A U.S. Holder will have a basis in any Canadian dollar distributed by
us equal to the U.S. dollar value of the Canadian dollar on the date it is
actually or constructively received by the U.S. Holder. Generally, any gain or
loss resulting from currency exchange fluctuations during the period from the
date the dividend payment is includible in income to the date the payment is
converted into U.S. dollars will be treated as ordinary income or loss. Such
gain or loss will generally be income from sources within the United States
for foreign tax credit limitation purposes. Distributions in excess of our
current and accumulated earnings and profits, as determined for U.S. federal
income tax purposes,

                                      64
will be treated as a non-taxable return of capital to the extent of the U.S.
Holder's tax basis in the shares and thereafter as capital gain.

   A U.S. Holder may, subject to certain limitations, be eligible to claim as
a credit or deduction, for purposes of computing its U.S. federal income tax
liability, the Canadian withholding tax paid in respect of dividends from us.
Dividends from us will generally constitute foreign-source income and will
generally be classified as "passive income" or, in the case of certain U.S.
Holders, "financial services income" for purposes of determining the U.S.
foreign tax credit limitation. The calculation of foreign tax credits and, in
the case of a U.S. Holder that elects to deduct foreign taxes, the
availability of deductions, involves the application of complex rules that
depend on a U.S. Holder's particular circumstances. U.S. Holders should
consult their own tax advisers regarding the availability of foreign tax
credits and deductions for such Canadian withholding tax.

Taxation of Capital Gains

   A U.S. Holder will, upon the sale, exchange or other taxable disposition of
a share, recognize a gain or loss for U.S. federal income tax purposes in an
amount equal to the difference between the U.S. dollar value of the amount
realized and the U.S. Holder's tax basis, determined in U.S. dollars, in the
share. In general, such gain or loss will be treated as arising from sources
within the United States for U.S. federal income tax purposes, unless it is
attributable to an office or other fixed place of business maintained by the
U.S. Holder outside the United States and certain other conditions are
satisfied.

   Subject to the discussion below, under "Passive Foreign Investment Company
Considerations," the gain or loss recognized upon the sale of a share will be
a capital gain or loss. The maximum non-corporate U.S. federal income tax rate
on net capital gains is currently 20% for capital assets held for more than
one year. Net capital gains on the sale of capital assets held for one year or
less are subject to U.S. federal income tax at ordinary income tax rates. For
a corporate U.S. Holder, all capital gains are currently taxed at the same
rate as ordinary income. The deductibility of capital losses is subject to
limitations.

   Any tax imposed by Canada directly on the gain from such a sale or other
disposition would generally be eligible for the U.S. foreign tax credit;
however, if such gain were not treated as arising from sources outside the
United States, the U.S. Holder might not be able to use the credit otherwise
available because of the U.S. foreign tax credit limitation rules. The rules
relating to the determination of the U.S. foreign tax credit are complex and
U.S. Holders should consult their own tax advisers with respect to these
rules.

   A U.S. Holder that purchases shares with previously owned foreign currency
generally will recognize ordinary income or loss in an amount equal to any
difference between the U.S. Holder's tax basis in the foreign currency and the
U.S. dollar value of the foreign currency at the spot rate on the date the
shares are purchased. The U.S. Holder's basis in the shares generally will be
equal to the U.S. dollar value of the foreign currency at the spot rate on the
date of the purchase (or, if the shares are traded on an established
securities market, in the case of cash basis and electing accrual basis
taxpayers, the settlement date). A U.S. Holder that receives foreign currency
upon sale or other disposition of the shares will realize an amount equal to
the U.S. dollar value of the foreign currency on the date of the sale or other
disposition (or, if the shares are traded on an established securities market,
in the case of cash basis and electing accrual basis taxpayers, the settlement
date). A U.S. Holder will have a tax basis in the foreign currency received
equal to the U.S. dollar amount realized. Any gain or loss realized by a U.S.
Holder upon a subsequent disposition of foreign currency (including upon an
exchange for U.S. dollars) will be ordinary income or loss.

                                      65
Passive Foreign Investment Company Considerations

   We believe, based on our income, assets and activities, that we should not
be treated as a passive foreign investment company for U.S. federal income tax
purposes for our taxable year ended February 28, 2002 or any preceding taxable
year. However, an actual determination of passive foreign investment company
status is fundamentally factual in nature and it is possible that we could
nonetheless be treated as a passive foreign investment company for U.S.
federal income tax purposes for such taxable year or preceding taxable years.
Further, there can be no assurance that we will not be or become a passive
foreign investment company in the future.

   In general terms, we will be a passive foreign investment company with
respect to a taxable year if either:

  .  75% or more of our gross income in such taxable year is passive income;
     or

  .  the average quarterly percentage of the value of our assets that produce
     or are held for the production of passive income is at least 50%.

   For this purpose, if we own (directly or indirectly) at least 25% (by
value) of the stock of another corporation, we will be treated as if we had
directly received our proportionate share of the gross income of the other
corporation and as if we directly owned our proportionate share of the assets
of the other corporation. In addition, the IRS has indicated that cash
balances, even if held as working capital, are considered to be assets that
produce passive income.

   If we were classified as a passive foreign investment company at any time
during the period in which a U.S. holder owned shares, unless the U.S. Holder
timely made one of specific available elections, a special tax regime would
apply to both:

  .  any "excess distribution," which would be such U.S. Holder's share of
     distributions on the shares in any year that are greater than 125% of
     the average annual distributions on the shares received by the U.S.
     Holder in the three preceding years or the U.S. Holder's holding period
     for the shares, if shorter; and

  .  any gain realized on the sale or other disposition of the shares held by
     the U.S. Holder.

   Under this regime, any excess distribution and any gain so realized would
be treated as ordinary income and would be subject to tax as if:

  .  the excess distribution or gain had been realized ratably over the U.S.
     Holder's holding period;

  .  the excess distribution or gain allocable to prior taxable years in
     which we were classified as a passive foreign investment company had
     been subject to tax at the highest applicable tax rate; and

  .  the interest charge generally applicable to underpayment of tax had been
     imposed on the taxes deemed to have been payable in each of those years
     in which we were classified as a passive foreign investment company.

   In addition, the estate of an individual U.S. Holder who dies while owning
shares may not be eligible to step up the tax basis of the shares.

                                      66
If we are classified as a passive foreign investment company during any
taxable year in which a U.S. holder holds shares, we will continue to be
treated as a passive foreign investment company with respect to such shares in
subsequent taxable years notwithstanding our failure to meet either of the
passive foreign investment company tests in such subsequent years, unless the
U.S. Holder elects to "purge" our passive foreign investment company status by
treating the shares as disposed of in a taxable transaction under the excess
distribution rules described above.

   The foregoing rules with respect to distributions and dispositions may be
avoided if a U.S. Holder is eligible for and timely makes a valid "mark-to-
market" election. If a mark-to-market election is made, the U.S. Holder will,
in general, include as ordinary income each year the excess, if any, of the
fair market value of its shares for that year (measured at the close of the
U.S. Holder's taxable year) over its adjusted tax basis in the shares. The
U.S. Holder will also be allowed an ordinary loss each year of the excess, if
any, of its adjusted tax basis over the fair market value of its shares, but
only to the extent of the net amount of previously included mark-to-market
income as a result of the mark-to-market election. The U.S. Holder's tax basis
in the shares will be adjusted to reflect these income or loss amounts. The
mark-to-market election is made on a shareholder-by-shareholder basis and,
once made, can only be revoked with the consent of the Internal Revenue
Service. Assuming the shares are regularly traded, the mark-to-market election
would be available with respect to the shares.

   Each U.S. Holder is urged to consult its own tax adviser concerning the
potential application of the passive foreign investment company rules to the
U.S. Holder's ownership and disposition of shares.

U.S. Backup Withholding and Information Reporting

   In general, information reporting requirements will apply to dividends in
respect of the shares and the proceeds received on the sale or disposition of
the shares paid within the United States, and in certain cases outside of the
United States, to a U.S. Holder unless the U.S. Holder is an exempt recipient,
such as a corporation, and backup withholding may apply to such amounts if the
U.S. Holder fails to provide an accurate taxpayer identification number or to
report interest and dividends required to be shown on its federal income tax
returns. The amount of any backup withholding from a payment to a U.S. Holder
will be allowed as a credit against the U.S. Holder's U.S. federal income tax
liability.

F. Dividends and Paying Agents

   As noted in "Consolidated Statements and Other Financial Information" in
"Item 8. Financial Information," we have never declared or paid dividends and
do not anticipate paying cash dividends in the foreseeable future.

G. Statement by Experts

  Not applicable.

H. Documents on Display

   We are a reporting company under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Since we are a "foreign private issuer" as
defined in the Exchange Act, we are exempt from the provisions of the Exchange
Act which prescribe the furnishing and content of proxy statements to
shareholders and relating to short swing profits reporting and liability.

   You may review a copy of this annual report, including exhibits and
schedules filed with it, at the SEC's public reference facility in Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.

                                      67
20549. You may also obtain copies of such materials from the Public Reference
Section of the SEC, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. You may call the SEC at 1-800-
SEC-0330 for further information on the public reference rooms. The SEC
maintains a web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC.

