VHQ Entertainment Inc – ‘20-F’ for 5/31/02

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Annual Report of a Foreign Private Issuer   —   Form 20-F
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 20-F        Form 20-F Annual Report                              122    550K 
 2: EX-4        Ex. 2-1 Debenture                                     20     72K 
 3: EX-10       Exh 4-18 Asset Purchase Agreement                     10     19K 
 4: EX-99       Exh 10-1 Certification                                 2      6K 
 5: EX-99       Exh 10-2 Certification                                 2      6K 

20-F   —   Form 20-F Annual Report
Document Table of Contents

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 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 FORM 20-F

(MARK ONE)                                                                      
  [ ]        REGISTRATION  STATEMENT  PURSUANT  TO  SECTION  12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934                       
OR
  [X]        ANNUAL  REPORT  PURSUANT TO  SECTION 13 OR  15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934                                  
FOR THE FISCAL YEAR ENDED MAY 31, 2002                
OR
             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: 0-31112

VHQ ENTERTAINMENT INC.
--------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

CANADA
--------------------------------------------------------------------------------
 (JURISDICTION OF INCORPORATION OR ORGANIZATION)

 6201 - 46TH AVENUE, RED DEER, ALBERTA T4N 6Z1
--------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: 
       TITLE OF EACH CLASS             NAME OF EACH EXCHANGE ON WHICH REGISTERED
NONE                                                  
--------------------------------   ---------------------------------------------

SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: 

 COMMON SHARES
--------------------------------------------------------------------------------
(TITLE OF CLASS)

SECURITIES  FOR  WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION 15(d)
OF THE ACT:                                                                     

NOT APPLICABLE
--------------------------------------------------------------------------------
(TITLE OF CLASS)

INDICATE THE NUMBER OF OUTSTANDING  SHARES OF  EACH OF THE  ISSUER'S  CLASSES OF
CAPITAL OR COMMON STOCK AS OF:                                                  
May 31, 2002: 12,306,803 Common Shares                                          

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    X               Item 18                            
-------                     -------           

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 TABLE OF CONTENTS
                                                                            PAGE

ITEM 1.    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS...............2

ITEM 2.    OFFER STATISTICS AND EXPECTED TIMETABLE.............................2

ITEM 3.    KEY INFORMATION.....................................................2

ITEM 4.    INFORMATION ON THE COMPANY.........................................16

ITEM 5.    OPERATING AND FINANCIAL REVIEW AND PROSPECTS.......................34

ITEM 6.    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.........................51

ITEM 7.    MAJORITY SHAREHOLDERS AND RELATED PARTY TRANSACTIONS...............66

ITEM 8.    FINANCIAL INFORMATION..............................................71

ITEM 9.    LISTING............................................................72

ITEM 10.   ADDITIONAL INFORMATION.............................................73

ITEM 11.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET                 
           RISKS..............................................................88

ITEM 12.   DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.............88

ITEM 13    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES....................88

ITEM 14    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS             
           AND USE OF PROCEEDS................................................88

ITEM 15    CONTROLS AND PROCEDURES............................................89

ITEM 16    [RESERVED].........................................................89

ITEM 17.   FINANCIAL STATEMENTS...............................................89

ITEM 18.   FINANCIAL STATEMENTS...............................................89

ITEM 19.   EXHIBITS...........................................................89

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NOTE REGARDING FORWARD LOOKING STATEMENTS                                       

Except for statements of historical fact, certain  information  contained herein
constitutes   "forward-looking   statements,"  including,   without  limitation,
statements containing the words "believes,"  "anticipates," "intends," "expects"
and words of similar import, as well as all projections of future results.  Such
forward-looking  statements involved known and unknown risks,  uncertainties and
other factors which may cause the actual results or  achievements of the Company
to be  materially  different  from any  future  results or  achievements  of the
Company expressed or implied by such  forward-looking  statements.  Such factors
include,  among others, the following:  the Company's limited operating history,
the  Company's  need for  additional  financing  to  expand  its  business,  the
competition in the movie video and video game industry,  technological change in
the video  industry  that may  adversely  affect  the  Company's  business,  the
Company's  dependence on key officers and employees,  the Company's  reliance on
third-party  providers of video  entertainment  and video games,  the  Company's
ability to integrate new stores into its operations  and to manage  growth,  the
seasonality of the video  entertainment  industry,  and other factors  described
under "Item 3. Key Information - Risk Factors" in this annual report.           

December 13, 2002                                                               

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ITEM 1.           IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS         

Not applicable.                                                                 

ITEM 2.           OFFER STATISTICS AND EXPECTED TIMETABLE                       

Not applicable.                                                                 

ITEM 3.           KEY INFORMATION                                               

SELECTED FINANCIAL DATA                                                         

The  following   table  sets  forth   selected   financial  data  regarding  our
consolidated operating results and financial position. The data has been derived
from  our  consolidated  financial  statements,  which  have  been  prepared  in
accordance with accounting  principles  generally  accepted in Canada ("Canadian
GAAP").  For reconciliation to accounting  principles  generally accepted in the
United  States see the captions  under the May 31, 1999,  May 31, 2000,  May 31,
2001,  and May 31,  2002  columns.  The  following  selected  financial  data is
qualified  in its  entirety  by, and  should be read in  conjunction  with,  the
consolidated  financial  statements and notes thereto included elsewhere in this
annual report.  The selected financial data is expressed in Canadian dollars (in
accordance with Canadian GAAP).                                                 

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ALL FIGURES IN ($ CAD)

                                                        [Enlarge/Download Table]

                      THE TWELVE    THE TWELVE     THE TWELVE      THE TWELVE     ONE MONTH      THE TWELVE  
                     MONTH PERIOD  MONTH PERIOD   MONTH PERIOD    MONTH PERIOD  ENDED MAY 31,   MONTHS ENDED 
                         ENDED       ENDED MAY        ENDED      ENDED MAY 31,       1998      APRIL 30, 1998
                     MAY 31, 2002    31, 2001     MAY 31, 2000        1999                                   

                       (Audited)     (Audited)      (Audited)      (Audited)                                 
                                                                                                             
REVENUE               26,114,173    $21,330,467    $12,884,852     $4,919,535      $217,632      $1,087,674  

GROSS MARGIN          13,965,521     13,293,605      8,620,422      3,189,942       143,879         408,416  

TOTAL OPERATING       13,990,192     12,052,194      7,728,628      2,791,188       146,931         443,087  
COSTS & EXPENSES                                                                                             

OPERATING INCOME                                                                                             
(LOSS)                                                                                                       

  Cdn GAAP                24,671      1,241,411        891,794        398,754        (3,052)        (34,671) 
  US GAAP               (428,671)    (1,859,456)      (621,236)       398,754          N/A             N/A   

NET INCOME (LOSS)                                                                                            

   Cdn GAAP           (2,349,289)    (2,813,521)     2,102,867        217,383        (3,567)        (38,408) 
   US GAAP               517,510     (4,495,956)      (827,410)       217,383          N/A             N/A   

NET INCOME (LOSS)                                                                                    .       
PER SHARE                                                                                                    

  Cdn GAAP                 (0.20)         $(.24)          0.21           0.03            0             (.01) 
  US GAAP                   0.04           (.42)          (.09)          0.03           N/A             N/A  

NUMBER   OF  SHARES                                                                                          
USED  TO  CALCULATE                                                                                          
EARNINGS     (LOSS)                                                                                          
PER SHARE:                                                                                                   

  Cdn GAAP            11,903,465     11,490,281     10,086,383      7,294,697     5,200,000       7,200,000  
  US GAAP             11,737,724     10,768,281      8,956,383      6,511,720         N/A             N/A    

DIVIDENDS                  0              0              0              0              0               0     
DECLARED PER                                                                                                 
SHARE                                                                                                        

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$CAD

                                                        [Enlarge/Download Table]


                        --------------------------------------------------------------------------------------------------------
                                 AT               AT               AT               AT               AT               AT        
                            MAY 31, 2002     MAY 31, 2001     MAY 31, 2000     MAY 31, 1999      MAY 31, 1998    APRIL 30, 1998 

                        --------------------------------------------------------------------------------------------------------
                                                                                                                                
CASH                          $ 121,145         $155,371         $238,635         $229,504         $272,519         $655,698    

WORKING CAPITAL              (4,836,192)      (2,859,075)        (549,127)        (182,719)         (53,898)         398,569    
(DEFICIENCY)                                                                                                                    

TOTAL ASSETS                                                                                                                    

  Cdn GAAP                   15,580,249       13,737,968       14,553,094        3,955,310        2,063,515        2,244,704    
  US GAAP                    15,580,249       15,160,017       16,784,142        3,955,310           N/A              N/A       

TOTAL LIABILITIES                                                                                                               

  Cdn GAAP                    9,355,981        6,646,715        6,187,053        1,115,732          533,490          461,919    
  US GAAP                     8,607,981        9,152,258        7,855,161        1,115,732           N/A              N/A       

NET ASSETS                                                                                                                      

  Cdn GAAP                    6,224,268        7,091,253        8,366,041        2,839,578        1,530,025        1,782,785    
  US GAAP                     6,972,268        6,007,759        8,928,982        2,839,578           N/A              N/A       

SHARE CAPITAL                                                                                                                   

  Cdn GAAP                    9,108,803        7,626,499        6,087,766        2,664,170        1,572,000        1,821,193    
  US GAAP                    12,637,991       11,155,687        9,580,954        2,664,170           N/A              N/A       

LONG-TERM DEBT                                                                                                                  

  Cdn GAAP                      949,383          110,794          233,996          222,422           56,161           56,161    

  US GAAP                       949,383        3,364,023        3,989,910          222,422           56,161           56,161    
================================================================================================================================


CURRENCY AND EXCHANGE RATES                                                     

The following  table sets forth the exchange rates for one Canadian dollar ("$")
expressed in terms of one United States  dollar  ("US$") in effect at the end of
the following  periods,  and the average exchange rates (based on the average of
the exchange  rates on the last day of each month in such periods) and the range
of high and low exchange rates for such periods.                                

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                                                        [Enlarge/Download Table]

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                       THE TWELVE      THE TWELVE      THE TWELVE      THE TWELVE      THE TWELVE    
                         MONTH        MONTH PERIOD    MONTH PERIOD    MONTH PERIOD    MONTH PERIOD   
                         PERIOD      ENDED MAY 31,       ENDED       ENDED MAY 31,   ENDED MAY 31,   
                        ENDED MAY         2001        MAY 31, 2000        1999            1998       
                        31, 2002                                                                     

-----------------------------------------------------------------------------------------------------
                                                                                                     
END OF PERIOD            0.6266          0.6468          0.6677          0.6791          0.6863      
-----------------------------------------------------------------------------------------------------
AVERAGE FOR THE          0.6383          0.6596          0.6792          0.6616          0.7064      
PERIOD                                                                                               
-----------------------------------------------------------------------------------------------------
HIGH FOR THE PERIOD      0.6622          0.6831          0.6969          0.6891          0.7305      
-----------------------------------------------------------------------------------------------------
LOW FOR THE PERIOD       0.6200          0.6333          0.6607          0.6341          0.6832      
-----------------------------------------------------------------------------------------------------


                                                        [Enlarge/Download Table]

--------------------------------------------------------------------------------------------------------------------
                                        U.S. DOLLARS PER CANADIAN DOLLAR                                            

--------------------------------------------------------------------------------------------------------------------
                               OCTOBER         SEPTEMBER       AUGUST          JULY          JUNE          MAY      
                                 2002             2002          2002           2002          2002          2002     
--------------------------------------------------------------------------------------------------------------------
                                                                                                                    
  HIGH FOR THE MONTH            0.6407           0.6433        0.6442         0.6603        0.6619        0.6547    
--------------------------------------------------------------------------------------------------------------------
  LOW FOR THE MONTH             0.6272           0.6304        0.6264         0.6297        0.6452        0.6452    
--------------------------------------------------------------------------------------------------------------------

Exchange  rates are based upon the noon  buying  rate in New York City for cable
transfers in foreign currencies as certified for customs purposes by the Federal
Reserve  Bank of New York.  The noon rate of  exchange  on October  31,  2002 as
reported  by the  United  States  Federal  Reserve  Bank  of New  York  for  the
conversion  of Canadian  dollars  into United  States  dollars was  Cdn$1.5610 =
US$1.00; Cdn$1.00 = US$0.6406. Unless otherwise indicated, in this annual report
all references herein are to Canadian Dollars.                                  

RISK FACTORS                                                                    

Our securities are highly  speculative.  It is important to consider that we are
in the  growth  stage  of our  operations  as an  operator  of  video  and  home
entertainment  stores.  Described  below are specific  risks that are associated
with our business.                                                              

COMPANY SPECIFIC RISKS                                                          

WE HAVE A HISTORY OF RECENT LOSSES AND WE MAY INCUR LOSSES IN FUTURE PERIODS.   

As of May 31, 2002, our retained deficit was $2,884,535.  We reported net losses
of $2,349,289  for the fiscal year ended May 31, 2002,  and  $2,813,521  for the
fiscal year ended May 31, 2001.  Our operating  expenses and marketing  expenses
have increased  continuously  since  inception and we expect them to continue to
increase  significantly  in the next several  years as we  implement  our growth
strategy and expand our business.  As a result,  we anticipate that we will need
to increase  our  revenues to achieve  profitability.  In order to increase  our
revenues,  our stores must remain  competitive  and we must  maintain  continued
growth in same store sales and generate expected sales from new stores. If our  

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revenues do not increase as much as we expect or if our  expenses  increase at a
greater  pace  than  revenues,  we may  not  be  able  to  sustain  or  increase
profitability on a quarterly or annual basis.                                   

WE HAVE AND WILL CONTINUE TO OPERATE WITH A NEGATIVE WORKING CAPITAL DEFICIT.   

At May 31, 2002, we had a working  capital  deficit of $4.8 million  compared to
$2.89 million as at May 31, 2001. The working  capital  deficit results from the
accounting  treatment of our rental inventory.  Rental inventory is treated as a
capital  asset rather than a current  asset under  Canadian GAAP because it is a
depreciable  asset  and  is not an  asset  that  is  reasonably  expected  to be
completely  realized in cash or sold in the normal business cycle.  Although the
rental  of  this  inventory  generates  a  major  portion  of our  revenue,  the
classification  of this  asset as  non-current  results  in its  exclusion  from
working capital.  The aggregate amount payable for this inventory,  however,  is
reported  as a current  liability  until paid and,  accordingly,  is included in
working  capital.  As a result,  we do not believe  that  working  capital is an
appropriate  measure of our  liquidity and  anticipate  that we will continue to
operate with a working capital deficit.                                         

WE HAVE A LIMITED  OPERATING  HISTORY,  WHICH MAKES IT  DIFFICULT TO PREDICT THE
FUTURE SUCCESS OF OUR OPERATIONS AND OUR INDIVIDUAL VIDEO AND HOME ENTERTAINMENT
STORES.                                                                         

We have  only a limited  operating  history  upon  which  you can  evaluate  our
business and  prospects.  We entered  into the retail  video rental  industry by
acquiring Integrated Retail Corp. in September 1998. Integrated Retail Corp. was
formed in 1997.  See "Item 4.  Information  on the Company - Our  Acquisitions".
Approximately 30% of our video and home  entertainment  stores are less than two
years old, which makes it difficult to predict the future success of each store.
You  should  consider  our  prospects  in  light  of  the  risks,  expenses  and
difficulties  we may  encounter  as an early  stage  company in a stage of rapid
growth through acquisition. These risks include:                                

     o        our  ability  to  effectively   integrate  new  stores  into   our
organization;                                       

     o        the adverse  effect that acquisition costs may have on the results
of our historical operations;                       

     o        competition,  including  increased competition,  in the markets we
service;                                            

     o        the adverse effect that our new stores or acquisitions may have on
      the sales of our existing stores serving the same markets;

o        our ability to attract and maintain quality personnel;       

o        general regional and national economic conditions;           

     o        consumer   trends   related  to  video   entertainment  and   home
entertainment;                                      

o        acceptance of our entertainment and product mix;             

o        timing of promotional events and product introductions; and  

o        our ability to execute our business strategy effectively.    

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Comparable  store sales may not increase at historical rates and operating costs
may increase in the future.  Changes in our comparable store sales results could
cause the price of the common stock to fluctuate substantially.                 

TO  DATE,  MUCH  OF  OUR  REVENUE  GROWTH  IS  ATTRIBUTABLE  TO THE  OPENING  OR
ACQUISITION  OF NEW  STORES.  IF WE ARE NOT ABLE TO INCREASE  REVENUE  GROWTH AT
EXISTING  STORES,  WE MAY NOT BE ABLE TO INCREASE OR SUSTAIN REVENUE GROWTH ONCE
WE REACH A LOWER GROWTH STAGE.                                                  

The majority of our revenue  growth since  inception  can be  attributed  to the
acquisition of new retail locations. Since inception, we have paid $3.19 million
in cash and issued an  aggregate of  7,974,957  shares,  warrants and options in
making such acquisitions. In order to sustain revenue growth as our acquisitions
decrease, we must increase the revenue of existing retail locations.  If we fail
to increase existing store revenue, our results will suffer.                    

WE  MAY BE  UNABLE  TO  SUSTAIN  OUR  GROWTH  OR TO  MANAGE  THE  GROWTH  OF OUR
OPERATIONS, WHICH MAY AFFECT OUR PROFITABILITY.                                 

Our  growth  strategy  includes  the  acquisition  of  existing  video  and home
entertainment  stores and the  opening  of new  stores.  During the fiscal  year
ending May 31,  2002,  we opened four new stores.  As of the date of this annual
report,  we operate a total of 49 stores,  compared to operating 45 stores as at
May 31, 2001,  and 33 stores at May 31, 2000.  In January 2003 we expect to open
our  50th  store.  Execution  of  our  growth  strategy  requires  our  existing
management personnel to, among other things:                                    

     o        identify  acquisition  candidates  who are  willing to  sell their
businesses at reasonable prices;                    

     o        identify new sites where we can successfully compete and negotiate
              acceptable  leases to implement  cost-efficient  development plans
for new stores;                                     

o        obtain financing for acquisitions and new store development; 

     o        hire,  train  and  assimilate  store  managers  and  other   store
personnel;                                          

     o        hire and  train additional product fulfillment personnel to handle
additional product distribution; and                

     o        integrate each store's management information system and marketing
programs into our system.                           

Our growth could strain the ability of existing  management to accomplish  these
tasks and  lessen the  effectiveness  of  management  with  respect to  existing
operations.  We cannot assure you that we will  successfully  open new stores or
identify,  negotiate,  finance,  consummate or  assimilate  the  acquisition  of
additional  video  and  home  entertainment  stores  in  the  future.  Continued
substantial  growth  could  have a  material  adverse  effect on our  results of
operations,  while on the other hand,  the  failure to maintain  our growth rate
could have a material adverse effect on the price of our common shares.         

In  addition  to the  management  challenges,  our future  growth  will  require
significant  capital.  In the past,  acquisitions  and store  openings have been
financed primarily with proceeds from our previous private                      

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and public offerings of common shares, debt and internally  generated cash flow.
We may seek to raise  additional  capital through future public or private sales
of debt or equity securities.  However,  we cannot assure you that we can obtain
sufficient  capital on  reasonable  terms,  if at all, to  implement  our growth
strategy.                                                                       

OUR BUSINESS  STRATEGY  REQUIRES THE OPENING OF, OR  ACQUISITION  OF, NEW RETAIL
LOCATIONS,  BOTH OF WHICH ARE RESOURCE  INTENSIVE,  AND MAY REQUIRE US TO OBTAIN
ADDITIONAL FINANCING.  IF WE FAIL TO OBTAIN SUCH FINANCING,  WE MAY BE UNABLE TO
IMPLEMENT OUR BUSINESS STRATEGY AND OUR RESULTS MAY SUFFER.                     

Financing  for the opening and  acquisition  of new stores may be in the form of
debt or equity or both and may not be available on terms acceptable to us, if at
all.  We estimate  that the average  cash  investment  for tenant  improvements,
inventory (net of payables), marketing and training required to open a new store
is between approximately $225,000 and $275,000 for our traditional store format.
We estimate the cost of opening a rebranded VHQ Entertainment  store to be up to
approximately  $275,000. The actual cost of opening a store may be significantly
greater than such current estimates.  We may need to seek additional debt and/or
equity  financing in order to fund our  continued  expansion  through our fiscal
year  ending  May 31,  2003  and  beyond.  In  addition,  our  ability  to incur
indebtedness  or issue  equity  or debt  securities  could be  limited  by risks
described throughout this Risk Factors section, including general economic risks
and risks  affecting our business and results of  operations;  some of which are
beyond our control.  Further, our issuance of equity securities to raise capital
to  acquire  or open  additional  stores  may have the  effect of  diluting  the
interests of our existing stockholders.                                         

PIRACY OF THE PRODUCTS WE OFFER MAY ADVERSELY AFFECT OUR OPERATIONS.            

With the advent of the Internet,  the risk with respect to the access to pirated
motion picture products has increased. Traditionally, pirated VHS tapes could be
obtained on a black  market,  however,  these tapes were of poor quality and the
distributors of the tapes could be shut down quickly since they could be located
as soon  as they  attempted  to  sell  the  pirated  tapes.  However,  with  the
development of the Internet, and its non-jurisdictional nature, there is now the
potential for wide  distribution  of pirated movies at a low cost.  This poses a
threat  to not only  the  producers  and  creators  of  motion  pictures  but to
entertainment providers like us.                                                

Currently movie studios  generate  approximately  60% of their overall  revenues
from  non-theatrical  resources  (including  retail and rental) and accordingly,
maintaining rights and control over their product distribution over the Internet
is fundamental to the ongoing  profitability of the studios.  We expect that the
movie  industry  will  follow the music  industry,  which in the  United  States
recently  challenged  the sale of  non-licensed  music  over the  Internet.  The
creators and owners of music were successful in stopping a significant web based
distributor of unlicensed music from continuing to sell their product.  Like the
music industry,  we believe the studios will take an aggressive position against
piracy  over the  Internet,  since it is  fundamental  to  profitability  of the
studios to ensure that only licensed providers distribute their products.  There
can be no guarantees, however, that the studios will take steps to enforce their
rights against Internet piracy or that they will be successful in preventing the
distribution of pirated movies.                                                 

IF WE DON'T  RECEIVE  ADDITIONAL  FINANCING,  WE WILL NOT BE ABLE TO EXECUTE OUR
BUSINESS PLAN.                                                                  

We will require  additional  financing to execute our business plan. Our ability
to arrange such  financing in the future will depend in part upon the prevailing
capital market conditions, as well as our business performance.  There can be no
assurance that we will be successful in our efforts to arrange additional       

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financing  on  satisfactory  terms.  If  additional  financing  is raised by the
issuance  of shares  from  treasury,  control  of our  business  may  change and
shareholders  may  suffer  additional  dilution.   If  adequate  funds  are  not
available,  or are not available on acceptable terms, we may not be able to take
advantage  of  opportunities,  develop  new  products  or  otherwise  respond to
competitive pressures and remain in business.                                   

ACQUISITION RISKS                                                               

Our growth strategy may involve the continued  acquisition of existing video and
home entertainment stores. This strategy includes the following risks:          

WE MAY BE UNABLE TO COMPETE WITH OTHER VIDEO CHAINS FOR  ATTRACTIVE  ACQUISITION
TARGETS, WHICH MAY LIMIT OUR GROWTH.                                            

Some of our  competitors  may seek to  acquire  some of the same  video and home
entertainment stores that we seek to acquire.  This competition for acquisitions
would likely increase  acquisition  prices and related costs and result in fewer
acquisition  opportunities,  which could have a material  adverse  effect on our
growth or our ability to acquire acquisition targets on acceptable terms.       

WE MAY BE UNABLE TO COMPETE  WITH OTHER VIDEO  CHAINS FOR  ATTRACTIVE  NEW STORE
LOCATIONS, WHICH MAY LIMIT OUR GROWTH.                                          

Some of our  competitors  may seek to  acquire  some of the same  video and home
entertainment new store locations that we seek to acquire.  This competition for
new stores would likely increase new store acquisition  prices and related costs
and result in fewer new store opening opportunities, which could have a material
adverse  affect on our growth or our  ability  to open new stores on  acceptable
terms.                                                                          

SELLERS OF ACQUISITION TARGETS MAY MAKE  MISREPRESENTATIONS  TO US OR BREACH THE
TERMS OF AN ACQUISITION AGREEMENT,  WHICH COULD ADVERSELY AFFECT THE VALUE OF AN
ACQUISITION.                                                                    

Our acquisition of Family Video (our Saskatoon stores) was a stock  acquisition,
subject to certain stated  liabilities such as store leases. We acquired Rainbow
Video (our four original Calgary stores) by acquiring all of the stock of Safiqa
Holdings Ltd., and thereby the assets acquired are subject to all liabilities of
that  entity,  stated or  otherwise.  We  acquired  the  Movies  Plus  stores by
acquiring  all of the stock of 705556  Alberta  Ltd.,  and  thereby  the  assets
acquired are subject to all liabilities of that entity, stated or otherwise.  In
completing each acquisition, we relied upon certain representations,  warranties
and indemnities made by the sellers with respect to each of these  acquisitions,
as well as our own due diligence investigations.                                

In the future, we may acquire additional video and home entertainment  stores or
chains in either asset  acquisitions or stock  acquisitions.  In either case, we
will rely upon certain  representations,  warranties and indemnities made by the
sellers with respect to each of these  acquisitions  and our due  diligence.  We
cannot assure you that the sellers'  representations and warranties will be true
and correct or that our due diligence investigations will uncover all materially
adverse facts relating to the operations and financial condition of the acquired
businesses.  In the  event  that  we are  required  to pay for  obligations  not
expressly  assumed,  or which the seller, in connection with such  acquisitions,
has not disclosed or in the                                                     

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event there are  material  misrepresentations,  we may not be able to recoup the
costs of paying such obligations, or recover our damages, from the sellers.     

WE ANTICIPATE THAT MOST POTENTIAL  ACQUISITION TARGETS WILL BE PRIVATE COMPANIES
AND THAT WE WILL HAVE LIMITED KNOWLEDGE OF THEIR OPERATING HISTORIES,  WHICH MAY
ADVERSELY AFFECT OUR ABILITY TO MAKE AN INFORMED ACQUISITION DECISION.          

Notwithstanding our own due diligence  investigations,  our management will have
limited knowledge about the specific  operating  histories,  trends and customer
buying  patterns  of the video  and home  entertainment  stores  that we seek to
acquire.  Further,  we anticipate  that potential  acquisition  targets may have
limited  operating  histories,  which could make predicting their future success
uncertain. Consequently, we cannot assure you that we will make acquisitions, if
any, at favorable prices, that acquired stores will perform as well as they have
performed historically or that we will have sufficient information to accurately
analyze the markets in which we elect to make  acquisitions.  Our failure to pay
reasonable  prices  for  acquisitions  or to acquire  profitable  video and home
entertainment  stores  could have a material  adverse  effect on our  results of
operations.                                                                     

OUR FAILURE TO INTEGRATE THE OPERATIONS OF VIDEO AND HOME  ENTERTAINMENT  STORES
THAT  WE  ACQUIRE  WITH  EXISTING  STORES  AND  SYSTEMS  MAY  CREATE   OPERATING
INEFFICIENCIES, WHICH COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.         

The  success of the video and home  entertainment  stores we acquire  depends in
large  part on our  ability  to  integrate  these  stores  into our  purchasing,
marketing and management  information  systems. If we fail to integrate acquired
stores  successfully  and on a  timely  basis,  we  may  not  achieve  operating
efficiencies  and our results of  operations  may suffer.  We currently  operate
stores that we have acquired under different brand names,  including the "Family
Video" name,  and we may acquire and operate other video and home  entertainment
stores under other brand names.  Operating  stores under  different  brand names
creates  a  challenge  for  our   management  and  may  diminish  our  operating
efficiencies.  We anticipate that we will maintain the personnel and the general
business operations of the video and home entertainment  stores we acquire.  The
success of these  acquisitions  will be dependent,  in part,  upon the manner in
which we are able to integrate the personnel  into our operations and the manner
in which the acquired stores were operated. We cannot assure you that we will be
able to integrate these existing video and home entertainment stores in a manner
consistent with our standards.                                                  

OPERATING RISKS                                                                 

Our  business  is  subject  to  operating   risks   associated   with  the  home
entertainment  industry and our  operations.  Set forth below are material risks
associated with the operation of our business.                                  

THE VIDEO RETAIL AND HOME ENTERTAINMENT  INDUSTRY IS HIGHLY COMPETITIVE AND SOME
OF OUR COMPETITORS HAVE SUBSTANTIALLY  GREATER RESOURCES THAN US, WHICH THEY MAY
USE TO IMPLEMENT  STRATEGIES  THAT COULD  ADVERSELY  AFFECT OUR MARKET SHARE AND
RESULTS OF operations.                                                          

The home entertainment industry is highly competitive and there are few barriers
to entry.  We  compete  with many  other  video and home  entertainment  stores,
including  stores  operated by regional  and national  chains,  as well as other
businesses  offering  video  cassettes  and video  games  such as  supermarkets,
pharmacies,   convenience  stores,   bookstores,   mass  merchants,  mail  order
operations and other  retailers.  Some of our  competitors may open locations in
close proximity to our video and home entertainment                             

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stores and may offer broader product selections,  lower prices and better rental
terms than us, which may cause our customers to patronize our competitors.  Some
of our competitors have greater financial and marketing resources,  market share
and name  recognition  than us, which may allow them to quickly  develop  market
presence in the  markets we serve or allow them to expand into new markets  that
we intend to serve.  We cannot  assure  you that we will be able to  effectively
compete with these competitors.                                                 

In  addition,  we  compete  with  all  leisure-time  activities,  such as  movie
theaters,  network and cable television,  direct broadcast satellite television,
live theater, sporting events and family entertainment centers. In the event the
demand for our products declines, our business and results of operations will be
adversely affected.                                                             

THE  VIDEO  ENTERTAINMENT  PRODUCTS  THAT WE  OFFER  ARE  SUBJECT  TO  TECHNICAL
OBSOLESCENCE, WHICH COULD REDUCE THE DEMAND FOR THE PRODUCTS WE OFFER.          

We  compete  with,  among  others,   pay-per-view   cable   television   systems
("Pay-Per-View"),  in  which  subscribers  pay a fee to see a  movie  that  they
select.  Pay-Per-View  presently  offers only a limited  number of channels  and
movies  in  certain  cable  television  markets;   however,  recently  developed
technologies   permit  certain  cable  companies,   direct  broadcast  satellite
companies (such as DirecTV),  telephone  companies and other  telecommunications
companies to transmit a much greater  number of movies to homes  throughout  the
United States at frequent  intervals (often as frequently as every five minutes)
throughout the day, referred to as "Near  Video-on-Demand"  ("NVOD").  NVOD does
not offer full  interactivity or VCR functionality such as allowing the consumer
to  control  the  playing  of  the  movie,  starting,  stopping  and  rewinding.
Ultimately,  further  improvements  in  these  technologies  could  lead  to the
availability of a broad selection of movies to consumers on demand,  referred to
as Video-on-Demand  ("VOD"),  at a price which may be competitive with the price
of video  cassette  rentals  and with VCR  functionality.  Some  cable and other
telecommunications  companies  have tested and are  continuing  to test  limited
versions of NVOD and VOD, as well as premium  digital cable  channels in various
markets throughout  Canada, the United States and Europe.  Changes in the manner
in which movies are marketed,  primarily  related to an earlier release of movie
titles to NVOD and VOD distribution  channels,  could substantially decrease the
demand for video cassette rentals, which would have a material adverse effect on
our  business.  Currently,  movie  titles  are  released  to the  video and home
entertainment  specialty  store market from 30 to 120 days before release to the
Pay-Per-View (including NVOD and VOD) distribution channels.                    

THE DVD FORMAT IS  EXPECTED  TO GAIN  POPULARITY  WHICH WILL  REQUIRE US TO MAKE
ADDITIONAL CAPITAL EXPENDITURES TO INCREASE OUR DVD SELECTION.                  

We anticipate  that the  popularity of movies  recorded on DVDs will increase as
the price of DVDs become  comparable with video cassettes.  We currently offer a
selection of DVDs in all of our stores and  anticipate  that the selection  will
grow as a percentage of the titles we offer.  In the future,  we may be required
to offer a broader  selection of catalogue  titles on DVD to remain  competitive
and to meet the demands of the  markets we serve.  We  anticipate  that this may
require a substantial  investment in DVD  inventory,  which may not be offset by
increased  unit  rentals.  In addition,  the advent of video  compact  discs may
result in consumers  purchasing more films than in the past,  which could have a
materially  adverse effect on our rental volume and, as a result,  on our profit
margins.                                                                        

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VIDEO GAMING IS EXPECTED TO GAIN POPULARITY WITH CONSUMERS WHICH WILL REQUIRE US
TO MAKE ADDITIONAL  CAPITAL  EXPENDITURES TO INCREASE OUR VIDEO GAMING SELECTION
ON VARIOUS PLATFORMS.                                                           

We anticipate that video games will become increasingly  popular with consumers,
as additional  functionality  and new games and features are promoted on various
platforms.  We  currently  offer a  selection  of  video  games  on  most  major
platforms, including Microsoft X-Box, Nintendo Game Cube and Sony Playstation in
all of our stores and we anticipate  that the selection will continue to grow as
a  percentage  of the  overall  titles that we offer.  In the future,  we may be
required  to offer  both a  broader  selection  and an  increased  number of new
release video games on all platforms in order to remain  competitive and to meet
the  demands of the  markets we serve.  We  anticipate  that this may  require a
substantial  investment  in video  game  software,  which  may not be  offset by
increased rentals.                                                              

THE VIDEO RENTAL INDUSTRY WOULD LOSE A SIGNIFICANT  COMPETITIVE ADVANTAGE IF THE
MOVIE STUDIOS ADVERSELY CHANGE THEIR CURRENT DISTRIBUTION PRACTICES.            

A significant  competitive  advantage that the video rental  industry  currently
enjoys over most other movie distribution  channels,  except theatrical release,
is the early  timing of the video store  distribution  "window."  This window is
exclusive against most other forms of non-theatrical movie distribution, such as
pay-per-view,  premium  television,  basic  cable  and  network  and  syndicated
television.  The length of the window for movie rental varies, typically ranging
from 30 to 90 days  for  domestic  video  stores  and  from  120 to 180 days for
international video stores.  Thereafter,  movies are made sequentially available
to television distribution channels.                                            

We could be materially adversely affected if:                                   

  -    the video store windows were no longer the first following the theatrical
release;                                                          

-    the length of the video store windows were shortened;                  

-    the video store windows were no longer as exclusive as they are now; or

  -    an increasing number of titles were released to "sell-through" instead of
rental                                                            

because newly released movies would be made available  earlier on other forms of
non-theatrical movie distribution.  As a result,  consumers would no longer need
to wait until after the video store distribution window to view a newly released
movie on other distribution channels and our business results might suffer.     

OUR PRIMARY  DEPENDENCE ON CERTAIN  SUPPLIERS AND  WHOLESALERS TO SUPPLY US WITH
INVENTORY  MAY AFFECT OUR  ABILITY TO OPERATE IN THE EVENT ANY SUCH  SUPPLIER IS
UNABLE TO FULFILL OUR INVENTORY NEEDS ON REASONABLE TERMS.                      

Our  continuing  profitability  depends  in  part  on  our  ability  to  acquire
sufficient  quantities  of the latest and most  popular  titles (VHS  cassettes,
DVDs, video games and music CDs) on a timely basis and at favorable  prices.  As
of October 31, 2002, we acquired  approximately  40% of our supply of rental VHS
cassettes and DVDs, and substantially all of our video game products, from Video
One Ltd. The current  contract  with Video One is scheduled to expire on January
30, 2003 unless earlier renewed.                                                

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While we believe that we can obtain  comparable  quantities of titles from other
suppliers,  the number of  alternative  suppliers has diminished in recent years
due to the  consolidation  of the  industry and the  termination  of our present
relationship  with Video One could  adversely  affect our  results of  operation
until a suitable  replacement is found.  Also, we cannot guarantee that any such
replacement  would  provide  service  or  payment  terms as  favorable  as those
provided by Video One.                                                          

OUR  OPERATIONS  ARE SUBJECT TO SEASONAL AND OPERATING  FLUCTUATIONS,  WHICH MAY
AFFECT THE RESULTS OF OUR OPERATIONS.                                           

Our video  cassette,  DVD and video game rental  business is somewhat  seasonal,
with revenues in April and May  generally  being lower due in part to the change
to Daylight  Savings Time and improved  weather,  and revenues in September  and
October  generally being lower due in part to the start of school,  the football
season and the new  television  season.  The  seasonality  of our business could
adversely affect our financial results.                                         

In addition, future operating results may be affected by many factors, including
variations in the number and timing of store openings, the timing of, and public
acceptance of new release  titles  available for rental and sale,  the timing of
our acquisition of existing video and home  entertainment  stores, the extent of
competition, marketing programs, weather, special or unusual events, such as the
Olympics or a televised event of significant  public  interest,  local organized
sports  activities and other factors that may affect  retailers in general.  Any
concentration of new store openings and the related new store  pre-opening costs
near the end of a fiscal  quarter could have an adverse  effect on the financial
results for that quarter.                                                       

BECAUSE  MARGINS ON  SELL-THROUGH  PRODUCTS ARE LOWER THAN RENTAL  MARGINS,  OUR
MARGINS COULD BE MATERIALLY  ADVERSELY AFFECTED IF A GREATER PROPORTION OF NEWLY
RELEASED  MOVIES WERE INITIALLY  PRICED AS A SELL-THROUGH  PRODUCT AND CONSUMERS
DESIRED TO OWN THESE MOVIES RATHER THAN RENT THEM.                              

In general,  studios initially price their movies at prices that are too high to
generate  significant  consumer  demand for  purchase.  Recently,  however,  the
studios have released a limited number of movies at prices  intended to generate
consumer demand to purchase these movies rather than rent them. This is referred
to as  sell-through  pricing.  If studios  release  more movies at  sell-through
prices,  demand for video  rentals may decrease and our results may be adversely
affected.                                                                       

Sell-through retail margins are generally lower than rental margins. Some of our
competitors, such as mass merchandisers, warehouse clubs and Internet sites, can
distribute and sell these sell-through  movies on VHS tape or DVD at lower costs
and/or  may  operate at lower  margins  than us. As a result,  our  sell-through
business has comprised only a small percentage of our total revenue.  We believe
our profitability  would be adversely  affected if we did not derive most of our
revenues  from the  higher  margin  rental  business.  We  could  be  materially
adversely affected if:                                                          

  -       a greater proportion of either release format were initially priced as
sell-through merchandise; and                               

-       consumers desired to own, and not rent, these movies.               

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WE HAVE A  SIGNIFICANT  AMOUNT OF FIXED COSTS AND,  AS A RESULT,  AN INCREASE IN
DOWNTIME OR DECREASE IN PRODUCTIVITY COULD RESULT IN OPERATING LOSSES.          

Fixed costs, including costs associated with our premises and salaries,  account
for a significant  portion of our costs and expenses.  As a result,  downtime or
lost  productivity  resulting  from lower  demand,  equipment  failures or other
factors could result in operating losses for our business.                      

MANY OF THE  COMMUNITIES  IN WHICH HAVE STORES ARE DEPENDENT  UPON A SINGLE OR A
FEW INDUSTRIES.  IF ONE OR MORE OF THESE INDUSTRIES  EXPERIENCES A DOWNTURN, THE
ECONOMIES OF THESE  COMMUNITIES MAY EXPERIENCE A DOWNTURN WHICH COULD REDUCE THE
REVENUES FROM STORES IN ONE OR MORE OF THOSE COMMUNITIES.                       

We have  developed a business  strategy  targeting the secondary  retail markets
located in communities  with a minimum trading area population of  approximately
5,000 to 10,000  people.  The  strength  of the local  economy in these types of
communities  typically  depends  upon the  strength  of a smaller  number of key
industries.  If the major  sustaining  industry in one of these  communities  is
negatively affected, the strength of the entire local economy will be negatively
affected and the amount of disposable income of the residents in that particular
community will decrease.  Consequently,  a store operated by us in that location
may be negatively affected.                                                     

COMPANY AND SECURITIES RELATED RISKS                                            

WE DEPEND ON THE EXPERTISE OF KEY PERSONNEL. IF ANY OF THESE INDIVIDUALS WERE TO
LEAVE, OUR BUSINESS MAY SUFFER.                                                 

Our future success  depends on the continued  services of certain key management
personnel,  including  Trevor M.  Hillman,  our  Chairman  and  Chief  Executive
Officer, Gregg C. Johnson, our President and Chief Operating Officer,  Derrek R.
Wong,  our Senior  Vice  President  of Finance and Chief  Financial  Officer and
Michael D. McKelvie, our Senior Vice President, Marketing & Communications.  The
loss of any one of these individuals could have a material adverse effect on our
results of operations. We maintain key-man life insurance for Trevor M. Hillman.
We have entered into consulting  agreements with Mr. Hillman and Mr. Johnson. To
date we have not entered into written employment agreements with Mr. Wong or Mr.
McKelvie.  Our continued growth and profitability  also depend on our ability to
attract  and  retain  other  management  personnel,  including  qualified  store
managers.                                                                       

OUR  CHAIRMAN  AND CHIEF  EXECUTIVE  OFFICER,  TREVOR M.  HILLMAN,  BENEFICIALLY
CONTROLS  APPROXIMATELY  16.23%  OF OUR  COMMON  SHARES  AND  OUR  OFFICERS  AND
DIRECTORS AS A GROUP CONTROL 49.07%,  AND AS A RESULT, CAN INFLUENCE THE CONTROL
OF OUR COMPANY.                                                                 

As of November 30, 2002, Trevor M. Hillman beneficially controlled approximately
16.33% of our  issued and  outstanding  common  shares,  and our  Directors  and
officers, as a group, beneficially controlled approximately 49.07% of our common
shares. As a result,  these stockholders,  if acting together,  would be able to
effectively  influence control matters  requiring  approval by our stockholders,
including the election of all members of the Board of Directors and  significant
corporate  transactions,  such as mergers or other business  combinations.  This
control may delay, deter or prevent a third party from acquiring or merging with
us, which in turn could reduce the market price of our common stock.            