   You may read and copy any reports, statements or other information that we
file with the SEC at the addresses indicated above, and you may also access
them electronically at the web site set forth above. These SEC filings are
also available to the public from commercial document retrieval services.

   We are required to file reports and other information with the securities
commission in all provinces of Canada. You are invited to read and copy any
reports, statements or other information, other than confidential filings,
that we file with the provincial securities commissions at their public
reference rooms. These filings are also electronically available from the
Canadian System for Electronic Document Analysis and Retrieval (SEDAR)
(http://www.sedar.com), the Canadian equivalent of the SEC's electronic
document gathering and retrieval system (EDGAR).

   Copies of any documents referred to in this annual filing and filed with
the SEC can be obtained without charge by contacting our Corporate Secretary,
c/o ImagicTV Inc., One Brunswick Square, 14th Floor, Saint John, New
Brunswick, Canada, telephone number: (506) 631-3000. In order to obtain timely
delivery of these documents, you must request this information no later than
seven business days before the date on which you would like to receive the
documents

I. Subsidiary Information

  Not applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   With respect to quantitative information about market risk, we currently do
not use derivative instruments. With respect to qualitative information, see
"Management's Discussion and Analysis--Impact of Foreign Exchange Rate
Exposure and Impact of Interest Rate Exposure" in "Item 5. Operating and
Financial Review and Prospects."

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

  Not applicable.

                                      68
PART II

ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

   Not applicable.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
         PROCEEDS

A.Use of Proceeds

   We completed our initial public offering pursuant to a registration
statement on Form F-1 (File

   No. 333-48452) which was declared effective by the SEC on November 20,
2000. The managing underwriters of the syndicate were Merrill Lynch & Co.,
Chase H & Q and CIBC World Markets. Prior to our initial public offering we
had approximately $22.4 million in cash and cash equivalents. We had $68.6
million in cash and cash equivalents on hand following our initial public
offering and our September and October private placements. The net proceeds
from our initial public offering were $46.2 million. As of May 14, 2002 we had
used approximately $25.2 million of these proceeds for sales and marketing
activities, research and development and for working capital and general
corporate purposes, including severance and other costs related to our
November 2001 restructuring. We expect to continue to use the proceeds in this
way in the future. Pending this use, the proceeds invested in short-term,
interest-bearing, investment-grade securities, certificates of deposit or
direct or guaranteed obligations of Canada or the United States. See
"Developments in Fiscal 2001" in "Item 4. Information on the Company" for
further details.

ITEM 15.[RESERVED]

ITEM 16.[RESERVED]

                                   PART III

ITEM 17.FINANCIAL STATEMENTS

   We have responded to Item 18 in lieu of responding to this Item.

                                      69
ITEM 18.FINANCIAL STATEMENTS

                 INDEPENDENT AUDITORS' REPORT TO SHAREHOLDERS

   We have audited the consolidated balance sheets of ImagicTV Inc. as at
February 28, 2002 and February 28, 2001, and the consolidated statements of
operations, shareholders' equity and cash flows for the years ended February
28, 2002, February 28, 2001 and February 29, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.

   With respect to the consolidated financial statements for the years ended
February 28, 2002, and February 28, 2001, we conducted our audits in
accordance with Canadian generally accepted auditing standards and United
States generally accepted auditing standards. With respect to the consolidated
financial statements for the year ended February 29, 2000, we conducted our
audit in accordance with Canadian generally accepted auditing standards. Those
standards require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation.

   In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at February
28, 2002 and February 28, 2001 and the results of its operations and its cash
flows for the years ended February 28, 2002, February 28, 2001 and February
29, 2000 in accordance with Canadian generally accepted accounting principles.

[LOGO]

Chartered Accountants

Toronto, Canada

March 25, 2002

                                      70
ImagicTV Inc.
                          Consolidated Balance Sheets
            [In thousands of U.S. dollars, except number of shares]
February 28, February 28,
                                                           2001         2002
                                                       ------------ ------------
Assets
Current assets:
  Cash and cash equivalents (note 2)..................   $ 46,414     $ 45,641
  Short-term investments (note 2).....................     14,346          359
  Accounts receivable, trade..........................      4,240          305
  Accounts receivable, trade--related parties.........      1,440          143
  Instalment receivables..............................        705           --
  Inventory...........................................        295           --
  Prepaid expenses, deposits and other receivables....      1,436          904
                                                         --------     --------
Total current assets..................................     68,876       47,352
                                                         --------     --------
Capital assets (note 3)...............................      2,970        2,133
                                                         --------     --------
Total assets..........................................   $ 71,846     $ 49,485
                                                         ========     ========
Liabilities and Shareholders' Equity
Current liabilities:
  Accounts payable....................................   $  1,055     $    667
  Accrued liabilities.................................      2,973          793
  Payable to related parties..........................        850          290
  Deferred revenue....................................      1,119          437
  Current portion of long-term debt (note 4)..........         72            9
                                                         --------     --------
Total current liabilities.............................      6,069        2,196
                                                         --------     --------
Long-term debt (note 4)...............................      1,577        1,496
                                                         --------     --------
Shareholders' equity (note 5):
  Authorized:
    Unlimited common shares, no par value
    Unlimited preferred shares, no par value
  Issued and outstanding:
    24,669,336 Common Shares
     (February 28, 2001--24,592,624)..................     87,678       85,698
    Nil preferred.....................................         --           --
  Deferred stock-based compensation...................     (2,670)        (393)
  Accumulated deficit.................................    (20,282)     (38,986)
  Cumulative currency translation adjustments.........       (526)        (526)
                                                         --------     --------
Total shareholders' equity............................     64,200       45,793
                                                         --------     --------
Total liabilities and shareholders' equity............   $ 71,846     $ 49,485
                                                         ========     ========
See accompanying notes to the consolidated financial statements

Signed on behalf of the Board of Directors

[LOGO]                                  [LOGO]
Peter G. Jollymore, Chairman            Carey Diamond, Director

                                       71
ImagicTV Inc.
                     Consolidated Statements of Operations
            [In thousands of U.S. dollars, except per share amounts]
Year ended   Year ended   Year ended
                                          February 29, February 28, February 28,
                                              2000         2001         2002
                                          ------------ ------------ ------------
Revenues:
  License fees..........................    $ 1,384      $  4,770     $    631
  Royalty fees..........................         --         1,288        1,197
  Services..............................        393         1,791        2,387
  Equipment.............................        321         1,150           --
                                            -------      --------     --------
Total revenues..........................      2,098         8,999        4,215
                                            -------      --------     --------
Cost of revenues:
  Services..............................        657         2,379        2,603
  Equipment.............................        331         1,068           --
                                            -------      --------     --------
Total cost of revenues..................        988         3,447        2,603
                                            -------      --------     --------
Gross profit............................      1,110         5,552        1,612
                                            -------      --------     --------
Operating expenses:
  Sales and marketing...................      2,325         7,763        8,928
  Research and development..............      4,084         7,967        7,151
  General and administrative............        827         2,815        4,582
  Restructuring expense.................         --            --        1,162
                                            -------      --------     --------
Total operating expenses................      7,236        18,545       21,823
                                            -------      --------     --------
Loss from operations....................     (6,126)      (12,993)     (20,211)
Interest income, net....................        121         1,133        1,656
Forgivable government assistance (note
 4).....................................        434            --           --
Foreign exchange gain (loss)............        (31)          426          (28)
                                            -------      --------     --------
Loss before provision for income taxes..     (5,602)      (11,434)     (18,583)
Provision for income taxes (note 7).....        (44)          (24)        (121)
                                            -------      --------     --------
Net loss................................    $(5,646)     $(11,458)    $(18,704)
                                            =======      ========     ========
Basic and diluted net loss per share
 (note 10)..............................    $ (0.40)     $  (0.58)    $  (0.76)
                                            =======      ========     ========
Weighted average number of shares used
 in computing basic and diluted net loss
 per share (000s).......................     13,968        19,796       24,606
See accompanying notes to the consolidated financial statements

                                       72
ImagicTV Inc.

                Consolidated Statements of Shareholders' Equity
                         (In thousands of U.S. dollars)
Deferred Stock-             Cumulative
                         Common Shares        Based                   Currency       Total
                         --------------  Compensation on Accumulated Translation Shareholders'
                         Number Amount    Stock Options    Deficit   Adjustment     Equity
                         ------ -------  --------------- ----------- ----------- -------------
Balances, February 28,
 1999................... 11,131 $ 5,658      $   --       $ (3,178)     $  13       $ 2,493
 Net loss...............     --      --          --         (5,646)        --        (5,646)
 Reporting currency
 translation
 adjustments............     --      --          --             --         28            28
 Issuance of shares for
 cash...................  6,418   8,831          --             --         --         8,831
                         ------ -------      ------       --------      -----       -------
Balances, February 29,
 2000................... 17,549  14,489          --         (8,824)        41         5,706
 Net loss...............     --      --          --        (11,458)        --       (11,458)
 Amortization of
 deferred stock-based
 compensation...........     --      --         550             --         --           550
 Deferred stock-based
 compensation...........     --   3,220      (3,220)            --         --            --
 Reporting currency
 translation
 adjustments............     --      --          --             --       (567)         (567)
 Issuance of shares for
 cash...................  7,044  69,969          --             --         --        69,969
                         ------ -------      ------       --------      -----       -------
Balances, February 28,
 2001................... 24,593  87,678      (2,670)       (20,282)      (526)       64,200
 Net loss...............     --      --          --        (18,704)        --       (18,704)
 Amortization of
 deferred stock-based
 compensation...........     --      --         317             --         --           317
 Deferred stock-based
 compensation...........     --  (1,960)      1,960             --         --            --
 Issuance of shares for
 cash...................     76     (20)         --             --         --           (20)
                         ------ -------      ------       --------      -----       -------
Balances, February 28,
 2002................... 24,669 $85,698      $ (393)      $(38,986)     $(526)      $45,793
                         ====== =======      ======       ========      =====       =======
See accompanying notes to consolidated financial statements

                                       73
ImagicTV Inc.
                     Consolidated Statements of Cash Flows
                         (In thousands of U.S. dollars)
Year Ended   Year Ended   Year Ended
                                         February 29, February 28, February 28,
                                             2000         2001         2002
                                         ------------ ------------ ------------
Cash flows from operating activities:
  Net loss..............................   $(5,646)     $(11,458)    $(18,704)
  Items not involving cash:
    Depreciation and amortization.......       483         1,169        1,864
    Non-monetary transaction (note
     9(b))..............................      (102)           --           --
    Stock-based compensation............        --           550          317
    Write-down of capital assets on
     restructuring......................        --            --          211
  Change in operating assets and
   liabilities:
    Accounts receivable, trade..........    (1,160)       (2,893)       3,935
    Accounts receivable, trade--related
     parties............................      (312)         (748)       1,297
    Instalment receivables..............        --          (979)         705
    Inventory...........................       234          (302)         295
    Prepaid expenses, deposits, and
     other receivables..................     1,052        (1,281)         532
    Accounts payable and accrued
     liabilities........................       289         3,510       (2,568)
    Due to related parties..............       286           556         (560)
    Deferred revenue and customer
     deposits...........................     1,099          (238)        (683)
                                           -------      --------     --------
  Cash used in operating activities.....    (3,777)      (12,114)     (13,359)
                                           -------      --------     --------
Cash flows from investing activities:
  Purchases of capital assets...........      (992)       (2,964)      (1,237)
  Sale (purchase) of short-term
   investments, net.....................        --       (14,346)      13,987
                                           -------      --------     --------
  Cash from (used in) investing
   activities...........................      (992)      (17,310)      12,750
                                           -------      --------     --------
Cash flows from financing activities:
  Issuance of common shares, net of
   share issue costs....................     8,831        69,969          (20)
  Proceeds (repayment) of long-term
   debt.................................     1,763           (20)        (144)
                                           -------      --------     --------
  Cash from (used in) financing
   activities...........................    10,594        69,949         (164)
                                           -------      --------     --------
Effect of foreign currency exchange
 adjustments............................       (32)         (507)          --
                                           -------      --------     --------
Increase (decrease) in cash and cash
 equivalents............................     5,793        40,018         (773)
Cash and cash equivalents, beginning of
 year...................................       603         6,396       46,414
                                           -------      --------     --------
Cash and cash equivalents, end of year..   $ 6,396      $ 46,414     $ 45,641
                                           =======      ========     ========
Supplemental cash flow information:
  Cash paid for taxes...................   $    44      $     37     $    125
  Cash received for interest............   $    --      $    697     $  2,052
See accompanying notes to consolidated financial statements

                                       74
ImagicTV Inc.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        (in thousands of U.S. dollars)

ImagicTV Inc. was incorporated on December 24, 1997 and commenced operations
on January 5, 1998. ImagicTV develops and licenses infrastructure software
products and provides related services that enable telephone companies and
other service providers to deliver multi-channel digital television and
interactive media services to their subscribers' televisions and personal
computers over a broadband network.

1.Significant accounting policies:

   These financial statements are stated in U.S. dollars, except as otherwise
noted. They have been prepared in accordance with accounting principles
generally accepted in Canada which, except as disclosed in note 12, conform in
all material respects with accounting principles generally accepted in the
U.S.

  (a)Consolidation:

      These consolidated financial statements include the accounts of
    ImagicTV Inc. and its wholly owned subsidiaries, iMagicTV (US), Inc.,
    and iMagicTV (UK) Limited. All intercompany transactions and balances
    are eliminated on consolidation.

  (b)Currency translation:

      The functional currency of ImagicTV is the U.S. dollar. Transactions
    of the Canadian parent company and fully integrated foreign subsidiaries
    which are denominated in currencies other than the U.S. dollar are
    translated into U.S. dollars using the temporal method. Exchange gains
    and losses arising from these transactions are included in the results
    of operations for the year. Transactions of foreign subsidiaries which
    are considered self-sustaining, and therefore the functional currency is
    the local currency, are translated using the current rate method and
    resulting exchange gains and losses are recorded as Cumulative Currency
    Translation Adjustments in Shareholders' Equity.

  (c)Use of estimates:

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

  (d)Cash and cash equivalents and short-term investments:

      All highly liquid investments, with an original term to maturity of
    three months or less at the time of purchase, are classified as cash
    equivalents. Investments with a term to maturity of more than three
    months but less than one year are classified as short-term investments.

  (e)Inventory:

      Inventory is recorded at the lower of cost, determined on an average
    cost basis, and net realisable value.

                                      75
ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

  (f)Capital assets:

      Capital assets are stated at cost, net of accumulated depreciation and
    amortisation, and, other than leasehold improvements, are depreciated
    over their estimated useful lives. Leasehold improvements are recorded
    at cost and are amortized over the lesser of their useful lives or the
    term of the related lease. Expenditures for maintenance and repairs have
    been charged to the statements of operations as incurred.

    Depreciation and amortisation are computed using the straight-line
    method as follows:
Computer hardware              2 years
                Office furniture and equipment 5 years
                Leasehold improvements         Term of lease
                Software licenses              2 years
ImagicTV regularly reviews the carrying values of its capital assets
    by comparing the carrying amount of the asset to the expected
    undiscounted future cash flows to be generated by the asset. If the
    carrying value exceeds the undiscounted future cash flows, a write-down
    is charged to the statement of operations for the excess. During the
    year-end February 28, 2002, ImagicTV recorded a write-down of capital
    assets as part of the restructuring plan discussed in note 6.

  (g)Revenue recognition:

      ImagicTV's revenues are derived primarily from license fees (which
    include installation), royalty fees and service elements. Service
    elements, which include maintenance and technical support, training,
    consulting and other services, are not essential to the functionality of
    ImagicTV's licensed products.

      In cases where ImagicTV sells a multi-element arrangement, the fees
    are allocated to the elements based on ImagicTV-specific objective
    evidence of each element's fair value. Vendor-specific objective
    evidence used in determining the fair value of license revenues is based
    on the price charged by ImagicTV when the same element is sold
    separately to a customer of a similar size and nature. Vendor-specific
    objective evidence used in determining the fair value of training,
    consulting and other services is based on the standard daily rates per
    diem for the type of service being provided multiplied by the estimated
    time to complete the task. Vendor-specific objective evidence used in
    determining the fair value of maintenance and technical support is based
    on the annual renewal rates. Fees related to the delivery of multi-
    element arrangements are non-refundable.

      For arrangements where ImagicTV cannot establish vendor-specific
    objective evidence of fair value for the delivered license portion of
    the arrangement, ImagicTV uses the residual method to recognize revenue.
    Under the residual method, for arrangements where ImagicTV can establish
    vendor-specific objective evidence for all undelivered elements, which
    are typically service and maintenance, ImagicTV allocates that value to
    the revenue relating to the undelivered elements and records the
    remaining value of the contract as license revenue.

                                      76
ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

      Revenues from product elements consist primarily of license and
    royalty fees. Up front licence fees are recognized when a contract with
    a customer has been executed, delivery and acceptance of the software
    have occurred, the license fee is fixed and determinable, and collection
    of the related receivable is deemed probable by management. Royalty fees
    are either in the form of a non-refundable one-time royalty payment for
    a preset number of subscribers, a one-time per subscriber activation
    royalty payment or a monthly royalty fee based upon the number of active
    subscribers at the end of each month. Non refundable one-time royalty
    payments for a fixed number of subscribers are recorded as revenue when
    it is determined that the software has been delivered and accepted, the
    collection of the amount is probable and ImagicTV has no further
    obligations related to the provision of the royalty license. One-time
    royalty activation payments are recognized quarterly based on the net
    increase in the number of subscribers at the end of each quarter.
    Monthly royalty fees are recognized monthly based on the number of
    active subscribers at the end of each month.

      Service revenues from training, consulting and other services are
    recognized when the services are performed. Losses on professional
    services contracts, if any, are recognized at the time such losses are
    identified.

      Maintenance and technical support revenues paid in advance are non-
    refundable and are recognized ratably over the terms of the agreements,
    which are typically 12 months.

      Product, service and equipment revenues that have been prepaid but do
    not yet qualify for recognition as revenue under ImagicTV's revenue
    recognition policy are reflected as deferred revenues on ImagicTV's
    balance sheet.