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OUR  PRESIDENT  AND CHIEF  OPERATING  OFFICER,  GREGG C.  JOHNSON,  BENEFICIALLY
CONTROLS APPROXIMATELY 9.22% OF OUR COMMON SHARES AND OUR OFFICERS AND DIRECTORS
AS A GROUP CONTROL 49.07% AND AS A RESULT, CAN INFLUENCE CONTROL OF OUR COMPANY.

As of November 30, 2002, Gregg C. Johnson beneficially controlled  approximately
9.22%  of our  issued  and  outstanding  common  shares,  and our  officers  and
Directors,  as a group,  beneficially  controlled  approximately  49.07%  of our
common shares. As a result, the stockholders,  if acting together, would be able
to effectively influence control matters requiring approval by our stockholders,
including the election of all members of the Board of Directors and  significant
corporate  transactions,  such as mergers or other business  combinations.  This
control may delay, deter or prevent a third party from acquiring or merging with
us, which in turn could reduce the market price of our common stock.            

WE ARE A FOREIGN  CORPORATION  AND ALL OF OUR DIRECTORS AND OFFICERS ARE OUTSIDE
OF THE UNITED STATES, WHICH MAY MAKE ENFORCEMENT OF CIVIL LIABILITIES DIFFICULT.

We  incorporated  under the laws of Canada.  As of October 31, 2002,  all of our
Directors and officers are  residents of Canada,  and  substantially  all of our
assets  are  located  outside  of the  United  States.  Consequently,  it may be
difficult for United States  investors to effect  service of process  within the
United States upon our Directors or officers, or to realize in the United States
upon judgments of United States courts  predicated upon civil  liabilities under
the United States Securities  Exchange Act of 1934, as amended.  A judgment of a
United States court predicated solely upon such civil liabilities would probably
be enforceable in Canada by a Canadian court if the United States court in which
the judgment was obtained had jurisdiction, as determined by the Canadian court,
in the matter.  There is substantial  doubt whether an original  action could be
brought  successfully  in Canada  against  any of such  persons  or the  Company
predicated solely upon such civil liabilities.                                  

WE HAVE  RESERVED UP TO  2,352,000  COMMON  SHARES FOR FUTURE  ISSUANCE AS STOCK
OPTIONS AND 389,819  COMMON  SHARES FOR  ISSUANCE  UPON THE EXERCISE OF EXISTING
WARRANTS,  WHICH IF ISSUED MAY CAUSE  DILUTION IN THE VALUE OF CURRENTLY  ISSUED
AND OUTSTANDING SHARES.                                                         

As of November 30, 2002, we have granted  incentive  stock options to Directors,
officers and key employees  exercisable to acquire up to 1,627,300 common shares
and issued  warrants  which are  exercisable  to  acquire  up to 705,074  common
shares.  Such  options  and  warrants,  if  fully  exercised,  would  constitute
approximately  18.6% of our common  share  capital at  November  30,  2002.  The
exercise of such options and the  subsequent  resale of such common  shares into
the public market could  adversely  affect the  prevailing  market price and our
ability to raise  equity  capital in the future at a time and price which we may
deem  appropriate.  We may also enter into commitments in the future which would
require us to issue  additional  common shares and we may grant additional share
purchase warrants and stock options.                                            

BROKER-DEALERS  MAY BE  DISCOURAGED  FROM EFFECTING  TRANSACTIONS  IN OUR SHARES
BECAUSE  THEY ARE  CONSIDERED  PENNY  STOCKS AND ARE  SUBJECT TO THE PENNY STOCK
RULES.                                                                          

Rules 15g-1 through 15g-9 promulgated under the Securities Exchange Act of 1934,
as  amended,   impose  sales  practice  and  disclosure   requirements  on  NASD
brokers-dealers  who make a market in "a penny stock".  A penny stock  generally
includes any  non-NASDAQ  equity  security  that has a market price of less than
US$5.00  per share.  Since July 24,  2001 our shares have been listed and posted
for trading on the Toronto Stock  Exchange,  the TSX.  Prior to this, our shares
were listed on the Canadian Venture                                             

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Exchange,  the CDNX.  The high and low closing  price of our shares  during 1999
ranged from $2.50  (high) to $0.50 (low),  between  $5.25 (high) and $1.85 (low)
during 2000,  between $3.50 (high) and $1.65 (low) during 2001 and between $2.30
(high) and $0.38 (low)  during the period  from  January 1, 2001 and October 31,
2002. The price of our shares on October 31, 2002 was $0.70.                    

Under the penny stock regulations, a broker-dealer selling penny stock to anyone
other than an established customer or an "accredited  investor"  (generally,  an
individual  with  net  worth in  excess  of  US$1,000,000  or an  annual  income
exceeding US$200,000, or US$300,000 together with his or her spouse) must make a
special  suitability  determination  for the  purchaser  and  must  receive  the
purchaser's  written  consent  to the  transaction  prior  to sale,  unless  the
broker-dealer  or the transaction is otherwise  exempt.  In addition,  the penny
stock regulations require the broker-dealer to deliver, prior to any transaction
involving a penny stock, a disclosure  schedule  prepared by the SEC relating to
the penny stock market, unless the broker-dealer or the transaction is otherwise
exempt. A broker-dealer is also required to disclose  commissions payable to the
broker-dealer and the registered  representative  and current quotations for the
securities.  Finally,  a  broker-dealer  is required to send monthly  statements
disclosing  recent price  information  with respect to the penny stock held in a
customer's  account and information  with respect to the limited market in penny
stocks.  Our shares  would be  considered a penny stock.  The  additional  sales
practice and disclosure requirements imposed upon brokers-dealers may discourage
broker-dealers from effecting  transactions in our shares,  which could severely
limit the  market  liquidity  of the shares and impede the sale of our shares in
the secondary market.                                                           

ITEM 4.           INFORMATION ON THE COMPANY                                    

HISTORY AND DEVELOPMENT OF VHQ ENTERTAINMENT INC.                               

We, VHQ Entertainment Inc., were incorporated as 753541 Alberta Ltd., an Alberta
corporation under the BUSINESS  CORPORATIONS ACT (Alberta) on September 5, 1997.
Our authorized capital consisted of an unlimited number of common shares.       

On  December  11,  1997,  we issued  2,000,000  common  shares  to our  founding
shareholders for aggregate  consideration of $100,000.  On December 22, 1997, we
amended our Articles of Incorporation  to change our name to Video  Headquarters
Inc.  and to  create a new class of an  unlimited  number  of  preferred  shares
issuable in series.                                                             

In March 1998, we completed an initial public offering as a "Junior Capital Pool
Company"  under the rules of the Alberta  Securities  Commission and The Alberta
Stock  Exchange.  A Junior  Capital Pool Company is a company with no identified
business,  which is formed  and  capitalized  for the  purposes  of  identifying
business  opportunities.  In our initial public  offering,  we issued  2,000,000
common  shares at $0.10 per share for gross  proceeds  of  $200,000.  Our common
shares were listed and posted for  trading on the junior  capital  pool board of
The Alberta Stock Exchange on June 9, 1998.                                     

Effective  September  18, 1998,  we acquired  all of the issued and  outstanding
securities of Integrated Retail Corp. See "Our Acquisitions - Our Acquisition of
Integrated Retail". We also amended our Articles of Incorporation to consolidate
our common  shares on a two (2) shares  for one (1) share  basis,  so that after
giving effect to the  consolidation  and our  acquisition  of Integrated  Retail
Corp,  our issued and  outstanding  common shares  amounted to 7,200,000  common
shares. Our acquisition of Integrated                                           

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Retail Corp.  constituted a "major  transaction"  under the rules of the Alberta
Securities Commission. As such, we were no longer classified as a Junior Capital
Pool  Company  and our shares  were  listed for  trading  on The  Alberta  Stock
Exchange. In November 1999, The Alberta Stock Exchange merged with the Vancouver
Stock Exchange to become the Canadian Venture Exchange (the "CDNX").  Our common
shares were traded on the CDNX under the trading symbol "VHQ" from November 1999
to July 30, 2001 at which time we voluntarily  delisted our shares from the CDNX
as a result of the listing of our shares on the Toronto Stock Exchange  ("TSX").
On July 24, 2001 our common shares commenced trading on the TSX.                

At our  November  22,  2000 annual  meeting of  shareholders,  our  shareholders
approved,  among other items,  the filing of Articles of  Continuance  under the
Canada  Business  Corporations  Act  and  the  changing  of  our  name  to  "VHQ
Entertainment,   Inc."  from  "Video  Headquarters  Inc.".  The  Certificate  of
Continuance under the Canadian Business  Corporations Act ("CBCA") was issued on
December 1, 2000.  Also at the November  15, 2001 special and annual  meeting of
shareholders,  Trevor H. Hillman,  Peter Lacey,  Gregg C. Johnson,  Catherine J.
McDonough,  Ayaz Kara,  Lorn Becker and Marc Gignac were elected to the Board of
Directors  to serve  one-year  terms  expiring  at the next  annual  meeting  of
shareholders.  On June 5, 2002 we accepted the  resignation  of Lorne Becker and
Ayaz Kara as directors.                                                         

Since our inception  (September 5, 1997) to May 31, 2002, our principal  capital
expenditures  and  divestitures  (including  interests in other  companies) were
approximately   $22.14  million.   Information   concerning   principal  capital
expenditures and divestitures,  since inception and currently planed are further
described under "Our Acquisitions",  below, and "Item 5. Operating and Financial
Review and Prospects". We have not been subject to any bankruptcy,  receivership
or similar proceedings.                                                         

Save and except  for a written  expression  of  interest  to acquire  all of the
assets of the Company by Video Update Inc. (a  wholly-owned  subsidiary of Movie
Gallery Inc.  NASDAQ:  MOVI),  dated  December 10, 2001;  subsequent to which no
further  discussions  or  negotiations  have  been  undertaken,  we have not had
indications  of any public  takeover by third parties with respect to our shares
and have not and do not  intend  to  engage  in any  public  takeovers  of third
parties since our inception and during the current fiscal year.                 

Our  principal  business  office is  located  at 6201 - 46th  Avenue,  Red Deer,
Alberta,  T4N 6Z1,  and our  registered  office is  located  at 1900,  715 - 5th
Avenue, S.W., Calgary,  Alberta, T2P 2X6. Our phone number is (403) 346-8119 and
our e-mail address is www.mail@vhq.ca.                                          

Our website is located at  WWW.VHQ.CA.  Information  contained on our website is
not part of this Registration Statement.                                        

BUSINESS OVERVIEW                                                               

As at the date of this annual  report we operate a chain of 49 retail  video and
home entertainment  stores in Western Canada and the North West Territories.  We
expect to open our 50th store in January 2003. Our business strategy is to focus
on serving in rural and  secondary  markets and  smaller  urban  centers,  which
typically have less competition,  lower fixed costs and lower staffing costs. We
intend to grow by  opening  new  stores  using our video and home  entertainment
store format that we have  developed  and by acquiring  existing  video and home
entertainment  stores in the market that we target to serve.  We intend to first
complete  our  expansion  throughout  Western  Canada  by the end of  2004,  and
thereafter,  we  intend  to  expand  into  Eastern  Canada  following  a similar
strategy.  Although  small rural and secondary  markets                         

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in the United States are  demographically  similar to those in Canada, we do not
intend to pursue  expansion  into the United States until we have completed to a
significant degree, our current Canadian expansion likely in 2006.              

The Company's  capital  expenditures,  which relates mainly from the purchase of
rental assets and acquisitions, are as follows:                                 

                                                        [Enlarge/Download Table]

--------------------------------------------------------------------------------------------------------------
12 MONTHS ENDING                 12 MONTHS ENDING             12 MONTHS ENDING             12 MONTHS ENDING   
  MAY 31, 2002                      MAY 31, 2001                 MAY 31, 2000                 MAY 31, 1999    
--------------------------------------------------------------------------------------------------------------
                                                                                                              
$6,584,005                       $6,972 million               $7,950 million               $2.767 million     
--------------------------------------------------------------------------------------------------------------

Information  concerning our principal  capital  expenditures  and  divestitures,
since  inception  and  currently  planned,  are  further  described  under  "Our
Acquisitions" and "Item 5. Operating and Financial Review".                     

VIDEO AND ENTERTAINMENT INDUSTRY                                                

We are engaged  primarily in the rental and sale of filmed  entertainment in VHS
and DVD format and related  merchandise,  the rental and sale of video games and
related  accessories  and the sale of music.  The  products  we rent or sell are
generally  within  the  "home  entertainment"  market.  According  to the  Video
Software  Dealers  Association  ("VSDA")U.S.  consumers  spent US $17.4  billion
renting and buying prerecorded video in 1999, up 2.4% from expenditures  in1998.
Video spending in Canada also rose in 1999 by about 2.4% with video expenditures
of about US $2.0 billion.  According to Adams Media Research,  the total numbers
of videos purchased by consumers in 1999 was 685 million compared to 674 million
in 1998.  As well,  according  to the VSDA 90% of all US adult VCR  owners  have
rented a video at least once a week.                                            

Sales  of  VCRs  continue  to  grow.   According  to  the  Consumer  Electronics
Association,  22 million VCRs were sold in the US up 26% from 1998.  As well, US
consumers  bought  approximately  3.7 million DVD players in 1999  According  to
Adams Media  Research,  DVD sales are  expected to increase  over 800% from $4.6
milllion in 1999 to $41.87 million in 2004,  therefore expanding the opportunity
for entertainment sales.                                                        

The Recording  Industry  Association  of America  reported  North American music
industry revenues of US$13.2 billion in 2001,  representing a 3.1% increase over
the previous year. North America represents the greatest music market,  followed
closely by Europe.  Japan falls into third place with  approximately  50% of the
volume of sales  achieved  in Europe.  Worldwide  music  sales  total over US$38
billion  annually.  In the video games market,  also referred to as  interactive
entertainment  media,  retail sales in the United States were US$6.0  billion in
2000 according to the NPD Group, an international  marketing information company
based in Port Washington, New York. Electronic or computer-based games fall into
four major  categories;  personal  computer  games,  console or next  generation
games, hand-held games, and online games accessed via the Internet.             

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The retail market for video and home entertainment has changed dramatically over
the last five years and has been characterized by a consolidation of many of the
smaller independent operators.  Once a cottage industry of small privately owned
enterprises,  the  market  has now  largely  been  rolled  up with  concentrated
ownership  in the  hands  of a few  large  publicly  traded  corporations.  This
consolidation  has  occurred  primarily as a result of the fact that most retail
outlets needed increasing  amounts of capital to keep pace with the ever growing
number of titles  produced by the major studios,  as well as the expanding "copy
depth"  programs  offered by the larger chains that carry both a broad selection
and  extensive  number  of per title  copies  in an  effort  to ensure  that the
consumer is not disappointed by their  respective  selection not being available
for rental.  As many  independent  retailers  were unable to compete,  the major
operators  acquired  many  retailers  and many  retailers  simply  closed  their
businesses.                                                                     

Over the last decade the home  entertainment  industry at the retail  storefront
level has  experienced  tremendous  growth in the dollars  spent by consumers on
video  rental.  We  believe  that this is due partly to the fact that VHS player
penetration  into households  still ranks as one of the most successful  product
introductions ever, as well as the fact that studios continue to expand both the
number and  quality of  offerings  to the market.  Consumers  continue to have a
large demand for home video, and at present,  the revenues  generated from video
release  comprise  up to 60% of a  studio's  revenues  associated  with a  title
release.  The  studios  thus make  concerted  efforts  to protect  the  revenues
resulting  from this  market,  and,  as such,  continue to  introduce  marketing
techniques to expand this sector, including direct to video releases, as well as
"sell-through"  pricing on well  performing  "A" titles  whereby such titles are
introduced at pricing for retail sale (as opposed to rental).  This sell-through
pricing  allows  retailers  to benefit from lower  acquisition  costs for rental
inventory, as well as the opportunity to sell such titles.                      

We view the recent market  success of digital  versatile  discs ("DVDs") to be a
major  factor for the home  entertainment  market.  The DVD format  incorporates
several  advanced  features,   including  digital  quality  picture  and  sound,
outtakes,  additional  footage,  multiple language encoding,  special director's
cuts and pans of  scenes,  the  ability  to edit  content  on the fly to match a
particular  rating or make the title suitable for a particular  audience and the
ability to "jump"  from scene to scene.  These  features  have made DVD the most
successful new home entertainment  product offering for the last three years. We
have made  substantial  investment  into DVD  inventory  for rental and revenues
generated from DVD continue to increase at dramatic  rates,  particularly in the
urban centers.                                                                  

We also view new hardware product  offerings such as Sony's  Playstation  2(TM),
Microsoft's  X-BoxTM and the Nintendo Game CubeTM to be a significant  factor in
the video and home  entertainment  industry.  The Playstation 2(TM) features the
ability to play DVD movies,  DVD or CD-based  video games and CD-based music all
on a single platform.  This convergence of technologies  will likely result in a
convergence  of  media  platforms  toward  DVD and may  result  in even  greater
penetration of DVD-compliant hardware than exists today.                        

Over the last five years the retail  market has  transitioned  away from a model
whereby  the  video  retailer  buys a copy of a title  and  rents the copy for a
return of its capital to a model whereby the major studios  provide the title at
a low initial  capital cost, and the revenues are then shared between the studio
and the  retailer.  This model has been used by theatres  for decades and now is
becoming  increasingly  prevalent in the home entertainment  market as well. The
revenue sharing model is available to most retailers  through third parties such
as Rentrak Corporation,  or directly with the studios themselves. The difference
between  direct and third party models is  principally  (i) the up front capital
cost (ii) the  percentage of revenues  retained by the  retailer,  and (iii) the
cost of "buying" out the title at the end of the                                

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contract.  Typically,  third party  contracts  result in greater  upfront costs,
lower revenue  sharing  percentages  to the  retailer,  and higher buyout costs.
Consequently,  those retailers that have been able to obtain direct studio deals
have held a competitive  advantage in the marketplace and thus have been able to
provide  both a  greater  selection  of titles  and a  greater  number of copies
in-store of each title.                                                         

To  date,  we have  participated  in  revenue  sharing  through  a  third  party
arrangement with Rentrak Corporation, and, more recently, directly with a number
of  studios.  We believe  that we will  retain  our  contractual  and  strategic
alliance with Rentrak  Corporation  in the future for the supply of product from
studios that we do not enter into revenue  sharing  arrangements  with,  and for
studios that do not offer direct revenue sharing programs.  We cannot assure you
that we will  successfully  negotiate  revenue sharing  arrangements  with other
movie  studios or that we will  maintain our revenue  sharing  arrangement  with
Rentrak.  Our inability to maintain  revenue sharing  arrangements  would have a
materially adverse effect on our business and results of operations.            

OUR RETAIL BUSINESS GROWTH STRATEGY                                             

Our  business  strategy  is to compete in  neighborhood  markets in large  urban
centers,  small urban centers and rural  markets with a trading area  population
averaging  approximately  10,000.  We believe that the  advantages  of targeting
these markets are:                                                              

o      less competition;                                              

   o      the ability to develop market share at lower per customer expense;

o      lower fixed costs (leased space);                              

o      lower staffing costs; and                                      

o      lower existing market penetration by competitors.              

We generally  charge rental rates that are competitive with rates charged by our
competitors.                                                                    

We intend to grow by establishing new, or acquiring established,  video and home
entertainment stores.                                                           

We intend to apply specific  selection  criteria when  evaluating new locations,
including:                                                                      

     o      trading  area  population  base  within  20 miles exceeding 5,000 to
10,000 persons;                                         

o      competition in area;                                           

o      availability of convenient retail space with available parking;

o      traffic, frontage and exposure at retail site; and             

     o      demographic  characteristics  of  the  area (household size, age and
income).                                                

OUR RETAIL STORES                                                               

Our video and home  entertainment  stores are typically  located in retail strip
shopping  centres and well-located  stand-alone  retail stores and range in size
from  3,500 to 6,000  square  feet.  Our  stores  are  open  seven  days a week,
generally from 10 a.m. to 12 midnight.                                          

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Our stores display new release movies  alphabetically  and catalogue  titles are
displayed  alphabetically by category,  such as "Action,"  "Comedy," "Drama" and
"Children." Our typical store's inventory  consists of video cassettes  ("VHS"),
digital  versatile discs ("DVD"s),  video games and music compact discs ("CD"s).
The  actual  inventory  of each  store  varies  depending  on its  location.  We
continually  review each store to ensure that inventory for both rental and sale
is meeting local demand.  Also,  each store has a few special  interest  titles,
covering such subjects as hunting, golf and education, selected by management to
appeal to the customer  base in the store's  local  market area.  We make buying
decisions  centrally  and base these  decisions  on box office  results,  actual
rental history of comparable titles within each store and industry research.    

Based on our  experience,  we believe  that our  typical  store's  revenues  are
affected by internal  factors such as our new release  title  selection  and the
number of copies of each new  release  available  for rental as  compared to our
competitors.  We are  committed  to offering  as many copies of new  releases as
necessary to be competitive within a market,  while at the same time keeping our
costs as low as  possible.  New VHS tapes,  DVDs and music CDs offered by us for
sale are primarily  "hit" titles  promoted by the studios for  sell-through,  as
well as special interest titles,  children's  titles and seasonal titles related
to particular holidays.                                                         

We design each store  using  uniform  store  fixtures,  equipment  and layout to
create brand  identity.  Our stores play movie previews and promotions of coming
attractions on in-store video and sound preview systems for the enjoyment of our
customers.  Each of our stores is decorated in bright and attractive colours and
features posters and stand-up displays promoting specific movie, music and video
game  titles.  We arrange  movies and video games in  attractive  display  boxes
organized into  categories by topic,  except for new movie and video game rental
releases,  which are assembled  alphabetically  in their own section for ease of
selection by customers.                                                         

Our stores were originally operated under the brand "Video Headquarters". During
the past 18 months, we have adopted a new format under the "VHQ" brand. This new
format is designed to generate  higher  traffic  volumes and repeat  business as
part  of  our  branding  effort.   Our  store  layout  uses  inviting   colours,
state-of-the-art    entertainment    systems,   and   a   broad   selection   of
entertainment-related  products,  including  music CDs, video game  accessories,
video games for sale,  studio  merchandise  related to filmed  entertainment and
music, sell-through filmed entertainment and an expanded selection of DVD titles
for rent.  As part of our branding  strategy,  we are in the process of painting
and installing  new fixtures in existing  stores and in making  physical  layout
changes to enhance check-out processes. The final stage of our branding strategy
will be to update store  exteriors  and signage.  We believe that the  increased
product selection provides opportunities for cross-product promotion in order to
increase the average size of a purchase.  We have opened 13 locations  using the
new format and have begun the introduction of the new format in an additional 17
locations.  As of the date of this annual report,  the remaining stores continue
to operate under the "Video Headquarters" brand.                                

Generally,  we spend  approximately  $225,000-$275,000  to open each new  store.
These costs are net of tenant  inducements and include tenant finish,  fixtures,
computers,  point-of-sale  equipment,  security  devices,  interior and exterior
signage,  inventory for rent,  deposits,  staff  recruitment  and training,  and
inventory for sale.                                                             

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Our policy is to constantly  evaluate our existing store base to determine where
improvements  may benefit  our  competitive  position in the areas we serve.  In
negotiating  leases, we attempt to negotiate flexible lease terms to allow us to
react to changing demographics and other market conditions.                     

In the future,  we may  actively  pursue  relocation  opportunities  to adapt to
market shifts.  Similarly,  we may elect to expand and/or remodel certain of our
stores in order to improve  facilities,  meet  customer  demand and maintain the
visual appeal of each store.                                                    

OUR EXISTING RETAIL LOCATIONS                                                   

At the time of  completion  of our  acquisition  of  Integrated  Retail Corp. on
September  18,  1998,  Integrated  operated  seven video and home  entertainment
retail  outlets in  Alberta.  Since  that date,  we opened 20 new video and home
entertainment  retail  outlets  in  Alberta  and one in  Yellowknife,  Northwest
Territories.  On September 29, 1999, we acquired Safiqa,  which owned four video
and home  entertainment  stores in the Calgary market  operating under the trade
name  "Rainbow  Video." On December  1, 1999,  we acquired  Star  Vision,  which
operated six video superstores in the Saskatoon market operating under the trade
name "Family  Video." On March 21, 2000, we acquired the two "Movies Plus" video
and home  entertainment  retail outlets located in Calgary.  On June 15, 2000 we
acquired the assets of "Silver  Screen  Video",  a video and home  entertainment
store in Saskatoon, Saskatchewan. On July 11, 2000, we acquired two video stores
located in Spruce Grove and Stony Plain, Alberta. On March 15, 2001, we acquired
the assets and business  operations of a video rental and retail store operating
in La Ronge,  Saskatchewan.  These  openings  and  acquisitions  bring the total
number of our home  entertainment  outlets now  operating up to 49. We expect to
open our 50th store in January 2003. It is management's intent to convert all of
our  stores to the VHQ  Entertainment,  Inc.  brand  over the course of the next
year.                                                                           

Set forth below are the locations of our video specialty  outlets (as at October
31, 2002).                                                                      

                                                        [Enlarge/Download Table]

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     NAME OF LOCATION                                  CITY/TOWN                              PROVINCE OR TERRITORY 
--------------------------------------------------------------------------------------------------------------------
                                                                                                                    

Video Headquarters or VHQ   Sylvan Lake; Red Deer - North; Blackfalds; Wetaskiwin; Leduc;    Alberta                
retail outlets              Drayton Valley; Rocky Mountain House; Whitecourt;                                       
                            Lloydminster; Lacombe; Lethbridge - North; Lethbridge - South;                          
                            Ft. Saskatchewan; Airdrie; Edmonton - Northwood; Edmonton -                             
                            Millwoods; Red Deer - South; Calgary - Northpointe; Calgary -                           
                            West Market; Okotoks; Calgary - Lake Chaparral; Brooks;                                 
                            Drumheller; Calgary - Abbeydale; Calgary - Castleridge;                                 
                            Calgary - Riverbend; Calgary - Westgate; Calgary - Monterey;                            
                            Calgary - Braeside; Spruce Grove; Stony Plain; Lethbridge -                             
                            West; Calgary - Panorama Hills; Calgary - Coral Springs;                                
                            Ponoka; Calgary - Dover;  Calgary - Kingsland; Camrose; Leduc                           
                            - South.                                                                                

--------------------------------------------------------------------------------------------------------------------
Video Headquarters retail   Yellowknife.                                                     Northwest Territories  
outlets                                                                                                             
--------------------------------------------------------------------------------------------------------------------

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VHQ retail outlets          La Ronge; Saskatoon - 115th St.; Saskatoon - 8th St.; Weyburn;   Saskatchewan           
                            Saskatoon - Churchill; Saskatoon - Lawson; Saskatoon -                                  
                            Confederation; Saskatoon - Lakeview; Saskatoon - Forest Grove.                          
--------------------------------------------------------------------------------------------------------------------

MARKET SEGMENTS AND REVENUE MIX                                                 

Our principal  revenues are derived from the following  categories (a) video and
DVD rental; (b) video game rental;  (c) confectionery  sales; (d) video, and (e)
music,  DVD, and video gaming software sales.  The sale and distribution of each
category of product is  conducted  principally  through  our retail  storefronts
located  entirely in western  Canada  (principally  Alberta)  and the  Northwest
Territories,  and via the Internet through our website, www.vhq.ca. For the last
two fiscal  years,  the  breakdown of sales in each  category as a percentage of
gross revenues is as follows:                                                   

                                                        [Enlarge/Download Table]

-----------------------------------------------------------------------------------------------------------------------
                  CATEGORY                      FISCAL 1999      FISCAL 2000(1)<F1>   FISCAL 2001       FISCAL 2002    
-----------------------------------------------------------------------------------------------------------------------
                                                                                                                       
Video and DVD rental:                                   79.3%                74.3%             67.6%             66.5% 
-----------------------------------------------------------------------------------------------------------------------
Video game rental:                                        N/A                 5.2%              9.9%              8.9% 
-----------------------------------------------------------------------------------------------------------------------
Confectionary sales:                                     5.0%                 5.1%              6.5%              6.3% 
-----------------------------------------------------------------------------------------------------------------------
Previously   viewed   video/gaming   software            2.0%                 1.6%              1.0%              3.0% 
sales:                                                                                                                 
-----------------------------------------------------------------------------------------------------------------------
Sell-through video/gaming software sales:               13.6%                11.0%              8.9%              8.2% 
-----------------------------------------------------------------------------------------------------------------------
Music sales:                                             0.1%                 2.8%              6.1%              7.1% 
-----------------------------------------------------------------------------------------------------------------------

<FN>                                                                                                                   
(1)<F1>  In  2000, we began  diversifying our product  mix to include studio and                                       
other  entertainment  related  merchandise,  including  clothing,   posters  and                                       
memorabilia.                                                                                                           
</FN>                                                                                                                  

SEASONALITY OF THE RETAIL VIDEO INDUSTRY                                        

The  video  and home  entertainment  industry  is  characterized  by a degree of
seasonality  related to weather and such other  factors as  holidays  and school
holidays. Generally speaking, the industry experiences its greatest sales during
periods of  inclement  weather  typically  experienced  during  the winter  when
outdoor or other  competing  activities may not be available.  During periods of
weather conducive to outdoor activities,  particularly during the summer months,
sales are adversely  affected.  To a large extent sales are affected by holidays
and school  holidays when families and school  children are at home.  During the
winter months this effect is substantial on sales, in particular during holidays
for  Christmas  and Easter when the industry  experiences  its  greatest  sales.
During  the  summer  months  the  effect of  children  not  attending  school is
material, particularly toward the end of the summer holiday period.             

LICENSES / SOURCES AGREEMENTS                                                   

We source our product lines through a number of suppliers.  Approximately 43% of
our VHS and DVD rental assets are supplied through Video One Canada Ltd. ("Video
One"). Rentrak Corporation                                                      

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("Rentrak") provides  approximately 7% of our VHS and DVD rental assets. We have
a one year  non-exclusive  Product  Fulfillment  Agreement with Video One which,
unless renewed, extends through January 30, 2003. Under the agreement, Video One
supplies us with film  entertainment  rental and retail products,  entertainment
merchandise and video game rental products.                                     

We also have a ten year  non-exclusive  Revenue  Share  Agreement  with  Rentrak
Corporation. This agreement also provides for the supply of rental products on a
revenue share basis.                                                            

The other 50% of our VHS and DVD rental and retail product is sourced  through a
number of direct revenue  sharing  agreements we have with a number of the major
studios (see "Video and Entertainment  Industry" above),  other product purchase
arrangements we have with individual suppliers and wholesalers.                 

To date, we participated  in revenue  sharing through a third party  arrangement
with Rentrak Corporation,  and, more recently with a number of studios directly.
We believe  that we will retain our  contractual  and  strategic  alliance  with
Rentrak  Corporation  in the future for the supply of product  from  studios not
dealing  directly  with the Company and for studios that do not engage in direct
revenue sharing programs.                                                       

We obtain our video game product  almost  entirely  from Video One and our music
from Langara Distribution Inc., a music distribution company owned by Wilmington
Rexford (formerly E-Trend Networks,  Inc.). See "Wilmington  Rexford"  (formerly
"E-Trend Networks,  Inc."). We continually review  arrangements with third-party
suppliers  and may, in the normal course of business,  change such  suppliers if
more advantageous terms of supply can be negotiated.                            

MARKETING AND ADVERTISING                                                       

We have developed a  comprehensive  advertising  and promotion  strategy that is
implemented in the various  markets  depending on the market  demographics.  The
various marketing approaches include:                                           

1.       LOCAL STORE MARKETING/SALES PROMOTIONS                                 

         Sales promotions include price discounts, contests, and daily or weekly
         features. Also, each retail store is encouraged to participate in local
         community  events,   including  sports,   charities  and  other  public
functions.                                                    

2.       BULK MAIL                                                              

         The  mailing  of  unaddressed  fliers  with  coupons is one of the most
         effective  ways of  building  store  traffic and  maintaining  customer
loyalty.                                                      

3.       RADIO ADVERTISING                                                      

         Radio advertising is a core strategy used in major markets.  It is also
a key element in building the recognition of the VHQ brand.   

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4.       PRINT                                                                  

         Newspaper  advertising  is used on a local  level to  promote  in-store
activities and major product announcements.                   

5.       OUTDOOR SIGNAGE                                                        

         In highly competitive markets, outdoor advertising (including billboard
         and transit  signage) is used in the  perimeter  marketing  area of the
         competition.  This is a defensive  strategy to keep the VHQ brand front
         and center in locations  where consumers have a choice as to where they
buy or rent home entertainment software.                      

6.       THIRD PARTY PARTNERSHIP/STRATEGIC PARTNERS                             

         Participation  in  cross-promotion  with  strategic  partners and co-op
         advertising in  conjunction  with film studios and music labels is done
         on an ongoing  basis.  Also,  each  store is  mandated  to  continually
         exploit  cross-marketing  opportunities (such as cross-couponing)  with
other retailers, such as pizza stores, in its local market.   

7.       CUSTOMER DATA BASE                                                     

         Customers  who fail to return to a store in a specified  period of time
         are contacted  directly.  This contact is managed via telephone  and/or
         direct mail.  More recently we have adopted new  marketing  strategies,
         including  "late  fee"  waivers  and  $5.00  credit  vouchers  to bring
customers back.                                               

Our current  marketing  budget is  approximately  1% of sales.  We also  receive
funding for advertising  through various vendor  co-operative  advertising funds
and market  development  funds  established  with  product  suppliers  and movie
studios. We also benefit from advertising marketing done by studios and theatres
in connection  with the promotion of the theatre  release of films. We expect we
will  increase  our  marketing   budget,   particularly  as  we  add  television
advertising, and as we continue to add new stores to the chain.                 

Our retail stores are actively involved in their respective communities, and are
focused on meeting the needs of their loyal customers.                          

INVENTORY                                                                       

Inventory  consists of new and used software of VHS tapes, DVDs and video games,
CD music and confectionary available for sale. As at May 31, 2002, the inventory
value of VHS tapes, DVDs and video games was $650,253, the inventory value of CD
music was $1,011,711 and the inventory value of confectionary available for sale
was $198,277.                                                                   

STORE RENTAL ASSETS                                                             

The VHS tapes,  DVD,  and video  game  assets  available  for rent in each store
consists of our  catalogue  titles (those in release for more than one year) and
new release titles. New releases of VHS tapes and                               

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video games purchased from suppliers for existing stores are drop-shipped to the
stores. Our stores generally offer from 5,000 to 10,000 VHS tapes, from 1,000 to
5,000 DVDs,  and from 500 to 1,500 video  games,  depending  upon  location.  We
generally  have a one-day  rental term for new release  movies less than 21 days
old which tends to keep new releases  more readily  available.  Rental terms for
new releases  greater than 21 days old but less than 120 days old are  generally
two days and rental terms on  children's,  catalogue  titles and titles  greater
than 120 days old are generally seven days. Video games generally have a two-day
rental term for the most recent new releases and seven days for older, catalogue
titles.                                                                         

VHS tapes, DVD, and video games used as initial capital assets in our new stores
consist  of excess  copies of  catalogue  titles  and new  release  titles  from
existing stores, supplemented as necessary by purchases directly from suppliers.
Each rental VHS tape, DVD and video game is removed from its original packaging,
and an optical bar code label used in our  computerized  inventory  system and a
security label is applied to the media  directly.  The cassette is placed in the
rental  case,  and the  original  product  packaging  is then  used for  display
purposes.  The repackaged VHS tapes,  DVDs,  video games and display cartons are
then  shipped to the store ready for use.  Additionally,  each store has certain
VCRs,  televisions  and game players that are  available for rent. As at May 31,
2002, the total net book value of all VHS tapes,  DVDs and video games available
for rent was  $6,896,791.  As at May 31,  2002,  the total net book value of all
VCRs, televisions and game players available for rent was $179,137.             

INFORMATION SYSTEMS                                                             

Each of our stores is equipped  with a  point-of-sale  ("POS")  system.  Our POS
system  provides  detailed  information  with  respect  to a store's  operations
(including  the rental  history of titles and daily  operations for each store).
Our POS system  tracks all rental and sale  information  using  scanned bar code
information.  Each night our POS system  transmits  store data to the management
information  system  ("MIS") at our  corporate  office.  All data is  processed,
generating  reports  which allow our  management  to  effectively  monitor store
operations  and  inventory,  as well as to review  rental  history  by title and
location to assist in making purchasing  decisions with respect to new releases.
Our POS system also enables us to perform a monthly physical inventory using bar
code  recognition.  Management  is currently  reviewing  our current  system and
intends  to replace  it with a  customized  POS  system  that  provides  greater
functionality  and  ability  to data  mine for  marketing  purposes.  Management
intends to develop and implement a new POS system during calendar 2003.         

COMPETITION AND TECHNOLOGICAL OBSOLESCENCE                                      

We believe the principal competitive factors in the home entertainment  industry
are:                                                                            

o        store location, visibility, and layout and design;           

o        title selection;                                             

o        the number of copies of each new release available;          

o        customer service; and                                        

o        pricing.                                                     

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The home entertainment industry is highly competitive, and we compete with other
video and home entertainment stores, including stores operated by other regional
and national chains such as Blockbuster Video, Rogers Video, Video Update, Movie
Gallery and Superior Video. We also compete with other  businesses  offering VHS
tapes,  DVDs and  video  games  such as  supermarkets,  pharmacies,  convenience
stores, bookstores, mass merchants, mail order operations and other retailers.  

In addition, we compete with all forms of entertainment, such as movie theatres,
network  and  cable   television,   direct   broadcast   satellite   television,
Internet-related   activities,   live  theatre,   sporting   events  and  family
entertainment  centres.  Some  of our  competitors  have  significantly  greater
financial and marketing  resources and name  recognition  than us.  Emerging new
technologies such as "Near Video On Demand", "Video On Demand" and digital cable
also  provide  competition  as  discussed  in "Item 3.  Key  Information  - Risk
Factors".                                                                       

We cannot  assure you that we will  successfully  compete in the markets that we
serve or that we will  generate  sufficient  revenue and  positive  cash flow to
remain profitable.                                                              

TRADEMARKS                                                                      

We have or are in the  process  of  applying  for  various  Canadian  trademarks
including,  but not  limited  to,  "VHQ",  the VHQ  logo,  "WHERE  ENTERTAINMENT
BEGINS",  and  "MOVIES  MUSIC  GAMES ... AND MORE".  We expect to receive  final
Canadian  trademark  approval  for those marks in due course but there can be no
assurance that we will be successful.                                           

Our brand names are  important to us and we believe that their  importance  will
increase as we continue to expand our operations.  We have sought  registration,
where possible,  to afford some measure of protection for our  intellectual  and
intangible property.                                                            

We cannot assure you that our efforts to protect our intellectual and intangible
property will be successful.                                                    

OUR EMPLOYEES                                                                   

As of May 31, 2002, we had approximately 420 employees, including 5 employees in
Senior Management, 8 employees in Operations/mid-level  management, 61 employees
in Operations/store-level  management, 7 employees in head office administration
and  approximately  339  employees  who service  customers in our video and home
entertainment stores. A majority of our employees are either permanent part-time
or part-time employees.  Of the total number of employees at such date, 330 were
located in Alberta, 81 in Saskatchewan and 9 in the Northwest Territories.      

CORPORATE STRUCTURE                                                             

We operate our retail video and home entertainment business directly and through
four wholly-owned  subsidiaries:  Integrated Retail Corp. ("Integrated Retail"),
an Alberta corporation, Safiqa Holdings Ltd. ("Safiqa"), an Alberta corporation,
Star Vision Enterprises Inc. ("Star Vision"),  a Saskatchewan  corporation,  and
705556 Alberta Ltd. ("705556"), an Alberta corporation.                         