      Product revenues that have been recognized as revenues under
    ImagicTV's revenue recognition policy but for which the cash proceeds
    are not yet due are reflected as instalment receivables. Instalment
    receivables primarily represent future instalment payments on license
    fee revenue, which are due within 12 months from the balance sheet date.

  (h)Research and development expenses:

      Costs related to research, design and development of software products
    are charged to research and development expenses as incurred. Software
    development costs are capitalized beginning when a product's
    technological feasibility has been established, which generally occurs
    upon completion of a working model, and ending when a product is
    available for general release to customers. To date, completing a
    working model of ImagicTV's product and the general release of the
    product have substantially coincided. As a result, ImagicTV has not
    capitalized any software development costs since such costs have not
    been significant.

  (i)Investment tax credits:

      ImagicTV is entitled to Canadian federal and provincial investment tax
    credits which are earned as a percentage of eligible research and
    development expenditures incurred in each taxation year. Investment tax
    credits are available to be applied against future tax liabilities,
    subject to a 10-year carry-forward period. Investment tax credits are
    accounted for as a reduction of the related expenditure for items of a
    current nature and a reduction of the related asset cost for items of a
    long-term nature, provided that ImagicTV has reasonable assurance that
    the tax credits will be realized. To date, no investment tax credits
    have been recognized.

                                      77
ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

(j) Income taxes:

  Income taxes are accounted for under the asset and liability method of
  accounting for income taxes. Under the asset and liability method, future
  tax assets and liabilities are recognized for the future tax consequences
  attributable to differences between the financial statement carrying
  amounts of existing assets and liabilities and their respective tax basis
  and operating loss and tax credit carryforwards. Future tax assets and
  liabilities are measured using enacted or substantively enacted tax rates
  expected to apply when the asset is realized or the liability is settled.
  The effect on future tax assets and liabilities of a change in tax rates is
  recognized in income in the period that substantive enactment or enactment
  occurs. A substantive enacted rate is only used when the proposed tax rate
  change is specified in sufficient detail to be understood and applied in
  practice and has been drafted and tabled in legislative or regulatory form
  with the appropriate governing bodies.

(k) Stock-based compensation:

  ImagicTV uses the intrinsic value method to account for its stock-based
  employee compensation plan. As such, deferred stock-based compensation is
  recorded if it is determined that, on the date of grant, the fair market
  value of the underlying common share exceeds the exercise price per share.
  Deferred stock-based compensation is recognized as an expense over the
  vesting period of the option. Stock options granted to consultants and
  other non-employees are accounted for using the fair value method. Under
  this method, options granted are recognized at their fair value as services
  are performed and options are earned.

(l) Fair value:

  Financial instruments consist of cash and cash equivalents, short-term
  investments, accounts receivable, trade accounts receivable for trade-
  related parties, instalment receivables, accounts payable, payable to
  related parties and accrued liabilities. The carrying values for these
  financial instruments approximate their fair values due to the relatively
  short periods to maturity of the instruments. In addition, the carrying
  value of long-term debt obligation approximates its fair values. ImagicTV
  determines the fair value of its financial instruments based on quoted
  market values or discounted cash flow analyses for instruments having
  similar terms and financing characteristics.

(m) Concentration of credit risk:

  Financial instruments that potentially expose ImagicTV to concentrations of
  credit risk consist primarily of cash and cash equivalents, short-term
  investments, accounts receivable trade and instalment receivables. Cash and
  cash equivalents consist primarily of deposits with major commercial banks
  and highly liquid investments, the maturities of which are three months or
  less from the date of purchase. ImagicTV performs periodic credit
  evaluations of the financial condition of its customers.

   Short-term investments consist primarily of high-grade fixed income
securities with maturities of more than three months but less than one year.

   At February 28, 2002, 96% of the accounts receivable were concentrated with
two customers. At February 28, 2001, 77% of the accounts receivable were
concentrated with five customers. Allowances are maintained for potential
credit losses consistent with the credit risk of specific customers.

                                      78
ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

2. Cash and cash equivalents and short-term investments:

   All short-term debt securities are classified as held to maturity because
ImagicTV has the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at amortized cost, adjusted
for amortisation of premiums and accretion discounts to maturity. ImagicTV
owns no short-term investments that are considered to be trading securities
nor available for sale securities.

   The components of cash and cash equivalents and short-term investments are
summarized as follows (in thousands):
February 28, February 28,
                                                           2001         2002
                                                       ------------ ------------
Cash and cash equivalents:
 Cash.................................................   $ 1,332      $ 1,891
 Corporate commercial paper...........................        --        1,051
 Short-term debt securities...........................    45,082       42,699
                                                         -------      -------
 Net book value.......................................   $46,414      $45,641
                                                         =======      =======
Short-term investments:
 Corporate commercial paper...........................   $14,116      $    --
 Term deposit.........................................       230          359
                                                         -------      -------
Net book value........................................   $14,346      $   359
                                                         =======      =======
3. Capital assets:
February 28, February 28,
                                                           2001         2002
                                                       ------------ ------------
Computer hardware.....................................    $2,156       $2,177
Office furniture and equipment........................     1,419        1,299
Leasehold improvements................................       300          419
Software licenses.....................................       427          751
                                                          ------       ------
                                                           4,302        4,646
Less: accumulated depreciation and amortisation.......     1,332        2,513
                                                          ------       ------
Net book value........................................    $2,970       $2,133
                                                          ======       ======
79
ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

4. Long-term debt:

   During the year ended February 29, 2000, ImagicTV, through an application
filed by Newbridge Networks Corporation (now Alcatel Canada Ltd.) (an ImagicTV
shareholder), was granted a government assistance loan ("Repayable Loan") in
the amount of $1,766,000 and a forgivable loan ("Forgivable Loan") in the
amount of $434,000 by the Government of the Province of New Brunswick, Canada,
to assist ImagicTV in creating research and development employment in New
Brunswick. The Forgivable Loan was fully forgiven as advanced and recognized
in the statement of operations as forgivable government assistance. The
Repayable Loan is unsecured and repayable in annual instalments equal to 1.5%
of the license fee revenues of the immediately preceding year, and the
balance, if any, is due on February 25, 2006. The Repayable Loan is interest-
free until February 25, 2006 and, if not paid at that date, thereafter will
bear interest at 6.3% per annum. In addition, the Repayable Loan is subject to
accelerated repayment if the total number of full-time employees employed in
the Province of New Brunswick falls below 92 at any time during the year ended
February 28, 2002. As at February 28, 2002, the number of full-time employees
employed in the Province of New Brunswick, being approximately 106, exceeded
the prescribed amounts.

5. Shareholders' equity:

  (a) Description of shares:

    Common Shares

    Each outstanding common share is entitled to one vote at shareholder
    meetings and is entitled to receive dividends if, as, and when declared
    by the Board of Directors. Subject to the rights of holders of shares of
    any class-ranking senior to the common shares, holders of common shares
    are entitled to receive the remaining property or assets of ImagicTV in
    the event of liquidation, dissolution or winding-up. The common shares
    have no pre-emptive, redemption or conversion rights.

    Preferred Shares

    The Board of Directors has the authority, without further action by the
    shareholders, to issue an unlimited number of preferred shares in one or
    more series. These preferred shares may be entitled to dividend and
    liquidation preferences over the common shares. The board will be able
    to fix the designations, powers, preferences, privileges and relative,
    participating, optional or special rights of any preferred shares
    issued, including any qualifications, limitations or restrictions.
    Special rights which may be granted to a series of preferred shares may
    include dividend rights, conversion rights, voting rights, terms of
    redemption and liquidation preferences, any of which may be superior to
    the rights of the common shares.

  (b) Common share issuances:

    (i)   On December 17, 1999, ImagicTV issued 3,808,146 common shares to a
          group of investors for cash consideration, net of costs, of
          $6,144,000.

    (ii)  During the year ended February 29, 2000, ImagicTV issued an
          aggregate of 791,694 common shares to employees for total cash
          consideration, net of costs, of $1,011,000.

                                      80
ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

    (iii)  During the year ended February 29, 2000, pursuant to the Pre-
           emptive Rights granted to the shareholders of ImagicTV in the
           Shareholders' Agreement, the Company issued 1,818,261 common
           shares for cash consideration of $1,676,000.

    (iv)   In July 2000, ImagicTV's Board of Directors authorized a private
           placement of up to $25,000,000, of which $10,000,000 was reserved
           for specified existing shareholders. On September 19, 2000,
           ImagicTV issued warrants to purchase common shares to five
           existing shareholders for a total cash consideration of
           $10,000,000. In October 2000, in connection with the additional
           private placements described in (v) below, the share purchase
           warrants were converted into 909,061 common shares.

    (v)    In October 2000, ImagicTV issued 272,719 common shares to America
           Online, Inc. for aggregate proceeds of $3,000,000 and 1,090,875
           common shares to Cisco Systems, Inc. for aggregate proceeds
           of $12,000,000.

    (vi)   On November 21, 2000, ImagicTV completed its initial public
           offering of 4,750,000 common shares for net proceeds of
           $46,200,000. In connection with the initial public offering, all
           of ImagicTV's outstanding Class A common shares, Class B common
           shares and Class C common shares were converted into a single new
           class of common shares on a one-for-one basis. In addition,
           ImagicTV effected a share split on a 1.1636-for-1 basis. ImagicTV
           also created a class of preferred shares issuable in series, none
           of which have been issued. ImagicTV's share capital and earnings
           (loss) per share have been restated on a retroactive basis to
           give effect to the conversion of the shares to a single new class
           of common shares and the share split.

    (vii)  During the year ended February 28, 2001 ImagicTV issued 21,382
           common shares to employees on the exercise of options for cash
           consideration of $18,000.

    (viii) During the year ended February 28, 2002 ImagicTV issued 76,712
           common shares to employees on the exercise of options for cash
           consideration of $54,000.

  (c) Stock option plan:

    On December 17, 1999, ImagicTV established a Share Option Plan (the
    "1999 Plan"). The 1999 Plan allows for the granting of options to
    acquire common shares to employees, consultants and directors of
    ImagicTV and its affiliates. Options granted under the 1999 Plan have a
    maximum term of seven years and an exercise price per share of no less
    than the fair market value of the common shares as determined by the
    Board of Directors on the date of the option grant. The options vest
    annually over four years. ImagicTV has reserved 3,511,825 common shares,
    for issuance under the 1999 Plan, provided that the Board of Directors
    has the right to increase the number of shares reserved.

    ImagicTV's Board of Directors adopted a new share option plan on
    November 9, 2000 (the "2000 Plan"). The 2000 Plan does not affect
    options granted under its 1998 or 1999 Plans. No new options will be
    granted under the 1998 or 1999 Plans. The compensation committee of
    ImagicTV's Board of Directors administers the 2000 Plan and determines,
    among other things, the persons eligible to participate in the 2000 Plan
    and the vesting periods and other attributes of individual options. The
    2000 Plan provides for the grant of options to employees, officers and
    directors of, and consultants to, ImagicTV and its affiliates.

                                      81
ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

   Options held by any person under the 2000 Plan, together with any new
options granted to that person, may not at any time exceed 5% of the aggregate
number of our common shares outstanding from time to time. The maximum number
of shares issuable under the 2000 Plan is 1,879,185. The options granted under
the 2000 Plan will have a maximum term of 10 years and an exercise price no
less than the fair market value of ImagicTV's common shares on the date of the
grant, or 110% of fair market value in the case of an incentive stock option
granted to an employee who owns common shares having more than 10% of the
combined voting power of the shares outstanding.

   A summary of the status of ImagicTV's options as of February 28, 2002 is as
follows:
Weighted
          Range of         Number      Average Remaining          Number of
       Exercise Prices   of Options Contractual Life (Years) Options Exercisable
       ---------------   ---------- ------------------------ -------------------
$ 0.54--$ 0.62      558,984            3.39                  466,160
       $ 0.73--$ 0.95      762,252            4.78                  362,978
       $ 1.07--$ 2.80    1,193,040            5.36                  423,053
       $ 7.04--$ 11.17     210,599            5.67                   53,883
       ---------------   ---------            ----                ---------
            Total        2,724,875            4.82                1,306,074
       ===============   =========            ====                =========
The following table summarizes options issued:
February 29, 2000          February 28, 2001          February 28, 2002
                          -------------------------- -------------------------- --------------------------
                                         Weighted                   Weighted                   Weighted
                            Number       Average       Number       Average       Number       Average
                          of Options  Exercise Price of Options  Exercise Price of Options  Exercise Price
                          ----------  -------------- ----------  -------------- ----------  --------------
Outstanding, beginning
 of period..............    849,428       $0.64      2,188,155       $0.96       3,565,339      $2.02
Granted.................  1,399,234        1.21      1,588,903        3.51         515,611       1.00
Cancelled...............    (60,507)       0.91       (190,337)       2.30      (1,279,363)      2.30
Exercised...............         --          --        (21,382)       0.80         (76,712)      0.71
                          ---------       -----      ---------       -----      ----------      -----
Outstanding, end of
 period.................  2,188,155       $0.96      3,565,339       $2.02       2,724,875      $1.93
                          =========       =====      =========       =====      ==========      =====
Options exercisable, end
 of period..............    295,205       $0.63        804,960       $0.82       1,306,074      $1.24
                          =========       =====      =========       =====      ==========      =====
To February 28, 2002, all stock options have been granted to employees,
officers and directors of ImagicTV. For the year ended February 28, 2002,
ImagicTV recorded nil deferred stock-based compensation (February 28, 2001--
$3,220,000; February 29, 2000--nil) relating to options issued to employees.
During the year ended February 28, 2002, ImagicTV recorded a recovery of
deferred stock-based compensation of $1,960,000 (February 28, 2001--nil;
February 29, 2000--nil) representing the net book value of options that were
cancelled and not fully vested under ImagicTV's option plan. Amortisation of
deferred stock-based compensation of $317,000 has been recorded as an
operating expense for the year ended February 28, 2002 (February 28, 2001--
$550,000; February 29, 2000--nil).

                                      82
ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)
6. Restructuring charge:

   In response to the continued slowdown in capital spending in the
telecommunications industry and the resulting decrease in ImagicTV's expected
revenues, ImagicTV has undertaken measures to streamline operations. On
November 14, 2001, ImagicTV adopted a restructuring plan, which reduced the
number of global employees, reduced discretionary marketing expenses, and
introduced new tools and processes to increase development productivity and
improve efficiencies in our software demonstration and installation
activities. As a result of these efforts, ImagicTV recorded a restructuring
charge of $1,162,000 in the year ended February 28, 2002, which included
severance related costs for 76 employees and the write-down of excess capital
assets to their net recoverable amounts.

   The following table summarizes the charges:
Cumulative
                                                      drawdown       Provision
                                      Year Ended  -----------------  balance at
                                     February 28,   Cash   Non-cash February 28,
                                         2002     Payments Charges      2002
                                     ------------ -------- -------- ------------
Restructuring charge:
 Severance..........................    $  909      $775     $ --       $134
 Stock-based compensation charges...        42        --       42         --
 Write-down of capital assets.......       211        --      211         --
                                        ------      ----     ----       ----
Total charge........................    $1,162      $775     $253       $134
                                        ======      ====     ====       ====
7. Income taxes:

   The provision for income taxes differs from the amount computed by applying
the statutory income tax rate to loss before provision for income taxes. The
sources and tax effects of the differences are as follows (in thousands):
Fiscal Year Ended
                                            -----------------------------------
                                            29-Feb-2000 28-Feb-2001 28-Feb-2002
                                            ----------- ----------- -----------
Statutory rate applied to loss before
 provision for income taxes................   $(2,583)    $(5,157)    $(8,195)
Adjustments resulting from:
 Change in enacted rates...................        --          --       2,858
 Lower tax rates in other countries........        --          --         (58)
 Stock-based compensation not deducted for
  tax......................................        --         249         140
 Large corporation tax.....................        44          24           7
 Other.....................................        62          62          35
                                              -------     -------     -------
Sub-total..................................    (2,477)     (4,822)     (5,213)
Change in valuation allowance..............     2,521       4,846       5,092
                                              -------     -------     -------
Income taxes...............................   $    44     $    24     $   121
                                              =======     =======     =======
83
ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

   Significant components of ImagicTV's deferred tax assets are as follows (in
thousands):
As at
                                                        -----------------------
                                                        28-Feb-2001 28-Feb-2002
                                                        ----------- -----------
Research and development expenses deferred for income
  tax purposes.........................................   $ 3,911     $ 4,582
 Net operating losses carried forward..................     4,674       9,685
 Share issue costs.....................................     2,419       1,568
 Reserves..............................................        --          32
 Fixed assets..........................................      (229)         --
                                                          -------     -------
Deferred tax assets....................................    10,775      15,867
Less valuation allowance...............................   (10,775)    (15,867)
                                                          =======     =======
Total..................................................   $    --     $    --
                                                          =======     =======
In addition to the above, to the extent that ImagicTV is able to utilize
the research and development expenses that have been deferred for income tax
purposes to reduce taxable income, ImagicTV will have available investment tax
credits of approximately $2,829,000 as at February 28, 2002 and $2,251,000 as
at February 28, 2001 that would be available to reduce income taxes otherwise
payable and which begin expiring in 2010.

   In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realisation of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers projected future taxable income, uncertainties related to the
industry in which ImagicTV operates, and tax planning strategies in making
this assessment. In order to fully realize the deferred tax assets, ImagicTV
will need to generate future taxable income of approximately $42,000,000 prior
to the expiration of the net operating losses carried forward. Due to the
uncertainties related to the industry in which ImagicTV operates and the
uncertainty of generating taxable income prior to the expiration of losses
carried forward, the tax benefit of the above carryforward amounts have been
completely offset by a valuation allowance.

   In accordance with income tax law in Canada, research and development
expenses may be deducted in periods subsequent to the period incurred. The
amounts set out in the table above represent research and development expenses
in the consolidated statement of operations that will be deductible in future
years for income tax purposes.

   As of February 28, 2002, ImagicTV had approximately $25,465,000 of
operating losses carried forward available to reduce future years' taxable
income in Canada. These losses and deductions expire as follows: 2005--
$42,000; 2006--$853,000; 2007--$2,760,000; 2008--$6,180,000; and 2009 -
$15,630,000.