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OUR ACQUISITIONS                                                                

In implementing our business  strategy,  we identified and acquired  established
video  stores in markets  that we  targeted.  We have  completed  the  following
acquisitions:                                                                   

OUR ACQUISITION OF INTEGRATED                                 

         On September 18, 1998, we acquired  Integrated Retail Corp., a retailer
         operating  seven video  stores,  from security  holders of  Integrated,
         including the following  related parties:  Trevor Hillman,  at the time
         our President and Chief Executive Officer,  Gregg Johnson,  at the time
         our Executive Vice President,  Tracy Diane Barker, Sherrie Lee Hillman,
         Tari Dawn  Gervais,  and Timothy  Gordon  Hillman,  pursuant to a Share
         Purchase   Agreement   dated  July  20,  1998.  The   transaction   was
         non-armslength  since a majority of the shares of Integrated were owned
         by Trevor  Hillman (our  Chairman  and Chief  Executive  Officer),  his
         family  members,  and Gregg Johnson (our President and Chief  Operating
Officer).                                                     

         Under the terms of the Share  Purchase  Agreement,  we purchased all of
         the issued and  outstanding  common  shares of  Integrated  and certain
         outstanding options and broker warrants issued by Integrated,  free and
         clear  of  all  liens,   claims,   charges,   security  interest,   and
         encumbrances.  We agreed to acquire these  securities for the following
consideration:                                                

                  (i)      issuance  of  5,000,000  (post-consolidation)  of our
                           common  shares  to the  shareholders  of  Integrated,
                           including the following  related party  shareholders:
                           Trevor  Hillman   (1,400,000),   Tracy  Diane  Barker
                           (800,000),  Sherrie Lee Hillman (200,000),  Tari Dawn
                           Gervais   (800,000),   and  Timothy   Gordon  Hillman
(800,000);                

                  (ii)     issuance  of  200,000  (post-consolidation)  of   our
                           common shares to Gregg C. Johnson in exchange for the
                           cancellation of his options to acquire 250,000 shares
of Integrated;            

                  (iii)    issuance of warrants exercisable  to purchase 500,000
                           (post-consolidation)  of our  common  shares at $0.75
                           per share  until  March 31,  1999,  all of which have
been exercised; and       

                  (iv)     issuance of warrants exercisable  to purchase 210,000
                           (post-consolidation)  of our  common  shares at $0.50
                           per share until March 31, 1999, 104,000 of which were
          exercised prior to their expiration.

         We also agreed to enter into an employment agreement dated May 1, 1998,
         with Trevor  Hillman  under which Trevor  Hillman was  appointed as our
         President and Chief Executive  Officer for a term of five years with an
         annual  salary  of  $52,000.  The  terms  of the  agreement  have  been
         modified. Currently, the annual salary is set at the greater of $60,000
         or an  amount  equal to  one-half  of 1% of the  gross  sales  actually
         achieved by us during each fiscal  year,  providing  that our  earnings
         before interest, taxes, depreciation and amortization exceeds 11% on an
         annualized  basis.  See  "Item 6 -  Directors,  Senior  Management  and
Employees".                                                   

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         As VHQ  Entertainment  and Integrated  were under common control at the
         time of the acquisition,  our financial  statements have been presented
         using the continuity of interest  method of accounting  under which the
         financial  position and results of operations for the current and prior
         periods are  presented as if the new  corporate  structure  had existed
since inception of Integrated.                                

OUR ACQUISITION OF RAINBOW VIDEO                              

         On September 29, 1999, we acquired  Safiqa  Holdings  Ltd., of Calgary,
         Alberta, an independent video retailer operating four video superstores
         in the Calgary market under the brand name "Rainbow Video," pursuant to
         a share  purchase  agreement  dated June 1, 1999,  by and  between  VHQ
         Entertainment and Ayaz Kara, our Vice President - Business Development,
Nayaz Kara, and Moez Hirji (the "Safiqa Agreement").          

         Under the terms of the Safiqa Agreement,  we acquired all of the issued
         and outstanding  common shares of Safiqa,  free and clear of all liens,
         claims,  charges,  security  interest,  and encumbrances.  We agreed to
acquire these shares for the following consideration:         

                  (i)      issuance  of  a total of 900,000 of our common shares
                           at a deemed  value of $1.25 to Ayaz  Kara  (450,000),
                    Nayaz Kara (225,000) and Moez Hirji (225,000);

                  (ii)     $100,000  in  cash  payable  to  Ayaz Kara ($50,000),
                     Nayaz Kara ($25,000), and Moez Hirji ($25,000);

                  (iii)    Promissory Notes in the aggregate principal amount of
                           $900,000, issued to Ayaz Kara ($450,000),  Nayaz Kara
                           ($225,000) and Moez Hirji ($225,000), each payable on
                           or before March 31, 2000, with interest calculated at
                           the  rate of 12% to  December  31,  1999 and 18% from
                           January 1, 2000 to March 31, 2000,  all of which have
        been fully paid and cancelled; and

                  (iv)     payment to Ayaz Kara (50%), Nayaz Kara (25%) and Moez
                           Hirji (25%) of an  adjustment  to the purchase  price
                           based on the  working  capital  position of Safiqa on
                           May 31, 1999, to the extent current  assets  exceeded
       current liabilities on such date.

         We also  agreed to enter  into an  employment  agreement  dated June 1,
         1999,  with Ayaz Kara  under  which Ayaz Kara was  appointed  as a Vice
         President  of the  company  for a term of three  years,  with an annual
         salary  of  $50,000  plus 1% of the our  gross  sales  revenues  in the
         Calgary  market.  Mr. Kara is currently  our Vice  President,  Business
         Development. We also agreed to enter into an employment agreement dated
         June 1, 1999, with Moez Hirji under which Moez Hirji was appointed as a
         Regional  Manager for a term of three years,  with an annual  salary of
         $50,000.  Mr. Hirji resigned from his position effective  September 15,
2000.                                                         

         Our  acquisition of Safiqa was accounted for by the purchase  method of
         accounting.  Safiqa reported revenues in excess of $2.81 million during
its fiscal year ended December 31, 1998.                      

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OUR ACQUISITION OF FAMILY VIDEO                               

         On  December  1, 1999,  we acquired  Star  Vision  Enterprises  Inc. of
         Saskatoon,  Saskatchewan,  an independent video retailer  operating six
         video  superstores in the Saskatoon market under the brand name "Family
         Video," pursuant to a share purchase  agreement dated December 1, 1999,
         by and between VHQ Entertainment  and Marc Gignac,  our Vice President,
         Saskatchewan   Operation,   and  Gisele   Gignac  (the  "Family   Video
Agreement").                                                  

         Pursuant to the Family Video Agreement, we agreed to acquire all of the
         issued and outstanding common shares of Star Vision,  free and clear of
         all liens, claims,  charges,  security interest,  and encumbrances.  We
 agreed to acquire these shares for the following consideration:

                  (i)      a  Promissory  Note  issued to Marc and Gisele Gignac
                           in  the  principal  amount  of  $1,000,000,  $500,000
                           payable on January 31, 2000, and $500,000  payable on
                           February 29, 2000,  with  interest  calculated at the
                           rate of 10% per annum,  which note was fully paid and
cancelled;                

                  (ii)     1,010,000  of  our common shares at a deemed value of
                           $1.40  issued to Marc  Gignac  (510,000)  and  Gisele
Gignac (500,000);         

                  (iii)    $500,000 to Marc Gignac and Gisele Gignac pursuant to
      a non-competition agreement; and

                  (iv)     a cash payment adjustment to the purchase price based
                           on the  working  capital  position  of Star Vision on
                           November  30,  1999,  to the  extent  current  assets
                exceeded current liabilities on such date.

We also agreed to enter into an employment agreement with Marc Gignac for a term
of three  years,  with an annual  salary of $50,000  plus 1% of our gross  sales
revenues in the Saskatchewan market. In addition,  VHQ Entertainment Inc. issued
an option  to Marc  Gignac  exercisable  to  acquire  25,000  shares of  E-Trend
Networks,  Inc.  common stock for $1.00 per share until November 31, 2002.  This
option was subsequently cancelled on the disposition of our interest in E-Trend.
See "Wilmington  Rexford  (formerly  "E-Trend  Networks,  Inc.").  Mr. Gignac is
currently  our Vice  President -  Saskatchewan  Operations  and a Director.  Our
acquisition  of  Star  Vision  was  accounted  for by  the  purchase  method  of
accounting.                                                                     

OUR ACQUISITION OF MOVIES PLUS                                

         Effective  March 21, 2000, we acquired  705556 Alberta Ltd. of Calgary,
         Alberta,  an independent  video  retailer  operating two video and home
         entertainment  superstores under the trade name "Movies Plus", pursuant
         to a Share Purchase  Agreement  dated March 21, 2000 by and between VHQ
         Entertainment, Inc. and Altaf Hirji and Shelina Hirji (the "Movies Plus
Agreement").                                                  

         Under the terms of the Movies Plus Agreement,  we agreed to acquire all
         of the issued and outstanding common shares of 705556 Alberta, free and
         clear  of  all  liens,   claims,   charges,   security  interest,   and
         encumbrances.  We agreed to  acquire  these  shares  for the  following
consideration:                                                

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                  (i)      $150,000 in cash to Altaf Hirji ($90,000) and Shelina
Hirji ($60,000);          

                  (ii)     Promissory  Notes  in  the amount of $50,000 to Altaf
                           Hirji ($30,000) and Shelina Hirji  ($20,000)  payable
                           on or before  April 30,  2000,  which Notes have been
fully paid and cancelled; 

                  (iii)    Promissory  Notes in the aggregate  principal  amount
                           of  $50,000  issued  to  Altaf  Hirji  ($30,000)  and
                           Shelina Hirji ($20,000)  payable on or before May 30,
                           2000, which Notes have been fully paid and cancelled;
and                       

                  (iv)     86,207  of  our  common  shares at a  deemed value of
                           $4.35  to  Altaf  Hirji (51,724 shares)  and  Shelina
Hirji (34,483 shares).    

OUR ACQUISITION OF SILVERSCREEN VIDEO                         

         On June 15, 2000, our wholly-owned subsidiary,  Star Vision Enterprises
         acquired  all the  assets  of  Silverscreen  Video,  a video  and  home
         entertainment  store  operating in Saskatoon,  Saskatchewan  from Raeco
  Holdings Incorporated ("Raeco") for the following consideration:

                  (i)      issuance of 25,000 common shares of VHQ Entertainment
                      to Raeco with a deemed price of $4.00 per share;

(ii)     $25,000 in cash paid at closing;   

            (iii)    a payment of $25,000 made on July 15, 2000; and

            (iv)     a payment of $50,000 made on September 1, 2000.

OUR ACQUISITION OF M&K VIDEO SPOT                             

         On July 11,  2000,  we acquired  the assets of M&K Video Spot Inc.,  an
         independent  video  retailer  operating a video  store in Stony  Plain,
         Alberta  and a store in Spruce  Grove,  Alberta  under  the brand  name
         "Video Spot",  pursuant to an Asset Purchase  Agreement  dated July 11,
2000, by and between VHQ Entertainment and M&K Video Spot Inc.

         Under the terms of the Asset Purchase Agreement, we acquired all of the
         assets of M&K Video  Spot Inc.,  free and clear of all  liens,  claims,
         charges,  security  interest,  and  encumbrances.  We agreed to acquire
these assets for the following consideration:                 

                  (i)      a  total  of 43,750 of our  common shares at a deemed
                   value of $4 per share to M&K Video Spot Inc.;

                 (ii)     $125,000 in cash payable to M&K Video Spot Inc.; and

                  (iii)    a Promissory  Note in the aggregate  principal amount
                           of $125,000,  payable in twelve monthly  installments
                           beginning  September  1, 2000,  with  interest at the

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                           rate of 9% per year,  issued to M&K Video  Spot Inc.,
                   which note has been fully paid and cancelled.

         We also  granted M&K Video Spot Inc. a security  interest in certain of
         our assets to secure the payment  under the  Promissory  Note issued to
         M&K Video Spot Inc. The principal of M&K Video Spot Inc. entered into a
         non-competition  agreement in connection  with our  acquisition  of the
assets of M&K Video Spot Inc.                                 

M&K Video Spot Inc.  reported  revenues  of  approximately  $770,000  during its
fiscal year ended December 31, 1999.                                            

OUR ACQUISITION OF THE ASSETS OF HOLLYWOOD NORTH VIDEO LIMITED                  

         Effective  March 15,  2001 we  acquired  all the  assets  and  business
         operations  of Hollywood  North Video  Limited,  an  independent  video
         retailer  operating  a video  rental  and  retail  store  in La  Ronge,
         Saskatchewan,  for the aggregate purchase price of $70,000,  payable by
         way of a $40,000  cash  payment on the closing date and the delivery of
         two $15,000  post-dated  cheques  for April 15, 2001 and May 15,  2001,
which were subsequently cashed.                               

WILMINGTON REXFORD INC. (FORMERLY E-TREND NETWORKS, INC.)                       

In  furthering  our desire to  mitigate  the  potential  risk from the  Internet
evolving  as a means of the sale and  distribution  of  competing  entertainment
content and products,  in April 1999 we participated in the formation of E-Trend
Networks,  Inc.  ("E-Trend"),  a Nevada  corporation  headquartered  in Calgary,
Alberta. Through its web site located at WWW.ENTERTAINME.COM, E-Trend created an
online entertainment portal for the sale of filmed entertainment in both VHS and
DVD  format,  CD music,  video  games,  as well as access  to  industry  related
information and news. At the time of E-Trend's incorporation,  we owned 65.8% of
its outstanding  common shares.  However,  our ownership  position was gradually
reduced as E-Trend issued shares from treasury to finance its activities.       

In January 2000,  E-Trend acquired Langara  Distribution  Inc., a Canadian based
wholesaler of music, to support its music title fulfillment operations.  E-Trend
uses Langara  Distribution Inc. to provide music procurement and fulfillment for
its own network web site and provide  similar  services for other Internet based
businesses.                                                                     

On February  22,  2001,  E-Trend  was  acquired by Cool  Entertainment  Inc.,  a
Delaware  corporation formerly quoted for trading on the NASD OTC Bulletin Board
("Cool"). As a result of the acquisition, the shareholders of E-Trend became the
controlling  shareholders  of Cool,  Cool changed its name to E-Trend  Networks,
Inc. and the Delaware  corporation became the parent of E-Trend.  At the date of
E-Trend's acquisition of Cool, we owned 40.1% of the issued shares of E-Trend.  

On December 26, 2001,  we entered into an agreement to sell our entire  holdings
in the Delaware corporation, being 2,000,000 shares of common stock, to The Game
Holdings, Ltd., a British Virgin Islands Corporation, for US$0.40 per share, for
an aggregate purchase price of US$800,000. It was agreed that the purchase price
would be payable over 18 months pursuant to a secured  Promissory Note delivered
by The Game Holdings, Ltd. as follows:                                          

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    (a)      US$10,000 per month from January, 2002 until March, 2002;

       (b)      US$30,000 per month from April, 2002 until May 31, 2003; and

         (c)      the  remainder  of the purchase price will be paid on June 30,
2003.                                       

The Promissory Note bore interest at a rate of 6% per annum. The Promissory Note
was to be secured by way of a second charge  registration  against a yacht owned
by The Game  Holdings,  Ltd.  which as at June 22, 2001 had an estimated  market
value of  approximately  US$1,600,000  and a replacement  value of approximately
US$2,000,000 as determined by an independent  appraiser,  the appraisal of which
was delivered by the purchaser.                                                 

Subsequently,  the parties agreed to amend the original agreement and Promissory
Note in that the payment schedule  pursuant to the agreement and Promissory Note
would be  revised so that we would  receive  payment  of the  purchase  price as
follows:                                                                        

         (a)      US$30,000  per month on the last day of each month from April,
2002 to September, 2003; and                

         (b)      on October 31, 2003 the remaining  outstanding  balance of the
                  purchase price plus accrued and unpaid  interest due and owing
would then be paid.                         

Also the  security on the  Promissory  Note is to be amended in that a pledge of
the shares of The Game Holdings, Ltd. are to be delivered as opposed to a direct
charge against the yacht owned by The Game Holdings, Ltd. As of the date of this
annual  report,  an  executed  copy of the  Amending  Agreement  and the revised
Promissory  Note have not yet been returned by The Game  Holdings,  Ltd., and no
written  agreement is in place with  respect to the pledge of shares.  As of the
date of this  annual  report,  no  payments  have  been  received  from The Game
Holdings, Ltd. as required by the terms of the promissory note.                 

On February 19, 2002,  the Delaware  corporation  changed its name to Wilmington
Rexford,  Inc. and the stock trades under the symbol  "WREX" on the OTC Bulletin
Board.  E-Trend  still  operates as the  wholly-owned  subsidiary  of Wilmington
Rexford, Inc.                                                                   

OUR PROPERTIES AND EQUIPMENT                                                    

Our  head  office  is  located  in  Red  Deer,   Alberta  where  we  operate  an
administrative  and  central  distribution  facility  from a 7,000  square  foot
facility leased from a related party. Our head office consists of administrative
and executive  offices and our central  receiving,  warehousing and distribution
facility  for all our retail  locations.  We are also the head tenant on a lease
for a 5,000 square foot facility in Calgary,  Alberta  which is currently  being
sublet to and occupied by E-Trend Networks, Inc.                                

As of the date of this  annual  report,  we  operate  49  retail  video and home
entertainment  stores, all of which are leased from third parties,  including 39
stores  located in  Alberta,  with the  greatest  concentration  in central  and
southern Alberta,  9 stores in Saskatchewan,  and one in Yellowknife,  Northwest
Territories.  We  expect to open our 50th  store in  January  2003.  Five of our
stores are leased from Hillman Holdings Inc., a company  beneficially  owned and
controlled by Gordon  Hillman,  the father of Trevor  Hillman,  our Chairman and
CEO. We lease all of our video and home entertainment                           

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stores at market  competitive  rates for each geographic  location.  The average
term of our  video  and  home  entertainment  store  leases  is five  years  and
typically most leases  include one or two renewal  options for further five year
periods, priced at a discount to the then prevailing market rates.              

ITEM 5.           OPERATING AND FINANCIAL REVIEW AND PROSPECTS                  

This Management's  Discussion and Analysis (MD&A) focuses on key statistics from
the consolidated  financial  statements of VHQ Entertainment  Inc. ("VHQ" or the
"Company") for the twelve month fiscal years ended May 31, 2002,  2001 and 2000,
and pertains to known risks and  uncertainties  relating to its  business.  This
MD&A should not be  considered  all-inclusive,  as it excludes  changes that may
occur in general economic,  political and environmental conditions.  The MD&A of
the financial conditions and results of operations should be read in conjunction
with the attached consolidated  financial statements for the years ended May 31,
2002,  2001 and 2000,  as well as in related notes  contained  elsewhere in this
annual report.                                                                  

TWELVE  MONTH  PERIOD  ENDED MAY 31,  2002,  COMPARED TO THE TWELVE MONTH PERIOD
ENDED MAY 31, 2001                                                              

 (ALL FIGURES QUOTED IN CANADIAN DOLLARS UNLESS OTHERWISE INDICATED)

RESULTS OF OPERATIONS                                                           

Total revenues for the year ended May 31, 2002  increased  22.4% to 26.1 million
compared to $21.3 million for 2001.                                             

The increase in revenues results from a number of factors,  the most significant
of which includes:  (i) an 8.9% increase in the number of new stores to 49 as at
May 31, 2002  compared to 45 stores at May 31, 2001;  and, (ii) a 6% increase in
same-store  sales for the year ended May 31, 2002 compared to the similar twelve
month period in 2001.                                                           

The increase in the same-store  sales results from:  (i) the continued  consumer
acceptance and growth of the DVD format  resulting in a significant  increase in
DVD related  sell  through and rental  revenues;  (ii) strong and broad  product
availability  for customers  from direct copy depth  programs with movie studios
for filmed  entertainment  product;  (iii) the  increase in sales of  previously
viewed movies and games;  (iv) the continued  focus and successful  execution of
VHQ's  branded  sales  and  marketing  campaigns  that  generate  high  consumer
excitement,  brand  awareness and traffic at its stores;  and, (v) the continued
growth of music sales and confectionery items.                                  

Same-store sales includes all the stores that were operating during the entirety
of both periods being compared.                                                 

The relative mix of revenues  between  rental and product sales for the year was
78.4% and 21.6% respectively, and was stable compared to 77.7% and 22.3% for the
previous year.  During the year, the Company  successfully  focused on expanding
its selection of DVDs and games for rental and sell through and  increasing  the
frequency of previously viewed movies sales campaigns to accelerate the turnover
of its rental assets.                                                           

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Rental  revenues  include rentals of VHS tapes,  DVDs,  video games and sales of
previously viewed movie titles on VHS and DVD formats.  The strategic importance
of DVDs as a product offering continues to grow evidenced by DVD rental revenues
exceeding 21.9% of rental revenues compared to 15% of rental revenues for 2001. 

Product sales includes the sale of  confectionery,  CD and cassette based music,
sell-through  filmed  entertainment on VHS and DVD, gaming  accessories,  studio
merchandise, posters and ancillary goods.                                       

The Company's  success in augmenting and  diversifying  its rental  revenues via
product sales is evidenced by the 26.6% growth of revenues from product sales of
new software, music and confectionery.                                          

COST OF SALES                                                                   

COST OF SALES FOR RENTALS                                                       

The cost of sales for  rentals  increased  69.8% to $7.42  million  for the year
ended May 31, 2002,  compared to $4.37  million for the similar  period in 2001.
The  increase in rental costs  mainly  results  from the 104.3%  increase in the
amortization expense attributed to the June 1, 2001 implementation of a 12 month
amortization  period for the  Company's  rental  assets  compared  to a 24 month
amortization period in previous years.                                          

The cost of sales for rentals is comprised of two key components.  The first key
component is revenue sharing expenses incurred by the Company with certain movie
studios. The second key component is the amortization of rental assets including
VHS tapes, DVDs, video games and equipment for rent.                            

For the year  ended May 31,  2002,  amortization  expense  on  rental  inventory
increased  to $5.31  million  and was 71.5% of the cost of rentals up from $2.60
million or 59.5% for the previous year ended May 31, 2001.                      

Compared to total revenues,  the  amortization of rental product expense was 27%
for the year ended May 31,  2002  compared  to 15.7% for the  similar  period in
2001.                                                                           

The significant  increase in the  amortization of rental product expense results
from the  change in the  amortization  policy  of the  Company's  rental  assets
effective  June 1, 2001 whereby the  amortization  rate of the rental assets was
accelerated to 12 months from 24 months. As a result of this change, the Company
expensed a higher than normal amount of  amortization of rental product over the
fiscal year ending May 31, 2002,  after which the amortization of rental product
expense is expected to decline to more normalized levels commencing in the first
quarter ending August 2002.                                                     

COST OF PRODUCT SALES                                                           

The  cost of  product  sales  includes  the cost of new VHS  tapes  and DVDs for
sell-through,  confectionery  items,  music, video games and equipment and other
goods inventoried for sale. The cost of product sales as a percentage of product
sales for the year ended May 31, 2002  increased to 83.8%  compared to 77.2% for
the previous year due to lower margins earned on confectionery  items. The lower
confectionery  margins  resulted  from  the  numerous  movie  and  confectionery
"Combos"  which  served to increase  traffic and full priced  movie rental sales
transactions.  To further support confectionery  margins, the Company           

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expects to reduce the number of  confectionery  product  lines  offered and seek
larger volume purchases on a smaller number of items.                           

GROSS MARGIN                                                                    

Gross margin as a percentage of total revenues unfavorably declined to 53.5% for
the year ended May 31, 2002  compared to 62.3% for the year ended May 31,  2001.
The decline in gross margin  results from the higher amount of  amortization  of
rental  product  expense  incurred  during the year  caused by the change of the
amortization  policy  of  rental  assets  to 12  months  from  24  months.  This
negatively impacted gross margins by increasing the amortization expense charged
during the year.                                                                

STORE OPERATING EXPENSES                                                        

Store  operating  expenses  include all store level expenses such as store rent,
telephone,  utilities,  signage,  equipment rental, store personnel labour wages
and benefits, alarm monitoring,  taxes and licenses,  insurance, and repairs and
maintenance expenses.                                                           

During the fiscal year ended May 31, 2002, store operating  expenses declined to
39.9% of total  revenues  compared to 42.7% of total revenues for the year ended
May 31,  2001.  The key  factor to the  decline  in store  operating  costs as a
percentage  of total  revenues was the careful  management  of store labor costs
which  declined to 18.8% of total sales for the year ended May 31, 2002 compared
to 20.2% for the year ended May 31,  2001.  Management  believes  that  customer
service levels, however, remain very high and uncompromised.                    

GENERAL AND ADMINISTRATIVE EXPENSES                                             

General and administrative  expenses include  administrative and warehouse wages
and  benefits,  advertising  and  promotion,  bank charges,  business  taxes and
licenses,  consulting  and  professional  fees,  equipment  rental,  head office
expenses and rent,  travel and  entertainment,  public company fees, head office
telephone  and  utilities,  shop  supplies  and  insurance  for the head  office
premises.                                                                       

General and administrative  expenses as a percent of total revenues increased to
12.5% for the year ended May 31, 2002  compared to 10.9% of total  revenues  for
the similar 12 month period in 2001.                                            

The  increase in general and  administrative  expenses  results  from  increased
accounting, legal and consulting fees related to the Company's various financing
initiatives  including  the United  States  Securities  and Exchange  Commission
registration  statement of Form 20F to make the Company's securities tradable in
the United States,  as well as the costs  associated  with the  preparation of a
prospectus for a fully marketed distribution of the Company's shares in Canada. 

AMORTIZATION OF INTANGIBLES                                                     

Amortization of intangibles  expense for the year ended May 31, 2002 declined to
$31,776  compared to $361,934 for the similar period in 2001.  Effective June 1,
2001 the  amortization  of  intangibles  was  significantly  reduced  due to the
adoption  of the new  accounting  treatment  as  detailed  in the CICA  handbook
section 3062.                                                                   

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OPERATING INCOME                                                                

The  operating  loss for the year ended May 31, 2002 was $24,671  compared to an
operating income of $1,241,411 for the year ended May 31, 2001.                 

INTEREST EXPENSE                                                                

Interest expense for the 12 months ended May 31, 2002 increased to $219,765 from
$119,649  for the  similar  period in 2001.  Included  in  interest  expense  is
interest of $44,000  related to the 8% convertible  debenture  which the Company
issued on December 1, 2001.                                                     

VIDEO LIMITED PARTNERSHIP DISBURSEMENTS                                         

In December  1999, the Company sold certain  capital assets  comprised of filmed
entertainment  and video games of its wholly owned subsidiary  Integrated Retail
Corp. to Video Limited  Partnership for net proceeds of $4.0 million,  resulting
in a gain of $1.3 million. See "Item 7. Majority  Shareholders and Related Party
Transactions - Related Party Transactions." Video Limited Partnership,  in turn,
engaged the Company to manage the distribution and rental of such rental assets,
with the parties  involved  sharing the revenues  generated  from these  capital
assets.  The Company had the option to repurchase  these capital assets any time
after June 30, 2001.                                                            

Pursuant to an agreement  effective  December 1, 2001, the Company purchased all
of  the  partnership   units  from  the  Video  Limited  Partners  for  a  total
consideration  of $2.1 million  payable by way of the issuance of 546,336 units,
with each unit  comprised of one common share of the Company and one half of one
common share  purchase  warrant (for a total of 273,168  warrants being issued),
and the issuance of a $1.28 million three year composite convertible  debenture.
The annual  rate of  interest  on the  debenture  is 8% per annum  with  blended
monthly  principal  and interest  payments of $40,125  payable over a three-year
term.  The  principal  amount of the debenture can be converted at any time into
common  stock of the  Company  at the  option of the  holder at $2.50 per common
share to  December  1, 2003 and at $3.00 per common  share to  December 1, 2004.
Each whole warrant  issued as part of the units is  exercisable  into one common
share until December 1, 2003 at $2.00 per share.                                

As  a  result  of  this  purchase,   the  Company  effectively   eliminated  all
disbursements to the Video Limited Partnership effective December 1, 2001. Video
Limited Partnership  disbursements  declined to $698,299 from $1,509,565 for the
previous year ended May 31, 2001.                                               

WRITE DOWN OF CAPITAL ASSETS                                                    

The write-down of certain capital assets relates to the Company's acquisition of
the partnership units of the Video Limited Partnership. In this transaction, the
Company  effectively  purchased all the VHS tapes  previously owned by the Video
Limited  Partnership,  the units of which were  purchased for $2.1 million.  The
amount in  excess of the  residual  value of the VHS  tapes  resulting  from the
purchase  was  subsequently   expensed  against  earnings.   The  capital  asset
write-down of $1.32 million is a non-cash expense.                              

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NET INCOME                                                                      

The Company  recorded a net loss of $2.3 million for the year ended May 31, 2002
compared to a net loss of $2.8 million for the similar twelve month period ended
May 31, 2001. A significant  portion of this loss results from the write-down of
capital assets associated with the purchase of the Video Limited Partnership and
the higher amortization of rental product expense. Management expects net income
to  significantly  improve with the  elimination  of Video  Limited  Partnership
disbursements, with increased focus on control of costs, and with the continuing
maturation of existing  stores towards  higher,  more stabilized and predictable
revenue levels .                                                                

LIQUIDITY AND CAPITAL RESOURCES                                                 

The Company  generates cash from the rental and sale of  entertainment  software
including VHS tapes, DVDs, CD music and video games. The Company's business is a
cash business and thus the Company does not  typically  carry  receivables  from
customers.  The  Company's  primary  capital  requirements  are for  opening and
acquiring new stores and for the purchase of rental and sell-through  inventory.
Other capital requirements include the refurbishment,  remodeling and relocation
of existing stores.  The Company has funded its capital  requirements  primarily
from cash flow from operations, the proceeds of various private placement equity
offerings,   senior   debt  credit   facilities,   vendor   financing   and  the
securitization of certain assets.                                               

The Company's EBITDA favorably  increased 24% to $5.6 million for the year ended
May 31, 2002 from $4.5  million for the previous  year ended May 31, 2001.  This
increase  results from the Company's  continued  ability to expand  revenues via
increases to same-store sales and growing the number of store locations.        

EBITDA is a non-GAAP  earnings  measure  and does not  conform to Canadian or US
GAAP and may not be comparable to measures presented by other companies.  EBITDA
is defined as earnings before interest,  current and future taxes,  amortization
of capital assets, intangibles and lease inducements,  Video Limited Partnership
disbursements,  write-down of  investments  and  write-down  of capital  assets.
EBITDA  should be  considered  in addition to, but not as a  substitute  for, or
superior  to,  operating  income,  net income,  cash flow and other  measures of
financial  performance  prepared in accordance with Canadian  Generally Accepted
Accounting Principals.                                                          

As at May 31, 2002  approximately  85% of our revolving  bank credit  facilities
were  utilized.  The Company's  revolving  credit  facilities are not subject to
financial  covenants  or  margining  formulas,  and are at floating  rates.  The
Company does not intend to fix any amount of this revolving debt. All borrowings
are in Canadian  dollars and the Company does not expect to draw any  borrowings
in U.S. dollars.                                                                

Other than the ongoing  need to purchase  rental  assets  based on the  customer
demand and at the  Company's  discretion,  the Company has not entered  into any
material  contracts  obligating the Company to material  commitments for capital
expenditures.                                                                   

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CASH FROM OPERATING ACTIVITIES                                                  

Funds  provided by operations  for the year ended May 31, 2002  increased 42% to
$5.1 million compared to $3.6 million for the year ended May 31, 2001. The major
factors  contributing to the increase were the higher reported  revenues and the
increased amortization of capital assets and intangibles.                       

CASH FROM FINANCING ACTIVITIES                                                  

Cash from financing  activities decreased to $1.5 million for the year ended May
31, 2002,  compared to cash of $2.7 million for the year ended May 31, 2001. The
major  financing  activities  included  the  issuance  of long term debt and two
private  placements  that  included the issuance of common stock and warrants to
purchase common stock. During the year, the Company issued $1.28 million,  three
year, 8%,  convertible  debentures and $820 thousand of units  consisting of one
common share and one-half  common share  warrant as  consideration  for the $2.1
million purchase of the Video Limited Partnership.  However, because no cash was
exchanged,  neither the issuance of the debentures and units nor the acquisition
of the Video Limited Partnership is a financing or investing activity.          

CASH FROM INVESTING ACTIVITIES                                                  

Cash used for investing  activities  was $6.6 million for the year ended May 31,
2002 compared to $6.3 million for the previous year. The key investing  activity
was the  continual  purchase  of VHS tapes,  DVDs and video  games to ensure the
Company's product selection remains new and exciting to customers.              

WORKING CAPITAL DEFICIT                                                         

At May 31,  2002,  the  Company had  negative  working  capital of $4.8  million
compared to negative  working capital of $2.8 million for the previous year. The
negative  working  capital  results from the accounting  treatment of our rental
assets.  Rental  assets  are  treated as a  non-current  asset  under  Generally
Accepted  Accounting  Principals because it is a depreciable asset and is not an
asset that is reasonably  expected to be completely  realized in cash or sold in
the normal business cycle.  Although the rental of these assets generate a major
portion  of  the  Company's  revenue,   the  classification  of  this  asset  as
non-current results in its exclusion from working capital.  The aggregate amount
payable for these assets, however, is reported as a current liability until paid
and, accordingly,  is included in working capital. As a result,  management does
not believe that working capital is an appropriate  measure of our liquidity and
anticipates  that its business will  continue to operate with a working  capital
deficit.                                                                        

We  believe  that  internally  generated  cash flow from  operations,  borrowing
capacity with our credit facilities,  cash on hand and trade credit will provide
the necessary  capital to fund the Company's  operation's  of 50 stores over the
foreseeable  future.  However,  to fund a significant  increase in the number of
operating stores and/or acquisitions, additional sources of debt and equity will
be required.                                                                    

On September 30 , 2002 the Company withdrew its prospectus  offering of units to
the  public  owing to  unfavorable  market  conditions  at the time.  Management
intends to consider the  possibility  of proceeding  with private  placements of
shares to fund the future  growth  requirements  of the Company  resulting  from
acquisitions  or a significant  increase in the number of operating  stores.  To
this end,  shareholders  of the Company  approved a resolution  authorizing  the
Company to proceed  with one or more  series of  private  placements  that could
result  in  the   issuance  of  up  to  100%  of  the  issued  and   outstanding
capitalization of                                                               

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the Company over the ensuing year.  Although  management has been  authorized to
proceed with a private  offering of shares  there can be no assurance  that such
private placement will proceed, or proceed on terms favorable to shareholders.  

OUTLOOK                                                                         

There is no doubt that the economic  downturn  since late 2000 has had an impact
on all retailers in Canada.  Management  believes  offering low-cost family home
entertainment,  however,  positions  the Company to continue to prosper  even in
these uncertain economic conditions.  Throughout fiscal 2002 it was difficult to
access any meaningful  equity  financings for growth.  Despite this, the Company
has demonstrated its ability to grow organically  through cash-flow,  though not
to the level of growth management had hoped to achieve.  Management  expects the
Company  will  continue to grow  organically  for the  foreseeable  future until
access to the capital markets for significant growth is possible.               

There are many aspects of the home entertainment  industry that continue to buoy
management's expectations for the future. DVD has emerged as the fastest adopted
consumer  technology in history and this DVD  "phenomena" has launched a renewed
interest in the consumer to rent and buy movies. As DVD technology  continues to
mature  and add new and  exciting  functionality  for the  consumer,  management
expects  Canadian  households  will continue to  demonstrate  that the rental of
movies  is  the  primary  method  for  Canadian  households  to  access  in-home
entertainment.                                                                  

In addition to movies,  an exciting  growth  opportunity  for the Company is the
evolution of new interactive  video gaming  platforms that have  transformed the
face of gaming.  No longer an  entertainment  choice of pre-teens and teens, new
gamers span an age demographic from pre-teens to retirees. Though hardware costs
have fallen  dramatically  making gaming affordable for most Canadian  families,
the software remains quite expensive and out of the reach of many consumers.  To
these  disenfranchised  consumers  in  particular,  the  Company  offers a value
proposition  of not only "try  before  you buy",  but also the  availability  of
"previously  played" new  release  games at  significant  discount to new retail
prices.  VHQ  management   believes  that  video  gaming  software  rentals  and
"previously  played  sales are  likely to  deliver  significant  growth  for the
Company  over the next three to five years as both new gamers  join the fray and
new gaming titles continue to enter and drive the consumer market.              

With  respect to  operations,  management  has several  initiatives  underway to
continue to enhance efficiencies, productivity and reduce operating costs across
all levels, from distribution through store operations. The Company continues to
recognize  that general and  administrative  costs remain  relatively  high as a
percentage of gross revenues and so, in addition to efforts to expand the number
of operating stores,  management also intends to seek a reduction of general and
administrative expenses over the course of fiscal 2003. Additionally, management
anticipates an overall  reduction of staff turnover through the course of fiscal
2003 as new employee incentives are implemented across the chain.  Management is
hopeful that these, and other related  operational  initiatives,  such as profit
sharing  and  employee  ownership  programs,  will  result in a net  benefit  to
revenues and net profitability over the longer term.                            

Management  believes that overall  gross margins are likely to improve  slightly
over fiscal 2003 as the Company  continues to benefit from growing  economies of
scale,  as well as the low price point of DVD.  Gross revenues are also expected
to improve as the Company  continues to add  storefronts  and  experiences  same
store sales growth throughout the chain.                                        

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TWELVE MONTH  PERIOD  ENDED MAY 31, 2001,  COMPARED TO TWELVE MONTH PERIOD ENDED
MAY 31, 2000                                                                    

REVENUES                                                                        

Total  revenues  increased  65.5% to $21.3  million  for fiscal  2001 from $12.9
million for fiscal 2000. This increase was due to a number of factors,  the most
significant of which included (i) an increase in same-store revenues of 47%, and
(ii) a 36% increase in the number of stores  operating during fiscal 2001 versus
fiscal  2000 as we added 12  stores  to our  network  during  fiscal  2001.  The
increase in same-store revenues was primarily the result of:                    

         (i)      increased  product availability  for  customers as a result of
                  direct  revenue  sharing  and copy depth  programs  for filmed
entertainment products;                     

      (ii)     a strong slate of new title releases versus the prior year;

         (iii)    the  continued  consumer  acceptance  and  growth  of  the DVD
platform;                                   

         (iv)     the successful  chain-wide  re-branding  campaign and internal
                  marketing   program   designed  to  generate   more   consumer
                  excitement  and  purchase  of  items,   including   music  and
sell-through filmed entertainment;          

         (v)      the  addition  of  CD  music  sales  into  a greater number of
stores; and                                 

         (vi)     increases   in   ancillary   sales,   including  predominantly
confectionary items.                        

It has been our experience that new-built  stores typically reach mature revenue
streams in 12 to 18 months from opening.  Generally  speaking,  revenue  streams
mature  earlier in our rural markets and later in urban markets where our stores
face greater  competition.  As such,  for so long as we continue our  aggressive
new-build strategy,  management  anticipates strong revenue and same-store sales
growth results from operations.                                                 

The  relative  mix of revenues  between  rental and product  sales  revenues for
fiscal 2001 were 78% and 22%, respectively.  This ratio remained consistent with
fiscal  2000  revenues  that were 79% and 21%,  respectively.  Many of the gains
experienced  in the  addition  of sales  related to music were offset by similar
gains in rental revenues  resulting from greater copy depth and the addition and
growth of the DVD rental market.  Our decision to increase our inventory of DVDs
resulted in DVD rental revenues  increasing to 15% of rental revenues for fiscal
2001 compared to less than 5% of rental revenues for fiscal 2000.               

COST OF SALES FOR RENTALS                                                       

Rental  revenue  costs for fiscal 2001 were 26.4% of rental  revenues,  a slight
increase   from  20.3%  in  fiscal  2000  due   primarily  to  the   significant
concentration of product purchases in the fourth quarter of calendar 2000.      

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The  amortization  expense  associated  with  rental  products  amounted to $2.6
million,  representing  59.5% of the cost of rental  revenues  for fiscal  2001.
Comparatively,  such  amortization  expenses for fiscal 2000 were $1.5  million,
representing 69.9% of the cost of rental revenues.  The decrease in amortization
expense as a percentage of revenue was attributable to our shifting purchases of
new rental product towards revenue sharing programs in which the initial capital
outlay is lower.                                                                

We commenced revenue sharing programs in November 2000 and the initial financial
effects of these and  subsequent  programs  were  reflected in this period.  Our
management  anticipates that more significant positive results will be generated
in the future as we derive greater  revenue from the rental of product  provided
under such revenue sharing agreements.                                          

COST OF PRODUCT SALES                                                           

The cost of product sales as a percentage of the revenue generated was 77.2% for
fiscal  2001, a slight  decrease  from the prior fiscal year results that posted
81.6%. The decrease was primarily  attributable to greater  supplier  discounts,
particularly with respect to purchases of CD based music in the third and fourth
quarters of fiscal 2001.                                                        

GROSS MARGINS                                                                   

Our total gross margin for fiscal 2001 amounted to $13.3 million, an increase of
54.2% over the $8.6 million  posted for fiscal  2000.  The increase in the gross
margin  resulted  directly  from a significant  increase in revenues  during the
period,  together with a successful program to control expansion costs.  Overall
gross margins  declined to 62.3% for fiscal 2001 from 66.9% for fiscal 2000, the
decline  resulting  from our  participation  in revenue  sharing  and copy depth
programs for filmed  entertainment  that,  on average,  have lower gross margins
than do traditional buying arrangements. Additionally, increasing product sales,
and in particular,  CD music sales have negatively  affected overall margins for
the period as product  sales  typically  generate  lower  margins than do rental
sales.                                                                          

STORE OPERATING EXPENSES                                                        

Store operating expenses increased slightly to 43.9% of total revenue for fiscal
2001, up from 42.9% for fiscal 2000.  The increase in store  operating  expenses
was  primarily  due to an  increase in the number of stores  operating  in urban
centers that generally  require  higher lease  payments per square foot,  higher
store updating/rebranding costs and higher wages paid to store level staff.     