8. Segmented information:

   ImagicTV operates in a single reportable operating segment, that is, to
provide software products to telecommunications companies and other service
providers that enable the delivery of digital broadcast television services to
residential subscribers over high-speed Internet Protocol networks. The single
reportable operating segment derives its revenues from the sale of software
and related services. As of

                                      84
ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

   February 28, 2002, substantially all assets related to ImagicTV's
operations were located in Canada. Revenues are attributable to geographic
location based on the location of the customer, as follows (in thousands):
Fiscal Year Ended
                                          --------------------------------------
                                          February 29, February 28, February 28,
                                              2000         2001         2002
                                          ------------ ------------ ------------
Revenue by geographic location:
 Canada..................................   $ 1,362       $3,757       $2,128
 United States...........................        --        3,699        1,273
 Europe..................................       736        1,543          651
 Asia Pacific............................        --           --          163
                                            -------       ------       ------
                                            $ 2,098       $8,999       $4,215
                                            =======       ======       ======
For the year ended February 28, 2002, Aliant Inc. accounted for
approximately 30% of the total revenues. In addition, two other customers,
Saskatchewan Telecommunications and CenturyTel Service Group, LLC accounted
for 17% and 17%, respectively, of the total revenues. In the year ended
February 28, 2001, Aliant Inc. accounted for approximately 28% of total
revenues. In addition, three other customers, CenturyTel Service Group, LLC,
Nortel Networks Inc. and Boardwalk Equities accounted for 18%, 10% and 10%,
respectively, of total revenues. In the year ended February 29, 2000, Aliant
Inc. (formerly NBTel) accounted for 38% of total revenues. In addition, two
other customers, Kingston Vision and Saskatchewan Telecommunications accounted
for 31% and 16%, respectively, of total revenues.

9. Related-party transactions:

  The nature of the related-party transactions is summarized below:

  (a) NBTel and Aliant Inc.:

      On April 16, 1999, ImagicTV entered into a licensing agreement with
      NBTel, whereby NBTel received a perpetual, non-exclusive license to use
      ImagicTV's product in the Province of New Brunswick for cash
      consideration of C$500,000 ($334,000), and future one-time royalty
      payments based on the number of NBTel subscribers to the service. On
      December 16, 1999, the NBTel license agreement was assigned to Aliant
      Inc. (the parent company of NBTel) and was amended to include a license
      for the pcVu product and to expand the geographic territory of the
      license to include the Provinces of Nova Scotia, Prince Edward Island
      and Newfoundland on an exclusive basis in these provinces. ImagicTV
      received consideration amounting to C$900,000 ($610,000) payable as to
      C$500,000 on January 31, 2000 and C$200,000 payable on each of January
      31, 2001 and 2002. On January 16, 2001, the license agreement was
      further amended to include a sale of 40,000 subscriber-based license
      fees for C$3,200,000, payable in non-refundable instalments of
      C$1,600,000 on January 16, 2001 and C$1,600,000 on February 28, 2002.

      The initial license agreement dated April 16, 1999 included multiple
      elements including the delivery of DTV Manager version 1.0 and DTV
      Manager version 2.0, installation and maintenance and support. For
      accounting purposes, the entire non-refundable

                                      85
ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

      cash consideration was allocated to the various elements based on the
      specific evidence of their values. DTV Manager version 1.0 was
      delivered shortly after the execution of the agreement. DTV Manager
      version 2.0 was not available for delivery at that time. The license
      fee revenue was deferred until November 1999, the date at which
      ImagicTV delivered and installed DTV Manager version 2.0. The
      maintenance fee is being recognized on a straight-line basis over the
      term of the maintenance contract. The future one-time royalty payments
      based on net new subscribers are recognized as earned.

      Of the additional C$900,000 in consideration to be received in
      connection with the Aliant Inc. amendment, C$500,000 was recognized as
      revenue upon the delivery of pcVu in February 2000, C$200,000 was
      recognized as revenue when it became due on January 31, 2001 and the
      remaining C$200,000 was recognized as revenue when it became due on
      January 31, 2002. As of February 28, 2002, the final payment of
      C$200,000 was outstanding.

      Of the C$3,200,000 for the sale of 40,000 subscriber based licence
      fees, C$1,600,000 was recognized in February 2001 as it became due and
      C$1,600,000 was recognized in February 2002 when it became due. As of
      February 28, 2002, all payments were received.

      ImagicTV also sells set-top boxes, at little or no mark-up, to NBTel
      and Aliant for distribution to their subscribers. Revenue related to
      the sale of set-top boxes to NBTel amounted to $180,000 for the year
      ended February 29, 2000, $1,039,000 for the year ended February 28,
      2001, and nil for the year ended February 28, 2002.

      ImagicTV reimburses NBTel for certain operating expenses incurred on
      its behalf, including premises rent, communications, and corporate
      services.

  (b) Newbridge Networks Corporation (now Alcatel Canada Ltd.):

      In November 1999, ImagicTV entered into an agreement with a
      shareholder, Newbridge Networks Corporation ("Newbridge"), whereby
      Newbridge received a license to use ImagicTV's product for
      demonstration purposes in exchange for equipment supplied by Newbridge.
      The transaction was recorded at the fair value of the equipment
      received from Newbridge amounting to $102,000. In connection with this
      transaction, ImagicTV recorded license revenues in the same amount.

      In February 2000, ImagicTV entered into an amendment to the above
      agreement, which provided Newbridge with additional licences to use
      ImagicTV's product for demonstration purposes. The term of the
      additional site licences were one year, expiring on February 7, 2001.
      As of February 28, 2001, ImagicTV sold additional licenses to Newbridge
      for aggregate cash consideration of $40,000.

      In June 2000, ImagicTV provided Newbridge with a 90-day trial license
      for $17,000 that was used for demonstration purposes.

      ImagicTV has also supplied Newbridge with set-top boxes at little or no
      mark-up above cost.

  (c) America Online, Inc. and CISCO Systems Inc.:

      In October 2000, ImagicTV entered into a memorandum of understanding
      with America Online agreeing to provide America Online with up to
      $3,000,000 in research and

                                      86
ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

  development services, calculated at ImagicTV's commercial rates for
  consulting and development services and based on pricing and other terms no
  less favourable than that received by any third-party. Of this amount,
  ImagicTV is obligated to expend $500,000 to conduct investigative research
  and development to be specified by the parties.

  The obligation to perform the remaining $2,500,000 in services for
  continued research and development is contingent upon America Online
  entering into a trial or commercial license with ImagicTV for its software.
  To date, ImagicTV had not entered into any licensing arrangements or
  agreements with America Online. The memorandum of understanding does not
  contain any contractual commitment that would require ImagicTV to license
  its software to America Online. America Online and ImagicTV are to
  negotiate in good faith the ownership and licensing rights of the
  intellectual property resulting from any research and development
  activities. At the date of these financial statements, ImagicTV had not
  entered into any agreements in this regard with America Online.

  The common shares issued to America Online (note 5(v)) do not contain any
  terms or conditions, including any put or redemption rights, that would
  cause ImagicTV to repay or refund any of the proceeds received for the
  common shares sold to America Online. Moreover, there are no contractual
  commitments that would require ImagicTV to pay or refund America Online any
  cash or other consideration if ImagicTV failed to perform under the
  memorandum of understanding or if America Online failed to take advantage
  of ImagicTV's commitment to provide services under the memorandum of
  understanding.

  In connection with ImagicTV's private placement to Cisco Systems, it
  granted Cisco Systems a right of first negotiation. Pursuant to this right
  of first negotiation, if ImagicTV's Board of Directors receives a bona fide
  offer to acquire ImagicTV or all or substantially all of ImagicTV's assets
  from any of three specified entities, or if ImagicTV's Board of Directors
  votes to initiate a sale to any of these three specified entities of 25% or
  more of ImagicTV's total voting equity or all or substantially all of
  ImagicTV's assets, ImagicTV must, within 24 hours, give Cisco Systems
  notice of the terms of the sale proposal. After ImagicTV delivers this
  notice, Cisco Systems will have ten days to submit a proposal to ImagicTV's
  Board of Directors to acquire ImagicTV at a price to be set out in the
  proposal. Accordingly, under the limited circumstances described above,
  Cisco Systems has been granted an option to make an offer to acquire
  ImagicTV. If ImagicTV's Board of Directors decides to pursue Cisco Systems'
  proposal, ImagicTV has agreed to negotiate in good faith exclusively with
  Cisco Systems for a period of ten days. However, (a) if Cisco Systems does
  not submit a proposal within ten days of receipt of ImagicTV's notice, (b)
  if Cisco Systems' proposal is not pursued by ImagicTV's Board of Directors
  or (c) if Cisco Systems and ImagicTV fail to mutually agree on the terms of
  a transaction, then the right of first negotiation expires as to that
  proposal, and ImagicTV can negotiate and enter into a definitive agreement
  with the entity that made the initial proposal. Further, this right of
  first negotiation terminates (1) in the event that Cisco Systems owns less
  than 50% of the common shares it purchased on October 6, 2000 or (2) upon
  the date of the closing of the acquisition of all or substantially all of
  ImagicTV's assets or an acquisition of ImagicTV by another entity in which
  the holders of ImagicTV's outstanding voting equity immediately prior to
  the transaction own, immediately after the transaction, securities
  representing less than 50% of the voting equity of the surviving entity.