GENERAL AND ADMINISTRATIVE                                                      

General and  administrative  expenses  increased to $2.3 million for fiscal 2001
from $2 million in the prior fiscal  year.  The  increase  resulted  from higher
administration salaries required in connection with the 36% growth in the number
of stores, as well as legal and professional fees associated with our listing on
the Toronto Stock  Exchange,  and audit fees  incurred in  connection  with back
audits of  subsidiaries  as  required  by  Regulation  S-X of the United  States
Securities and Exchange Commission.                                             

Although general and  administrative  expenses  increased over those recorded in
the prior year, they declined  favorably to 10.9% of revenues for fiscal 2001 as
compared to 15.2% for fiscal  2000.  During                                     

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the  period,  we began to realize  the  benefits  of  economies  of scale as G&A
expenses were amortized over a greater number of operating stores.              

AMORTIZATION OF INTANGIBLES                                                     

Amortization  of  intangibles  decreased  slightly to 1.7% in fiscal 2001 versus
1.9% in  fiscal  2000.  This  decrease  was  primarily  due to the  increase  in
same-store  revenue in fiscal 2001. We continued to book additional  goodwill in
connection with our acquisitions  made during the year. Our management  believes
such goodwill  additions are likely to continue for the foreseeable future as we
continue our store acquisition program.                                         

OPERATING INCOME                                                                

As a result of the  above  factors,  excluding  the  impact of the  amortization
policy change on rental  inventory and the write down of  investment,  operating
income  increased by 39.2% to $1.24  million in fiscal 2001, up from $891,794 in
fiscal 2000.  Increases in operating  income  resulted from increased same store
sales and revenue gains.                                                        

VIDEO LIMITED PARTNERSHIP DISBURSEMENTS                                         

In  December  of 1999,  we entered  into an  agreement  whereby we sold  certain
capital  assets for net  proceeds of $4.0  million  resulting  in a gain of $1.3
million.  The funds were raised  through the  disposition  of rental  movies and
games in Integrated  Retail  Corp.,  one of our  subsidiaries,  to Video Limited
Partnership.  The partnership in turn engaged us to manage the  distribution and
rental of such rental  inventory  comprised of movies and games, and the parties
agreed to split the revenues  generated  from these  capital  assets.  We had an
option  exercisable on demand at any time after June 30, 2001 to reacquire these
capital assets.                                                                 

Payments to Video Limited Partnership amounted to $1.5 million in fiscal 2001 as
compared to $732,990  during fiscal 2000.  The increase is  attributable  to the
fact that  payments  made during  fiscal 2000  commenced  in December  1999 and,
therefore,  were not made for a full one-year period.  Payments to Video Limited
Partnership  amounted to  approximately  $125,000 per month.  Of such amount,  a
graduated  portion is applied to pay down the  principal  portion of the initial
$4.0 million purchase of capital assets.                                        

Effective  December 1, 2001 we purchased  all of the Video  Limited  Partnership
Units for the issuance of 546,336  units with each unit  comprised of one common
share of VHQ and  one-half  of a warrant to purchase a common  share,  with each
whole warrant  exercisable  into one common share at an exercise  price of $2.00
per share for a period of two years,  and  $1,280,475 of  subordinated  8% three
year  convertible  debentures,  which are  convertible  in common shares for two
years at $2.50 per share for two years and $3.00 in the third year.             

NET INTEREST EXPENSE                                                            

Net  interest  expense  decreased  to 0.6% in fiscal  2001 versus 1.2% in fiscal
2000. This decrease was primarily due to reductions in average debt  outstanding
during fiscal 2001.                                                             

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INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS                       

In fiscal 2001, we posted a loss before income taxes and extraordinary  items of
$387,803  compared to an income of $7,307  reported in fiscal 2000. The relative
results are  comparable  given the fact that we did not remit  payments to Video
Limited Partnership for the whole of fiscal 2000.                               

RECOVERY OF INCOME TAXES                                                        

The income tax  recovery  in the amount of  $1,717,00  for the period is largely
attributed  to the change in the  estimate of the useful life of rental  product
and to the  write-down of the  investment  in E-Trend.  As a result of these two
changes, the differences between the tax cost and the accounting cost of certain
assets and  liabilities  on the balance sheet has been  reduced,  resulting in a
future tax recovery.                                                            

INVESTMENT WRITE-DOWN                                                           

As at May 31,  2001 we held a 38.37%  equity  interest  in  E-Trend.  E-Trend is
engaged primarily in the on-line sale and distribution of movies on VHS and DVD,
music on CD and video games on various platforms. E-Trend is also engaged in the
research  and  development  of  technologies  and  strategies  to  mitigate  the
evolution of the Internet as a means of competitive  distribution  to us. Due to
current  market  conditions  at  the  time,  and  in  particular  to  conditions
respecting  high-tech and "dot-com" companies in general, our management decided
to take a one-time,  non-cash charge and effect a write down in the value of its
ownership  in E-Trend.  We sold our  interest in E-Trend on December 26, 2001 to
The Game  Holdings,  Ltd.  See "Item 4 -  "Information  on the Company - E-Trend
Networks, Inc.".                                                                

WRITE-DOWN OF CAPITAL ASSETS                                                    

Effective May 31, 2001, we changed our estimation of the useful life and salvage
value of our rental  products.  As a result of this change,  we have revised our
estimates  of the  useful  life of rental  products  to a 12 month  amortization
period  from 24 months and have  reduced our  estimate of the salvage  value per
item.  This  change has been  applied  prospectively  as a change in  accounting
policy and resulted in a one-time  write-down of capital assets in the amount of
$2.26 million.                                                                  

NET LOSS                                                                        

We recorded a net loss of $2.8  million  for fiscal 2001 for the reasons  stated
above, as compared to a net profit of $2.1 million for fiscal 2000. Our net loss
per share  (basic) was $0.24 for the 12 months ended May 31, 2001  compared to a
net earning of $0.21 per share (basic) for the twelve months ended May 31, 2000.

During  fiscal 2001,  we generated  $1.18 million in EBITDA as compared to $1.13
million in fiscal 2000. The increase in EBITDA was driven primarily by operating
earnings resulting from a 65.5% increase in total revenues.                     

CASH FROM OPERATING ACTIVITIES                                                  

Net cash provided by operating  activities  was $3.55 million for fiscal 2001 as
compared to $3.24 million for fiscal 2000. The major components of the cash from
operating  activities  was  amortization  of capital  assets of $3.33 million of
which $2.60 million or 78% was amortization of rental assets, $2.26 million     

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from the write down of rental  assets,  $1.89 million from the write down of the
value of our investment in E-Trend, and $721,186 from the net change in non-cash
components of working capital.                                                  

The net change in non-cash  components of working capital  decreased to $721,180
for the  twelve  months  ended May 31,  2001 from $1.19  million  for the twelve
months ended May 31, 2000.  During fiscal 2001,  we received  payment in full on
the $884,009  note  receivable  from the Video Limited  Partnership.  Inventory,
which  consists  of  mainly  music  based  software  such as CDs and  cassettes,
increased to $1.5 million  from  $789,971 as we stocked a greater  number of our
stores with music product for sale.                                             

CASH FROM FINANCING ACTIVITIES                                                  

In June 2000,  we entered  into a  short-term  credit  facility  with  Community
Savings for a secured,  revolving line of credit in the amount of $800,000. This
facility augmented an existing short-term revolving facility offered through the
TD Bank  and  Trust  in the  amount  of  $200,000  for an  aggregate  short-term
revolving credit line of $1.0 million.                                          

Net cash  provided by financing  activities  was $2.7 million for fiscal 2001 in
comparison to $987,081 in the prior fiscal year. The major  contributors to cash
from  financing  activities for fiscal 2001 were the 366,754 shares that we sold
for  approximately  $1.38  million as well as an  increase  of  $731,325  in the
utilization  of  the  Company's  short-term  credit  facilities.  Proceeds  from
long-term  debt also  increased  during  2001,  although  the net effect of such
proceeds was offset by even greater repayments of long-term debt made during the
fiscal year.                                                                    

On March 21, 2001 we also entered  into a long-term  expansion  credit  facility
with  Community  Savings in the amount of $1.5  million  (the  "Facility").  The
Facility was available to us for expansion purposes only and not to fund general
working capital needs.  The Facility was secured by a $1.5 million deposit by us
at  Community  Savings.  In order  to make  draws  under  the  Facility  certain
covenants with respect to substantial  completion of the store, as well as other
operating and capital criteria had to be met.                                   

CASH FROM INVESTING ACTIVITIES                                                  

Net cash used in  investing  activities  was $6.3  million  for  fiscal  2001 as
compared  to $4.2  million  for fiscal  2000.  This  increase  in funds used for
investing   activities   was  primarily  the  result  of  increases  in  capital
expenditures  of $6.97  million,  primarily  related  to  rental  inventory  and
property, furnishings and equipment purchased to support the growth in our store
base,  our increased new store  development  plan, and a strategic move to stock
greater  copy-depth  of product.  As well,  we used $225,000 cash as part of the
consideration towards the purchase Silver Screen video (one store) and M&K Video
(two stores).                                                                   

WORKING CAPITAL DEFICIT                                                         

At May 31, 2001, we had a working capital  deficit of $2.89 million,  due to the
accounting  treatment of our rental inventory.  Rental inventory is treated as a
noncurrent asset under generally accepted accounting  principles because it is a
depreciable  asset  and  is not an  asset  that  is  reasonably  expected  to be
completely  realized in cash or sold in the normal business cycle.  Although the
rental  of this  inventory  generates  the major  portion  of our  revenue,  the
classification of this asset as noncurrent results in its exclusion from working
capital.  The aggregate amount payable for this inventory,  however, is reported
as a current  liability  until paid and,  accordingly,  is  included  in working
capital.  Consequently, we believe                                              

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that  working  capital is not an  appropriate  measure of our  liquidity  and we
anticipate that we will continue to operate with a working capital deficit.     

TWELVE  MONTH  PERIOD  ENDED MAY 31,  2000,  COMPARED TO THE TWELVE MONTH PERIOD
ENDED MAY 31, 1999.                                                             

REVENUES                                                                        

Total  revenues  increased  162% to $12.88  million for the twelve  month period
ended May 31, 2000 compared to $4.92 million for the similar twelve month period
in 1999. The substantial  increase in revenues  resulted from a 136% increase in
the number of stores  from 14 as at May 31,  1999  compared  to 33 as at May 31,
2000, and a 14.9%  increase in same-store  sales for the twelve months ended May
31, 2000 compared to the similar twelve month period in 1999.                   

During fiscal 2000 we added 19 stores.  Eleven of these stores were added during
the third and fourth  quarters  of fiscal  2000,  including  six stores  that we
acquired from Star Vision  Enterprises  Inc. ("Star  Vision") in Saskatoon,  two
stores in Calgary that we acquired from M&K Video Spot and three new build store
locations. Accordingly, much of the new stores' revenues was not present for the
entire  fiscal  period and thus the reported  revenues  were not  indicative  of
expected annualized revenues.                                                   

The relative mix of revenues  between rental  revenues and product sales for the
twelve  months  ended May 31, 2000 and the twelve  months ended May 31, 1999 was
79% and 21% respectively.  Revenues generated from DVDs in fiscal 2000 were less
than 5% of total rental revenues.  There were marginal  revenues  generated from
DVDs in fiscal 1999.                                                            

We introduced DVD based  entertainment  in our stores  commencing  July 1998 and
introduced CD and cassette based music for sell-through in our stores commencing
July 1999.                                                                      

COST OF SALES FOR RENTALS                                                       

The cost of sales for  rentals  increased  101% to $2.08  million for the twelve
months ended May 31, 2000  compared to $1.04 million for the twelve months ended
May 31, 1999.  The increase in the cost of sales for rentals  resulted  from our
revenue  sharing  programs with certain studios which commenced in November 2000
and increased use of copy depth programs.                                       

For the  twelve  months  ended  May 31,  2000,  amortization  expense  on rental
inventory  was $1.45  million  representing  70% of the total  cost of  rentals,
compared to $643,896 or 62% of the costs of rentals for the twelve  months ended
May 31, 1999.  Our rental  products  which include VHS tapes,  DVD's,  and video
games are amortized, for fiscal 1999 and fiscal 2000. The salvage value for each
unit of rental product is $7.00 per unit.                                       

COST OF PRODUCT SALES                                                           

The cost of product sales as a percentage of product sales for the twelve months
ended May 31, 2000 was 82%  compared to 68% for the similar  twelve month period
in 1999.                                                                        

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GROSS MARGIN                                                                    

Gross  margin for the twelve  months  ended May 31, 2000  increased  to 66.9% of
total  revenues  compared to 64.8% of total revenues for the twelve months ended
May 31, 1999.                                                                   

The increase in the total gross margin  resulted  primarily  from improved gross
margins  from rental  revenues.  Specifically,  the overall  gross  margins from
rental  revenues  increased  from 73% of total  rental  revenues  for the twelve
months ended May 31, 1999 to 80% of total rental  revenues for the twelve months
ended May 31, 2000.  The stronger  gross margins from rental  revenues more than
offset the decline in gross  margins from product  sales,  the gross  margins of
which  declined to 18% of product sales for the twelve months ended May 31, 2000
compared to gross margins of 32% for the similar twelve month period in 1999.   

The increase in gross margins from rental  revenues  resulted from lower revenue
sharing  costs as a  percentage  of total  rental  revenues for the period as we
purchased fewer movie titles as a percent of total rental revenues under revenue
sharing arrangements in fiscal 2000 than in fiscal 1999.                        

STORE OPERATING EXPENSES                                                        

Store operating  expenses  decreased as a percent of total revenues to 42.9% for
the twelve  months  ended May 31, 2000  compared to 46.1% for the twelve  months
ended May 31,  1999.  Lower  year over year  rent,  amortization  of  non-rental
assets,  equipment  rental,  and shop supplies as a percentage of total revenues
were  the  main  factors  for the  improvement  in  store  operating  costs as a
percentage of total revenues.                                                   

Included in store operating expenses was amortization of assets excluding rental
and  intangible  assets,  which was $370,464 for the twelve months ended May 31,
2000 and $266,200 for twelve months ended May 31, 1999.  This increase  resulted
from the higher level of capital  assets  resulting  from  acquisitions  and the
build out of new stores during the twelve month period ended May 31, 2000.      

GENERAL AND ADMINISTRATIVE EXPENSES                                             

General and administrative  expenses as a percent of total revenues increased to
15.2% of total  revenues for the twelve  months  ended May 31, 2000  compared to
10.5% of total revenues for the twelve months ended May 31, 1999. This increase,
as a percent of total revenues, primarily resulted from the one time development
expenses of approximately  $243,000  related to the development of E-trend,  our
e-commerce internet subsidiary.                                                 

AMORTIZATION OF INTANGIBLES                                                     

Amortization expense of intangible assets increased to $246,288 or 1.9% of total
revenues for the twelve  months ended May 31, 2000  compared to $3,819 or .1% of
total  revenues  for the twelve  months  ended May 31,  1999.  The  increase  in
amortization of intangibles was the result of our acquisition of Safiqa Holdings
Ltd., Star Vision Enterprises Inc., and 705556 Alberta Ltd., operating as Movies
Plus which were purchased on September 29, 1999, December 1, 1999, and March 21,
2000, respectively.                                                             

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NET INTEREST EXPENSE                                                            

Interest  expense on long term debt  increased to $151,497 for the twelve months
ended May 31, 2000 from $8,371 for the twelve  months  ended May 31,  1999.  The
increase in interest  costs resulted from  additional  short term notes and long
term debt borrowed to finance our new store  openings and  acquisitions.  During
fiscal  2000 we  repaid,  in full,  the  short  term  notes  payable  that  were
associated  with the  acquisition  of  Safiqa  Holdings  Ltd.  and  Star  Vision
Enterprises Inc.                                                                

OTHER ITEMS                                                                     

In December  1999, we sold certain rental assets of our  subsidiary,  Integrated
Retail Corp., to the Video Limited  Partnership for net proceeds of $4.0 million
which  resulted  in  a  $1.3  million  non-cash  gain.  See  "Item  7,  Majority
Shareholders and Related Party Transactions - Related Party Transactions".      

During the period  June 1, 1999 to March 1, 2000 we fully  consolidated  all the
operations of E-Trend on our consolidated  balance sheet,  statement of earnings
and  statement of  cashflow.  During this time,  we held a majority  interest in
E-Trend's voting shares but did not have control of E-Trend's board.  Subsequent
to March 1,  2000,  as a result of two  equity  offerings  of  E-Trend  Networks
initiated  by  E-Trend's  board,  our  interest  declined  to 38.37%  which then
resulted in changing  the  treatment  of our  ownership of E-Trend to the equity
method of accounting. This change resulted in a non-cash gain of $2.45 million. 

The  non-cash  minority  shareholders  interest  of $114,572  resulted  from the
consolidation treatment of E-Trend to March 1, 2000. The non-cash equity loss on
investment of $268,249 is our  proportion  of losses that E-Trend  incurred from
the  period  March  1,  2000 to May 31,  2000  based  on the  equity  method  of
accounting.                                                                     

FUTURE INCOME TAX EXPENSE                                                       

Future  income taxes  increased to $1.5 million for the twelve  months ended May
31, 2000  compared to $173,000  for the twelve  month period ended May 31, 1999.
The increase in future income taxes  resulted from an increase in the difference
between the tax cost and the  accounting  cost of certain  assets on the balance
sheet.                                                                          

NET INCOME                                                                      

Net income for the twelve  months  ended May 31, 2000  increased to $2.1 million
compared to $217,383 for the similar twelve month period ended May 31, 1999. Our
earnings per share (basic) was $0.21 in 2000 compared to $0.03 per share (basic)
in fiscal 1999. The increase in net income resulted from the increased number of
stores,  gain on  disposal of assets to the  limited  partnership  and a gain on
dilution of our equity interest in E-Trend Networks.                            

CASH FROM OPERATING ACTIVITIES                                                  

Funds  provided by  operations  increased to $3.24 million for the twelve months
ended May 31, 2000 compared to $1.30 million for the twelve months ended May 31,
1999. The major contributing factor to the increase was the growth in the number
of operating stores and continued maturation of the revenue                     

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streams  from such  stores.  The net change in  non-cash  components  of working
capital increased to $1.19 million for the twelve months ended May 31, 2000 from
$9,734 for the twelve months ended May 31, 1999. Accounts  receivable  increased
to $354,747 for the period ended May 31, 2000 due to increased tenant allowances
receivable  from  various  landlords as we opened six new stores  during  fiscal
2000.  Consistent  with the increase in the number of stores,  inventory  levels
also increased to $789,971 as at May 31, 2000 compared to $214,138 as at May 31,
1999.                                                                           

CASH FROM FINANCING ACTIVITIES                                                  

Financing activities provided cash of $987,081 for the twelve month period ended
May 31, 2000  compared to $1.4 million for the twelve month period ended May 31,
1999.  During  fiscal 2000, a combination  of 575,947  options and warrants were
exercised for net proceeds of $29,348 and 1,996,207 shares were issued for $2.91
million in lieu of cash related to our  acquisitions.  In addition,  the Company
was advanced $361,331 from a related company for operational  financing.  Fiscal
1999 saw the  issuance of 2,624,276  shares for net  proceeds of  $643,059,  the
issuance of a combination  of options and warrants for  $429,250,  and long term
debt, net of repayment of $225,029.                                             

CASH FROM INVESTING ACTIVITIES                                                  

For the twelve  months  ended May 31,  2000,  we  expended  $5.0  million on the
purchase of capital assets,  $5.7 million on the acquisition of Safiqa Holdings,
Star  Vision  Enterprises  Inc.,  and  705556  Alberta  Ltd.  We paid for  these
acquisitions via a cash component of $2.8 million and issued common shares for a
deemed value of $2.9 million.                                                   

For the twelve  months ended May 31, 1999 we expended $2.7 million that was used
for the build out of seven new stores and to purchase rental product for the new
and existing stores.                                                            

A note  receivable of $884,009 as at May 31, 2000 was due from the Video Limited
Partnership which bore interest at the rate of 15% per annum, was unsecured, and
was payable upon demand. This note was repaid in cash on Jan 19, 2001.          

WORKING CAPITAL DEFICIT                                                         

At May 31,  2000,  we had  negative  working  capital of  $549,127  compared  to
$182,719 as at May 31, 1999.  The negative  working  capital  resulted  from the
accounting treatment of our rental inventory.  Rental inventory was treated as a
non-current asset under generally accepted accounting principals because it is a
depreciable  asset  and  is not an  asset  that  is  reasonable  expected  to be
completely  realized in cash or sold in the normal business cycle.  Although the
rental  of  this  inventory  generates  a  major  portion  of our  revenue,  the
classification of this asset as non-current results in its exclusion for working
capital.  The aggregate amount payable for this inventory,  however, is reported
as a current  liability  until paid and,  accordingly,  is  included  in working
capital.  As a result,  we do not believe that working capital is an appropriate
measure of our liquidity  and we  anticipate  that our business will continue to
operate with a working capital deficit.                                         

RESEARCH DEVELOPMENT, PATENTS AND LICENSES                                      

Our  industry  does not  require  and we have not  engaged in any  research  and
development activities.                                                         

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For a list of trademarks  we hold or in the process of applying for,  please see
"Trademarks" in "Item 4. Information on the Company".                           

TRENDS                                                                          

BUSINESS RISKS AND MANAGEMENT                                                   

The video rental and home entertainment industry is very competitive.  We face a
number  of  competitors,  including  larger  video  retail  chains  and  smaller
independent   video  rental  outlets,   music  stores  and  video  game  stores.
Competition exists mainly on a local basis, with main competitive  factors being
price, service and quality.  Management  continually reviews its competitors and
analyzes upcoming industry trends. There can be no assurance,  however,  that we
will be  successful in addressing  competitive  threats or adequately  assessing
future industry trends.                                                         

We have  developed a business  strategy  targeting the secondary  retail markets
located in communities of approximately  5,000 - 10,000 people.  The strength of
the local  economy in these  types of  communities  typically  depends  upon the
strength of a smaller number of key industries. If the major sustaining industry
in one of these communities is negatively  affected,  the strength of the entire
local economy will be negatively affected and the amount of disposable income of
the residents in that particular community will decrease.  Consequently, a store
operated by us in that location may be negatively affected.                     

We intend to further increase the number of stores that we operate. The start-up
costs  associated  with  establishing  a new  store  are  significant.  We  have
calculated that it will cost approximately  $225,000 to establish each new store
location (and up to $275,000 for each full product mix VHQ Entertainment store).
Such costs may increase as we introduce  new concept  retail stores in an effort
to match  competitor  offerings.  There is no assurance  that we will be able to
obtain  adequate  financing or adequate cash flows from  operations to cover the
projected start-up costs of establishing a new store location.                  

In order to gain  efficiencies  generated by economies of scale,  we must open a
larger number of stores  across a  geographically  dispersed  area. We must rely
initially upon outside sources of capital to finance  start-up costs  associated
with the opening of new stores as current cash flows alone are not sufficient to
fund new store openings in the numbers  anticipated  us. In the event we are not
successful in raising additional capital to open new stores, we will not be able
to achieve anticipated  efficiencies or pricing  structures,  all of which could
have a material adverse impact on operations and profitability.                 

RECENT U.S. ACCOUNTING PRONOUNCEMENTS                                           

In June 2001, the Financial  Accounting  Standards Board ("FASB")  approved SFAS
141,  "Business  Combinations"  ("SFAS 141"), and SFAS 142,  "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 141 supersedes Accounting Principles Board
Opinion ("APB") No. 16, "Business Combinations." The provisions of SFAS 141: (i)
require  that  the  purchase  method  of  accounting  be used  for all  business
combinations  initiated after June 30, 2001, (ii) provide specific  criteria for
the initial recognition and measurement of intangible assets apart from goodwill
and (iii) require that unamortized  negative goodwill be written off immediately
as an  extraordinary  gain instead of being deferred and amortized.  The Company
adopted  SFAS 142 as of January 1, 2002.  SFAS 142 is  substantially  similar to
CICA Handbook Section 3062,  Goodwill and Other  Intangibles,  which the Company
adopted effective June 1, 2001.                                                 

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In August 2001,  the FASB issued SFAS 144,  "Accounting  for the  Impairment  or
Disposal  of  Long-Lived  Assets"  ("SFAS  144"),  effective  for  fiscal  years
beginning after December 15, 2001.  SFAS 144 replaces SFAS 121,  "Accounting for
the  Impairment of Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed
Of."  SFAS 144  establishes  an  accounting  model for  long-lived  assets to be
disposed  of by  sale,  including  discontinued  operations,  and  replaces  the
provisions  of APB  Opinion  No. 30 for the  disposal of segments of a business.
SFAS  144  retains  the  fundamental  provisions  of  SFAS  121  concerning  the
recognition  and  measurement  of long-lived  assets to be held and used and the
measurement of long-lived  assets to be disposed of by sale.  However,  SFAS 144
provides additional  guidance with regard to discontinued  operations and assets
to be disposed of. In addition,  SFAS 144 excludes  goodwill from its scope. The
impact of the adoption of SFAS 144 is not expected to have a material  effect on
the Company's consolidated financial statements.                                

SFAS 146,  "Accounting for Costs  Associated  with Exit or Disposal  Activities"
("SFAS 146") was issued on July 30, 2002 and replaces Emerging Issues Task Force
Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an  Activity."  SFAS 146  requires  companies  to  recognize
certain costs associated with exit or disposal activities when they are incurred
rather than at the date of a commitment  to an exit or disposal  plan.  SFAS 146
will be  effective  for exit or disposal  activities  that are  initiated  after
December 31, 2002.                                                              

ITEM 6.     DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                          

OUR DIRECTORS, SENIOR MANAGEMENT AND KEY EMPLOYEES                              

The following  table sets forth our Directors  and our senior  management  team,
each an executive  officer,  and all positions  they held with us as of November
30, 2002.                                                                       

---------------------------------------------------------------------------     
NAME AND MUNICIPALITY OF                     CURRENT OFFICE IN THE      
RESIDENCE                 AGE               COMPANY     
---------------------------------------------------------------------------     
TREVOR M. HILLMAN,              33        Chief Executive Officer,
Red Deer, Alberta                          Chairman and Director
---------------------------------------------------------------------------     
  GREGG C. JOHNSON,              38       President, Chief Operating
Red Deer County, Alberta                              Officer           
---------------------------------------------------------------------------     
                               43         Senior Vice President,
    DERREK R. WONG,                        Finance and Chief Financial
Olds, Alberta                                   Officer     
---------------------------------------------------------------------------     
MICHAEL D. MCKELVIE             49          Senior Vice President 
  Calgary, Alberta                        Marketing & Communications
---------------------------------------------------------------------------     
    AYAZ KARA,                  43        Vice President, Business
Calgary, Alberta                                Development     
---------------------------------------------------------------------------     

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---------------------------------------------------------------------------     
NAME AND MUNICIPALITY OF                     CURRENT OFFICE IN THE      
RESIDENCE                 AGE               COMPANY     
---------------------------------------------------------------------------     
                                45         Director of Operations,
   MARC L. GIGNAC,                         Saskatchewan and Director
Saskatoon, Saskatchewan                                               

---------------------------------------------------------------------------     
TIMOTHY J. SEBASTIAN             37                Director         
Edmonton, Alberta                                               

---------------------------------------------------------------------------     
PETER A. LACEY,(1)              44                Director        
Red Deer County, Alberta                                                

---------------------------------------------------------------------------     
CATHERINE J. MCDONOUGH,(1)          46                Director            
Red Deer County, Alberta                                                

---------------------------------------------------------------------------     
GORDON HILLMAN,               58                Director      
Red Deer, Alberta                                               
---------------------------------------------------------------------------     

Notes:   (1)      We are required  by the CANADA  BUSINESS  CORPORATIONS  ACT to
           have an audit committee of the Board of Directors.  Messrs. Lacey and
           Hillman  and  Ms.  McDonough  are  currently the members of the audit
           committee.  We  also  have  a  Corporate  Governance  and  Nominating
           committee and a Compensation  committee,  both of which are comprised
of Ms. McDonough and Messrs. Lacey and Johnson.           

Our  executive  officers are appointed by and serve at the pleasure of the board
of directors. Except as disclosed below, to the best of our knowledge, there are
no arrangements or understandings with major shareholders, customers, suppliers,
or others, pursuant to which any of the officers or directors was selected as an
officer or director of the Company.                                             

The information  contained  herein is based upon  information  furnished by each
director and executive officer.  Except for Gordon Hillman, who is the father of
Trevor  Hillman,  none of our  Directors  or  executive  officers has any family
relationship with any other officer or Director.                                

The  following  is a brief  biographical  information  on each of our  executive
officers and Directors listed above:                                            

TREVOR M. HILLMAN is our Chief  Executive  Officer,  Chairman of the Board and a
Director.                                                                       

         Mr. Hillman has been our Chief  Executive  Officer and a Director since
         December  11,  1997.  He was our  President  from  December 11, 1997 to
         November 15, 2001, when he was appointed  Chairman of the Board.  Also,
         since July of 1997,  Mr.  Hillman has been the  President of Integrated
         Retail Corp., a start-up  venture  involved in the retail and rental of
         video  products  (which was  acquired  by us in  September  1998).  Mr.
         Hillman was a Director of E-Trend  Networks,  Inc. from inception until
         December  26,  2001.  Mr.  Hillman has been a Director of IROC  Systems
         Corp.,  a public  company  listed on the TSX Venture  ("TSX  Venture"),
         involved in the oil and gas safety  industry  since March 3, 2000.  Mr.
         Hillman  also has been a Director of Chinook  Energy  Services  Inc., a
         public company listed on the TSX Venture,  involved in  non-destructive
         testing in the oil and gas industry, since September 1, 2000. From 1994
to 1997,  Mr.                                                 

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         Hillman  provided  consulting  services to  entertainment  based retail
         clients  through TMH  Holdings  Ltd.  Prior  thereto,  Mr.  Hillman was
 Operations Manager of Video View Ltd. from August 1983 to 1994.

GREGG C. JOHNSON is our President and Chief Operating Officer.                  

         A graduate of Osgoode  Hall Law School of York  University  in Toronto,
         Canada,  in 1989,  Mr.  Johnson  was in private  practice  in  Calgary,
         Alberta.  He then moved to Japan and joined the Japanese law firm Aoki,
         Christensen  & Nomoto in 1989.  In 1991,  Mr.  Johnson  joined  the law
         office of Dr. Mujahid  Al-Sawwaf in Jeddah,  Saudi Arabia. In 1993, Mr.
         Johnson joined The Tracker  Corporation of Toronto,  Ontario,  a public
         company  trading  on the NASD  OTCBB  market,  where  he was  primarily
         responsible for legal,  financing and public reporting  matters.  Since
         August of 1995, Mr. Johnson has provided  investment  banking  services
         with Summit  Capital  Corporation.  Mr.  Johnson was the Executive Vice
         President and  Secretary of Merch  Performance  Inc., a public  company
         listed and trading on the TSX Venture  engaged in the  manufacture  and
         distribution  of  automotive  parts,  from April 1997 to June 1998.  He
         served as our  Executive  Vice  President  from  December  11,  1997 to
         November  15, 2001 when he was  appointed  as our  President  and Chief
         Operating  Officer.  He was also a Director  from  December 11, 1997 to
         November  27,  2002.  Mr.  Johnson  also served as a Director of Cervus
         Corporation,  a public company listed on the TSX Venture engaged in the
         acquisition  and  management of John Deere  dealerships  from inception
         until  December 19, 2001,  and as a Director of IROC Systems  Corp.,  a
         public company  listed on the TSX Venture,  involved in the oil and gas
         safety  business from inception until April 9, 2001, and Chinook Energy
         Services  Inc., a public  company listed and trading on the TXS Venture
         involved in the non-destructive testing business from September 1, 2001
         to January 17, 2002. Mr. Johnson was elected to a second 3-year term in
         October  2001 as a  councilor  with Red  Deer  County,  Alberta  and is
         currently the Reeve (Mayor of the  municipality).  Mr.  Johnson was the
         President of E-Trend Networks, Inc. from inception to February 7, 2001,
         and a Director of E-Trend Networks, Inc. from inception to December 26,
2001.                                                         

DERREK R. WONG is our  Senior  Vice  President  of Finance  and Chief  Financial
Officer.                                                                        

         Mr. Wong has been our Senior Vice President Finance and Chief Financial
         Officer  since  September  24,  2001.  From  1997 to 2001 Mr.  Wong was
         President  of  Cirrus  Capital  Corporation,   a  financial  consulting
         company.   Through  Cirrus  Capital  Corporation,   Mr.  Wong  provided
         financial consulting services,  including, but not limited to, services
         relating to mergers and acquisitions,  investor relations and corporate
         finance to Atlas Cold Storage,  a wholly owned subsidiary of Atlas Cold
         Storage Income Trust, from 1997 to 2000. From 1991 to 1997 Mr. Wong was
         Vice President, Corporate Finance of Bank of America. Mr. Wong received
         a Bachelor of Commerce degree from the University of Calgary in 1982, a
         Masters of  Business  Administration  from the  Richard  Ivey School of
Business in 1985, and is a Chartered Financial Analyst.       

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MICHAEL D. MCKELVIE is our Senior Vice President, Marketing & Communications.   

         Mr.  McKelvie  has  been  our  Senior  Vice   President,   Marketing  &
         Communications  since May 1, 2000.  Mr.  McKelvie has held senior level
         marketing,  sales and communications positions in the industry since it
         started in 1979.  After  serving as  Director,  Sales &  Marketing  for
         Universal  Studios Home  Entertainment  Canada for 13 years, he was the
         founding  partner  of EMG Media  Inc.,  where he created  and  launched
         HOLLYWOOD@home(TM),  Canada's most-read home video trade magazine. Most
         recently,   he  was  Sr.  Marketing  and  Communications   Manager  for
         Blockbuster  Canada  Co.,  where he managed  the  largest TV  marketing
         campaign  ever  run  by  a  Canadian  video  retailer  and  was  solely
         responsible  for the  creation  and launch of  WWW.BLOCKBUSTER.CA.  Mr.
         McKelvie  served as the Senior Vice  President - Marketing  for E-Trend
from May 1, 2000 to March 1, 2002.                            

AYAZ KARA is our Vice-President, Business Development.                          

         Mr.  Kara  has  been our Vice  President,  Business  Development  since
         September  29, 1999.  Mr. Kara also served on the Board of Directors of
         the Company from November 22, 1999 to June 5, 2002. Prior thereto,  Mr.
         Kara was the  President  and a Director of Safiqa  Holdings  Ltd.  from
         February  1993  until  September  1999.  Mr.  Kara is also  served as a
         Director of IROC Systems  Corp., a public company listed and trading on
         the TSX Venture,  from March 3, 2000 to December 1, 2000.  Mr. Kara was
         the interim President of E-Trend  Networks,  Inc. from October 16, 2001
         to  January  18,  2002  and Mr.  Kara has been a  Director  of  E-Trend
Networks, Inc. from December 26, 2001 to present.             

MARC L. GIGNAC is our Director of Operations, Saskatchewan.                     

         Mr.  Gignac has been our  Director of  Operations,  Saskatchewan  since
         December 1, 1999. Mr. Gignac also served on our Board of Directors from
         March 24, 2000 to November 27, 2002. Prior thereto,  Mr. Gignac was the
         President and a Director of our  Saskatchewan  subsidiary,  Star Vision
Enterprises Inc. from December 1986 until November 1999.      

TIMOTHY J. SEBASTIAN is a Director of the Company.                              

         Mr.  Sebastian was our General  Counsel and Secretary from October 2000
         until  April 2002.  As of May 1, 2002,  Mr.  Sebastian  resigned as our
         General  Counsel  to return to  private  practice  with the law firm of
         Bryan & Company in Edmonton,  Alberta. Mr. Sebastian graduated from the
         University  of Alberta Law School in 1990. He was an associate and then
         a partner with the law firm of Bryan & Company in Edmonton and Calgary,
         Alberta,  from 1990 until  October  2000.  During his law  career,  Mr.
         Sebastian  practiced in the areas of general  corporate law,  corporate
         finance,  securities and intellectual  property.  Mr. Sebastian is also
         the Secretary for IROC Systems Corp. and Chinook Energy  Services Inc.,
         each of  which is a  public  company  listed  on the TSX  Venture.  Mr.
         Sebastian  also served as General  Counsel and Corporate  Secretary for
         E-Trend from October 2001 to January 2002.  Mr.  Sebastian  resigned as
         our  Secretary  and became a director of the  Company on  November  27,
2002.                                                         

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PETER A. LACEY is a Director of the Company.                                    

         Mr. Lacey has been a Director of the Company  since  November 22, 1999.
         Mr. Lacey has been President, Chief Executive Officer and a Director of
         Cervus  Corporation,  a public  company  listed and  trading on the TSX
         Venture,  since  November 24, 1998. Mr. Lacey has been the President of
         Deermart  Equipment  Sales Ltd., a John Deere farm implement and garden
         equipment  dealer located in Red Deer,  Alberta,  since April 1982. Mr.
         Lacey  has been a  Director  of Amoil  Resources  Inc.,  an oil and gas
         company listed and trading on the TSX Venture,  since  September  1994.
         Mr.  Lacey has also been a director  and the  Chairman  of the Board of
         Q-Tel Wireless  Inc., a wireless  Internet  company,  listed on the TSX
         Venture since March 2000,  operating in Northern Alberta. Mr. Lacey has
         been a member of Red Deer  College  Board of  Governors  since  October
1997.                                                         

CATHERINE J. MCDONOUGH is a Director of the Company.                            

         Mrs.  McDonough has been a Director of the Company  since  November 22,
         1999. Mrs. McDonough has been and continues to be a successful investor
         with over twenty years of investment experience. She owned and operated
         a jewellery design business in Honolulu, Hawaii. She has been active in
         charitable  organizations  and has  served on the  Boards of several of
         them including the U.S. Navy Submarine Officer's Wives Club and various
         charitable  causes  related to the Pearl  Harbor  Naval  Station.  Mrs.
McDonough currently resides in Red Deer County, Alberta.      

GORDON HILLMAN is a Director of the Company.                                    

         Mr.  Hillman has been President of G&J Holdings Inc. since 1967 and has
         started and operated  many  businesses  throughout  Alberta  under this
         company.  This includes the building of Video View from one small 1,000
         square foot store in Red Deer,  Alberta in 1983 to a chain of 23 stores
         throughout Alberta,  which were sold in January of 1997, as well as the
         operation of dollar  stores  which have also  recently  been sold.  Mr.
         Hillman has also been  actively  involved  in real  estate  development
         throughout  Alberta through Hillman  Holdings Inc.,  another company of
         which  he is  President.  Mr.  Hillman  is a  past  Director  of  Merch
         Performance  Inc., a public  company now trading on Tier 3 of the CDNX.
    Mr. Hillman became a director of the Company on November 27, 2002.

None of our  Directors  and/or  executive  officers have been the subject of any
order, judgment, or decree of any governmental agency or administrator or of any
court of competent  jurisdiction,  revoking or suspending for cause any license,
permit or other  authority of such person or of any corporation of which he is a
Director and/or executive  officer,  to engage in the securities  business or in
the sale of a particular  security or temporarily or permanently  restraining or
enjoining  any such  person  or any  corporation  of which he is an  officer  or
Director from engaging in or continuing any conduct,  practice, or employment in
connection with the purchase or sale of securities, or convicting such person of
any felony or  misdemeanor  involving a security or any aspect of the securities
business or of theft or of any felony.                                          

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COMPENSATION                                                                    

COMPENSATION OF DIRECTORS                                                       

At the present time, we have five Directors.  Outside Directors receive $500 per
meeting to a maximum of six meetings per year.                                  

As of  November  30,  2002,  our  Directors  (including  Directors  who are also
officers) held outstanding, exercisable options and warrants to purchase a total
of 739,410 of our common shares. See "Item 6 - Directors, Senior Management, and
Employees - Share Ownership".                                                   

RETIREMENT PLANS                                                                

We do not offer a  retirement  plan or  retirement  benefits to our  officers or
directors.                                                                      

EXECUTIVE OFFICERS                                                              

The aggregate compensation paid to all our executive officers in our fiscal year
ended May 31,  2002 was  $815,565.  The  following  table  details  compensation
information for Mr. Trevor M. Hillman, our Chairman and Chief Executive Officer,
Gregg C.  Johnson,  our  President  and  Chief  Operating  Officer,  Timothy  J.
Sebastian,  a Director  (formerly our General  Counsel and  Secretary)  and Ayaz
Kara, our Vice President Business Development for the periods indicated.  We are
not required to disclose and do not publicly  disclose the  compensation  of any
executive  officer unless such officer received a combined base salary and bonus
of more than $100,000 during our fiscal year ended May 31, 2002.                