                                      87
ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

(d) Innovatia Inc.:

    In December 2000, ImagicTV entered into an agreement with Innovatia Inc.,
    a wholly owned subsidiary of Aliant Inc. According to this agreement,
    Innovatia was to provide ImagicTV with consulting services by utilizing
    Innovatia's Living Lab environment to assist in the development, marketing
    and sale of ImagicTV products and create an environment in the Living Lab
    for ImagicTV to test new services in a production environment. ImagicTV's
    commitment was to pay C$50,000 per month from December 2000 to May 2001
    with the option to renew for a further 6 months. For the year ended
    February 28, 2001, ImagicTV recorded an expense of C$150,000 in relation
    to this agreement.

    During the year ended February 28, 2002, ImagicTV elected to renew the
    agreement for a further six months, extending it to November 30, 2001. For
    the year ended February 28, 2002, ImagicTV recorded an expense of
    C$450,000 in relation to this agreement.

    The following table summarizes the related party transactions and balances
    (in thousands):
Fiscal Year Ended
                                          --------------------------------------
                                          February 29, February 28, February 28,
                                              2000         2001         2002
                                          ------------ ------------ ------------
Related party transactions:
   Revenues License fees.................     $671        $ 116        $ 109
   Royalty fees..........................       --        1,249        1,001
   Services..............................      110          168          299
   Equipment.............................      205        1,052           --
   Operating expenses....................      469          805        1,029
   Interest income.......................       87           --           --
As of
                                                   -----------------------------
                                                   February 28, February 28,
                                                       2001         2002
                                                   ------------ ------------
Related party balances:
   Accounts receivable, trade.....................    $1,440        $143
   Deferred revenues..............................        27         219
   Accounts payable...............................       850         290
88
ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

10. Loss per share:

   Loss per share has been calculated based on the weighted average number of
common shares outstanding. Due to the net loss for all periods presented, all
potential common shares outstanding are considered anti-dilutive and are
excluded from the calculation of diluted loss per share. Common shares
issuable on the exercise of share options, that could potentially dilute basic
loss per share in the future, based on the treasury stock method, amounted to
344,000 for the period ended February 28, 2002 (1,649,000--February 28, 2001;
442,000--February 29, 2000).

11. Commitments:

   Future minimum lease payments under non-cancellable operating leases for
premises are as follows (in thousands):
As at
                                                               February 28, 2002
                                                               -----------------
2003..........................................................       $767
2004..........................................................        554
2005..........................................................        560
2006..........................................................        412
2007..........................................................         --
2008 and thereafter...........................................         --
Included in the lease commitments above are amounts related to an operating
lease with a shareholder, NBTel, for office premises. The lease expired on
February 28, 2001 and ImagicTV exercised its renewal option of one year.
Rental expense under this lease amounted to $290,000 for the year ended
February 28, 2002, $250,000 for the year ended February 28, 2001, and $270,000
for the year ended February 29, 2000.

12. Canadian and U.S. accounting policy differences:

   The consolidated financial statements of ImagicTV have been prepared in
accordance with generally accepted accounting principles ("GAAP") as applied
in Canada. There are no material measurement differences between Canadian GAAP
and U.S. GAAP that apply to the consolidated financial statements. Additional
disclosures required under U.S. GAAP include the following:

  (a) Other disclosures:

      Included in accrued liabilities at February 28, 2002 are accrued
      vacation pay expenses of $144,000. At February 28, 2001 vacation pay
      expenses of $302,000 and initial public offering costs of $1,401,000
      were included in accrued liabilities.

      Included in general and administrative operating expenses for the year
      ended February 28, 2002 is $856,000 of bad debt expense (nil for the
      year ended February 28, 2001, nil for the year ended February 29,
      2000).

                                      89
ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

  (b) Recent accounting pronouncements:

      In July 2001, the Financial Accounting Standards Board ("FASB") issued
      Statement of Financial Accounting Standard ("SFAS") No. 141, "Business
      Combinations". SFAS No. 141 requires that all business combinations be
      accounted for under the purchase method for business combinations
      initiated after June 30, 2001 for which the date of acquisition is July
      1, 2001 or later. Use of the pooling-of-interests method is no longer
      permitted. In July 2001, the FASB issued SFAS No. 142, "Goodwill and
      Other Intangible Assets". SFAS No. 142 requires that goodwill no longer
      be amortized to earnings, but instead be periodically reviewed for
      impairment. SFAS No. 142 must be adopted starting with fiscal years
      beginning after December 15, 2001. In August 2001, the Accounting
      Standards Board ("AcSB") issued Handbook Section 1581, "Business
      Combinations", and Handbook Section 3062, "Goodwill and Other
      Intangible Assets", which are consistent with SFAS No. 141 and SFAS No.
      142, respectively, except for certain remaining generally accepted
      accounting principles differences, including the accounting for
      purchased in-process research and development. The impact of adopting
      the provision of SFAS No. 141, No. 142 and Section 1581 and 3062 will
      not have any effect on ImagicTV's financial statements as ImagicTV has
      not completed any business combinations since inception.

      In October 2001, the FASB issued SFAS No. 144, "Accounting for the
      Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses
      significant issues relating to the implementation of SFAS No. 121,
      "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
      Assets to be Disposed of", and develops a single accounting method
      under which long-lived assets that are to be disposed of by sale are
      measured at the lower of book value or fair value less cost to sell.
      Additionally, SFAS No. 144 expands the scope of discontinued operations
      to include all components of an entity with operations that (i) can be
      distinguished from the rest of the entity and (ii) will be eliminated
      from the ongoing operations of the entity in a disposal transaction.
      SFAS No. 144 is effective for financial statements issued for fiscal
      years beginning after December 15, 2001 and its provisions are to be
      applied prospectively. ImagicTV is currently assessing the impact of
      SFAS No. 144 on its financial position and results of operations.

      In December 2001, the AcSB issued Handbook Section 3870 "Stock-Based
      Compensation and Other Stock-Based Payments". Section 3870 establishes
      standards for the recognition, measurement, and disclosure of stock-
      based compensation and other stock-based payments made in exchange for
      goods and services provided by employees and non-employees. It applies
      to transactions in which shares of common stock, stock options, or
      other equity instruments are granted or liabilities incurred based on
      the price of common stock or other equity instruments. ImagicTV's
      current accounting policy as it relates to stock-based compensation
      complies with the US GAAP. ImagicTV's current account policy is an
      acceptable method of accounting for stock-based compensation and other
      stock-based payments under Section 3870 and therefore ImagicTV does not
      believe that the adoption of this standard will have a material impact
      on its financial position or results of operations.

                                      90
ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

  (c) SFAS 123 pro forma information:

        SFAS No. 123, "Employee Stock Compensation" encourages, but does not
      require, the recording of compensation costs related to stock options
      granted to employees to be valued at fair value. For companies choosing
      not to adopt the fair value measurement for stock-based compensation,
      the pronouncement requires the disclosure of pro forma net income and
      net income (loss) per share information as if ImagicTV had accounted
      for its stock options issued under the fair value method. ImagicTV has
      elected not to adopt the recording of compensation cost for employee
      stock options at fair value and, accordingly, a summary of the pro
      forma impact on the statement of operations granted to employees is
      presented in the table below (in thousands of dollars, except per share
      amounts):
Fiscal Year Ended
                                                   ----------------------------
                                                   February  February  February
                                                   29, 2000  28, 2001  28, 2002
                                                   --------  --------  --------
Net loss................................... $(5,646)  $(11,458) $(18,704)
       Compensation expense related to the fair
        value of stock options....................     (69)     (160)      (163)
                                                   -------   --------  --------
       Pro forma net loss......................... $(5,715)  $(11,618) $(18,867)
                                                   =======   ========  ========
       Pro forma net loss per share............... $ (0.41)  $  (0.59) $  (0.77)
                                                   =======   ========  ========
The fair value of each option granted prior to ImagicTV becoming a
      publicly traded company in November 2000 have been estimated at the
      date of grant using the minimum value method and by applying the
      following assumptions: weighted average risk-free interest rate of
      5.88% for the year ended February 28, 2001, and 5.76% for the year
      ended February 29, 2000; a dividend yield of 0%; and expected terms
      equal to the option vesting period.

        The fair value of each option granted between the date ImagicTV
      became a publicly traded company and February 28, 2002 has been
      estimated at the date of grant using the Black-Scholes option pricing
      model with the following assumptions used: dividend yield of 0%,
      expected volatility of 130% for the period ended February 28, 2002
      (109% for the year ended February 28, 2001), risk-free rate of return
      of 2.5% for the period ended February 28, 2002 (5.88% for the year
      ended February 28, 2001) and expected terms equal to the option vesting
      period.

        ImagicTV has assumed no forfeiture rate, as adjustments for actual
      forfeitures are made in the year they occur. The weighted average grant
      date fair value of options issued was $0.84, $0.37 and $0.19 for the
      years ended February 28, 2002, February 28, 2001, and February 29,
      2000, respectively.