                                                        [Enlarge/Download Table]

----------------------------------------------------------------------------------------------------------------------------
                                                                                   Long Term                                
                                                                                  Compensation                              
----------------------------------------------------------------------------------------------------------------------------
                                              Annual Compensation                    Awards                                 
----------------------------------------------------------------------------------------------------------------------------
  Name and Principal     Fiscal                                  Other Annual       Securities Under          All Other     
       Position           Year         Salary        Bonus       Compensation        Options($)(2)       Compensation ($)(3)
                                         ($)          ($)           ($)(1)                                                  
----------------------------------------------------------------------------------------------------------------------------
                                                                                                                            
Trevor M. Hillman          2002        139,705        Nil             16,884               200,000                    Nil   
(Chairman and Chief                                                                                                         
Executive Officer)                                                                                                          
----------------------------------------------------------------------------------------------------------------------------
                           2001        102,935        Nil             10,900                   Nil                    Nil   
----------------------------------------------------------------------------------------------------------------------------
                           2000         73,799     17,500              7,908               237,500                    Nil   
----------------------------------------------------------------------------------------------------------------------------
Gregg C. Johnson           2002        139,705        Nil              6,000               200,000                    Nil   
(President and Chief                                                                                                        
Operating Officer)                                                                                                          
----------------------------------------------------------------------------------------------------------------------------
                           2001         58,541        Nil                Nil                   Nil                    Nil   
----------------------------------------------------------------------------------------------------------------------------
                           2000         26,110        Nil                Nil               187,500                    Nil   
----------------------------------------------------------------------------------------------------------------------------

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                                                                                   Long Term                                
                                                                                  Compensation                              
----------------------------------------------------------------------------------------------------------------------------
                                              Annual Compensation                    Awards                                 
----------------------------------------------------------------------------------------------------------------------------
  Name and Principal     Fiscal                                  Other Annual       Securities Under          All Other     
       Position           Year         Salary        Bonus       Compensation        Options($)(2)       Compensation ($)(3)
                                         ($)          ($)           ($)(1)                                                  
----------------------------------------------------------------------------------------------------------------------------
                                                                                                                            
Ayaz Kara                  2002         50,753     57,954                Nil                   Nil                    Nil   
(Vice President,                                                                                                            
Business Development)                                                                                                       
----------------------------------------------------------------------------------------------------------------------------
                           2001         50,753     42,586                Nil                75,000                    Nil   
----------------------------------------------------------------------------------------------------------------------------
                           2000         50,753     28,021                Nil                   Nil                    Nil   
----------------------------------------------------------------------------------------------------------------------------
Timothy J.                 2002        104,376        Nil                Nil                75,000                    Nil   
 Sebastian                                                                                                                  
(Secretary) (4)                                                                                                             
----------------------------------------------------------------------------------------------------------------------------
                           2001         86,251        Nil                Nil                   Nil                    Nil   
----------------------------------------------------------------------------------------------------------------------------
                           2000            Nil        Nil                Nil                   Nil                    Nil   
----------------------------------------------------------------------------------------------------------------------------

(1)      Relates to vehicle  allowances.  Perquisites and other personal        
    benefits do not exceed the lesser of $10,000 and 10% of the annual
salary for the named Executive Officer.                       
(2)      See the two tables below.                                              
(3)      Perquisites and other personal benefits do not exceed the lesser of    
$50,000 and 10% of the annual salary.                         
(4)      Timothy J. Sebastian resigned as Secretary of the Corporation on       
   November 27, 2002 and was elected as a director of the Company on
November 27, 2002.                                            

STOCK OPTIONS GRANTED                                                           

The  following  table  details  information  with  respect to the grant of stock
options  to Trevor M.  Hillman,  Gregg C.  Johnson,  Ayaz  Kara and  Timothy  J.
Sebastian during the fiscal year ended May 31, 2002.                            

                                                        [Enlarge/Download Table]

-------------------------------------------------------------------------------------------------------------------------
           Name                                                                                                          
                              Securities       % of Total       Exercise or      Market Value of       Expiration Date   
                             Under Option    Options Granted     Base Price         Securities                           
                              Granted (#)    to Employees in    ($/Security)    Underlying Options                       
                                             Financial Year                       on the Date of                         
                                                                                Grant ($/Security)                       
-------------------------------------------------------------------------------------------------------------------------
                                                                                                                         
Trevor M. Hillman               200,000           26.05            $1.80              $1.80           November 30, 2006  
-------------------------------------------------------------------------------------------------------------------------

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-------------------------------------------------------------------------------------------------------------------------
                                                                                                                         
Gregg C. Johnson                200,000           26.05            $1.80              $1.80           November 30, 2006  
-------------------------------------------------------------------------------------------------------------------------
Ayaz Kara                         Nil              N/A              N/A                N/A                   N/A         
-------------------------------------------------------------------------------------------------------------------------
Timothy J. Sebastian            75,000            9.77%            $1.80              $1.80           November 30, 2006  
-------------------------------------------------------------------------------------------------------------------------

The following table sets forth information with respect to all options exercised
by Trevor M.  Hillman,  Gregg C.  Johnson,  Ayaz Kara and  Timothy J.  Sebastian
during  our  most  recently  completed  fiscal  year  and all  options  held and
outstanding by them on May 31, 2002.                                            

                                                        [Enlarge/Download Table]

------------------------------------------------------------------------------------------------------------------------- 
           Name                Securities      Aggregate Value     Unexercised Options at       Value of Unexercised in   
                               Acquired on        Realized           Financial Year End          the Money Options at     
                                Exercise             ($)                     (#)                Financial Year End (1)<F1>
                                   (#)                                                                                    
------------------------------------------------------------------------------------------------------------------------- 
                                                                                                                          
 Trevor M. Hillman                 Nil               Nil            437,500 exercisable,               NIL value          
                                                                      Nil unexercisable                                   
------------------------------------------------------------------------------------------------------------------------- 
 Gregg C. Johnson                  Nil               Nil            387,500 exercisable,               NIL value          
                                                                      Nil unexercisable                                   
------------------------------------------------------------------------------------------------------------------------- 
 Ayaz Kara                         Nil               Nil             75,000 exercisable,               NIL value          
                                                                      Nil unexercisable                                   
------------------------------------------------------------------------------------------------------------------------- 
 Timothy J. Sebastian              Nil               Nil             28,124 exercisable,               NIL value          
                                                                    46,876 unexercisable                                  
------------------------------------------------------------------------------------------------------------------------- 
<FN>                                                                                                                      
(1)<F1>  This amount was  determined by  multiplying the number of Common Shares                                          
         issuable  under such options by the closing price of the Common  Shares                                          
         on  the TSX on May 31,  2002  ($0.85)  and  subtracting  therefrom  the                                          
         product of  the  number  of such  Common Shares and  the exercise price                                          
         thereof.                                                                                                         
</FN>                                                                                                                     

EMPLOYMENT  CONTRACTS /  COMPENSATION  IN THE EVENT OF  TERMINATION OF CHANGE OF
CONTROL                                                                         

TREVOR HILLMAN, CHIEF EXECUTIVE OFFICER, CHAIRMAN OF THE BOARD AND A DIRECTOR   

         We have a services  agreement  with TMH Holdings  Ltd.  ("TMH") for the
         services  of Trevor M.  Hillman  as our  Chairman  and Chief  Executive
         Officer.  Pursuant to the  agreement,  we agreed to pay annually to TMH
         the greater of $60,000  and an amount  equal to 0.5% of the gross sales
         actually  achieved  by us during each  fiscal  year  provided  that our
         earnings before interest,  taxes, depreciation and amortization exceeds
11% on an annualized basis.                                   

         The  contract  commenced on April 1, 2001 and ends on December 31, 2004
         unless  terminated  earlier in accordance  with the  agreement.  We may
         terminate the  agreement at any time for cause  without  payment of any
         compensation  either by way of  anticipated  earnings or  damages.  The
         agreement  may not  otherwise be  terminated  earlier by us without the
         consent  of  TMH.   In  the  event  of  a  change  of  control  of  VHQ
Entertainment,  as  defined  in the  agreement,  TMH has the  

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         right to terminate  the  agreement and be paid an amount equal to three
         times the highest  annual  amount we paid to TMH during the three years
prior to the change of control.                               

GREGG C. JOHNSON, PRESIDENT AND CHIEF OPERATING OFFICER                         
         We have a services agreement with Summit Capital Corporation ("Summit")
         for the  services  of Gregg  C.  Johnson  as our  President  and  Chief
         Operating Officer. Pursuant to the agreement, we agreed to pay annually
         to Summit the  greater of  $60,000  and an amount  equal to 0.5% of the
         gross sales  actually  achieved by us during each fiscal year  provided
         that our earnings before interest, taxes, depreciation and amortization
exceeds 11% on an annualized basis.                           

         The  contract  commenced on April 1, 2001 and ends on December 31, 2004
         unless  terminated  earlier in accordance  with the  agreement.  We may
         terminate the  agreement at any time for cause  without  payment of any
         compensation  either by way of  anticipated  earnings or  damages.  The
         agreement  may not  otherwise be  terminated  earlier by us without the
         consent  of  Summit.  In  the  event  of a  change  of  control  of VHQ
         Entertainment,  as  defined in the  agreement,  Summit has the right to
         terminate  the agreement and be paid an amount equal to three times the
         highest annual amount we paid to Summit during the three years prior to
the change of control.                                        

MARC GIGNAC, DIRECTOR OF OPERATIONS, SASKATCHEWAN                               

         We have an employment contract with Marc Gignac for his services as our
         Director of Operations,  Saskatchewan.  Pursuant to the  agreement,  we
         agreed to pay annually to Marc Gignac $50,000 plus a quarterly bonus of
         1% of gross sales generated by our subsidiary,  Star Vision Enterprises
Ltd.                                                          

         The agreement  commenced on December 1, 1999 and is for a term of three
         years unless terminated  earlier in accordance with the agreement.  The
         agreement may be terminated by us at any time for cause without payment
         of any compensation  either by way of anticipated  earnings or damages.
         If the agreement is terminated earlier by us without cause, Marc Gignac
         is entitled to 12 months  notice or 12 months salary in lieu of notice.
         There are no change of control provisions in the agreement. The Company
is currently reviewing Mr. Gignac's contract.                 

DERREK R. WONG, SENIOR VICE PRESIDENT OF FINANCE AND CHIEF FINANCIAL OFFICER    

         To date, we have not entered into a written  employment  agreement with
         Mr. Wong for his  services as our Senior Vice  President of Finance and
Chief Financial Officer.                                      

MICHAEL D. MCKELVIE, SENIOR VICE PRESIDENT OF MARKETING AND COMMUNICATIONS      

         To date, we have not entered into a written  employment  agreement with
         Mr. McKelvie for his services as our Senior Vice President of Marketing
and Communications.                                           

None of our  Directors or executive  officers  received  other  compensation  in
excess of the lesser of US$25,000 or 10% of such officer's cash  compensation as
reported in the above  table and all  Directors  and  executive  officers,  as a
group,  did not receive other  compensation  which exceeded  US$25,000 times the
number of persons in the group or 10% of the compensation  reported in the table
set forth above.                                                                

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Except as set out  above,  we have no  material  bonus or profit  sharing  plans
pursuant  to  which  cash  or  non-cash  compensation  is or may be  paid to our
Directors or executive officers.                                                

BOARD PRACTICES                                                                 

All of the members of our Board of Directors are elected by the shareholders and
hold office until their  successors are duly elected and qualified,  unless they
sooner resign or cease to be Directors in accordance  with our Articles.  At our
annual  general  meeting on November  22,  1999,  our  shareholders  approved an
amendment  to our  Articles  of  Incorporation  to  increase  the  terms  of our
Directors to up to three years.  It is current  practice to elect  directors for
one-year terms only.                                                            

At the November 27, 2002  meeting,  all the  Directors  were elected to one year
terms.  Members of our Board of  Directors  are  elected  by the  holders of our
common  shares to  represent  the  interests of all  shareholders.  The Board of
Directors meets periodically to review significant developments affecting us and
to act on matters  requiring  Board  approval.  Although  the Board of Directors
delegates  many matters to others,  it reserves  certain powers and functions to
itself.  Currently,  the Board of Directors has appointed an Audit Committee,  a
Compensation Committee and a Corporate Governance and Nominating Committee.     

The Audit  Committee  is directed  to review the scope,  cost and results of the
independent audit of our books and records; the results of the annual audit with
management and the adequacy of our accounting, financial and operating controls;
to recommend annually to the Board of Directors the selection of the independent
auditors;  to consider proposals made by our independent auditors for consulting
work;  and to  report  to the  Board of  Directors,  when so  requested,  on any
accounting or financial matters.  Except as noted above in this section, none of
our  Directors  or  executive   officers  is  a  party  to  any  arrangement  or
understanding  with any other  person  pursuant  to which  said  individual  was
elected as a Director or officer of the Company.                                

The  Corporate  Governance  Committee  is  charged  with the  responsibility  of
ensuring  that our  Board of  Directors  has  effectively  implemented  policies
regarding the Board's  responsibility  for the stewardship of VHQ  Entertainment
including:                                                                      

(i)      the adoption of a corporate strategy;                

         (ii)     the adoption, on an annual basis,  of the corporate objectives
                  which the Chief Executive  Officer and our senior officers are
responsible for meeting;                    

(iii)    management succession planning;                      

(iv)     a communications program for VHQ Entertainment;      

         (v)      the   integrity  of  our  internal  control   and   management
information systems;                        

         (vi)     guidelines  whereby  individual  Directors  can engage outside
 advisors at the expense of VHQ Entertainment;

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         (vii)    reviewing  and  recommending  to the  Board for approval,  the
                  corporate  governance  report  for  inclusion   in the  Annual
                  Report  and, when  necessary,  for  inclusion  in  our  Annual
Information Circular;                       

         (viii)   requesting and receiving such  information with regards to our
                  affairs   as  the   Committee  may  consider   necessary   and
             appropriate to carry out its duties and responsibilities;

         (ix)     reporting to the Board at least once a year and when otherwise
required; and                               

         (x)      at  the  request of  the Board,  considering any other matters
                  which  would  assist  the  Directors in  meeting the corporate
                  governance  responsibilities  or  adhering  to  any governance
             guidelines established by the relevant regulatory bodies.

The Compensation  and  Nominating  Committee is charged with the  responsibility
of  setting and overseeing  the  compensation  of our  Directors  and  executive
officers including:                                                             

(i)      determining the amount and kind of compensation;     

         (ii)     reviewing and  recommending the executive compensation  report
                  to the Board for approval and inclusion in the Annual  Report,
           and when necessary, in the annual Information Circular;

         (iii)    requesting  and  receiving such  information and  explanations
                  with  regard  to  our  affairs  as  the Committee may consider
                  necessary  and  appropriate  to  carry  out  its  duties   and
responsibilities;                           

         (iv)     reporting to the Board as required and at least once per year;
and                                         

         (v)      at  the  request of  the Board,  considering any other matters
                  which  would  assist  the  Directors  in meeting the corporate
                  governance  responsibilities  or  adhering  to  any governance
             guidelines established by the relevant regulatory bodies.

OUR EMPLOYEES                                                                   

As of October 31, 2002, we employed  approximately  430  employees,  including 5
employees in senior management, 8 employees in operations/mid-level  management,
61 employees in  operations/store-level  management,  8 employees in head office
administration, and approximately 353 employees who service our customers in our
video and home  entertainment  stores.  A majority of our  employees  are either
permanent part-time or part-time employees.                                     

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The  following is a breakdown of the average  number of employees we employed by
geographic  location over the last three fiscal years and the three month period
ended August 31, 2002:                                                          

                                                        [Enlarge/Download Table]

                                     -----------------------------------------------------------------------
                                                        AVERAGE NUMBER OF EMPLOYEES DURING:                 

        GEOGRAPHIC LOCATION                                                                                 
------------------------------------------------------------------------------------------------------------
                                      THE TWELVE MONTH       THE TWELVE MONTH         THE TWELVE MONTH      
                                        PERIOD ENDED        PERIOD ENDED MAY 31,    PERIOD ENDED MAY 31,    
                                        MAY 31, 2000               2001                    2002             
------------------------------------------------------------------------------------------------------------
                                                                                                            
              Alberta                        260                    330                     330             
------------------------------------------------------------------------------------------------------------
           Saskatchewan                       75                     90                      81             
------------------------------------------------------------------------------------------------------------
        Northwest Territory                   10                     13                       9             
------------------------------------------------------------------------------------------------------------
               TOTAL                         345                    433                     420             
------------------------------------------------------------------------------------------------------------

None of our employees are subject to collective  bargaining  agreements,  and we
believe we have a positive relationship with our employees.  Management has made
a priority of  continuing  to improve  employer/employee  relationships  and has
recently  added a number of  employee  incentive  initiatives,  including  stock
options  and  selective  cash  compensation  in an effort to  decrease  rates of
employee  turnover.  Over the course of fiscal 2002, rates of employee  turnover
decreased  yet such  rates are still  high  relative  to  industry  comparables.
Management is conducting further investigations into this matter in an effort to
reduce employee turnover rates.                                                 

SHARE OWNERSHIP                                                                 

Beneficial Share Ownership of Our Directors and Senior Management               

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The  following  table sets forth the  beneficial  ownership of our Directors and
senior management as at November 30, 2002:                                      

                                                        [Enlarge/Download Table]

--------------------------------------------------------------------------------------------------------------------
IDENTITY OF                                  NUMBER OF COMMON SHARES OWNED                                          
PERSONS OR GROUP                          BENEFICIALLY OR SUBJECT TO CONTROL             PERCENTAGE OF CLASS        
                                                    OR DIRECTION(1)                                                 
--------------------------------------------------------------------------------------------------------------------
                                                                                                                    
TREVOR M. HILLMAN, Director and                        2,383,513                               16.33%               
CEO                                                                                                                 
Red Deer, Alberta (2)                                                                                               
--------------------------------------------------------------------------------------------------------------------
GREGG C. JOHNSON, President and                        1,346,918                                9.22%               
Chief Operating Officer                                                                                             
Red Deer, Alberta (3)                                                                                               
--------------------------------------------------------------------------------------------------------------------
AYAZ KARA, Vice-President,                              551,235                                 3.77%               
Business Development                                                                                                
Calgary, Alberta (4)                                                                                                
--------------------------------------------------------------------------------------------------------------------
MICHAEL D. MCKELVIE, Senior                             33,334                              less than 1%            
Vice-President, Marketing &                                                                                         
Communications                                                                                                      
Calgary, Alberta (5)                                                                                                
--------------------------------------------------------------------------------------------------------------------
MARC L. GIGNAC, Director of                            1,076,000                                7.37%               
Operations, Saskatchewan                                                                                            
Saskatoon, Saskatchewan  (6)                                                                                        
--------------------------------------------------------------------------------------------------------------------
PETER A. LACEY, Director                                284,728                                 1.95%               
Red Deer, Alberta  (7)                                                                                              
--------------------------------------------------------------------------------------------------------------------
CATHERINE J. MCDONOUGH, Director                        104,147                             less than 1%            
Red Deer, Alberta (8)                                                                                               
--------------------------------------------------------------------------------------------------------------------
DERREK R. WONG, Senior Vice                             83,333                              less than 1%            
President of Finance, Chief                                                                                         
Financial Officer                                                                                                   
Olds, Alberta (9)                                                                                                   
--------------------------------------------------------------------------------------------------------------------
TIMOTHY J. SEBASTIAN                                    75,000                              less than 1%            
Director                                                                                                            
Edmonton, Alberta (10)                                                                                              
--------------------------------------------------------------------------------------------------------------------
GORDON HILLMAN, Director (11)                          1,225,596                                8.39%               
Red Deer, Alberta                                                                                                   
--------------------------------------------------------------------------------------------------------------------
OFFICERS AND DIRECTORS,                                7,163,804                               49.07%               
AS A GROUP                                                                                                          
--------------------------------------------------------------------------------------------------------------------

Notes:         (1)The figures  reflect  both  shares  actually owned and options
                  and/or  warrants  held by each individual that are exercisable
within 60 days of November 30, 2002.        

               (2)Includes options to acquire  437,500 shares  of  common  stock
                  and  warrants  to acquire  11,382  common  shares, exercisable
                  within 60 days of November 30, 2002 and 300,583 shares (and an
                  additional  27,083  options  exercisable  within  60  days  of
November 30, 2002) held by his spouse.      

               (3)Includes options  to  acquire  387,500  shares of common stock
                  and  warrants  to acquire  11,382  common  shares, exercisable
within 60 days of November 30, 2002.        

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               (4)Includes  options to  acquire  75,000  shares of common  stock
                  and  warrants  to  purchase 22,764  common shares, exercisable
                  within 60 days of November 30, 2002 and 225,000 shares held by
his spouse.                                 

               (5)Includes  options to acquire 33,334  common shares exercisable
within 60 days of November 30, 2002.        

               (6)512,000 shares (including  options to acquire 52,500 shares of
                  common  stock  and 5,961 warrants to purchase  common  shares,
                  exercisable  within 60  days of November 30, 2002) are held by
                  Marc Gignac,  while his wife,  Giselle Gignac,  holds  498,000
                  shares.  Does not include a $17,073  three year 8% convertible
                  debenture  granted by the Company in  favor  of  Mr.  Gignac's
                  holding company,  which such debenture is  convertible for the
                  first two years at $2.50 per share and  in  the  third year at
$3.00 per share.                            

               (7)Includes  shares owned by Summerhill  Investment  Corporation,
                  a  private  company in which Mr. Lacey owns 50% of the  shares
                  and his wife owns the  remaining  50% of the shares,  includes
                  options to acquire  102,500  common shares  and  warrants   to
                  acquire 22,764  common  shares  exercisable  within 60 days of
                  November 30,  2002.  Does not include a $409,752 three year 8%
                  convertible  debenture  granted by the Company in favor of Mr.
                  Lacey  and  his  family   members,  which  such  Debenture  is
                  convertible  for the first two years at $2.50 per share and in
the third year at $3.00 per share.          

               (8)Includes options to purchase 52,500 common shares and warrants
                  to purchase 11,382 common  shares,  exercisable within 60 days
of November 30, 2002.                       

               (9)Includes options to  purchase 75,000 common shares exercisable
within 60 days of November 30, 2002.        

               (10)Includes options to purchase 83,333 common shares exercisable
within 60 days of November 30, 2002.      

               (11)Includes options to purchase 10,083 common shares exercisable
within 60 days of November 30, 2002.      

               (12)Includes warrants to acquire 56,910 common shares exercisable
within 60 days of November 30, 2003.      

The following table sets out the options granted (both vested and non-vested) to
each individual listed above (as at November 30, 2002).                         

                                                        [Enlarge/Download Table]

---------------------------------------------------------------------------------------------------------------
OPTIONEE                            POSITION                  NUMBER OF       PRICE      EXPIRY DATE           
                                                              OPTIONS                                          
---------------------------------------------------------------------------------------------------------------
                                                                                                               
Trevor M. Hillman              CEO, Chairman & Director        237,500         $1.51         January 19, 2005  
                                                               200,000         $1.80        November 30, 2006  
---------------------------------------------------------------------------------------------------------------
Gregg C. Johnson               Chief Operating Officer,        187,500         $1.51         January 19, 2005  
                                 President & Director          200,000         $1.80        November 30, 2006  
---------------------------------------------------------------------------------------------------------------
Ayaz Kara                      Vice President, Business        75,000          $1.51         January 19, 2005  
                                     Development                                                               
---------------------------------------------------------------------------------------------------------------
Catherine J. McDonough                 Director                50,000          $1.51         January 19, 2005  
                                                               10,000          $1.80        November 30, 2006  
---------------------------------------------------------------------------------------------------------------
Peter A. Lacey                         Director                100,000         $1.51         January 19, 2005  
                                                               10,000          $1.80        November 30, 2006  
---------------------------------------------------------------------------------------------------------------
Derrek R. Wong                  Senior Vice President          150,000         $1.80        November 30, 2006  
                               Finance, Chief Financial                                                        
                                       Officer                                                                 
---------------------------------------------------------------------------------------------------------------
Marc L. Gignac                 President of Subsidiary,        50,000          $1.51         January 19, 2005  
                               Director of Operations,         10,000          $1.80        November 30, 2006  
                                     Saskatchewan                                                              
---------------------------------------------------------------------------------------------------------------

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---------------------------------------------------------------------------------------------------------------
                                                                                                               
Michael D. McKelvie             Senior Vice President,         50,000          $2.68        September 20, 2005 
                                    Marketing and                                                              
                                    Communications                                                             
---------------------------------------------------------------------------------------------------------------
Timothy J. Sebastian                   Director                75,000          $1.80        November 30, 2006  
---------------------------------------------------------------------------------------------------------------
Employees                            (as a group)              150,000         $1.50         January 19, 2005  
                                                               19,800          $2.68        September 20, 2005 
                                                               52,500          $1.80        November 30, 2006  
---------------------------------------------------------------------------------------------------------------
                                        TOTAL                 1,627,300                                        
---------------------------------------------------------------------------------------------------------------

OUR INCENTIVE STOCK OPTION PLAN                                                 

STOCK OPTIONS                                                                   

Two million  three hundred and fifty two thousand  (2,352,000)  shares of common
stock are  reserved  for the  issuance  of stock  options  pursuant to our stock
option plan (the "Plan").  The Plan provides that the Directors,  subject to the
price restrictions and other requirements of the Toronto Stock Exchange,  or any
other  Exchange  our  stock may  become  listed  on,  shall fix the terms of the
options and the option  price.  The Plan also  provides  that no option shall be
granted to any person except upon the recommendation of our Directors,  and only
Directors,  officers,  employees,  and other persons providing on-going services
are eligible for stock option grants.  Stock options  granted under the Plan may
not be for a period  longer than ten (10) years and the  exercise  price must be
paid in full upon exercise of the option.                                       

As of October 31, 2002,  there were  outstanding  options to purchase a total of
1,677,300  common shares under the Plan. The following table sets out details of
the current plan with respect to all such stock options:                        

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                                                        [Enlarge/Download Table]

---------------------------------------------------------------------------------------------------------------------
                                                        NAME OF SHARES                                               
         GROUP                  DATE OF GRANT            UNDER OPTION        EXERCISE PRICE       EXPIRATION DATE    
---------------------------------------------------------------------------------------------------------------------
                                                                                                                     
   Executive Officers         January 19, 2000             500,000               $1.51            January 19, 2005   
                             September 20, 2000             50,000               $2.68           September 20, 2005  
                              November 30, 2001            635,000               $1.80           November 30, 2006   
---------------------------------------------------------------------------------------------------------------------
 Directors who are not                                                                            January 19, 2005   
   Executive Officers         January 19, 2000             200,000               $1.51           November 30, 2006   
                              November 30, 2001             20,000               $1.80                               
---------------------------------------------------------------------------------------------------------------------
       Employees              January 19, 2000             150,000               $1.51            January 19, 2005   
                             September 20, 2000             19,800               $2.68           September 20, 2005  
                              November 30, 2001             52,500               $1.80           November 30, 2006   
---------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------
         TOTAL                                            1,627,300                                                  
---------------------------------------------------------------------------------------------------------------------

EMPLOYEE SHARE PURCHASE PLAN                                                    

Effective  October 10, 2001,  our Board of Directors  adopted an Employee  Share
Purchase Plan.  The Employee  Share  Ownership Plan was ratified and approved by
our  shareholders  at an annual meeting held November 15, 2001.  Pursuant to the
terms of the Employee Share Ownership Plan, officers, directors, consultants and
certain  employees,  may purchase  shares of our common stock at market  prices,
with the purchaser and VHQ  Entertainment  each paying  one-half of the purchase
price.  We can reserve up to 600,000 shares up to November 30, 2002 for issuance
at any one time pursuant to the Employee  Share  Ownership  Plan. As at November
30, 2002, 5,756 shares were issued under this plan.                             

ITEM 7.    MAJORITY SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                 

MAJORITY SHAREHOLDERS                                                           

We are  currently a publicly  held  corporation,  with our common shares held by
residents of Canada,  the United States and other countries.  To the best of our
knowledge,   we  are  not  controlled,   directly  or  indirectly,   by  another
corporation,  any  government  or any  natural  or legal  person,  severally  or
jointly.                                                                        

As of November 30, 2002, no person or corporation or other entity owns, directly
or indirectly,  or controls more than 5% of our common shares, the only class of
securities with voting rights, except for the persons or groups listed below:   

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                                                        [Enlarge/Download Table]

-----------------------------------------------------------------------------------------------------------------------
              IDENTITY OF                 NUMBER OF COMMON SHARES OWNED BENEFICIALLY                                   
           PERSONS OR GROUP                   OR SUBJECT TO CONTROL OR DIRECTION              PERCENTAGE OF CLASS      
-----------------------------------------------------------------------------------------------------------------------
                                                                                                                       
      TREVOR M. HILLMAN, Director,                                                                   16.23%            
           Chairman and CEO                               2,371,013 (1)<F1>                                            
           Red Deer, Alberta                                                                                           
-----------------------------------------------------------------------------------------------------------------------
 GREGG C. JOHNSON, Director, President                                                                9.22%            
      and Chief Operating Officer                         1,346,918 (2)<F2>                                            
           Red Deer, Alberta                                                                                           
-----------------------------------------------------------------------------------------------------------------------

       MARC L. GIGNAC, Director and                       1,076,000 (3)<F3>                           7.37%            
          Director of Operations                                                                                       
         Saskatoon, Saskatchewan                                                                                       
-----------------------------------------------------------------------------------------------------------------------
           TIMOTHY G. HILLMAN                               881,633 (4)<F4>                           6.04%            
           Red Deer, Alberta                                                                                           
-----------------------------------------------------------------------------------------------------------------------
            TARI D. GERVAIS                                 878,500 (4)<F4>                           6.01%            
           Red Deer, Alberta                                                                                           
-----------------------------------------------------------------------------------------------------------------------
            TRACY D. BARKER                                 849,417 (5)<F5>                           5.82%            
           Red Deer, Alberta                                                                                           
-----------------------------------------------------------------------------------------------------------------------
            GORDON HILLMAN                                1,225,596 (6)<F6>                           8.39%            
           Red Deer, Alberta                                                                                           
-----------------------------------------------------------------------------------------------------------------------
<FN>                                                                                                                   
Notes:     (1)<F1>Includes  options to acquire  437,500  shares of common  stock                                       
                  and warrants to  purchase  22,764  common  shares, exercisable                                       
                  within  60  days of November 30, 2002, and 300,583 shares (and                                       
                  27,083 options  exercisable  within 60 days  of  November  30,                                       
                  2002) held by his spouse.                                                                            

           (2)<F2>Includes options to acquire 387,500 shares of common stock and                                       
                  warrants   to   purchase   11,382   shares   of  common stock,                                       
                  exercisable within 60 days of November 30, 2002.                                                     

           (3)<F3>Includes  options to  acquire  52,500  shares of common  stock                                       
                  and warrants  to  purchase  5,961  common  shares, exercisable                                       
                  within  60 days of  November 30, 2002 are held by Marc Gignac,                                       
                  and  498,000  shares  owned  by Mr.  Gignac's  wife.  Does not                                       
                  include a $17,073 three year 8% convertible debenture  granted                                       
                  by the Company in favor of Mr. Gignac's holding company, which                                       
                  such debenture is convertible for the first two years at $2.50                                       
                  per share and in the third year at $3.00 per share.                                                  

           (4)<F4>Includes  options  to  acquire  50,833  shares of common stock                                       
                  exercisable within 60 days of November 30, 2002.                                                     

           (5)<F5>Includes  options  to  acquire  25,417  shares of common stock                                       
                  exercisable within 60 days of November 30, 2002.                                                     

           (6)<F6>Includes  warrants  to purchase 59,910 common shares within 60                                       
                  days of November 28, 2002.                                                                           

</FN>                                                                                                                  

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None of the above  shareholders  have  different  voting  rights  than our other
shareholders.                                                                   

There are no arrangements,  known to us, that may at a subsequent date result in
a change in our control.                                                        

UNITED STATES SHAREHOLDERS                                                      

Based on the records of the Montreal Trust, our registrar and transfer agent, at
May 31, 2002,  there were two holders of record of our common shares with United
States  addresses who  collectively  held 67,630 shares,  or less than 1% of the
12,538,559  issued and  outstanding  shares.  Our records  indicate  that, as of
October 31, 2002,  there were no holders of record of stock  options or warrants
with United States  addresses.  Based on the mailing requests  received from the
various depositories and "street name" holders, the Company estimates that there
are  approximately  700  beneficial  holders  of whom  less than 1% appear to be
resident in or have U.S.  mailing  addresses.  As noted  above,  we are not in a
position to confirm ownership by these parties.                                 

RELATED PARTY TRANSACTIONS                                                      

Other than as disclosed  below,  except for the ownership of our  securities and
the compensation  described herein, and advances of $190,000 by certain officers
to cover expenses and advances of $75,000 to certain officers, all of which were
reimbursed or repaid, for the three years ended May 31, 2002 and the period from
June 1, 2002 to October 31, 2002, we have not entered into any  transactions  or
loans between us and any (a) enterprises that directly or indirectly through one
or more  intermediaries,  control  or are  controlled  by, or are  under  common
control  with,  VHQ  Entertainment;  (b)  associates;  (c)  individuals  owning,
directly or  indirectly,  an interest in the voting  power of VHQ  Entertainment
that gives them significant influence over VHQ Entertainment,  and close members
of any such individuals'  family; (d) key management personnel and close members
of such  individuals'  families;  or (e)  enterprises  in  which  a  substantial
interest  in the voting  power is owned,  directly or  indirectly  by any person
described  in (c) or (d) or  over  which  such a  person  is  able  to  exercise
significant influence.                                                          

None of our insiders,  proposed  nominees for election as our Directors or their
associates and affiliates,  has any material interest in any transaction with us
since June 1, 1998, which has not been previously disclosed in this Registration
Statement on Form 20-F except as follows:                                       

1.       We acquired  Integrated  Retail from, among others,  Trevor H. Hillman,
         our Chief Executive  Officer and a member of our Board of Directors and
         Gregg Johnson,  our President,  Chief Operating Officer and a member of
         our Board of Directors.  See "Item 4.  Information on the Company - Our
         Acquisitions - Our  Acquisition of Integrated  Retail." This was not an
arms' length transaction.                                     

2.       A   Nevada   corporation,   E-Trend Networks,    Inc.   (formerly   The
         MovieSource.com  Corp.),  was incorporated April 29, 1999, to engage in
         the e-commerce sale and distribution of filmed entertainment, music and
         video games.  E-Trend Networks issued shares for nominal  consideration
         to Trevor H. Hillman (5.65%),  our Chief Executive Officer and a member
         of our Board of Directors,  Gregg C. Johnson (5.65%), our President and
         Chief  Operating  Officer and a member of our Board of  Directors,  and
Ayaz Kara (less than                                          

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         1%),  our Vice  President  - Business  Development  and a member of our
Board of Directors from November 22, 1999 to June 5, 2002.    

         In January 2000, E-Trend acquired Langara Distribution Inc., a Canadian
         based  wholesaler  of music,  to support  its music  title  fulfillment
         operations.  E-Trend uses Langara  Distribution  Inc. to provide  music
         procurement  and  fulfillment  for its own network web site and provide
similar services for other Internet based businesses.         

         On February 22, 2001, E-Trend was acquired by Cool Entertainment  Inc.,
         a  Delaware  corporation  formerly  quoted  for  trading  on  the  NASD
         over-the-counter   bulletin  board   ("Cool").   As  a  result  of  the
         acquisition,   the  shareholders  of  E-Trend  became  the  controlling
         shareholders of Cool, Cool changed its name to E-Trend  Networks,  Inc.
         On December 26,  2001,  we entered into an agreement to sell our entire
         holdings in E-Trend,  being  2,000,000  shares of common stock,  to The
         Game Holdings, Ltd., a British Virgin Islands Corporation,  for US$0.40
         per share, for an aggregate purchase price of US$800,000.  The purchase
         price will be payable over 18 months  pursuant to a secured  Promissory
Note delivered by The Game Holdings, Ltd. as follows:         

                  (a)      US$10,000  per  month from January, 2002 until March,
2002;                     

                  (b)      US$30,000  per  month  from April, 2002 until May 31,
2003; and                 

                  (c)      the remainder of the  purchase  price will be paid on
June 30, 2003.            

         The  Promissory  Note bears  interest  at a rate of 6% per  annum.  The
         Promissory   Note  was  to  be  secured  by  way  of  a  second  charge
         registration against a yacht owned by The Game Holdings,  Ltd. which as
         at June  22,  2001  had an  estimated  market  value  of  approximately
         US$1,600,000 and a replacement  value of approximately  US$2,000,000 as
         determined  by an  independent  appraiser,  the  appraisal of which was
         delivered by the purchaser.  See "Item 4 - Information on the Company -
         E-Trend  Networks,  Inc." To date,  the  Company has not  received  any
         payments from Game Holdings as required by the terms of the  promissory
         note.  As the  payments  are  received,  a gain  on the  sale  will  be
recognized.                                                   

         We currently rent office space in Calgary,  Alberta to E-Trend Networks
in our marketing and accounting office facility.              

3.       On  September 29, 1999, we completed our acquisition of Safiqa Holdings
         Ltd., an independent video retailer operating four video superstores in
         the Calgary market under the trade name "Rainbow Video." Ayaz Kara, the
         President of Safiqa Holdings Ltd, is now our Vice President, Operations
         and was a member of the Board of  Directors  from  November 22, 1999 to
         June  5,  2002.  See  "Item  4.   Information  on  the  Company  -  Our
Acquisitions - Our Acquisition of Rainbow Video."             

4.       On  December 1, 1999,  we  completed  our  acquisition  of  Star Vision
         Enterprises Inc., an independent video retailer operating six video and
         home  entertainment  superstores in the Saskatoon market.  Marc Gignac,
         President  and  Director  of  Star  Vision,   is  now  the  Director  -
         Operations,  Saskatchewan  for us and was a Director  of the Company to

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         November  27,  2002.  See  "Item 4.  Information  on the  Company - Our
Acquisitions - Our Acquisition of Star Vision."               

5.       We  lease our  principal  office and  warehouse  facility  in Red Deer,
         Alberta from G&J Holdings Inc., a company controlled by Gordon Hillman,
         the father of Trevor H.  Hillman,  our Chief  Executive  Officer  and a
         member  of our  Board of  Directors.  The lease is for a five year term
         commencing March 27, 1998. The rent payable in each year is as follows:

  (a)      year one         $3,723.96 per month;
  (b)      year two         $4,010.42 per month;
  (c)      year three       $4,296.88 per month;
  (d)      year four        $4,583.33 per month;
  (e)      year five        $4,869.79 per month.

         We are also  responsible  for  operational  costs under the lease.  The
         lease is renewable for two further five year terms under the same terms
         and conditions and at a rental rate based on a current rental market in
         the  City of Red  Deer,  in the  Province  of  Alberta.  See  "Item  4.
Information on the Company - Our Properties and Equipment."   

6.       In January of 2000, we completed a revenue  sharing  agreement  whereby
         we  sold   certain   capital   assets  of   Integrated   Retail   Corp.
         ("Integrated") to Video Limited Partnership.  See "Item 4 - Information
         on the  Company - Business  Overview  -  Licenses/Source  Agreements  -
         Revenue Sharing  Arrangement - Video Limited  Partnership."  Holders of
         the Limited  Partnership  Units included the following  insiders of VHQ
         Entertainment:  Trevor  Hillman,  our  Chief  Executive  Officer  and a
         Director,  who owned or controlled (directly or through his family) 20%
         of the  Limited  Partnership  Units;  Peter  Lacey,  a Director  of VHQ
         Entertainment  who  owned or  controlled  approximately  18.75%  of the
         units; Ayaz Kara, Vice President - Business Development (and a Director
         from  November 22, 1999 to June 5, 2002),  who owned 2.5% of the Units;
         and Catherine McDonough, a Director who owned approximately 2.5% of the
         units.  Other insiders of VHQ Entertainment  including Tari Gervais and
         Timothy  Hillman,  employees  of  VHQ  Entertainment,   Gregg  Johnson,
         President   and  Chief   Operating   Officer  and  a  Director  of  VHQ
         Entertainment, and Howard Bolinger, our former Chief Financial Officer,
own an aggregate of 3.1% of the Limited Partnership Units.    

         Effective December 1, 2001, we acquired all of the  outstanding Limited
         Partnership  Units from the Video Limited  Partners.  The Video Limited
         Partners had the option to receive units of VHQ Entertainment comprised
         of  one  common  share  and  one-half  of  a  share  purchase   warrant
         exercisable at any time over the next two years at $2.00 per share;  or
         an 8% three year subordinated  convertible  debenture.  The convertible
         debenture is  convertible  into common shares of VHQ  Entertainment  at
         $2.50 for two years  and $3.00 for the final  year.  As a result of the
         acquisition of the Limited  Partnership Units, we issued 546,336 common
         shares and 273,168 warrants and $1,280,475 worth of debentures.  Trevor
         Hillman  received  22,764  common  shares  and 11,382  warrants;  Gregg
         Johnson received 22,764 common shares and 11,382 warrants;  Marc Gignac
         (through his holding  company)  received 11,382 common shares and 5,691

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         warrants,  and  $17,073  of  the  convertible  debenture;  Peter  Lacey
         received 45,528 common shares,  22,764 warrants,  and $341,460 worth of
         the convertible debenture;  Ayaz Kara received 45,528 common shares and
         22,764 warrants;  Catherine McDonough received 22,764 shares and 11,382
warrants.                                                     

Except  for  our  acquisition  of  Integrated   Retail,   we  believe  that  the
transactions  described  above  were on terms  as  favorable  as we  would  have
obtained from non-related third parties at arms' length.                        

No  individual  who is, or at any time  during the last three  completed  fiscal
years and to the present was, a Director, executive officer or senior officer of
VHQ  Entertainment,  nor any proposed  nominee for election as a Director of VHQ
Entertainment, nor any associate of any one of them:                            

         a.       is,  or  at  any time during the last three  completed  fiscal
                  years and to the present has been,  indebted to us or  any  of
our subsidiaries; or                        

         b.       was indebted to another entity, which such indebtedness is, or
                  was at any time  during our last three  completed fiscal years
                  and  to  the  present,  the  subject  of a guarantee,  support
                  agreement,  letter  of  credit or other similar arrangement or
            understanding provided by us or any of our subsidiaries.

ITEM 8.    FINANCIAL INFORMATION                                                

CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION                         

SEE PAGES BEGINNING WITH PAGE F-1.                                              

SIGNIFICANT CHANGES                                                             

None                                                                            

LEGAL PROCEEDINGS                                                               

On January 18, 2001,  Beamscope Canada, Inc.  ("Beamscope"),  who had previously
supplied us with video game rental  products,  filed a statement of claim in the
Superior Court of Justice in Ontario,  Canada.  The claim alleges that Beamscope
is owed $159,074.56 for video games and related merchandise  provided to us from
August 2000 to November  2000. We have filed a  counterclaim  against  Beamscope
seeking  $1,500,000  in damages  for lost  business  as a result of  Beamscope's
failure to deliver products in a timely manner.  As of April 1, 2002 the parties
have  agreed to settle  the claim by the  payment  from us to  Beamscope  in the
amount of  $50,000  for a full  release  by both  sides.  As of the date of this
annual report, the $50,000 has not been paid.                                   

On  January 2, 2002,  Brian  Meyer  filed a  statement  of claim  against us and
E-Trend Networks, Inc. in the Court of Queen's Bench, Alberta, Judicial District
of Red Deer. Mr. Meyer claims that he was improperly terminated and is seeking a
judgment in the amount of $30,750 and general/punitive  damages in the amount of
$25,000,  plus interests and costs. On January 29, 2002, we filed a Statement of
Defence                                                                         

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as well as a  counterclaim  in the  amount of  $5,000  for a loan we made to Mr.
Meyer which has not been repaid. We intend to defend against Mr. Meyer's claim. 

To the best of our knowledge,  we are not subject to any other active or pending
legal proceedings or claims against us or any of our subsidiaries. However, from
time to  time,  we may  become  subject  to  additional  claims  and  litigation
generally associated with any business venture.                                 

DIVIDEND POLICY                                                                 

We have not paid any  dividends  on our  common  shares and do not intend to pay
dividends  on our common  shares in the  immediate  future.  Any decision to pay
dividends  on our  common  shares  in the  future  will be made by our  board of
directors  on the basis of  earnings,  financial  requirements  and  other  such
conditions that may exist at that time.                                         

ITEM 9.    LISTING                                                              

NATURE OF TRADING MARKET                                                        

Our common  shares have traded on the Toronto Stock  Exchange  ("TSX") under the
symbol "VHQ" since July 24,  2001.  Our shares  traded on the  Canadian  Venture
Exchange  (formerly The Alberta Stock  Exchange)  from  September 18, 1998 until
July  30,  2001  when we  voluntarily  delisted  from the TSX  Venture  Exchange
(formerly  the CDNX) as a result  of our TSX  listing.  Set forth  below are the
trading  prices for our common  shares on the TSX Venture  Exchange  and the TSX
monthly for the last six months and  quarterly  for  completed  financial  years
since the start of trading.                                                     

 THE CANADIAN VENTURE EXCHANGE
 (FORMERLY THE ALBERTA STOCK EXCHANGE)

------------------------------------------------------------------------------
 1998            HIGH (CDN$)         LOW (CDN$)        ACTUAL VOLUME
------------------------------------------------------------------------------
3rd Quarter (1)          $0.98               $0.50             185,833        
4th Quarter              $1.10               $0.50             184,617        
------------------------------------------------------------------------------

------------------------------------------------------------------------------
 1999            HIGH (CDN$)         LOW (CDN$)        ACTUAL VOLUME
------------------------------------------------------------------------------
1st Quarter              $0.98               $0.50             358,333        
2nd Quarter              $1.10               $0.50             197,000        
3rd Quarter              $1.00               $0.69             114,467        
4th Quarter              $1.75               $0.50             590,933        
------------------------------------------------------------------------------

------------------------------------------------------------------------------
 2000            HIGH (CDN$)         LOW (CDN$)        ACTUAL VOLUME
------------------------------------------------------------------------------
1st Quarter              $2.50               $1.30             475,950        
2nd Quarter              $2.50               $1.65             134,946        
3rd Quarter              $5.25               $1.85             839,657        
4th Quarter              $3.60               $2.65             229,056        
------------------------------------------------------------------------------

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 -------------------------------------------------------------------------------
 2001            HIGH (CDN$)         LOW (CDN$)        ACTUAL VOLUME
 -------------------------------------------------------------------------------
1st Quarter              $3.04               $2.00             449,766        
2nd Quarter              $2.40               $1.90             418,830        
3rd Quarter              $3.00               $1.80             97,130         
4th Quarter              $2.45               $1.65             468,893        
 -------------------------------------------------------------------------------

(1) Delisted from the TSX Venture Exchange as a result of listing on the Toronto
Stock Exchange on July 27, 2001.                                        

THE TORONTO STOCK EXCHANGE

--------------------------------------------------------------------------------
2002               HIGH (CDN$)         LOW (CDN$)         ACTUAL VOLUME 

1st Quarter               $1.95               $1.40              621,803        

April                 $1.53               $0.90              943,555    
May                  $1.15               $0.75              916,300   
June                 $0.85               $0.62              641,795   
July                 $0.75               $0.50              635,000   
August                $0.83               $0.62              346,900    
September               $0.80               $0.50              248,927      
October                $0.80               $0.38              349,902     
November               $0.65               $0.40              174,474     
--------------------------------------------------------------------------------

The closing sales price of our common  shares on the Toronto Stock  Exchange was
$0.45 on December 13, 2002.                                                     

Our common shares, no par value, are issued in registered form.                 

ITEM 10.   ADDITIONAL INFORMATION                                               

MEMORANDUM AND ARTICLES OF ASSOCIATION                                          

REGISTER & CORPORATE PURPOSE                                                    

CORPORATE REGISTRATION                                                          

We are a corporation  currently  registered in Canada under the Canada  Business
Corporations Act # 384084-1.                                                    

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PURPOSE                                                                         

Our  Articles  of  Continuance,  at  Section 6, allow us to carry on any and all
legal business  activities without  limitation.  Currently,  we operate,  though
wholly-owned subsidiaries,  a chain of 49 video and home entertainment stores in
Western Canada and the North West Territories.  Our business strategy focuses on
serving markets in smaller urban centers, which typically have less competition,
lower fixed costs and lower overhead.                                           

DIRECTOR POWERS & QUALIFICATIONS                                                

INTERESTED TRANSACTION                                                          

Under  Section  6.01 of our Bylaws,  a Director who (i) is a party to, (ii) is a
Director  or  officer,  or (iii) has a material  interest in any person who is a
party to a  material  contract  or  proposed  material  contract  with us or our
subsidiary  must  disclose the nature and extent of his interest.  However,  the
Director is not disqualified  from voting in the transaction  unless required by
the Canada Business Corporations Act.                                           

BOARD COMPENSATION                                                              

Subject to any unanimous shareholder agreements, the Board has the power to vote
compensation  to  themselves  or any member of their body  without  requiring an
independent quorum.                                                             

BORROWING POWER                                                                 

Our Directors, without authorization of the shareholders,  may: (i) borrow money
on the  credit  of the  Company,  (ii)  issue,  reissue,  sell  or  pledge  debt
obligations of the Company,  (iii) subject to the Canada  Business  Corporations
Act,  give a  guarantee  on behalf of the  Company to secure  performance  of an
obligation of any person,  and (iv) mortgage,  hypothecate,  pledge or otherwise
create a security  interest  in all or any  property  of the  Company,  owned or
subsequently  acquired, to secure any obligation of the Company. These borrowing
powers may be varied by amendment of the Articles of Continuance.               

DIRECTOR AGE LIMIT REQUIREMENT                                                  

There is currently no age limitation in place for Director positions.           

NUMBER OF SHARES REQUIRED FOR DIRECTOR QUALIFICATION.                           

Our  Directors  are not  required  to hold any of our  shares  to  qualify  as a
Director.                                                                       

RIGHTS AND PREFERENCES OF SHARES                                                

COMMON SHARES                                                                   

All common  shares are of the same class and have the same  rights,  preferences
and limitations.  Holders of common shares are entitled to receive  dividends in
cash,  property or shares  when and if  dividends  are  declared by the Board of
Directors out of funds legally available  therefor.  There are no limitations on
the payment of dividends.  A quorum for a general meeting of shareholders is not
less than two  persons                                                          

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holding  not less than 5% of the  shares  entitled  to be voted at the  meeting.
Holders  of  common  shares  are  entitled  to one  vote  per  share.  Upon  any
liquidation, dissolution or winding up of our business, the surplusif any, after
payment or provision for payment of all our debts,  obligations  or  liabilities
shall be distributed  to the holders of common shares.  There are no pre-emptive
rights,   subscription  rights,  conversion  rights  and  redemption  provisions
relating to the common  shares and none of the common shares carry any liability
for further calls.  At our last annual general meeting of  shareholders,  all of
our Directors were elected to serve one year terms;  however,  the Directors can
be appointed to serve staggered intervals.                                      

The rights of holders of common shares may not be modified  other than by a vote
of the majority of the common shares voting on such modification                

Shareholders may apply to a court of competent jurisdiction for various remedies
on the ground that our affairs are being conducted in a manner oppressive to one
or more of the  shareholders or that some  resolution of  shareholders  has been
passed  or is  proposed  that  is  unfairly  prejudicial  to one or  more of the
shareholders.  That  Court  may,  with a  view  to  bringing  it to an end or to
remedying  the  matters  complained  of,  make an interim  or final  order if it
considers appropriate.                                                          

There are no  restrictions  on the purchase or redemption of common shares by us
while  there is any  arrearage  in the  payment of  dividends  or  sinking  fund
installments.                                                                   

PREFERRED STOCK                                                                 

Our Board of Directors is authorized to issue such series of Preferred  Stock as
they shall authorize.  The terms of any dividend payment may be set by the Board
upon  issuance  of a given  series.  However,  all  Preferred  Stock will have a
preference  in  dividends  over any Common Stock and any other  securities  made
expressly  junior to the Preferred  Stock.  In the event of a  liquidation,  the
Preferred  Stock will be entitled to any surplus  remaining  after all debts and
senior  securities  have been paid. All dividend  arrearages on Preferred  Stock
will be paid before any  distributions  are made to Common Stock.  The Board may
set  such  pre-emptive  rights,   subscription  rights,  conversion  rights  and
redemption  provisions  relating to the  preferred  shares and set liability for
further  calls as it sees fit upon the issuance of a series of preferred  stock.
There are  currently  no  provisions  discriminating  against  any  existing  or
prospective  holder  of  Preferred  Stock  based  on such  shareholder  owning a
substantial amount of stock.                                                    

CHANGING RIGHTS OF STOCK                                                        

Under the Canada Business  Corporations  Act, the rights of holders of stock may
be changed by special  resolution  amending  the  Articles  of  Continuation.  A
shareholder  or Director  entitled to vote at a shareholder  meeting may propose
such a resolution. Notice of the meeting where such amendment will be considered
must set out the proposed  amendment.  In  considering  such an  amendment,  the
holders  of the class or  classes  subject to  modification  under the  proposed
amendment are entitled to vote separately as a class on the amendment regardless
or whether the shares are generally  entitled to vote.  The rights of holders of
common  shares may not be modified  other than by a vote of the  majority of the
common  shares  voting  on such  modification.  Because  a quorum  for a general
meeting of shareholders can exist with one shareholder (proxy holder) personally
present,  the rights of holders of common  shares may be modified by less than a
majority  of our  issued  common  shares.  None of  these  conditions  are  more
stringent than required by law.                                                 

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SHAREHOLDER MEETINGS                                                            

ANNUAL MEETINGS - TIME AND PLACE                                                

The Chairman of the Board,  managing Director, or President is authorized to set
the time,  date,  and place of the  annual  meeting.  Such  meeting  may be held
anywhere within Canada or the United States.                                    

NOTICE OF MEETINGS                                                              

Notice of the time and place of each meeting of the  shareholders  shall be sent
between  fifty  (50)  and  twenty-one  (21)  days  before  the  meeting  to each
shareholder entitled to vote, each Director, and to the auditors of the Company.

RECORD DATE                                                                     

The  Board  may set the  record  date  for a  meeting  between  fifty  (50)  and
twenty-one  (21) days before the  meeting.  If no record date is set, the record
date shall be the close of business on the date immediately preceding the day on
which  the  notice is  given,  or if no  notice  is given,  the day on which the
meeting is held.                                                                

RIGHT TO VOTE                                                                   

Before each meeting,  the Company shall prepare a list of shareholders  entitled
to vote at the  meeting.  If a record  date is fixed for the  meeting,  the list
shall consist of those registered at the close of business on the day of record.
If no record date is fixed, the shareholders listed shall be those listed at the
close of business on the last  business  day  immediately  preceding  the day on
which notice of a meeting is given,  or if no notice is given,  the day on which
the meeting is held. Only those shareholders entitled to vote are entitled to be
present at the meeting.                                                         

MEETINGS WITHOUT NOTICE                                                         

A meeting  may be held  without  notice at any time and place  permitted  by the
Canada Business  Corporations Act if: (1) all shareholders  entitled to vote are
present in person or  represented  by proxy or if not present or  represented by
proxy, that shareholder has waived notice or otherwise consented to the meeting,
and (2) if the  auditors  and  Directors  are  present  or  waive  notice  of or
otherwise consent to such meeting being held.                                   

OTHER PROVISIONS                                                                

There are no limitations  on the rights to own our common shares,  including the
rights of non-resident or foreign shareholders to hold or exercise voting rights
on our  shares.  Neither  our  articles of  association  nor bylaws  contain any
provision  that would have an effect of  delaying,  deferring,  or  preventing a
change in control of the Company and that would  operate  only with respect to a
merger,  acquisition,  or  corporate  restructuring  involving  us or any of our
subsidiaries.  Our bylaws do not contain any provisions  governing the ownership
threshold above which shareholder ownership must be disclosed.                  

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MATERIAL CONTRACTS                                                              

The following are the material contracts related to our business:               

Asset Purchase Agreement between Integrated Retail Corp. and Softech 002 Limited
Partnership dated September 29th, 1999.                                         

Employment Agreement with Ayaz Kara dated June 1, 1999. See "Item 6 - Directors,
Senior Management and Employees - Compensation - Executive Officers - Employment
Contracts" for a description of this agreement.                                 

Services  Agreement  with TMH Holdings Ltd. dated  effective  April 1, 2001. See
"Item 6 - Directors,  Senior Management and Employees - Compensation - Executive
Officers - Employment Contracts" for a description of this agreement.           

Services  Agreement with Summit Capital  Corporation  dated  effective  April 1,
2001. See "Item 6 - Directors,  Senior Management and Employees - Compensation -
Executive Officers - Employment Contracts" for a description of this agreement. 

Asset Purchase  Agreement  between M & K Video Spot Inc. and Video  Headquarters
Inc.  dated  July 11,  2000.  See  "Item 4 -  Information  on the  Company - Our
Acquisition of M & K Video Spot" for a description of the agreement.            

Management and Revenue  Sharing  Agreement  dated September 29, 1999 between the
Company and Video  Limited  Partnership.  See "Item 5 - Operating  and Financial
Review and  Prospects - Year Ended May 31,  2001  Compared to Year Ended May 31,
2000  -  Video  Limited  Partnership  Disbursements"  for a  description  of the
Agreement.                                                                      

Memorandum of Agreement  between Raeco Holdings  Incorporated  ("Raeco") and the
Company's  subsidiary,  Star Vision Enterprises Inc. ("Star Vision"),  regarding
the sale of Raeco's assets to Star Vision dated June 15, 2000.                  

Asset Purchase  Agreement with Hollywood  North Video Ltd. dated effective March
15, 2001.  See Item 4 -  "Information  on the Company - Our  Acquisitions  - Our
Acquisition of Hollywood North Video Ltd." for a description of this Agreement. 

Composite Convertible Subordinated Debenture dated December 1, 2001.            

Share Sale Agreement dated  effective  December 26, 2001 with The Game Holdings,
Ltd. See "Item 4 - Information on the Company - E-Trend Networks, Inc."         

Promissory Note granted by The Game Holdings,  Ltd. dated December 26, 2001. See
"Item 4 - Information on the Company - E-Trend Networks, Inc."                  

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Form of Amended  Definitive Share Purchase Agreement dated effective February 1,
2002 with The Game  Holdings,  Ltd. See "Item 4 -  Information  on the Company -
E-Trend Networks, Inc."                                                         

Form of  Amended  Promissory  Note  granted  by The Game  Holdings,  Ltd.  dated
February 1, 2002. See "Item 4 - Information  on the Company - E-Trend  Networks,
Inc.".                                                                          

Lease with G&J  Holdings  Inc.  See "Item 4.  Information  on the  Company - Our
Properties and Equipment" and "Item 7. Majority  Shareholders  and Related Party
Transactions - Related Party Transactions."                                     

Line of  Credit  and  Credit  Facility  with  Community  Savings.  See  "Item 5.
Operating and Financial  Review and Prospects - Year Ended May 31, 2001 Compared
to Year Ended May 31, 2000 - Cash From Financing Activities."                   

EXCHANGE CONTROLS                                                               

Canada has no system of exchange controls. There are no exchange restrictions on
borrowing from foreign  countries or on the  remittance of dividends,  interest,
royalties and similar payments, management fees, loan repayments,  settlement of
trade debts, or the repatriation of capital.  However, any dividends remitted to
U.S.  Holders,  as defined below,  will be subject to  withholding  tax. See the
heading "Taxation" below.                                                       

There  are no  limitations  under  the  laws  of  Canada  or  Alberta  or in our
memorandum  and  articles  on the  rights of  non-Canadians  to hold or vote our
common shares.  Under the provisions of the Investment  Canada Act (the "ICA" or
the "Act"), as amended by the Canada-United States Free Trade Implementation Act
(Canada), and the Canada-United States Free Trade Agreement, review and approval
of the transaction by the Investment Canada Agency  ("Investment  Canada"),  the
federal  agency  created by the ICA are required  where a U.S.  person  directly
acquires  control of a Canadian  business  with assets of more than $209 million
(2001).  The term "control" is defined as any one or more  non-Canadian  persons
acquiring all or substantially all of the assets used in the Canadian  business,
or the  acquisition of the voting shares of a Canadian  corporation  carrying on
the Canadian  business or the  acquisition  of the voting  interest of an entity
controlling  or  carrying  on the  Canadian  business.  The  acquisition  of the
majority of the  outstanding  shares is deemed to be an "acquisition of control"
of a corporation  unless it can be  established  that the purchaser will not, in
fact, control the Canadian corporation.                                         

Subject to the  comments  contained in the  following  paragraph  regarding  WTO
investors,   investments  requiring  notification  and  review  are  all  direct
acquisitions  of Canadian  businesses  with assets of $5,000,000 or more and all
indirect  acquisitions of Canadian businesses with assets between $5,000,000 and
$50,000,000   which   represent  more  than  50%  of  the  value  of  the  total
international  transaction.  (Indirect  acquisition means the acquisition of the
voting rights of an entity  controlling the Canadian  corporation.) In addition,
specific  acquisitions  or  new  businesses  in  designated  types  of  business
activities  related to Canada's  cultural heritage or national  identity,  which
would normally only be notifiable, could be reviewed if the Government of Canada
considers it in the public interest to do so.                                   

The ICA was amended with the  implementation  of the agreement  establishing the
World Trade  Organization  ("WTO") to provide for special review  thresholds for
"WTO  investors",  as defined in the Act. "WTO investor"  generally means (i) an
individual,  other than a Canadian,  who is a national of a                     

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WTO member (such as, for example,  the United  States),  or who has the right of
permanent  residence  in relation to that WTO member,  (ii)  governments  of WTO
members, and (iii) entities that are not Canadian controlled,  but which are WTO
investor  controlled,  as determined by rules  specified in the Act. The special
review  thresholds  for  WTO  investors  do not  apply,  and the  general  rules
described  above do apply,  to the  acquisition  of control of certain  types of
businesses  specified  in the Act,  including  a  business  that is a  "cultural
business".  If the WTO Investor  rules  apply,  an  investment  in shares of the
Issuer by or from a WTO investor will be reviewable  only if it is an investment
to  acquire  control  of the Issuer and the value of the assets of the Issuer is
equal to or greater than a specified  amount (the "WTO Review  Threshold").  The
WTO Review Threshold is adjusted  annually by a formula relating to increases in
the nominal  gross  domestic  product of Canada.  The WTO Review  Threshold  was
$209,000,000 (in 2001).                                                         

If any  non-Canadian,  whether or not a WTO  Investor,  acquires  control of the
Issuer by the  acquisition of shares,  but the  transaction is not reviewable as
described above, the non-Canadian is required to notify the Canadian  government
and  to  provide  certain  basic  information  relating  to  the  investment.  A
non-Canadian,  whether  or not a WTO  investor,  is also  required  to provide a
notice to the government on the establishment of a new Canadian business. If the
business of the Issuer is a  prescribed  type of business  activity  relating to
Canada's cultural heritage or national identity,  and if the Canadian government
considers it to be in the public interest to do so, then the Canadian government
may  give a notice  in  writing  within  21 days  requiring  the  investment  be
reviewed.                                                                       

For  non-Canadians  (other  than WTO  investors),  an  indirect  acquisition  of
control,  by the  acquisition of voting  interests of an entity that directly or
indirectly  controls the Issuer, is reviewable if the value of the assets of the
Issuer is then  $50,000,000 or more. If the WTO investor rules apply,  then this
requirement  does not  apply to a WTO  investor,  or to a person  acquiring  the
entity from a WTO  investor.  Special  rules  specified  in the Act apply if the
value of the assets of the Issuer is more than 50% of the value of the entity so
acquired.  By these special  rules,  if the  non-Canadian  (whether or not a WTO
investor) is acquiring control of an entity that directly or indirectly controls
the  Issuer,  and the value of the assets of the  Issuer and all other  entities
carrying on business in Canada, calculated in the manner provided in the Act and
the regulations under the Act, is more than 50% of the value,  calculated in the
manner provided in the Act and the  regulations  under the Act, of the assets of
all entities, the control of which is acquired,  directly or indirectly,  in the
transaction of which the acquisition of control of the Issuer forms a part, then
the  thresholds  for a direct  acquisition  of control as  discussed  above will
apply.  That is, a WTO  Review  threshold  of $209  million  (in 2001) for a WTO
investor  or a  threshold  of  $5,000,000  for a  non-Canadian  other than a WTO
investor. If the value exceeds that level, then the transaction must be reviewed
in the same manner as a direct  acquisition of control by the purchase of shares
of the Issuer.                                                                  

If an investment is reviewable, an application for review in the form prescribed
by regulations is normally  required to be filed with the agency  established by
the Act (the  "Agency")  prior to the  investment  and the investment may not be
consummated  until the review has been completed.  There are,  however,  certain
exceptions.  Applications concerning indirect acquisitions may be filed up to 30
days after the investment is consummated and applications  concerning reviewable
investments in  culture-sensitive  sectors are required upon receipt of a notice
for review. There is, moreover,  provision for the Minister (a person designated
as such  under the Act) to  permit  an  investment  to be  consummated  prior to
completion of review,  if he is satisfied  that delay would cause undue hardship
to the acquirer or  jeopardize  the  operation of the Canadian  business that is
being acquired. The Agency will submit the application to the Minister, together
with any other information or written undertakings given by the                 

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acquirer and any  representation  submitted to the Agency by a province  that is
likely to be significantly affected by the investment.                          

The Minister will then  determine  whether the investment is likely to be of net
benefit to Canada,  taking into  account  the  information  provided  and having
regard for other  factors  where they are  relevant.  Some of the  factors to be
considered  are the effect of the investment on the level and nature of economic
activity in Canada, including the effect on employment,  on resource processing,
on the utilization of parts,  components and services produced in Canada, and on
exports from Canada.                                                            

Additional  factors of  assessment  include (i) the degree and  significance  of
participation  by  Canadians  in the  Canadian  business  and in any industry in
Canada  of  which  it  forms  a part;  (ii)  the  effect  of the  investment  on
productivity,   industrial  efficiency,   technological   development,   product
innovation and product variety in Canada;  (iii) the effect of the investment on
competition within any industry or industries in Canada;  (iv) the compatibility
of the  investment  with  national  industrial,  economic and cultural  policies
taking  into  consideration   industrial,   economic  and  cultural   objectives
enunciated  by the  government  or  legislature  of any  province  likely  to be
significantly  affected  by the  investment;  and  (v) the  contribution  of the
investment to Canada's ability to compete in world markets.                     

To insure prompt  review and decision,  the Act sets certain time limits for the
Agency and the Minister.  Within 45 days after a completed  application has been
received,  the Minister must notify the acquirer  that (a) he is satisfied  that
the investment is likely to be of net benefit to Canada,  or (b) he is unable to
complete his review,  in which case he shall have 30 additional days to complete
his review  (unless the acquirer  agrees to a longer  period),  or (c) he is not
satisfied that the investment is likely to be of net benefit to Canada.         

Where the Minister has advised the acquirer  that he is not  satisfied  that the
investment is likely to be of net benefit to Canada,  the acquirer has the right
to make  representations  and submit  undertakings within 30 days of the date of
the notice (or any further  period that is agreed upon  between the acquirer and
the Minister). On the expiration of the 30-day period (or the agreed extension),
the Minister must quickly  notify the acquirer (a) that he is now satisfied that
the investment is likely to be of net benefit to Canada or (b)  confirming  that
he is not  satisfied  that the  investment  is  likely to be of net  benefit  to
Canada. In the latter case, the acquirer may not proceed with the investment or,
if the investment has already been consummated,  must relinquish  control of the
Canadian  business.  The Act authorizes  the Minister to give written  opinions,
binding  the  Minister,  on the  application  of the Act or  regulations  to the
persons  seeking the  opinions to the Agency or a designated  official.  The Act
also  authorizes  the  Minister to issue  guidelines  and  interpretations  with
respect to the application and administration of any provision of the Act or the
regulations.                                                                    

The Act provides  for civil  penalties  for  non-compliance  with any  provision
except breach of confidentiality  or provision of false  information,  for which
there are criminal penalties.                                                   

TAXATION                                                                        

UNITED STATES FEDERAL INCOME TAX CONSEQUENCES                                   

The following is a discussion of certain  possible  United States federal income
tax consequences, under current law, applicable to a U.S. Holder (as hereinafter
defined)  of common  shares of the  Company.  This  discussion  does not address
consequences peculiar to persons subject to special provisions of               

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federal  income tax law,  such as those  described  below as  excluded  from the
definition of a U.S.  Holder.  In addition,  this  discussion does not cover any
state,  local or foreign tax  consequences.  See  "Canadian  Federal  Income Tax
Consequences" below.                                                            

The following discussion is based upon the sections of the Internal Revenue Code
of 1986,  as amended (the  "Code"),  Treasury  Regulations,  published  Internal
Revenue Service ("IRS") rulings,  published  administrative positions of the IRS
and court decisions that are currently applicable,  any or all of which could be
materially and adversely  changed,  possibly on a retroactive basis, at any time
and which are subject to differing  interpretations.  This  discussion  does not
consider the potential  effects,  both adverse and  beneficial,  of any proposed
legislation  which,  if  enacted,  could be applied,  possibly on a  retroactive
basis,  at any time.  Holders and  prospective  holders of common  shares of the
Company  should  consult  their own tax  advisors  about the state,  local,  and
foreign tax consequences of purchasing, owning and disposing of common shares of
the Company.                                                                    

U.S. HOLDERS                                                                    

As used herein,  a "U.S.  Holder" means a holder of common shares of the Company
who is (i) a  citizen  or  individual  resident  of the  United  States,  (ii) a
corporation  or  partnership  created or  organized  in or under the laws of the
United States or of any  political  subdivision  thereof,  (iii) an estate whose
income is taxable in the United  States  irrespective  of source or (iv) a trust
subject to the  primary  supervision  of a court  within  the United  States and
control of a United States  fiduciary as described  Section  7701(a)(30)  of the
Code.  This summary does not address the tax  consequences  to, and U.S.  Holder
does not include,  persons subject to specific  provisions of federal income tax
law, such as tax-exempt  organizations,  qualified retirement plans,  individual
retirement  accounts and other tax-deferred  accounts,  financial  institutions,
insurance  companies,   real  estate  investment  trusts,  regulated  investment
companies, broker-dealers, persons or entities that have a "functional currency"
other than the U.S. dollar, shareholders subject to the alternative minimum tax,
shareholders who hold common shares as part of a straddle,  hedging,  conversion
transaction,  constructive  sale or other  arrangement  involving  more than one
position, and shareholders who acquired their common shares through the exercise
of employee  stock  options or  otherwise as  compensation  for  services.  This
summary is  limited to U.S.  Holders  who own  common  shares as capital  assets
within the meaning of Section  1221 of the Code.  This  summary does not address
the  consequences  to a person or entity holding an interest in a shareholder or
the  consequences  to a person of the ownership,  exercise or disposition of any
options, warrants or other rights to acquire common shares.                     

DISTRIBUTION ON COMMON SHARES OF THE COMPANY                                    

U.S. Holders receiving dividend distributions (including constructive dividends)
with  respect to common  shares of the Company are  required to include in gross
income for United  States  federal  income tax purposes the gross amount of such
distributions,  equal to the U.S. dollar value of such distributions on the date
of receipt  (based on the  exchange  rate on such date),  to the extent that the
Company has current or accumulated  earnings and profits,  without reduction for
any Canadian  income tax withheld  from such  distributions.  Such  Canadian tax
withheld  may be  credited,  subject to certain  limitations,  against  the U.S.
Holder's  federal  income tax  liability or,  alternatively,  may be deducted in
computing  the  U.S.  Holder's  federal  taxable  income  by those  who  itemize
deductions. (See more detailed discussion at "Foreign Tax Credit" below). To the
extent that distributions  exceed current or accumulated earnings and profits of
the  Company,  they will be treated  first as a return of capital up to the U.S.
Holder's  adjusted  basis in the common  shares and  thereafter as gain from the
sale or  exchange of the common                                                 

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shares.  Preferential tax rates for long-term  capital gains are applicable to a
U.S.  Holder which is an  individual,  estate or trust.  There are  currently no
preferential tax rates for long-term  capital gains for a U.S. Holder which is a
corporation.                                                                    

In the case of foreign currency  received as a dividend that is not converted by
the recipient into U.S. dollars on the date of receipt,  a U.S. Holder will have
a tax basis in the foreign  currency equal to its U.S.  dollar value on the date
of receipt.  Generally  any gain or loss  recognized  upon a subsequent  sale or
other  disposition  of the foreign  currency,  including  the  exchange for U.S.
dollars,  will be ordinary income or loss. However, an individual whose realized
gain does not exceed $200 will not recognize that gain, to the extent that there
are no expenses  associated with the transaction  that meet the requirements for
deductibility  as a trade or business  expense  (other  than travel  expenses in
connection with a business trip) or as an expense for the production of income. 

Dividends  paid on the  common  shares  of the  Company  generally  will  not be
eligible for the dividends received deduction provided to corporations receiving
dividends  from certain  United States  corporations.  A U.S.  Holder which is a
corporation and which owns shares  representing at least 10% of the voting power
and value of the Company may, under certain circumstances,  be entitled to a 70%
(or 80% if the U.S.  Holder owns shares  representing at least 20% of the voting
power and value of the Company) deduction of the United States source portion of
dividends  received from the Company (unless the Company qualifies as a "foreign
personal holding company" or a "passive foreign investment  company," as defined
below).  The  availability  of this  deduction  is subject  to  several  complex
limitations which are beyond the scope of this discussion.                      

Certain  information  reporting  and  backup  withholding  rules may apply  with
respect to the Company's  common  shares.  In  particular,  a payor or middleman
within the U.S.  will be required to withhold 31% of any payments to a holder of
the Company's  common shares of dividends on, or proceeds from the sale of, such
common shares within the U.S., unless the holder is an exempt recipient,  if the
holder fails to furnish its correct taxpayer  identification number or otherwise
fails to comply with, or establish an exemption from, the backup withholding tax
requirements.  Any amounts withheld under the U.S. backup  withholding tax rules
will be allowed as a refund or a credit against the U.S.  Holder's U.S.  federal
income tax liability, provided the required information is furnished to the IRS.
U.S.  Holders  are  urged  to  consult  their  own  tax  counsel  regarding  the
information  reporting and backup  withholding rules applicable to the Company's
common shares.                                                                  

FOREIGN TAX CREDIT                                                              

A U.S. Holder who pays (or has withheld from distributions)  Canadian income tax
with respect to the  ownership of common  shares of the Company may be entitled,
at the option of the U.S. Holder,  to either receive a deduction or a tax credit
for such foreign tax paid or withheld.  Generally,  it will be more advantageous
to claim a credit because a credit reduces United States federal income taxes on
a  dollar-for-dollar  basis,  while a deduction  merely  reduces the  taxpayer's
income subject to tax. This election is made on a year-by-year basis and applies
to all foreign  taxes paid by (or  withheld  from) the U.S.  Holder  during that
year. There are significant and complex  limitations  which apply to the credit,
among  which  is the  general  limitation  that the  credit  cannot  exceed  the
proportionate share of the U.S. Holder's United States income tax liability that
the U.S.  Holder's  foreign source income bears to his or its worldwide  taxable
income. In the determination of the application of this limitation,  the various
items of income and  deduction  must be  classified  into  foreign and  domestic
sources.  Complex rules govern this classification  process.  In addition,  this
limitation is calculated  separately with respect to specific  classes          

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of income such as "passive income, " "high withholding tax interest," "financial
services  income,"  "shipping  income,"  and certain  other  classifications  of
income.  Dividends distributed by the Company will generally constitute "passive
income" or, in the case of certain U.S. Holders, "financial services income" for
these purposes. In addition, U.S. Holders which are corporations that own 10% or
more of the voting stock of the Company may be entitled to an "indirect" foreign
tax credit  under  Section 902 with  respect to the payment of  dividends by the
Company   under  certain   circumstances   and  subject  to  complex  rules  and
limitations.  The  availability of the foreign tax credit and the application of
the  limitations  on the credit are fact  specific,  and U.S.  Holders of common
shares of the Company  should  consult  their own tax advisors  regarding  their
particular circumstances.                                                       

DISPOSITION OF COMMON SHARES OF THE COMPANY                                     

A U.S.  Holder will recognize gain or loss upon the sale of common shares of the
Company equal to the difference, if any, between (i) the amount of cash plus the
fair market value of any property received, and (ii) the shareholder's tax basis
in the common shares of the Company.  Preferential  tax rates apply to long-term
capital gains of U.S.  Holders which are  individuals,  estates or trusts.  This
gain or loss will be  capital  gain or loss if the  common  shares are a capital
asset in the hands of the U.S. Holder,  which will be long-term  capital gain or
loss if the  common  shares  of the  Company  are held for more  than one  year.
Deductions for net capital losses are subject to  significant  limitations.  For
U.S. Holders which are not corporations,  any unused portion of such net capital
loss may be carried  over to be used in later tax years  until such net  capital
loss is thereby  exhausted.  For U.S. Holders that are corporations  (other than
corporations  subject to  Subchapter S of the Code),  an unused net capital loss
may be carried  back three  years and carried  forward  five years from the loss
year to be offset  against  capital gains until such net capital loss is thereby
exhausted.                                                                      

OTHER CONSIDERATIONS                                                            

In the following  circumstances,  the above sections of this  discussion may not
describe the United States  federal income tax  consequences  resulting from the
holding and disposition of common shares:                                       

FOREIGN PERSONAL HOLDING COMPANY                              

If at any time  during a taxable  year (i) more  than 50% of the total  combined
voting power or the total value of the  Company's  outstanding  shares is owned,
directly  or  indirectly,  by five or  fewer  individuals  who are  citizens  or
residents of the United States and (ii) 60% (50% in some  circumstances) or more
of the  Company's  gross  income  for such year was  "foreign  personal  holding
company income" (e.g.  dividends,  interest and similar income), the Company may
be treated as a "foreign  personal holding company." In that event, U.S. Holders
that hold common  shares  would be required to include in gross  income for such
year their allocable  portions of such "foreign personal holding company income"
to the extent the Company does not actually  distribute such income. The Company
does not believe  that it  currently  qualifies  as a foreign  personal  holding
company.  However,  there  can be no  assurance  that  the  Company  will not be
considered  a foreign  personal  holding  company  for the current or any future
taxable year.                                                                   

FOREIGN INVESTMENT COMPANY                                    

If 50% or more of the  combined  voting  power or total  value of the  Company's
outstanding shares is held, directly or indirectly,  by citizens or residents of
the United States,  United States  domestic  partnerships  or                   

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corporations,  or estates or trusts  other  than  foreign  estates or trusts (as
defined by the Code Section 7701(a)(31)), and the Company is found to be engaged
primarily in the business of investing,  reinvesting,  or trading in securities,
commodities,  or any interest  therein,  it is possible  that the Company may be
treated  as a "foreign  investment  company"  as defined in Section  1246 of the
Code,  causing  all or part of any gain  realized  by a U.S.  Holder  selling or
exchanging  common  shares to be treated as ordinary  income rather than capital
gain.  The Company  does not believe  that it  currently  qualifies as a foreign
investment company. However, there can be no assurance that the Company will not
be considered a foreign investment company for the current or any future taxable
year.                                                                           

PASSIVE FOREIGN INVESTMENT COMPANY                            

Certain United States income tax legislation  contains rules governing  "passive
foreign investment companies" ("PFIC") which can have significant tax effects on
U.S.  Holders  of foreign  corporations.  These  rules do not apply to  non-U.S.
Holders.  Section 1297 of the Code defines a PFIC as a  corporation  that is not
formed in the United States and, for any taxable year, either (i) 75% or more of
its gross income is "passive  income,"  which includes  interest,  dividends and
certain rents and royalties or (ii) the average percentage, by fair market value
(or,  if the  corporation  is not  publicly  traded and  either is a  controlled
foreign corporation or makes an election,  by adjusted tax basis), of its assets
that produce or are held for the production of "passive  income" is 50% or more.
If a foreign corporation owns, directly or indirectly,  at least 25% by value of
the stock a second  corporation,  then for purposes of the PFIC tests  described
above, the first corporation will be treated as owning a proportionate  share of
the assets  of, and as  receiving  a  proportionate  share of the income of, the
second  corporation.  The Company believes that it did not qualify as a PFIC for
the fiscal year ended May 31, 2002. There can be no assurance that the Company's
determination  concerning its PFIC status will not be challenged or that it will
be able to  satisfy  record  keeping  requirements  that  will be  imposed  on a
qualified  electing  fund ("QEF").  Each U.S.  Holder of the Company is urged to
consult a tax  advisor  with  respect  to how the PFIC  rules  affect  their tax
situation.                                                                      

A U.S. Holder who holds stock in a foreign  corporation during any year in which
such corporation  qualifies as a PFIC is subject to United States federal income
taxation under one of two  alternative  tax regimes at the election of each such
U.S.  Holder.  The following is a discussion of such two alternative tax regimes
applied  to such U.S.  Holders  of the  Company  in the event the  Company  were
determined  to  be a  PFIC.  In  addition,  special  rules  apply  if a  foreign
corporation  qualifies as both a PFIC and a "controlled foreign corporation" (as
defined below) and a U.S. Holder owns,  actually or constructively,  10% or more
of the total  combined  voting power of all classes of stock entitled to vote of
such foreign  corporation (See more detailed  discussion at "Controlled  Foreign
Corporation" below).                                                            

A U.S.  Holder who elects in a timely  manner to treat the  Company as a QEF (an
"Electing  U.S.  Holder")  will be subject,  under  Section 1293 of the Code, to
current  federal income tax for any taxable year in which the Company  qualifies
as a PFIC on his pro rata share of the  Company's  (i) "net  capital  gain" (the
excess of net long-term  capital gain over net short-term  capital loss),  which
will be taxed as long-term  capital gain to the  Electing  U.S.  Holder and (ii)
"ordinary  earnings" (the excess of earnings and profits over net capital gain),
which will be taxed as ordinary  income to the  Electing  U.S.  Holder,  in each
case, for the shareholder's  taxable year in which (or with which) the Company's
taxable year ends, regardless of whether such amounts are actually distributed. 