  (d) Comprehensive Income:

        In June 1997, the Financial Accounting Standards Board issued SFAS
      No. 130, "Reporting Comprehensive Income" (SFAS No. 130), which
      establishes standards for reporting and presentation of comprehensive
      income. This standard defines comprehensive income as the changes in
      equity of an enterprise, except those resulting from shareholder
      transactions. For the years ended February 29, 2000 and February 28,
      2001 the difference

                                      91
ImagicTV Inc.

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont)
                        (in thousands of U.S. dollars)

between net loss and comprehensive loss arises solely from reporting currency
translation adjustments. As a result, total comprehensive loss amounted to
$5,618,000 for the year ended February 29, 2000 and $12,025,000 for the year
ended February 28, 2001. For the year ended February 28, 2002, there is no
difference between net loss and comprehensive loss.

                                      92
ITEM 19.EXHIBITS

   Documents filed as exhibits to this annual report:

   1.1 Articles of Incorporation of ImagicTV Inc. filed December 24, 1997 (as
amended on June 30, 1998 and November 27, 2000) (incorporated by reference to
Exhibit 3.1 to our registration statement on Form F-1 (Registration No. 33-
48452) (the "Registration Statement")).

   1.2 Bylaws of ImagicTV Inc. (incorporated by reference to Exhibit 3.4 to
the Registration Statement).

   4.1 Employee Share Option Plan (incorporated by reference to Exhibit 10.1
of the Registration Statement).

   4.2 Form of Share Option Agreement with respect to the Employee Share
Option Plan (incorporated by reference to Exhibit 10.2 of the Registration
Statement).

   4.3 Form of 2000 Share Option Plan (incorporated by reference to Exhibit
10.3 of the Registration Statement).

   4.4 Loan Agreement between Newbridge Networks Corporation and ImagicTV Inc.
(incorporated by reference to Exhibit 10.4 of the Registration Statement).

   4.5 Technology Transfer Agreement, dated January 1, 1998, between ImagicTV
Inc. and The New Brunswick Telephone Company, Ltd. (incorporated by reference
to Exhibit 10.5 of the Registration Statement).

   4.6 Technology Transfer Option Agreement, dated January 5, 1998, between
ImagicTV Inc., 506048 N.B. Ltd. and The New Brunswick Telephone Company, Ltd.
(incorporated by reference to Exhibit 10.6 of the Registration Statement).

   4.7 Development Agreement, dated January 5, 1998, between ImagicTV Inc.,
506048 N.B. Ltd and the New Brunswick Telephone Company, Ltd. (incorporated by
reference to Exhibit 10.7 of the Registration Statement).

   4.8 Licensing Agreement, dated April 19, 1999, between ImagicTV and The New
Brunswick Telephone Company, Ltd., together with a Novation and Amendment
Agreement to Licensing Agreement and Set-Top Box Supply and Software Licensing
Agreement, dated December 16, 1999, between ImagicTV Inc., NBTel and Aliant
Telecom Inc. (incorporated by reference to Exhibit 10.8 of the Registration
Statement).

   4.9 Executive Employment Agreement, dated July 26, 2000, between iMagicTV
and Marcel LeBrun (incorporated by reference to Exhibit 10.9 of the
Registration Statement).

   4.10 Executive Employment Agreement, dated July 14, 2000, between ImagicTV
and Marjean Henderson (incorporated by reference to Exhibit 10.10 of the
Registration Statement).

   4.11 Executive Employment Agreement, dated July 26, 2000, between ImagicTV
and Allan Cameron (incorporated by reference to Exhibit 10.11 of the
Registration Statement).

                                      93
4.12 Executive Employment Agreement, dated July 26, 2000, between ImagicTV
and Gerry Verner (incorporated by reference to Exhibit 10.13 of the
Registration Statement).

   4.13 Form of Management Option Agreement (incorporated by reference to
Exhibit 10.14 of the Registration Statement).

   4.14 Share Subscription Agreement, as amended, made as of September 29,
2000, between ImagicTV Inc. and America Online, Inc. (incorporated by
reference to Exhibit 10.15 of the Registration Statement).

   4.15 Share Subscription Agreement, as amended, made as of September 29,
2000, between ImagicTV Inc. and Cisco Systems, Inc., including separate Board
Observation Rights and Right of First Negotiation Letter, made as of the same
date (incorporated by reference to Exhibit 10.16 of the Registration
Statement).

   4.16 Form of Share Purchase Warrant (incorporated by reference to Exhibit
10.17 of the Registration Statement).

   4.17 Executive Employment Agreement, dated May 25, 2001, between ImagicTV and
Nigel Bealing.

   4.18 Executive Employment Agreement, dated March 1, 2001, between ImagicTV
and Norm Bier.

   4.19 Executive Employment Agreement, dated May 7, 2002, between ImagicTV
and Gerald Pond.

   8.0 Subsidiaries of ImagicTV Inc. (incorporated by reference to Exhibit
21.1 to the Registration Statement).

  10.1 Consent of KPMG LLP.

                                   SIGNATURE

   The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.

Dated: May 14, 2002

ImagicTV Inc.

Per: /s/ Jeffrey White
  Jeffrey White, Chief Financial Officer

                                      94
INDEX TO EXHIBITS
Number                         Description of Document
 ------                         -----------------------
1.1    Articles of Incorporation of ImagicTV Inc. filed December 24, 1997 (as
        amended on June 30, 1998 and November 27, 2000) (incorporated by
        reference to Exhibit 3.1 to our registration statement on Form F-1
        (Registration No. 33-48452) (the "Registration Statement")).
 1.2    Bylaws of ImagicTV Inc. (incorporated by reference to Exhibit 3.4 to
        the Registration Statement).
 4.1    Employee Share Option Plan (incorporated by reference to Exhibit 10.1
        of the Registration Statement).
 4.2    Form of Share Option Agreement with respect to the Employee Share
        Option Plan (incorporated by reference to Exhibit 10.2 of the
        Registration Statement).
 4.3    Form of 2000 Share Option Plan (incorporated by reference to Exhibit
        10.3 of the Registration Statement).
 4.4    Loan between Newbridge Networks Corporation and ImagicTV Inc.
        (incorporated by reference to Exhibit 10.4 of the Registration
        Statement).
 4.5    Technology Transfer Agreement, dated January 1, 1998, between ImagicTV
        Inc. and The New Brunswick Telephone Company, Ltd. (incorporated by
        reference to Exhibit 10.5 of the Registration Statement).
 4.6    Technology Transfer Option Agreement, dated January 5, 1998, between
        ImagicTV Inc., 506048 N.B. Ltd. And The New Brunswick Telephone
        Company, Ltd. (incorporated by reference to Exhibit 10.6 of the
        Registration Statement).
 4.7    Development Agreement, dated January 5, 1998, between ImagicTV Inc.,
        506048 N.B. Ltd and the New Brunswick Telephone Company, Ltd.
        (incorporated by reference to Exhibit 10.7 of the Registration
        Statement).
 4.8    Licensing Agreement, dated April 19, 1999, between ImagicTV and The New
        Brunswick Telephone Company, Ltd., together with a Novation and
        Amendment Agreement to Licensing Agreement and Set-Top Box Supply and
        Software Licensing Agreement, dated December 16, 1999, between ImagicTV
        Inc., NBTel and Aliant Telecom Inc. (incorporated by reference to
        Exhibit 10.8 of the Registration Statement).
 4.9    Executive Employment Agreement, dated July 26, 2000, between iMagicTV
        and Marcel LeBrun (incorporated by reference to Exhibit 10.9 of the
        Registration Statement).
 4.10   Executive Employment Agreement, dated July 14, 2000, between ImagicTV
        and Marjean Henderson (incorporated by reference to Exhibit 10.10 of
        the Registration Statement).
 4.11   Executive Employment Agreement, dated July 26, 2000, between ImagicTV
        and Allan Cameron (incorporated by reference to Exhibit 10.11 of the
        Registration Statement).
 4.12   Executive Employment Agreement, dated July 26, 2000, between ImagicTV
        and Gerry Verner (incorporated by reference to Exhibit 10.13 of the
        Registration Statement).
 4.13   Form of Management Option Agreement (incorporated by reference to
        Exhibit 10.14 of the RegistrationStatement).
 4.14   Share Subscription Agreement, as amended, made as of September 29,
        2000, between ImagicTV Inc. and America Online, Inc. (incorporated by
        reference to Exhibit 10.15 of the Registration Statement).
 4.15   Share Subscription Agreement, as amended, made as of September 29,
        2000, between ImagicTV Inc. and Cisco Systems, Inc., including separate
        Board Observation Rights and Right of First Negotiation Letter, made as
        of the same date (incorporated by reference to Exhibit 10.16 of the
        Registration Statement).
 4.16   Form of Share Purchase Warrant (incorporated by reference to Exhibit
        10.17 of the Registration Statement).
 4.17   Executive Employment Agreement, dated May 25, 2001, between ImagicTV
        and Nigel Bealing.
 4.18   Executive Employment Agreement, dated March 1, 2001, between ImagicTV
        and Norm Bier.
 4.19   Executive Employment Agreement, dated May 7, 2002, between ImagicTV and
        Gerald Pond.
 8.0    Subsidiaries of ImagicTV Inc. (incorporated by reference to Exhibit
        21.1 to the Registration Statement).
 10.1   Consent of KPMG LLP.
i