The effective QEF election also allows the Electing U.S. Holder to (i) generally
treat any gain  realized on the  disposition  of his Company  common  shares (or
deemed to be realized on the pledge of his shares) as                           

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capital gain; (ii) treat his share of the Company's net capital gain, if any, as
long-term  capital  gain  instead of ordinary  income;  and (iii)  either  avoid
interest  charges  resulting  from  PFIC  status  altogether,  or make an annual
election,  subject to certain limitations,  to defer payment of current taxes on
his  share of the  Company's  annual  realized  net  capital  gain and  ordinary
earnings subject, however, to an interest charge. If the Electing U.S. Holder is
not a  corporation,  such an  interest  charge  would be  treated  as  "personal
interest" that is not deductible.                                               

The procedure a U.S. Holder must comply with in making an effective QEF election
will  depend on whether  the year of the  election is the first year in the U.S.
Holder's holding period in which the Company is a PFIC. If the U.S. Holder makes
a QEF election in such first year,  i.e., a timely QEF  election,  then the U.S.
Holder may make the QEF election by simply filing the  appropriate  documents at
the time the U.S.  Holder files his tax return for such first year. If, however,
the  Company  qualified  as a PFIC in a prior  year,  then in addition to filing
documents,  the U.S.  Holder  must  elect to  recognize  (i)  under the rules of
Section 1291 of the Code  (discussed  herein),  any gain that he would otherwise
recognize if the U.S. Holder sold his stock on the qualification date or (ii) if
the Company is a  controlled  foreign  corporation,  the U.S.  Holder's pro rata
share of the Company's  post-1986  earnings and profits as of the  qualification
date. The qualification date is the first day of the Company's first tax year in
which the  Company  qualified  as a QEF with  respect to such U.S.  Holder.  The
elections  to  recognize  such gain or earnings  and profits can only be made if
such U.S.  Holder's holding period for the common shares of the Company includes
the  qualification  date.  By electing to  recognize  such gain or earnings  and
profits,  the U.S.  Holder will be deemed to have made a timely QEF election.  A
U.S.  Holder who made  elections to recognize gain or earnings and profits after
May 1, 1992 and before January 27, 1997 may, under certain circumstances,  elect
to change such U.S.  Holder's  qualification  date to the first day of the first
QEF  year.  U.S.  Holders  are  urged to  consult a tax  advisor  regarding  the
availability  of and  procedure  for electing to recognize  gain or earnings and
profits under the foregoing rules.                                              

A QEF election,  once made with respect to the Company,  applies to the tax year
for which it was made and to all  subsequent  tax years,  unless the election is
invalidated or terminated, or the IRS consents to revocation of the election. If
a QEF election is made by a U.S.  Holder and the Company  ceases to qualify as a
PFIC in a subsequent tax year, the QEF election will remain in effect,  although
not applicable,  during those tax years in which the Company does not qualify as
a PFIC. Therefore,  if the Company again qualifies as a PFIC in a subsequent tax
year, the QEF election will be effective and the U.S.  Holder will be subject to
the rules  described  above for Electing  U.S.  Holders in such tax year and any
subsequent tax years in which the Company qualifies as a PFIC. In addition,  the
QEF  election  remains in effect,  although not  applicable,  with respect to an
Electing U.S.  Holder even after such U.S.  Holder disposes of all of his or its
direct and indirect  interest in the shares of the Company.  Therefore,  if such
U.S.  Holder  reacquires  an interest in the Company,  that U.S.  Holder will be
subject to the rules described above for Electing U.S. Holders for each tax year
in which the Company qualifies as a PFIC.                                       

If a U.S.  Holder does not make a timely QEF election  during a year in which it
holds (or is deemed to have held) the common  shares in question and the Company
is a PFIC (a  "Non-Electing  U.S.  Holder"),  then special  taxation rules under
Section 1291 of the Code will apply to (i) gains realized on the disposition (or
deemed to be realized by reasons of a pledge) of his Company  common  shares and
(ii) certain "excess  distributions"  (generally,  distributions received in the
current  taxable  year that are in excess of 125% of the  average  distributions
received  during the three  preceding  years or, if shorter,  the U.S.  Holder's
holding period) by the Company.                                                 

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A Non-Electing  U.S.  Holder  generally  would be required to pro rate all gains
realized  on the  disposition  of his  Company  common  shares  and  all  excess
distributions  on his Company  common shares over the entire  holding period for
the common shares. All gains or excess distributions allocated to prior years of
the U.S. Holder (other than years prior to the first taxable year of the Company
during such U.S. Holder's holding period and beginning after January 1, 1987 for
which it was a PFIC)  would be taxed at the highest tax rate for each such prior
year applicable to ordinary income.  The Non-Electing  U.S. Holder also would be
liable for  interest on the  foregoing  tax  liability  for each such prior year
calculated  as if such  liability  had been due with  respect to each such prior
year.  A  Non-Electing  U.S.  Holder that is not a  corporation  must treat this
interest  charge  as  "personal   interest"   which,  as  discussed   above,  is
nondeductible.  The  balance  of the  gain or the  excess  distribution  will be
treated as ordinary income in the year of the disposition or  distribution,  and
no interest charge will be incurred with respect to such balance.               

If the Company is a PFIC for any taxable year during which a  Non-Electing  U.S.
Holder holds Company common shares, then the Company will continue to be treated
as a PFIC with respect to such Company  common  shares,  even if it is no longer
definitionally a PFIC. A Non-Electing U.S. Holder may terminate this deemed PFIC
status by  electing  to  recognize  gain  (which  will be taxed  under the rules
discussed above for Non-Electing  U.S. Holders) as if such Company common shares
had been sold on the last day of the last taxable year for which it was a PFIC. 

Effective for tax years of U.S. Holders  beginning after December 31, 1997, U.S.
Holders who hold, actually or constructively,  marketable stock (as specifically
defined in the Treasury  Regulations) of a foreign corporation that qualifies as
a PFIC may  annually  elect to mark such stock to the market (a  "mark-to-market
election").  If such an election is made, such U.S. Holder will generally not be
subject to the special taxation rules of Section 1291 discussed above.  However,
if the  mark-to-market  election is made by a Non-Electing U.S. Holder after the
beginning of the holding period for the PFIC stock,  then the Section 1291 rules
will  apply to  certain  dispositions  of,  distributions  on and other  amounts
taxable with respect to the Company common shares.  A U.S.  Holder who makes the
mark-to-market  election  will  include in income for the taxable year for which
the election was made an amount equal to the excess,  if any, of the fair market
value of the common  shares of the Company as of the close of such tax year over
such U.S. Holder's  adjusted basis in such common shares. In addition,  the U.S.
Holder is allowed a deduction for the lesser of (i) the excess,  if any, of such
U.S. Holder's adjusted tax basis in the common shares over the fair market value
of such shares as of the close of the tax year,  or (ii) the excess,  if any, of
(A) the  mark-to-market  gains for the common shares in the Company  included by
such U.S. Holder for prior tax years, including any amount which would have been
included  for any  prior  tax  year but for the  Section  1291  interest  on tax
deferral rules discussed above with respect to Non-Electing U.S.  Holders,  over
(B) the  mark-to-market  losses for shares that were allowed as  deductions  for
prior tax years. A U.S.  Holder's adjusted tax basis in the common shares of the
Company  will be  adjusted to reflect  the amount  included in or deducted  from
income as a result  of a  mark-to-market  election.  A  mark-to-market  election
applies to the taxable year in which the election is made and to each subsequent
taxable  year,  unless the Company  common  shares  cease to be  marketable,  as
specifically defined, or the IRS consents to revocation of the election. Because
the IRS has not  established  procedures for making a  mark-to-market  election,
U.S.  Holders  should  consult their tax advisor  regarding the manner of making
such an election.                                                               

Under  Section  1291(f)  of the  Code,  the IRS  has  issued  Proposed  Treasury
Regulations that, subject to certain exceptions,  would treat as taxable certain
transfers of PFIC stock by  Non-Electing  U.S.  Holders that are  generally  not
otherwise taxed, such as gifts, exchanges pursuant to corporate reorganizations,

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and transfers at death. Generally, in such cases the basis of the Company common
shares in the hands of the transferee and the basis of any property  received in
the exchange  for those  common  shares would be increased by the amount of gain
recognized.  Under the Proposed  Treasury  Regulations,  an Electing U.S. Holder
would not be taxed on certain transfers of PFIC stock, such as gifts,  exchanges
pursuant to corporate reorganizations,  and transfers at death. The transferee's
basis in this case will depend on the manner of the  transfer.  The specific tax
effect to the U.S.  Holder  and the  transferee  may vary based on the manner in
which the common  shares are  transferred.  Each U.S.  Holder of the  Company is
urged to consult a tax advisor  with  respect to how the PFIC rules affect their
tax situation.                                                                  

Certain  special,  generally  adverse,  rules will apply with respect to Company
common shares while the Company is a PFIC whether or not it is treated as a QEF.
For example  under Section  1298(b)(6) of the Code, a U.S.  Holder who uses PFIC
stock as security for a loan  (including  a margin loan) will,  except as may be
provided in regulations, be treated as having made a taxable disposition of such
shares.                                                                         

CONTROLLED FOREIGN CORPORATION                                

If more than 50% of the total  combined  voting  power of all  classes of shares
entitled  to vote or the  total  value of the  shares of the  Company  is owned,
actually  or  constructively,  by citizens or  residents  of the United  States,
United States domestic partnerships or corporations,  or estates or trusts other
than  foreign  estates or trusts (as defined by the Code  Section  7701(a)(31)),
each of which own, actually or constructively, 10% or more of the total combined
voting power of all classes of shares  entitled to vote of the Company  ("United
States  Shareholder"),  the  Company  could be treated as a  controlled  foreign
corporation  ("CFC")  under  Subpart F of the Code.  This  classification  would
affect many complex results,  one of which is the inclusion of certain income of
a CFC which is subject to current U.S.  tax. The United States  generally  taxes
United  States  Shareholders  of a CFC currently on their pro rata shares of the
Subpart F income of the CFC.  Such  United  States  Shareholders  are  generally
treated as having  received a current  distribution  out of the CFC's  Subpart F
income and are also  subject to current U.S. tax on their pro rata shares of the
CFC's earnings invested in U.S. property. The foreign tax credit described above
may reduce the U.S. tax on these amounts. In addition, under Section 1248 of the
Code, gain from the sale or exchange of shares by a U.S. Holder of common shares
of the Company  which is or was a United States  Shareholder  at any time during
the  five-year  period  ending  with the sale or exchange is treated as ordinary
income to the extent of earnings and profits of the Company  attributable to the
shares sold or exchanged. If a foreign corporation is both a PFIC and a CFC, the
foreign  corporation  generally  will not be treated  as a PFIC with  respect to
United States Shareholders of the CFC. This rule generally will be effective for
taxable years of United States Shareholders beginning after 1997 and for taxable
years of foreign corporations ending with or within such taxable years of United
States  Shareholders.  Special rules apply to United States Shareholders who are
subject to the special  taxation rules under Section 1291  discussed  above with
respect to a PFIC.  Because  of the  complexity  of  Subpart F, a more  detailed
review of these  rules is outside of the scope of this  discussion.  The Company
does not believe that it currently qualifies as a CFC. However,  there can be no
assurance  that the Company will not be  considered a CFC for the current or any
future taxable year.                                                            

CANADIAN FEDERAL INCOME TAX CONSIDERATIONS                                      

In this section, we summarize the material  anticipated  Canadian federal income
tax considerations relevant to your purchase of shares.                         

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Under the Income Tax Act,  as modified by the  Canada-United  States  Income Tax
Convention,  if you are an Unconnected  U.S.  Shareholder  you will generally be
exempt  from  Canadian  tax on a capital  gain  realized  on an actual or deemed
disposition of the shares (including a deemed disposition on death).            

Dividends  paid,  credited or deemed to have been paid or credited on the shares
to Unconnected U.S.  Shareholders will be subject to a Canadian withholding tax.
Under the  Canada-United  States Income Tax Convention,  the rate of withholding
tax generally  applicable to Unconnected U.S.  Shareholders who beneficially own
the dividends is reduced to 15%. In the case of  Unconnected  U.S.  Shareholders
that are companies that beneficially own at least 10% of our voting shares,  the
rate of withholding tax on dividends is reduced to 5%.                          

DIVIDENDS AND PAYING AGENTS                                                     

None.                                                                           

DOCUMENTS ON DISPLAY                                                            

The documents  incorporated  as exhibits to this annual report are available for
inspection at our principle  business office located at 6201 - 46th Avenue,  Red
Deer,  Alberta  T4N 6Z1,  or at our records  office  located at 1900,  715 - 5th
Avenue S.W., Calgary, Alberta, T2P 2X6.                                         

ITEM 11.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS           

Not Applicable.                                                                 

ITEM 12.   DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES               

NOT APPLICABLE.                                                                 

 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                                                  

Not applicable.                                                                 

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ITEM 15    CONTROLS AND PROCEDURES                                              

Within the 90-day  period  prior to the filing of this report there have been no
significant  changes in the  Company's  internal  controls or the  occurrence of
events or other factors that could significantly affect these controls.         

ITEM 16    [RESERVED]                                                           

Not applicable.                                                                 

PART III                                                                        

ITEM 17.   FINANCIAL STATEMENTS                                                 

See pages beginning with Page F-1.                                              

ITEM 18.   FINANCIAL STATEMENTS                                                 

Not applicable.                                                                 

ITEM 19.   EXHIBITS                                                             

Exhibit                                                                         
Number       Description                                                        
--------------------------------------------------------------------------------

1.1        Certificate of Incorporation dated September 5, 1997.(1)         

1.2        Certificate of Amendment dated December 22, 1997.(1)             

1.3        Certificate of Amendment and Registration of Restated Articles   
dated September 18, 1998.(1)                          

1.4        Certificate of Amendment and Registration of Restated Articles   
dated November 25, 1999.(1)                           

1.5        Certificate of Continuance dated December 1, 2000.(1)            

1.6        Articles of Continuance dated December 4, 2000.(1)               

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Exhibit                                                                         
Number       Description                                                        
--------------------------------------------------------------------------------

1.7        General By-Laws dated December 11, 1997. (1)                     

2.1        Composite Convertible Subordinated Debenture dated December 1,   
2001.                                                 

  4.1        Management and Revenue Sharing Agreement dated  September  29, 1999
between the Company and Video Limited Partnership. (1)

4.2        Employment Agreement with Ayaz Kara dated June 1, 1999.(1)       

4.3        Promissory Note issued to Rentrak Corp. dated July 19, 1999.(1)  

 4.4        Asset Purchase  Agreement  between M & K Video Spot Inc. and Video
Headquarters Inc. dated July 11, 2000.(1)             

  4.5        Memorandum of Agreement  between Raeco  Holdings  Incorporated  and
             the  Company's  subsidiary, Star Vision Enterprises Inc. dated June
15, 2000.(1)                                          

  4.6        Asset  Sale  Agreement  between  Hollywood North Video Ltd. and VHQ
Entertainment Inc. dated effective March 15, 2001.(1) 

  4.7        Definitive Share Purchase Agreement  between VHQ Entertainment Inc.
 and The Game Holdings, Ltd. dated December 26, 2001.(1)

  4.8        Promissory Note granted by The Game  Holdings, Ltd.  dated December
26, 2001.(1)                                          

  4.9        Form  of Amended Share Purchase Agreement between VHQ Entertainment
             Inc. and The Game Holdings,  Ltd.  dated effective February 1, 2002
(unsigned).(1)                                        

  4.10       Form of Promissory Note granted by The Game Holdings, Ltd. in favor
       of VHQ Entertainment Inc. dated February, 2002 (unsigned).(1)

  4.11       Services Agreement with TMH  Holdings Ltd. dated effective April 1,
2001.(1)                                              

  4.12       Services  Agreement with Summit Capital Corporation dated effective
April 1, 2001.(1)                                     

4.13       Lease Agreement with G&J Holdings Inc. dated March 27, 1998.(1)  

4.14       2001 Stock Option Plan.(1)                                       

 4.15       Employee Share Purchase Plan dated effective November 15, 2001.(1)

4.16       Line of Credit and Credit Facility with Community Savings.(1)    

4.17       Canadian Prospectus. (1)                                         

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Exhibit                                                                         
Number       Description                                                        
--------------------------------------------------------------------------------

  4.18       Asset  Purchase  Agreement  between  Integrated  Retail  Corp.  and
     Softech 002 Limited Partnership dated September 29th, 1999.

10.1       Certification of Chief Executive Officer                         

10.2       Certification of Chief Financial Officer                         

------------------                                                              

(1) Filed previously.                                                           

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SIGNATURES

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.                                               

Date:  December 17, 2002               By:    /S/ TREVOR HILLMAN                
                                           -------------------------------------
                    TREVOR HILLMAN
                                 Chief Executive Officer and
                           Chairman of the Board

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 CERTIFICATION

I, Trevor Hillman, certify that:                                                

1.       I  have  reviewed  this annual report on Form 20-F of VHQ Entertainment
Inc.;                                                         

2.       Based on my knowledge, this annual  report  does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances  under which
         such  statements  were made, not misleading  with respect to the period
covered by this annual report;                                

3.       Based on my knowledge, the financial  statements,  and other  financial
         information  included  in this  annual  report,  fairly  present in all
         material  respects the financial  condition,  results of operations and
         cash flows of the  registrant as of, and for, the periods  presented in
this annual report;                                           

Date: December 17, 2002                                                         
------------------------------                                        
Signed:         /S/TREVOR HILLMAN                                               
----------------------------                                      
TREVOR HILLMAN, CHIEF EXECUTIVE OFFICER                           

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 CERTIFICATION

I, Derrek Wong, certify that:                                                   

1.       I  have  reviewed  this annual report on Form 20-F of VHQ Entertainment
Inc.;                                                         

2.       Based on my  knowledge, this  annual report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances  under which
         such  statements  were made, not misleading  with respect to the period
covered by this annual report;                                

3.       Based on my knowledge,  the financial  statements,  and other financial
         information  included  in this  annual  report,  fairly  present in all
         material  respects the financial  condition,  results of operations and
         cash flows of the  registrant as of, and for, the periods  presented in
this annual report;                                           

Date:   DECEMBER 17, 2002                                                       
----------------------------------------                              
Signed:         /S/DERREK WONG                                                  
--------------------------------------                            
DERREK WONG, CHIEF FINANCIAL OFFICER                          

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To the Shareholders of                                                          
VHQ Headquarters Inc.                                                           

We have audited the consolidated  balance sheets of VHQ Entertainment Inc. as at
May 31, 2002, 2001 and 2000 and the consolidated statements of earnings (losses)
and retained earnings  (deficit) and cash flow for the years ended May 31, 2002,
2001  and  2000.  These  financial  statements  are  the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audit.                                        

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

In our opinion,  these consolidated  financial statements present fairly, in all
material  respects,  the  financial  position of the Company as at May 31, 2002,
2001 and 2000 and the  results  of its  operations  and cash  flow for the years
ended May 31, 2002, 2001 and 2000 in accordance with Canadian generally accepted
accounting principles.                                                          

Canadian generally accepted  accounting  principles vary in certain  significant
respects from  accounting  principles  generally  accepted in the United States.
Application  of accounting  principles  generally  accepted in the United States
would have affected assets and shareholders' equity as at May 31, 2002, 2001 and
2000 and results of operations  for the years ended May 31, 2002,  2001 and 2000
to the extent summarized in Note 21 to the consolidated financial statements.   

                                  /s/ COLLINS BARROW

                                     Chartered Accountants
Red Deer, Alberta                                                               
September 21, 2002, except for                                                  
Note 21 which is as of December 10, 2002                                        

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VHQ ENTERTAINMENT INC.
CONSOLIDATED BALANCE SHEET
 (ALL FIGURES $ CDN)

                                                                [Download Table]

                                                    May 31,                   

                                          2002          2001          2000    
                                      ------------  ------------  ------------
                                        (audited)     (audited)     (audited) 
                                                                              
ASSETS                                                                        
CURRENT                                                                       
Cash                                      121,145       155,371       238,635 
Accounts receivable                       184,367       237,583       354,747 
Inventory                               1,860,242     1,561,352       789,971 
Note receivable [NOTE 3]                        -             -       884,009 
Prepaid expenses and deposits             228,460       189,286       201,553 
                                      ------------  ------------  ------------
                                        2,394,214     2,143,592     2,468,915 

INVESTMENT IN SUBSIDIARY [NOTE 4]               -             -     1,886,851 

PROPERTY, PLANT AND EQUIPMENT                                                 
[NOTE 5]                               10,184,482     8,575,627     6,827,334 

GOODWILL AND INTANGIBLES [NOTE 6]       3,001,553     3,018,749     3,369,994 
                                      ------------  ------------  ------------
                                       15,580,249    13,737,968    14,553,094 
                                      ============  ============  ============
LIABILITIES AND                                                               
SHAREHOLDERS' EQUITY                                                          

CURRENT                                                                       
Bank indebtedness [NOTE 7]              1,150,358       800,556        69,231 
Accounts payable and accrued            4,656,570     3,977,617     2,860,675 
liabilities                                                                   
Current portion of lease inducements       83,590        65,744        25,212 
Current portion of capital assets                                             
under lease                               153,022             -             - 
Current portion of long-term debt       1,186,866       158,750        62,924 
                                      ------------  ------------  ------------
                                        7,230,406     5,002,667     3,018,042 

DEFERRED LEASE INDUCEMENTS [NOTE 13]      305,192       291,676       108,684 

CAPITAL ASSETS UNDER LEASE [NOTE 9]       235,538             -             - 

LONG-TERM DEBT [NOTE 8]                   713,845       110,794       233,996 

DUE TO RELATED COMPANY [NOTE 12]                -       493,578       361,331 

FUTURE INCOME TAXES [NOTE 11]             871,000       748,000     2,465,000 
                                      ------------  ------------  ------------
                                        9,355,981     6,646,715     6,187,053 

SHAREHOLDERS' EQUITY                                                          
Share capital [NOTE 10]                 9,108,803     7,626,499     6,087,766 
Retained earnings (deficit)            (2,884,535)     (535,246)    2,278,275 
                                      ------------  ------------  ------------
                                        6,224,268     7,091,253     8,366,041 
                                      ------------  ------------  ------------
                                       15,580,249    13,737,968    14,553,094 
                                      ============  ============  ============
COMMITMENTS [NOTE 13]                                                         

 ON BEHALF OF THE BOARD OF DIRECTORS

BY: /s/ TREVOR M. HILLMAN                   BY: /s/ CATHERINE J. MCDONOUGH      
DIRECTOR                                        DIRECTOR    

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

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VHQ ENTERTAINMENT INC.
 CONSOLIDATED STATEMENT OF EARNINGS (LOSSES) AND RETAINED EARNINGS (DEFICIT)
 (ALL FIGURES $ CDN)

                                                        [Enlarge/Download Table]

                                                          Year Ended May 31,              
                                            ----------------------------------------------
                                                2002             2001            2000     
                                            ------------     ------------     ------------
                                                                                          
REVENUES                                                                                  
   Rentals                                   20,474,085       16,579,831       10,205,031 
   Product sales                              5,640,088        4,750,636        2,679,821 
                                            ------------     ------------     ------------
   TOTAL REVENUES                            26,114,173       21,330,467       12,884,852 
                                            ----------------------------------------------

COST OF SALES                                                                             
   Revenue sharing                            2,112,239        1,772,261          625,743 
   Amortization of rental product             5,309,090        2,599,104        1,450,933 
                                            ------------     ------------     ------------
   Rental                                     7,421,329        4,371,365        2,076,676 
   Product sales                              4,727,323        3,665,497        2,187,754 
                                            ------------     ------------     ------------
  TOTAL COST OF SALES                        12,148,652        8,036,862        4,264,430 
                                            ----------------------------------------------

GROSS MARGIN                                 13,965,521       13,293,605        8,620,422 
                                            ----------------------------------------------
OPERATING COSTS AND EXPENSES                                                              
   Store operating expenses                  10,685,971        9,371,740        5,525,630 
   General and administrative                 3,272,445        2,318,520        1,956,710 
   Amortization of intangibles                   31,776          361,934          246,288 
                                            ------------     ------------     ------------
   TOTAL OPERATING COSTS AND                 13,990,192       12,052,194        7,728,628 
   EXPENSES                                 ----------------------------------------------

OPERATING INCOME (LOSS)                         (24,671)       1,241,411          891,794 
   Interest expense (net)                       175,274          119,649          151,497 
   Interest - convertible debenture              44,491                -                - 
   Video Limited Partnership                                                              
   disbursements                                                                          
       [NOTE 12]                                698,299        1,509,565          732,990 
                                            ------------     ------------     ------------

INCOME (LOSS) BEFORE THE FOLLOWING:            (942,735)        (387,803)           7,307 

   Writedown from Buyout of VLP              (1,315,779)               -                - 
      obligation [NOTE 2]                                                                 
   Write-down of investment [NOTE 4, 12]              -       (1,886,851)               - 
   Write-down of property, plant and                  -       (2,255,867                - 
      equipment [NOTE 17]                                                                 
   Minority interest [NOTE 4]                         -                -          114,572 
   Equity loss of investment [NOTE 1, 4]              -                -         (268,249)
   Gain on dilution of investment                     -                -        2,452,188 
      [NOTE 1,4]                                                                          
   Gain on disposal of property, plant and            -                -        1,297,049 
       equipment [NOTE 18]                  ------------     ------------     ------------

INCOME (LOSS)                                (2,258,514)      (4,530,521)       3,602,867 
   Income tax (recovery)                        (32,225)               -                - 
   Future income taxes (recovery)               123,000       (1,717,000)       1,500,000 
                                            ------------     ------------     ------------
NET INCOME (LOSS)                            (2,349,289)      (2,813,521)       2,102,867 

RETAINED EARNINGS (DEFICIT),                   (535,246)       2,278,275          175,408 
BEGINNING OF THE PERIOD                                                                   
                                            ----------------------------------------------
RETAINED EARNINGS (DEFICIT),                 (2,884,535)        (535,246)       2,278,275 
END OF THE PERIOD                           ============     ============     ============

EARNINGS (LOSS) PER SHARE [NOTE 15]               (0.20)           (0.24)            0.21 
                                            ============     ============     ============

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

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VHQ ENTERTAINMENT INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
 (ALL FIGURES $ CDN)

                                                                [Download Table]

                                                2002          2001          2000    
                                            ------------  ------------  ------------
                                                                                    
CASH WAS PROVIDED BY                                                                
(USED FOR):                                                                         
Operating activities                                                                
Net income (loss) for the period             (2,349,289)   (2,813,521)    2,102,867 
Add (deduct) items not affecting cash:                                              
Amortization of property, plant               5,776,096     3,329,413     2,067,683 
and equipment  and intangibles                                                      
Amortization of lease inducements              (166,047)     (109,876)      (21,042)
Writedown from Buyout of VLP                  1,315,779                             
obligation [NOTE 4]                                                                 
Write-down of capital assets                          -     2,255,867             - 
[NOTE 17]                                                                           
Write-down of investment [NOTE 4, 12]                 -     1,886,851             - 
Minority interest                                     -             -      (114,572)
Gain on dilution of investment                        -             -    (2,452,188)
Equity loss of investment                             -             -       268,249 
Gain on disposal of assets                            -             -    (1,297,049)
Future income taxes (recovery)                  123,000    (1,717,000)    1,500,000 
Net change in non-cash components                                                   
of working capital [NOTE 14]                                                        
        Accounts receivable                      53,216       117,164      (345,003)
        Inventory                              (298,890)     (771,381)     (575,833)
        Prepaid expenses                        (39,174)       12,267      (109,755)
        Accounts payable                        678,954     1,116,942     2,239,878 
        Working capital from acquisitions             -       246,194       (23,608)
                                            ------------  ------------  ------------
                                              5,093,645     3,552,920     3,239,627 
                                            ------------  ------------  ------------
FINANCING ACTIVITIES                                                                
Proceeds from issue of share capital,           662,800     1,538,733       509,596 
net of issuance costs                                                               
Proceeds from long-term debt                    700,000       125,000        74,065 
Repayment of long-term debt                    (349,308)     (183,626)      (89,369)
Increase (decrease) in short-term debt          349,802       731,325        69,231 
Lease inducements received                      197,409       333,400        62,227 
Proceeds from capital assets under lease        506,237             -             - 
Repayment of capital assets under lease        (117,678)            -             - 
Advance from (payment to) related                                                   
company                                        (493,578)      132,247       361,331 
                                            ------------  ------------  ------------
                                              1,455,684     2,677,079       987,081 
                                            ------------  ------------  ------------
INVESTING ACTIVITIES                                                                
Acquisitions [NOTE 2]                                 -      (225,000)   (2,750,000)
Dilution of subsidiary                                -             -       406,345 
Issuance of note receivable                           -             -      (925,000)
Repayment of note receivable                          -       884,009        40,991 
Proceeds from disposal of                           450             -     4,000,000 
property, plant and equipment                                                       
Purchase of property, plant and equipment    (6,584,005)   (6,972,272)   (4,989,913)
                                            ------------  ------------  ------------
                                             (6,583,555)   (6,313,263)   (4,217,577)
                                            ------------  ------------  ------------
Increase (decrease) in cash for the period      (34,226)      (83,264)        9,131 

CASH, BEGINNING OF THE PERIOD                   155,371       238,635       229,504 
                                            ------------  ------------  ------------
CASH, END OF THE PERIOD                         121,145       155,371       238,635 
                                            ============  ============  ============
CASH INTEREST PAID                              233,368       116,415       145,892 


SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

VHQ Entertainment  Inc. ("the  Corporation") is incorporated  under the Canadian
Business  Corporation Act and through its  subsidiaries  operates video and home
entertainment stores in Canada.                                                 

1.       SIGNIFICANT ACCOUNTING POLICIES                                        

BASIS OF CONSOLIDATION                                                          

The consolidated  financial  statements of the Corporation have been prepared in
accordance with generally accepted  accounting  principles in Canada and include
the accounts of the Corporation and its subsidiaries.  Intercompany transactions
and balances have been eliminated on consolidation.                             

These consolidated  financial statements include the accounts of the Corporation
and its wholly owned  subsidiaries:  Integrated  Retail Corp.,  Safiqa  Holdings
Ltd., Star Vision Enterprises Inc., and 705556 Alberta Ltd.                     

The excess of the  acquisition  costs of  investment  in  subsidiaries  over the
Company's  proportionate  share of the underlying value of the net assets at the
date of  acquisition  represents  goodwill,  and is  amortized  over periods not
exceeding 10 years. The value of goodwill,  and any impairment of that value, is
assessed by reference to cash flows,  operating  income and  estimation  of fair
value.  Effective  June 1, 2001 the Company  adopted  Handbook  Section  3062 no
further  provisions  for  amortization  of goodwill  have been included in these
financial statements.                                                           

During the period  June 1, 1999 to March 1, 2000 the  Corporation  included  the
accounts of E-Trend Networks, Inc. (E-Trend), which was under common control, in
the accounts of the Corporation excluding minority interest.                    

Subsequent to March 1, 2000, the Corporation's investment in E-Trend was diluted
to 38.37%.  Due to the loss in control of E-Trend,  the Corporation  adopted the
equity method of accounting for this investment.                                

MEASUREMENT UNCERTAINTY                                                         

Because a precise determination of many assets and liabilities is dependent upon
future events, the preparation of financial  statements for a period necessarily
involves  the use of  estimates  and  approximations  which have been made using
careful judgment.  The consolidated  financial  statements have, in management's
opinion,  been properly  prepared  within  reasonable  limits of materiality and
within the framework of the accounting policies summarized below.               

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INVENTORY                                                                       

Inventory,  consisting primarily of filmed entertainment on VHS and DVD formats,
video  games  and  CD  music  for  resale,   studio  merchandise,   video-gaming
accessories and confectionery  items, is valued at the lower of cost (determined
on an average invoice cost) and net realizable value.                           

REVENUE RECOGNITION                                                             

Due to the short term nature of the rental of VHS, DVDs and video games, revenue
is recognized at the time of the rental.  Where the Corporation has entered into
revenue sharing  agreements,  the revenues are recorded on a gross basis with an
offset to cost of sales.  Where the  Corporation  sells VHS, DVDs and games that
have been previously used to earn rental  revenue,  the Corporation  records the
sale in rental revenue and reduces the carrying value of its rental assets using
the net book value.                                                             

Revenue from the sale of product is recognized at the point of sale.            

PRE-OPENING COSTS                                                               

Pre-opening costs are expensed as they are incurred.                            

PROPERTY, PLANT AND EQUIPMENT                                                   

Property,  plant and  equipment are recorded at cost.  Amortization  is provided
using the following rates and methods to amortize the costs,  net of any salvage
values, over their estimated useful lives:                                      

Canopies and signs                            20% straight line           
Capital assets under lease                    10% declining balance       
Equipment and fixtures                        10% declining balance       
VCRs, TVs and game players                    30% declining balance       
VHS, DVDs and video games                     12 month straight line      
Computer hardware                             30% declining balance       
Computer software                             20% declining balance       
Leasehold improvements                        Over term of the lease plus 
                                        one renewal period
Logo and jingle                               3 years straight line       
Uniforms                                      2 years straight line       

Effective May 31, 2001, the  Corporation  changed its method of  amortization of
its rental product (VHS,  DVDs, and video games).  This method  accelerates  the
rate of  amortization  and was adopted as a result of an industry  trend towards
significant  increases in copy depth availability from movie studios and revenue
sharing  agreements  that have  resulted  in earlier  satisfaction  of  consumer
demand, thereby accelerating the rate of revenue recognition. As a result of the
change,  the  Corporation  has  revised  its  estimate of the useful life of its
rental product to a 12-month period of amortization from a 24-month period. This
change has been applied prospectively.                                          

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During the year ended May 31, 2001 the  Corporation  reviewed the carrying value
of its rental  product and  determined  that the carrying value exceeded the net
realizable  value and resulted in a one-time  write-down of property,  plant and
equipment,  as a result of this review,  effective May 31, 2001, the Corporation
changed its  estimate  of the salvage  value of its VHS and DVD movies and video
games from $7 per unit to $5, $10, and $15,  respectively.  This change has been
applied prospectively                                                           

As a result of this change,  amortization of rental product and net loss for the
year ended May 31, 2002 was increased by $2,654,545.  The related loss per share
amount,  as a result of this change for the nine-month period ended February 28,
2002 was increased $.08 per share.                                              

GOODWILL AND INTANGIBLES                                                        

Intangibles  such as logos and jingles,  trademarks  and other  intangibles  are
being amortized on a straight-line basis over periods of 3 to 15 years.         

In accordance  with new accounting  standards  introduced in 2001,  goodwill and
intangibles  with  indefinite  useful  lives  will not  amortize  but be  tested
annually  for  impairment.  The  Corporation  reviews the  goodwill  annually to
determine if the carrying value exceeds the fair value. Where the carrying value
exceeds  the fair value,  a charge  against net income is recorded in the period
that the  impairment  has occurred.  Based on  management's  review in 2002, the
Corporation  does  not  believe  that an  impairment  of the  carrying  value of
goodwill has occurred and no  provision  for  impairment  has been made in these
financial statements.                                                           

FUTURE INCOME TAXES                                                             

Future income tax assets and  liabilities  are  recognized for the future income
tax  consequences  attributable  to the carrying value of the assets reported on
the financial  statements  to the tax value as  determined  by Canada  Customs &
Revenue  Agency.  Future income tax assets or liabilities are measured using the
tax  rates  expected  to apply  to  taxable  income  in the  years in which  the
temporary differences are expected to reverse.                                  

Income tax expense of the Corporation is the sum of current income taxes and the
difference  between  opening and ending balances of future income tax assets and
liabilities.                                                                    

FINANCIAL INSTRUMENTS                                                           

Financial  instruments  of the  Corporation  consist  mainly  of cash  and  cash
equivalents,  accounts  receivable,  bank  indebtedness,  accounts  payable  and
accrued  liabilities  and  long  term  liabilities.  There  are  no  significant
differences between the carrying amounts of these items and their estimated fair
values.                                                                         

STOCK BASED COMPENSATION PLAN                                                   

The  Corporation  has a stock option plan and may grant  options to employees to
acquire common shares. No compensation expense is recognized when stock or stock
options are issued to employees. Consideration paid by employees on the exercise
of stock options is credited to share capital.                                  

The Corporation  introduced an employee share ownership plan to all employees in
2002.  Under  this  plan,  employees  are  entitled  to have a portion  of their
earnings withheld to purchase common stock in the Corporation. The Corporation's
contributions are charged to earnings.                                          

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CONSOLIDATED STATEMENT OF CASH FLOWS                                            

The Corporation uses the indirect method of reporting its consolidated statement
of cash flows.                                                                  

SEGMENTED INFORMATION                                                           

The  Corporation  does not disclose  segmented  information  as the  Corporation
engages in and monitors only one operating segment. The Corporation's geographic
segment is within the Canadian market.                                          

2.       ACQUISITIONS                                                           

Effective  December 1, 2001,  the  Corporation  acquired  all the units of Video
Limited Partnership for total consideration of $2.1 million.                    

                               $
                                ------------------
CONSIDERATION PAID                                                      
Convertible debenture                           1,280,475               
Common stock                                      819,504               
                                ------------------
                                 2,099,979
                                ==================

The consideration given under the acquisition  agreement was 546,336 units, each
comprised  of one  common  share of the  Corporation  and one half of one common
share  purchase  warrant  and a  $1.28  million  principal  amount  three  year,
composite,  subordinated,  convertible  debenture.  Each whole warrant issued as
part of the units is  exercisable to purchase one common share until December 2,
2003 at $2.00 per share.  The rate of interest on the  debenture is 8% per annum
with blended monthly  principal and interest  payments.  The principal amount of
the debenture can be converted at any time into common shares of the Corporation
at the option of the  holder at $2.50 per share  until  December  1, 2003 and at
$3.00 per share until December 1, 2004.                                         

Of the  $2,099,980  purchase  price for the  Video  Limited  Partnership  units,
$777,660 was allocated to property,  plant and equipment,  specifically  155,532
VHS tapes  representing  the salvage  value of the rental assets at the purchase
date.  The  remaining  $1,322,320  was  written  off as a one time charge to net
income  representing  the  extinguishment  of  future  cash  payments  under the
original revenue sharing contract with Video Limited Partnership.               

On July 11, 2000, the Corporation  acquired the assets of M & K Video Spot Inc.,
an independent video retailer operating one video store in Stony Plain,  Alberta
and one video store in Spruce Grove, Alberta under the name "Five Star Movies". 

On June 15, 2000, the Corporation's wholly owned subsidiary Star Vision acquired
from  Raeco  Holdings  Incorporated  all of  the  assets  of a  video  and  home
entertainment store operating under the name "Silver Screen Video" in Saskatoon,
Saskatchewan.                                                                   

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             Five Star       Silver Screen
           Movies            Video
           -------------     -------------
Assets Acquired                                                         
Capital Assets               $425,000          $200,000                 
           -------------------------------
            $425,000          $200,000
           -------------------------------
Consideration                                                           
Cash                         $125,000          $100,000                 
Note Payable                  125,000             - -                   
Share Capital                 175,000           100,000                 
           -------------------------------
            $425,000          $200,000
           ===============================

During the period ended May 31, 2000, the Corporation acquired all of the issued
and outstanding shares of 705556 Alberta Ltd., Star Vision Enterprises Inc., and
Safiqa  Holdings Ltd.  Each  Corporation  is engaged in the  operations of video
rental and retail stores in Canada.  The  acquisitions  have been  accounted for
using the purchase method of accounting as follows:                             

                                                        [Enlarge/Download Table]

                      705556          Star Vision           Safiqa                      
                      Alberta       Enterprises Inc.       Holdings                     
                       Ltd.                                  Ltd.            Total      
                         $                 $                  $                $        
                   -------------    ----------------    ---------------   ------------- 
                                                                                        
Assets Acquired                                                                         
Working capital        (7,768)          (23,609)                   --         (31,377)  
Capital assets        414,490         1,572,043             1,058,248       3,044,781   
Goodwill              343,278         1,809,566             1,372,752       3,525,596   
Deferred taxes       (125,000)         (444,000)             (306,000)       (875,000)  
                 -----------------------------------------------------------------------

                      625,000         2,914,000             2,125,000       5,664,000   
                 =======================================================================

Consideration                                                                           
Cash                  250,000         1,500,000             1,000,000       2,750,000   
Common shares         375,000         1,414,000             1,125,000       2,914,000   
                 -----------------------------------------------------------------------

                      625,000         2,914,000             2,125,000       5,664,000   
                 =======================================================================

On August 1, 1998, the Company acquired all of the issued and outstanding shares
of Integrated  Retail Corp.  for  consideration  of 5,200,000  common shares and
warrants of the Company.  Both of these  companies  have been  controlled by the
same individuals since inception,  therefore, there was no substantive change in
ownership of the shares.  As the  companies  were under  common  control and the
Company had no  operation  or assets prior to the  transaction  with  Integrated
Retail   Corporation,   this   transaction   has   been   accounted   for  as  a
re-capitalization  of  Integrated  Retail and the issuance of shares for the net
assets  of  the  Company.  Accordingly,  as  at  May  31,  2000  and  1999,  the
consolidated  balance sheets  include the assets and  liabilities of the Company
and  Integrated  at their  carrying  values and the  consolidated  statements of
earnings and retained  earnings  (deficit) and cash flows include the results of
their operations for all periods presented                                      

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3.       NOTE RECEIVABLE                                                        

The Note was due on demand from Video Limited Partnership,  bore interest at 15%
per annum and was unsecured. The Note was paid in full on January 19, 2001.     

4.       INVESTMENT IN SUBSIDIARY                                               

The Corporation consolidated the financial statements of its subsidiary, E-Trend
up to February 29, 2000.                                                        

Between the period from September,  1999 to February 29, 2000, the Corporation's
ownership was diluted to 45.18% through the issuance by E-Trend of common shares
from  treasury.  As a result of the dilution of the  Corporation's  ownership of
E-Trend, the Corporation's interest in E-Trend was subsequently accounted for by
the equity method of accounting and a dilution gain of $2,452,188 was recorded. 

E-Trend  reported a net loss during the period of March 1, 2000 to May 31, 2000.
The Corporation's share of this loss was $268,249.                              

On May 31, 2001, the Corporation  wrote down its investment in E-Trend resulting
in a one-time charge of $1,886,851 to net income.                               

On December  21,  2001,  the  Corporation  entered into an agreement to sell its
entire  holdings of  2,000,000  common  shares of E-Trend to The Game  Holdings,
Ltd., a British Virgin Islands  corporation,  for US$0.40 per share, for a total
price of US$800,000.  The purchase price was paid by way of a secured promissory
note of The Game  Holdings  payable as  follows:  (a)  US$10,000  per month from
January 2002 until March 2002; (b) US$30,000 per month from April 2002 until May
31 2003;  and (c) the  remainder  of the purchase  price on June 30,  2003.  The
promissory  note bears  interest at a rate of 6% per annum and is secured by way
of a second charge against a yacht owned by The Game Holdings  which, as at June
22, 2001,  had an estimated  market value of  approximately  US$1,600,000  and a
replacement value of approximately US$2,000,000, as determined by an independent
appraiser.  To date, the Corporation has not received any payments from The Game
Holdings as required by the terms of the  promissory  note.  As the payments are
received,  a gain on the sale will be recognized.  The Corporation believes that
this asset has a nominal fair value.                                            

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5.       PROPERTY, PLANT AND EQUIPMENT                                          

                                                                [Download Table]

                                                   May 31, 2002                    
                                 ------------------------------------------------- 
                                                    Accumulated         Net Book   
                                      Cost         Amortization           Value    
                                        $                $                  $      
                                 --------------   ---------------   -------------- 
                                                                                   
Canopies and signs                    607,046           263,919          343,127   
Capital assets under lease            506,237            50,624          455,613   
Equipment and fixtures              2,133,535           855,531        1,278,004   
VCRs, TVs, DVD and game players       490,234           311,098          179,136   
Rental product                     19,765,826        12,869,035        6,896,791   
Computer hardware                     621,109           462,789          158,320   
Computer software                     439,775           195,194          244,581   
Leasehold improvements                862,247           256,253          605,994   
Uniforms                               73,881            50,965           22,916   
                                 --------------------------------------------------
                                   25,499,890        15,315,408       10,184,482   
                                 ==================================================


                                                        [Enlarge/Download Table]

                                                   May 31, 2002                      
                                 -------------------------------------------------   
                                                    Accumulated         Net Book     
                                      Cost         Amortization           Value      
                                        $                $                  $        
                                 --------------   ---------------   --------------   
                                                                                     
Canopies and signs                     492,738           178,137          314,601    
Equipment and fixtures               2,074,197           720,041        1,354,156    
VCRs, TVs, DVD and game players        420,883           234,325          186,558    
Rental product                      13,468,906         7,636,718        5,832,188    
Computer hardware                      591,739           394,937          196,802    
Computer software                      374,973           134,049          240,924    
Leasehold improvements                 684,921           247,250          437,671    
Uniforms                                44,867            32,140           12,727    
                                  ---------------------------------------------------
                                    18,153,224         9,577,597        8,575,627    
                                  ===================================================

                                                        [Enlarge/Download Table]

                                                   May 31, 2002                      
                                 -------------------------------------------------   
                                                    Accumulated         Net Book     
                                      Cost         Amortization           Value      
                                        $                $                  $        
                                 --------------   ---------------   --------------   
                                                                                     
Canopies and signs                     295,323            89,129          206,194    
Equipment and fixtures               1,876,713           660,255        1,216,458    
VCRs, TVs, DVD and game players        188,559            81,788          106,771    
Rental product                       8,267,602         3,697,698        4,569,904    
Computer hardware                      481,195           323,913          157,282    
Computer software                      281,010            80,173          200,837    
Leasehold improvements                 526,441           160,103          366,338    
Logo and jingle                          3,250             2,617              633    
Uniforms                                27,220            24,303            2,917    
                                  ---------------------------------------------------
                                    11,947,313         5,119,979        6,827,334    
                                  ===================================================

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Amortization of rental assets is included in cost of goods sold in the amount of
$5,309,090;  $2,599,104;  and  $1,450,933,  is  included  in the cost of  rental
revenues for the years ended May 31, 2002, May 31, 2001, and May 31, 2000.      

Amortization  of  other  related  store  capital  assets  is  included  in store
operating expenses.                                                             

6.       GOODWILL AND INTANGIBLES                                               

                                                                [Download Table]

                                              May 31, 2002                   
                            -------------------------------------------------
                                               Accumulated         Net Book  
                                 Cost         Amortization           Value   
                                   $                $                  $     
                            -------------------------------------------------
                                                                             

Intangibles                       267,183            70,504          196,679 
Goodwill (indefinite life)      3,360,956           566,827        2,794,129 
Logo and jingles                   18,250             8,250           10,000 
Trademarks                            860               115              745 
                            -------------------------------------------------
                                3,647,249           645,696        3,001,553 
                            =================================================

                                                                [Download Table]

                                              May 31, 2002                   
                            -------------------------------------------------
                                               Accumulated         Net Book  
                                 Cost         Amortization           Value   
                                   $                $                  $     
                            -------------------------------------------------
                                                                             
Intangibles                       267,183            43,786          223,397 
Goodwill (indefinite life)      3,360,956           566,827        2,794,129 
Logo and jingles                    3,250             3,250              --- 
Trademarks                          1,310                87            1,223 
                            -------------------------------------------------
                                3,632,699           613,950        3,018,749 
                            =================================================


                                                                [Download Table]

                                              May 31, 2002                   
                            -------------------------------------------------
                                               Accumulated         Net Book  
                                 Cost         Amortization           Value   
                                   $                $                  $     
                            -------------------------------------------------
                                                                             
Intangibles                        258,437           18,668          239,769 
Goodwill (indefinite life)       3,360,956          230,731        3,130,225 
                            -------------------------------------------------

                                 3,619,393          249,399        3,369,994 
                            =================================================


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In accordance  with the  recommendations  of Section 3062, no provision has been
made in these financial  statements for amortization of goodwill.  As prescribed
by the transitional  provision of the new recommendations,  this change has been
applied prospectively.                                                          

                 2002           2001          2000
                  $             $              $
               -------------------------------------------
Net Income Reported         (2,349,289)    (2,813,521)     2,102,867            
               -------------------------------------------
Add back: Goodwill                                                              
amortization                       -        361,301        245,203          
               -------------------------------------------
Net Income (Loss)                                                               
Restated                    (2,349,289)    (2,452,220)     2,348,070            
               ===========================================
Weighted Average                                                                
Shares Outstanding        11,903,465     11,490,281     10,086,383          
               ===========================================

Reported EPS                     (0.20)         (0.24)          0.21            
               ===========================================
Adjusted EPS                     (0.20)         (0.21)          0.23            
               ===========================================

Amortization of intangibles in the amount of $31,776; $361,934; and $246,288 has
been  recognized as a separate  category in operating  costs and  expenses,  for
years ended May 31, 2002, May 31, 2001, and May 31, 2000.                       

7.       BANK INDEBTEDNESS                                                      

The  Corporation  has two  demand  operating  credit  facilities  with  Canadian
financial institutions providing for overdrafts which have maximum limits in the
amounts of $800,000 and $200,000.  The credit  facilities bear interest at prime
plus 1% (2001 - 7.25%) and prime plus 0.5% (6.75%), respectively.               

As at May 31, 2002,  the  outstanding  balance under these credit  facilities is
$849,877  with the net of  outstanding  cheques  less  funds  held on deposit of
$300,481.                                                                       

8.       LONG-TERM DEBT                                                         

                                                        [Enlarge/Download Table]

                                                                 May 31         May 31         May 31  
                                                                  2002           2001           2000   
                                                                    $              $              $    
                                                               ----------     ----------      ---------
                                                                                                       
Demand  loan,  due  in  blended  monthly   principal  and        294,725              -              - 
interest  payments of $12,398.  Interest at prime plus 1%                                              
per annum secured by a general security  agreement on all                                              
assets of the Corporation.                                                                             

Promissory note, due on September,  2002 bearing interest         77,299         77,299         74,065 
at 9% per annum  secured  by a  personal  guarantee  of a                                              
shareholder.                                                                                           

                                      F-13                                                             
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Promissory note from a director of the  Corporation,  due        100,000              -              - 
in monthly  installments  of $8,772 plus  interest at 10%                                              
per  annum.  The note is  secured  by a general  security                                              
agreement   covering  assets  of  one  store  located  in                                              
Saskatoon,  Saskatchewan.  The final  payment of the loan                                              
is due May 6, 2003.                                                                                    

Promissory  note,  due on demand plus  interest at 1% per        200,000              -              - 
month.  The promissory note is unsecured.                                                              

Small  business loan,  due in blended  monthly  principal        108,277        160,995        205,483 
and interest  payments of $5,250.  Interest at prime plus                                              
3% per annum,  secured a by a general security  agreement                                              
on all assets of the Corporation.                                                                      

Convertible  debenture,  due in blended monthly principal      1,120,410              -              - 
and  interest  payments of $40,125  maturing  December 1,                                              
2004;   interest   calculated   at  8%  per  annum.   The                                              
principal  amount of the debenture can be converted  into                                              
common  shares  of the  Corporation  at $2.50  per  share                                              
until  December  1,  2003 and at $3.00  per  share  until                                              
December 1, 2004.                                                                                      

Promissory  note, due in monthly  installments of $10,417              -           31,250            - 
plus  interest  at 9%  per  annum  secured  by a  general                                              
security  agreement  covering  assets  located  in Spruce                                              
Grove and Stony Plain.                                                                                 

Other                                                                  -                -       17,372 
                                                          ---------------------------------------------

                                                               1,900,711          269,544      296,920 

Less current portion                                           1,186,866          158,750       62,924 
                                                          ---------------------------------------------
                                                                 713,845        110,794        233,996 
                                                          =============================================

Estimated principal payments over the next three years are as follows:          

   $
   -----------

2003                   1,186,866                    
2004                     440,310                    
2005                     273,535                    
   -----------
   1,900,711
   ===========

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9.       OBLIGATIONS UNDER CAPITAL LEASES                                       

The  Corporation  has  entered  into a number of  capital  leases  with  monthly
payments ranging from $731 to $1991 including interest rates varying from 13% to
17%. The leases  expire  between April 2004 and June 2005.  The  principal  plus
interest payments for the next four years are as follows:                       

YEAR ENDING         PRINCIPAL          INTEREST             TOTAL           

           $                  $                  $

2003              153,022             45,368            198,390       

2004              174,596             22,082            196,678       

2005               59,879              2,813             62,692       

2006                1,063                 12              1,075       
             -------------------------------------------------------

           388,560             70,275            458,835

Current portion       (153,022)           (45,368)          (198,390)           
             -------------------------------------------------------

           235,538             24,097            260,445
             =======================================================

10.      SHARE CAPITAL                                                          

AUTHORIZED                                                                      

Unlimited number of preferred shares                                            
Unlimited number of common shares                                               

 Common Shares Issued                Number of Shares            $
    ---------------------------------      ------------------    ---------------
 Balance, May 31, 1999                       8,497,276           2,664,170
                                           -------------------------------------

 Exercise of options                           200,000              40,000

 Exercise of warrants                          316,575             395,719

 Exercise of broker options                     59,372              44,529

 Issued for acquisitions [NOTE 2]            1,996,207           2,914,000

 Issued for cash                                25,833              33,750

  Share issue costs                                 - -              (4,402)
                                           -------------------------------------

 Balance, May 31, 2000                      11,095,263           6,087,766
                                           -------------------------------------

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 Issued for acquisitions [NOTE 2]               68,750             275,000

 Issued for cash                               366,754           1,375,289

  Share issue costs                                 - -            (111,556)
                                           -------------------------------------

 Balance, May 31, 2001                      11,530,767           7,626,499
                                           -------------------------------------

 Issued for cash                               461,456             685,400

 Issued for acquisitions                       546,336             819,505

  Share issue costs                                   -             (22,601)
                                           -------------------------------------

 Balance, May 31, 2002                      12,538,559           9,108,803
                                           -------------------------------------

OPTIONS AND WARRANTS                                                            

The  Corporation  has a stock option plan  available to officers,  directors and
employees  with grants under the plan approved from time to time by the Board of
Directors.  The  exercise  price of each option  equals the market  price of the
Company's  stock at the date of grant.  The plan  provides  for  vesting  at the
discretion of the Board and the options expire after five years from the date of
grant.                                                                          

The Corporation has issued the following stock options:                         

                                                                  Weighted
                                                                   average
                                                                  exercise price
                                             Shares                ($)
                                              --------------      --------------
Granted during the year                            200,000              0.20    
                                              ----------------------------------
Outstanding as at May 31, 1999                     200,000              0.20    
Granted during the year                          1,000,000              1.51    
Cancelled during the year                         (200,000)             0.20    
                                              ----------------------------------
Outstanding as at May 31, 2000                   1,000,000              1.51    
Granted during year                                142,200              2.68    
                                              ----------------------------------
Outstanding as at May 31, 2001                   1,142,200              1.66    
Granted during the period                        1,017,500              1.90    
Cancelled during the period                       (102,400)             1.53    
                                              ----------------------------------
Outstanding as at May 31, 2002                   2,057,300              1.78    
                                              ==================================

Options exercisable as at May 31, 2002           1,649,379              1.72    
                                              ==================================

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As of May 31,  2002,  the  Corporation  has the  following  warrants to purchase
common shares outstanding:                                                      

                                                        [Enlarge/Download Table]

Warrants Outstanding    Date Issued    Date of Expiration          Exercise Price        
--------------------  ---------------  ------------------  ------------------------------
                                                                                         
       240,205         June 28, 2000     June 28, 2002     Exercisable   at   $5.00   per
                                                           share  until  June  28,  2001;
                                                           $6.00  per  share  until  June
                                                           28, 2002                      

       110,862         Aug 31, 2000      Aug 31, 2002      Exercisable   at   $5.00   per
                                                           share  until  Aug  31,   2001;
                                                           $6.00 per share  until Aug 31,
                                                           2002                          

       15,666          Oct 18, 2000      Oct 18, 2002      Exercisable   at   $5.00   per
                                                           share  until  Oct  18,   2001;
                                                           $6.00 per share  until Oct 18,
                                                           2002                          

       114,850         Aug 7, 2001      Aug 7, 2003        Exercisable   at   $2.50   per
                                                           share until Aug 7, 2003       

       273,168         Dec 1, 2001      Dec 1, 2003        Exercisable   at   $2.00   per
                                                           share until Dec 1, 2003       

       226,000         May 31, 2002      May 31, 2004      Exercisable  at $2  per  share
                                                           for the first year,  $2.50 per
                                                           share for the second year.    

11.      INCOME TAXES                                                           

The components of future tax assets and liabilities are as follows:             

                                          For the       For the        For the
                                         year ended    year ended     year ended
                                          May 31,        May 31,       May 31,
                                         2002           2001          2000
                                          $              $             $
                                        ----------------------------------------
FUTURE INCOME TAX ASSETS                                                        

Share issue costs                         (36,500)       (49,000)       (38,000)
Promissory note from E-Trend. sale       (454,000)             -              - 
                                        ----------------------------------------
                                         (490,500)       (49,000)       (38,000)
                                        ========================================

FUTURE INCOME TAX LIABILITIES                                                   

Difference between tax and accounting   1,181,000        797,000      1,938,000 
basis of property, plant and equipment                                          
Book value of investment in excess of           -              -        565,000 
adjusted cost base                                                              
Capital gain reserve                      180,500              -              - 
                                        ----------------------------------------
                                       1,361,500        797,000      2,503,000
                                        ========================================

                                         871,000        748,000      2,465,000
                                        ========================================

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The provision for income taxes differs from the provision  amount  calculated at
combined statutory federal and provincial tax rates for the following reasons:  

                                                        [Enlarge/Download Table]

                                                            For the           For the          For the   
                                                          year ended        year ended       year ended  
                                                            May 31,           May 31,          May 31,   
                                                             2002               2001             2000    
                                                               $                 $                $      
                                                    -----------------------------------------------------
                                                                                                         
Computed income taxes (recovery) at 35.76% (2001 -         (807,645)       (1,743,344)       1,620,570   
38.48%, 2000 - 44.98%)                                                                                   
Non-deductible expenses                                      13,470            38,480                -   
Amortization of intangibles                                 181,596           129,330          106,153   
Gain on disposal of assets and asset write-downs            470,523           241,676          (30,000)  
Dilution of investment                                            -                 -         (196,723)  
Effect of substantially enacted tax rates                   (52,875)         (356,214)               -   
Limited partnership income allocation                       521,570                 -                -   
Non-taxable portion of capital gain                        (225,604)                -                -   
Debt settlement                                              21,965                 -                -   
Investment writedown                                              -           (26,928)               -   
                                                    -----------------------------------------------------
                                                            123,000        (1,717,000)       1,500,000   
                                                    =====================================================

12.      RELATED PARTY TRANSACTIONS                                             

As at May 31, 2001 the amount due to a related  corporation  was due to E-Trend,
had no fixed terms of repayment,  bore interest at bank prime plus 1% per annum,
(8% at May 31, 2001),  and was  unsecured.  This amount was repaid in full as at
November 30, 2001.                                                              

Between the period from September  1999 to February 29, 2000, the  Corporation's
ownership was diluted to 45.18% through the issuance by E-Trend of common shares
from  treasury.  As a result of the dilution of the  Corporation's  ownership of
E-Trend, the Corporation's interest in E-Trend was subsequently accounted for by
the equity method of accounting and a dilution gain of $2,452,188 was recorded. 

E-Trend  reported a net loss during the period of March 1, 2000 to May 31, 2000.
The Corporation's share of this loss was $268,249.                              

On May 31, 2001, the Corporation  wrote down its investment in E-Trend resulting
in a one-time charge of $1,886,851 to net income.                               

Included  in  accounts  payable as at May 31,  2001 are  amounts  due to Langara
Distribution Inc., a wholly owned subsidiary of E-Trend: $470,315 (May 31, 2001)
and $94,251 (May 30, 2000).                                                     

The  Corporation  entered into a revenue  sharing  agreement  with Video Limited
Partnership  whereby  the two  parties  agreed to share  revenues  generated  by
certain rental assets in certain of the Corporation's  stores.  Certain partners
of  Video  Limited  Partnership  are  also  directors  and  shareholders  of the
Corporation. Disbursements paid to Video Limited Partnership relate to the terms
under  this  revenue  sharing   agreement.   Effective  December  1,  2001,  the
Corporation  acquired 100% of the partnership units of Video Limited Partnership
for total  consideration of $2.1 million ($580,482 paid to partners who are also
directors of the  Corporation),  as disclosed  in Note 2. The  Corporation  paid
$698,299 for the year                                                           

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ending May 31,  2002,  $1,509,565  for the year ending May 31, 2001 and $732,990
for the year ending May 31, 2000 under this revenue sharing agreement.          

The Corporation  has  transactions in the normal course of business with related
companies.  These amounts are measured at the exchange amounts. During the year,
the  Corporation  recorded  $679 (2001 - $7,397) of purchases  from  E-Trend,  a
related party.  The  Corporation  also recorded  purchases of music product from
Langara  Distribution Inc. (a wholly owned subsidiary of E-Trend) of $1,207,074,
2001 - $2,152,441.                                                              

The  Corporation  sold its  interest in E-Trend as disclosed in Note 16 of these
financial statements.                                                           

13.      COMMITMENTS                                                            

The  Corporation is committed to the following  rental payments under leases for
various premises:                                                               

                     $
                      ------------
2003                      3,094,289   
2004                      2,888,620   
2005                      2,550,598   
2006                      2,339,684   
2007                      1,879,173   
Thereafter                3,852,552   

                      16,604,916
                     =============

With  respect  to the above  leases,  the  Corporation  received  certain  lease
inducements,  which are being amortized and offset against rent expense over the
terms of the leases. Rent expense is included in store operating  expenses.  The
lease inducements to be amortized over the next five years are as follows:      

       2003        2004        2005        2006         2007        Thereafter
     --------    --------    --------    --------    ---------      ----------
$     83,590      72,742      61,016      55,105       28,496         87,833  

OPERATING LEASES                                                                

The  Corporation  is committed to a number of operating  leases that expire from
dates ranging June 2002 to July 2005.  The future  minimum lease  payments under
operating leases for equipment, vehicles and other contracts are as follows:    

     $
     -------------

2003                     139,644                    
2004                      79,439                    
2005                      23,788                    
2006                       2,657                    
       -------------

       245,528
       =============

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EMPLOYMENT AGREEMENTS                                                           

The Corporation  has employment  agreements with four officers that entitle them
to a percentage of gross revenues of the  Corporation.  Two of these  agreements
require payments of 0.5% each of the Corporation's gross revenues. One agreement
requires payments of 1% of the gross realized by the operation of certain retail
stores  operated  within the Province of  Saskatchewan.  One agreement  requires
payments of 1% of the gross  realized by the operation of certain  retail stores
operated  within the City of  Calgary.  During the years  ending May 31,  2002 -
$361,154;  May 31,  2001 - $120,894  and May 31,  2000 - $48,529 was paid to the
officers under these employment agreements.                                     

The Corporation  sources its VHS tapes, DVDs and video game product for rent and
for sale  through  formal  supply  contracts  with certain  suppliers  and movie
studios,  the  earliest  of which  contract  expires on January 30, 2003 and the
latest of which contract expires on December 31, 2009.                          

14.      CHANGE IN NON-CASH COMPONENTS OF WORKING CAPITAL                       

                                                        [Enlarge/Download Table]

                                             For the           For the           For the    
                                           year ended        year ended        year ended   
                                             May 31,           May 31,           May 31,    
                                               2002              2001              2000     
                                                 $                 $                 $      
                                          --------------------------------------------------
                                                                                            
Accounts receivable                            53,216           117,164          (345,003)  
Inventory                                    (298,890)         (771,381)         (575,833)  
Prepaid expenses and deposits                 (39,174)           12,267          (109,755)  
Working capital from acquisitions                   -           246,194           (23,608)  
Accounts payable and accrued liabilities      678,954         1,116,942         2,239,878   
                                          --------------------------------------------------
                                              394,106           721,186         1,185,679   
                                          ==================================================

15.      EARNINGS (LOSS) PER SHARE                                              

The earnings (loss) per share has been calculated  based on the weighted average
number of common shares outstanding for the fiscal periods ended May 31, 2002 of
11,903,465,  May 31, 2001 of  11,490,281,  and May 31, 2000 of  10,086,383.  The
Corporation has adopted the treasury stock method to compute dilutive effects of
stock options, warrants and convertible debentures on earnings (loss) per share.
Based on this method,  the options,  warrants and convertible  debentures do not
have a dilutive effect on the earnings (loss) per share.                        

16.      DISPOSAL OF SUBSIDIARY                                                 

On May 31,  2001,  the  Corporation  wrote down its  investment  in E-Trend.  On
December 21, 2001, the Corporation  entered into an agreement to sell its entire
holdings of 2 million common shares of E-Trend, to a foreign company for US$0.40
per share. The purchase price was to be paid by way of a secured promissory note
with interest at 6% per annum.  To date,  the  Corporation  has not received any
payments as required by the terms of the promissory note. As the  collectability
of the  promissory  note  is  unknown,  the  Corporation  has not  recorded  any
receivables or gains in these  financial  statements.  A gain on the disposal of
the asset will be recorded if any future  payments  of the  promissory  note are
received.                                                                       

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17.      WRITE DOWN OF PROPERTY, PLANT AND EQUIPMENT                            

During the year ended May 31, 2001, the Corporation  reviewed the carrying value
of its rental  product and  determined  that the carrying value exceeded the net
realizable  value and resulted in a one-time  write down of property,  plant and
equipment in the amount of $2,255,867.                                          

As a result of this write down the  Corporation  changed its  estimation  of the
useful  life and  salvage  values of its rental  product.  The  Corporation  has
revised  its  estimates  of the  useful  life of  rental  product  to a 12 month
amortization  period  from a 24 month  amortization  period and has  reduced its
estimate  of the salvage  value from $7 per item to $5 per VHS,  $10 per DVD and
$15 per video game.  This change has been applied  prospectively  as a change in
accounting estimate.                                                            

18.      GAIN OF DISPOSAL OF PROPERTY, PLANT AND EQUIPMENT                      

Effective September 30, 1999, the Corporation sold existing  video-tapes,  video
games and DVD's used for rental revenue to Video Limited Partnership for cash of
$4,000,000  resulting  in  a  gain  of  $1,297,049.  Video  Limited  Partnership
contracted  the  Corporation  to manage these  assets for which the  Corporation
earned a  revenue  sharing  fee.  As of May 31,  2000,  the  Corporation  earned
$2,226,813  under the contract with Video Limited  Partnership.  The Corporation
has  subsequently  acquired  the  units of the  Video  Limited  Partnership,  as
detailed in Note 2.                                                             

19.      CONTINGENCIES                                                          

The  Corporation  has  signed  an  irrevocable  letter of credit in favor of two
suppliers for $100,000 and $25,000 respectively.                                

20.      COMPARATIVE AMOUNTS                                                    

Certain  comparative figures have been adjusted to conform to the current year's
financial statement presentation.                                               

21.      US GAAP  RECONCILATION                                                 

Reconciliation  of Canadian  and United  States  Generally  Accepted  Accounting
Principles:                                                                     

The consolidated  financial statements of the Company are prepared in accordance
with generally accepted accounting principles in Canada ("Canadian GAAP") which,
in most respects,  conform to generally  accepted  accounting  principles in the
United States ("US GAAP").  Significant differences between Canadian and US GAAP
are as follows:                                                                 

Net income (loss):                                                              
                                Year ended May 31,
                                   ---------------------------------------------
                                     2002            2001          2000(F)
                                     ----            ----          -------
--------------------------------------------------------------------------------
Net income (loss) under            $(2,349,289)    $(2,813,521)     $2,102,867  
Canadian GAAP                                                                   
--------------------------------------------------------------------------------
Gain on disposal of assets (a)                                      (1,297,049) 
--------------------------------------------------------------------------------
VLP disbursements (a)                  698,299       1,509,565        732,990   
--------------------------------------------------------------------------------
Interest expense (a)                  (473,000)     (1,007,000)      (489,000)  
--------------------------------------------------------------------------------
Depreciation expense (a)              (404,000)       (809,000)      (472,000)  
--------------------------------------------------------------------------------
Write-down of assets (a)             1,315,779               -              -   
--------------------------------------------------------------------------------
Gain on settlement of debt (a)         690,000               -              -   
--------------------------------------------------------------------------------

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--------------------------------------------------------------------------------
Gain on dilution (b)                                                 (2,452,188)
--------------------------------------------------------------------------------
Stock-based compensation (c)                 -           (36,000)    (1,041,000)
--------------------------------------------------------------------------------
Income tax effect (d)                        -        (1,340,000)     2,088,000 
                                   ------------      ------------   ------------
--------------------------------------------------------------------------------
Net income (loss) under US           $(522,211)      $(4,495,956)     $(827,410)
GAAP                               ============      ============   ============
--------------------------------------------------------------------------------
Earnings (loss) per share (e):                                                  
--------------------------------------------------------------------------------
  Primary                                 $.04             $(.42)         $(.09)
--------------------------------------------------------------------------------
  Diluted                                 $.04             $(.42)         $(.09)
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

Balance sheet items:                                                            
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
Capital assets:                                                                 
--------------------------------------------------------------------------------
       Balance under Canadian     $10,184,482        $8,575,627     $6,827,334
GAAP                        
--------------------------------------------------------------------------------
     Effect of accounting for               -         1,422,049      2,231,049
                       VLP (a)     ------------      ------------   ------------
--------------------------------------------------------------------------------
        Balance under US GAAP     $10,184,482        $9,997,676     $9,058,383
                                   ============      ============   ============
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
Long-term debt:                                                                 
--------------------------------------------------------------------------------
       Balance under Canadian        $949,383          $110,794       $233,996
GAAP                        
--------------------------------------------------------------------------------
     Effect of accounting for               -         3,253,229      3,755,914
                       VLP (a)     ------------      ------------   ------------
--------------------------------------------------------------------------------
        Balance under US GAAP        $949,383        $3,364,023     $3,989,910
                                   ============      ============   ============
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
Deferred tax asset (liability):                                                 
--------------------------------------------------------------------------------
        Balance under Canadian       $(871,000)        $(748,000)   $(2,465,000)
GAAP:                         
--------------------------------------------------------------------------------
        Tax effect of US GAAP         748,000           748,000      2,088,000
                   differences     ------------      ------------   ------------
--------------------------------------------------------------------------------
         Balance under US GAAP        $123,000                $0      $(377,000)
                                   ============      ============   ============
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
Shareholders' equity:                                         
--------------------------------------------------------------------------------
       Balance under Canadian      $6,224,268        $7,091,253     $8,366,041
GAAP                        
--------------------------------------------------------------------------------
   Effect of income statement         743,584        (1,083,494)       562,941
                   adjustments     ------------      ------------   ------------
--------------------------------------------------------------------------------
        Balance under US GAAP      $6,967,852        $6,007,759     $8,928,982
                                   ============      ============   ============
--------------------------------------------------------------------------------

(a)      Video Limited Partnership  transaction - In September 1999, the Company
         sold existing  video tapes,  video games and DVD rental  inventory to a
         limited  partnership  and  recorded a gain on disposal of the assets of
         $1,297,049.  The Company  managed the rental of these  products and was
         responsible  for replacing them as they were sold or became  redundant.
         The Company and the limited  partnership  shared the rental income from
         the inventory. In December 2001, the Company acquired the assets of the
         limited partnership for total  consideration of $2.1 million.  Under US
         GAAP,  this  transaction  is considered to be a financing  transaction,
         whereby the proceeds  received would be shown as debt.  Payments to the
         limited  partnership  are  allocated  between  reduction  of  debt  and
         interest  expense  based the  buy-out  formula in the sales  agreement.
         Depreciation  expense  related to this rental  inventory  would also be
         recorded  under US GAAP.  The  acquisition  of the limited  partnership
assets is treated as a settlement of debt under US GAAP.      

(b)      Gain on  dilution  - In  September  1999 and May  2000,  the  Company's
         subsidiary,  E-Trend Networks, issued additional shares of its stock at
       prices greater than the Company's original cost basis. Under Canadian

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         GAAP, the  increase  in  the  Company's  investment  related  to  these
         transactions  is  recorded  as  a gain. Under US GAAP, this increase is
recorded as an equity transaction.                            

(c)      Stock-based  compensation  - During  fiscal 2000 and 2001,  the company
         issued  certain  stock options to employees  which had exercise  prices
         below the market price of the company's  common  stock.  Under US GAAP,
         compensation  expense is  recognized  for the  difference  between  the
 exercise price of the option and the market price of the stock.

(d)      Income tax effect - This item  represents  the income tax effect of the
other US GAAP differences.                                    

(e)      Earnings  per share - Under US GAAP,  shares held in escrow that are to
         be  released  pursuant  to  performance  criteria  are  not  considered
         outstanding for earnings per share  purposes.  The company had total of
         1,130,000  shares  escrowed  subject to performance  criteria that were
         released  as  follows:  753,334 on  November  15,  2000 and  376,666 on
         September 18, 2001. The effect of these escrowed shares was to decrease
         the weighted  average shares  outstanding  by 1,130,000  shares for the
         year ended May 31, 2000, 722,000 shares for the year ended May 31, 2001
and 109,861 shares for the year ended May 31, 2002.           

(f)      In fiscal  2001,  the Company  changed its estimate of useful lives for
         rental  inventory.  The  effect of this  change was  recorded  as other
         expense  under  Canadian  GAAP.  Under US GAAP,  this  effect  would be
         recorded  as cost of  sales.  The  effect  of this  change  would be to
 increase cost of sales and decrease gross margin by $2,255,867.

STOCK AND WARRANT COMPENSATION                                                  

The Company applies APB Opinion No. 25 and related interpretations in accounting
for options and warrants issued to employees.  Accordingly, no compensation cost
has been  recognized  for  issuances  of options and  warrants to  employees  at
exercise prices not less than the market value of the Company's  common stock on
the grant dates. Had  compensation  cost for the Company's plans been determined
consistent  with SFAS No. 123, the  Company's  net loss and loss per share would
have been increased to the pro forma amounts indicated below:                   

                               May 31,
                              --------------------------------------------------
                               2002             2001              2000
                              --------------    -------------    ---------------

Net income (loss)                                                               
   As reported                $    (522,211)    $ (4,495,956)    $     (827,410)
   Pro forma                     (1,724,920)      (4,614,131)        (1,246,448)

Primary earnings per share                                                      
   As reported                $        (.04)    $       (.42)    $         (.09)
   Pro forma                           (.12)            (.43)              (.11)

The fair  value of each  grant was  determined  using the  Black-Scholes  option
pricing model with the following assumptions:                                   

                               May 31,
                              --------------------------------------------------
                               2002             2001              2000
                              --------------    -------------    ---------------

Risk-free interest rate            3.00%             5.75%             5.75%    
Expected life of award             5 yrs             5 yrs             5 yrs    
Dividend yield                       0%                0%                0%     
Volatility                          135%              147%              150%    

F-23

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STOCK OPTION PLANS                                                              

The  Company  approved a stock  option plan (the  "Plan") to provide  directors,
officers and other key  employees  options to purchase  shares of the  Company's
stock.  The Plan was  approved by the Board of  Directors  on November 15, 2001.
Under the terms of the  Plan,  the  Directors  may  grant  directors,  officers,
employees,  and other "optionees"  options with the maximum shares not to exceed
2,352,000 shares.  The purchase price of the shares subject to an option will be
the  market  value of the  Company's  common  stock on the  date the  option  is
granted. Option vesting is determined upon each issuance.                       

A summary of the status of the  Company's  stock option plan as of May 31, 2002,
2001 and 2000 and changes  during the years  ended on those  dates is  presented
below:                                                                          

                                       Outstanding Options
                                        --------------------------------------
                                                              Weighted Average
                                           Shares             Exercise Price
                                        --------------        ----------------

FIXED OPTIONS                                                           

Balance at June 1, 1999                  200,000               $    0.20
  Granted                                850,000                    1.51
  Cancelled                             (200,000)                   0.20
                 ---------

Balance at May 31, 2000                  850,000               $    1.51
  Granted                                139,800                    2.68

Balance at May 31, 2001                  989,800                    1.66
  Granted                              1,017,500                    1.90

Balance at May 31, 2002                2,007,300               $    1.78
                                     -----------               ---------

Options exercisable at year-end        1,482,062                        
             ===========

The weighted  average fair value of options  granted  during the years ended May
31, 2000, 2001, and 2000 was $1.90, $2.68, and $1.51, respectively.             

The following table summarizes information about fixed stock options outstanding
at May 31, 2002:                                                                

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                                                        [Enlarge/Download Table]


                        Number      Weighted Average                                           Weighted     
      Range of      Outstanding at      Remaining       Weighted Average       Number          Average      
  Exercise Prices    May 31, 2002   Contractual Life     Exercise Price   Exercisable 2002  Exercise Price  

                                                                                                            
$       1.51            850,000           2.6         $        1.51            850,000      $     1.51      
        1.80            767,500           4.5                  1.80            468,750            1.80      
        2.20            200,000           4.3                  2.20             50,000            2.20      
        2.30             50,000           4.3                  2.30              4,167            2.30      
        2.68            139,800           3.3                  2.68             55,476            2.68      
                   ------------                                           ----------------  --------------- 

   $1.51 to $2.68     2,007,300           4.09                               1,428,393      $     1.67      
                   ============                                           ================  ================

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STOCK WARRANTS                                                                  

A summary of the status of the Company's  warrants as of May 31, 2002, 2001, and
2000 and changes during the years ended on those dates is presented below:      

                                                                Weighted
                                                                 Average
                                             Shares             Exercise Price
                                         ----------------       ----------------

WARRANTS                                                                  

Balance at June 1, 1999                         -               $       - 
 Granted                                  50,000                    2.00
                  ----------------

Balance at May 31, 2000                    50,000                    2.00 
 Granted                                 366,733                    5.00
                  ----------------

Balance at May 31, 2001                   416,733                    4.64 
 Granted                                 614,018                    2.09
                  ----------------

Balance at May 31, 2002                 1,030,751               $    3.12 
                                         ================       ================

Warrants exercisable at year-end        1,030,751                         
                  ================

The weighted  average fair value of warrants  granted during the years ended May
31, 2001, 2000 and 1999 were $2.09, $5.00, and $2.00.                           

The following  table  summarizes  information  about  warrants  outstanding  and
exercisable at May 31, 2002:                                                    

                                                        [Enlarge/Download Table]

                                            Weighted Average                          
     Range of      Number Outstanding at  Remaining Contractual     Weighted Average  
 Exercise Prices      May 31, 2001               Life               Exercise Price    
-----------------  ---------------------  ---------------------  ---------------------
                                                                                      
$     2.00                549,168                 1.5            $       2.00         
      2.50                114,850                 2.0                    2.50         
      5.00                366,733                 3.07                   5.00         
                   ---------------------                         ---------------------

 $2.00 to $5.00         1,030,751                 2.11           $       2.64         
                   =====================                         =====================

F-26

120 

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘20-F’ Filing		Date		First		Last			Other Filings
		12/31/09		116
		11/30/06		59		68
		9/20/05		67		68
		1/19/05		66		68
		12/31/04		60		61
		12/1/04		39		110
		5/31/04		113
		12/2/03		104
		12/1/03		39		110
		11/30/03		66
		10/31/03		35
		6/30/03		35		106
		5/31/03		10		71
		5/6/03		110
		1/30/03		14		116
		12/31/02		53					6-K
Filed on:		12/17/02		94		96
		12/13/02		3		75
		12/10/02		97
		11/30/02		16		69
		11/28/02		69
		11/27/02		55		72
		10/31/02		7		70			6-K
		9/21/02		97
		8/31/02		64
		7/30/02		53
		6/28/02		113
		6/5/02		19		72
		6/1/02		70
For Period End:		5/31/02		1		122			NT 20-F
		5/1/02		56
		4/1/02		73
		3/1/02		56
		2/28/02		103
		2/19/02		35
		2/1/02		80		92
		1/29/02		73
		1/18/02		56
		1/17/02		55
		1/2/02		73
		1/1/02		52
		12/26/01		34		92
		12/21/01		106		116
		12/19/01		55
		12/15/01		53
		12/10/01		19
		12/1/01		39		114
		11/30/01		114
		11/15/01		19		120
		10/16/01		56
		10/10/01		68
		9/24/01		55
		9/18/01		119
		9/1/01		55
		7/30/01		19		74
		7/27/01		75
		7/24/01		17		74
		6/30/01		39		52
		6/28/01		113
		6/22/01		35		106
		6/1/01		37		101
		5/31/01		4		122
		5/15/01		34
		4/15/01		34
		4/9/01		55
		4/1/01		60		92
		3/21/01		47
		3/15/01		24		92
		2/22/01		34		71
		2/7/01		55
		1/19/01		106
		1/18/01		73
		1/1/01		18
		12/4/00		91
		12/1/00		19		91
		11/22/00		19
		11/15/00		119
		9/15/00		31
		9/1/00		33		54
		7/15/00		33
		7/11/00		24		104
		6/28/00		113
		6/15/00		24		104
		5/31/00		4		122
		5/30/00		33		114
		5/1/00		56
		4/30/00		33
		3/31/00		31
		3/24/00		56
		3/21/00		24		49
		3/3/00		54		56
		3/1/00		50		114
		2/29/00		32		114
		1/31/00		32
		1/1/00		31
		12/31/99		31		34
		12/1/99		24		71
		11/30/99		32
		11/25/99		91
		11/22/99		56		72
		9/30/99		117
		9/29/99		24		92
		7/19/99		92
		6/1/99		31		122
		5/31/99		4		122
		4/29/99		70
		3/31/99		30
		12/31/98		31
		11/24/98		57
		9/18/98		18		91
		8/1/98		105
		7/20/98		30
		6/9/98		18
		6/1/98		70
		5/31/98		5		6
		5/1/98		30
		4/30/98		5		6
		3/27/98		72		92
		12/31/97		88
		12/22/97		18		91
		12/11/97		18		92
		9/5/97		18		91
		1/27/97		87
		5/1/92		87
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