U.S. SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 40-F

|(Check One)                                
|-------------------------------------------
|o                                          
|or                                         
|ý                                          
|For the fiscal year ended December 31, 2005
|Commission file number 000-27546           

ALLIANCE ATLANTIS COMMUNICATIONS INC.(Exact name of registrant as specified in its charter)

|Canada  Federal Statute(Province or other jurisdiction
of incorporation or organization) |  | 7812(Primary Standard Industrial
Classification Code Number
(if applicable)) |  | Not applicable(I.R.S. Employer
Identification Number
(if Applicable))
|----------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------- |  | ---------------------------------------------------------------------

121 Bloor Street East, Suite 1500, Toronto, Ontario M4W 3M5 (416) 967-1174(Address and Telephone Number of Registrant's Principal Executive Offices)

Alliance Atlantis Entertainment, Inc., 1543-7th Street, 3rd Floor,
Santa Monica, California 90401, (310) 899-8000(Name, Address (Including Zip Code) and Telephone Number
(Including Area Code) of Agent For Service in the United States)

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

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

Class B Non-Voting Shares, without par value(Title of Class)

Securities
for which there is a reporting obligation pursuant to Section 15(d) of the Act.    None

For
annual reports, indicate by check mark the information filed with this Form:

ý
Annual Information Form

ý
Audited Annual Financial Statements


Indicate
the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report:

December 31, 2005  42,284,837 Class B Non-Voting Shares, without par value
December 31, 2005  1,005,447 Class A Voting Shares, without par value

Indicate
by check mark whether the registrant by filing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to
Rule 12g3-2(b) under the Securities Exchange Act of 1934 (the "Exchange Act"). If "Yes" is marked, indicate the file number assigned to the registrant in connection
with such rule.

Yes

o

No

ý


Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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

ý

No

o


The
Annual Report on Form 40-F shall be incorporated by reference into or as an exhibit to, as applicable, each of the registrant's Registration Statements under the
Securities Act of 1933: Form S-8 (File Nos. 333-13284 and 333-09586)



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FORM 40F

Principal Documents

The
following documents have been filed as part of this Annual Report on Form 40-F, beginning on the following page:



40-F2

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LOGO

ALLIANCE ATLANTIS COMMUNICATIONS INC.

ANNUAL INFORMATION FORM

For the Year Ended December 31, 2005

March 20, 2006

121 Bloor Street East, Suite 1500, Toronto, Ontario, M4W 3M5
Telephone (416) 967-1174 Fax (416) 960-0971

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ALLIANCE ATLANTIS COMMUNICATIONS INC.    2005 ANNUAL INFORMATION FORM

TABLE OF CONTENTS

|                                              |                                                                                  | Page
|--------------------------------------------- | -------------------------------------------------------------------------------- | ----
|INCORPORATION                                 |                                                                                  | 1   
|                                              | PRINCIPAL SUBSIDIARIES                                                           |     
|THE COMPANY                                   |                                                                                  | 2   
|INDUSTRY OVERVIEW                             |                                                                                  | 2   
|                                              | BROADCASTING                                                                     |     
|                                              | ENTERTAINMENT                                                                    |     
|                                              | MOTION PICTURE DISTRIBUTION                                                      |     
|GENERAL DEVELOPMENT OF THE COMPANY'S BUSINESS |                                                                                  | 6   
|                                              | BROADCASTING                                                                     |     
|                                              | ENTERTAINMENT                                                                    |     
|                                              | MOTION PICTURE DISTRIBUTION                                                      |     
|                                              | REORGANIZATIONS                                                                  |     
|                                              | SIGNIFICANT ACQUISITIONS                                                         |     
|                                              | RECENT DEVELOPMENTS                                                              |     
|COMPETITION                                   |                                                                                  | 12  
|                                              | BROADCASTING                                                                     |     
|                                              | ENTERTAINMENT                                                                    |     
|                                              | MOTION PICTURE DISTRIBUTION                                                      |     
|REGULATION                                    |                                                                                  | 13  
|                                              | BROADCASTING                                                                     |     
|                                              | MOTION PICTURE DISTRIBUTION                                                      |     
|INTELLECTUAL PROPERTY                         |                                                                                  | 17  
|PROPERTIES AND FACILITIES                     |                                                                                  | 17  
|EMPLOYEES                                     |                                                                                  | 18  
|DIRECTORS AND OFFICERS                        |                                                                                  | 19  
|                                              | BOARD OF DIRECTORS                                                               |     
|                                              | AUDIT COMMITTEE                                                                  |     
|                                              | EXECUTIVE OFFICERS                                                               |     
|DESCRIPTION OF SHARE CAPITAL                  |                                                                                  | 26  
|                                              | CLASS A VOTING SHARES AND CLASS B NON-VOTING SHARES                              |     
|DESCRIPTION OF CERTAIN INDEBTEDNESS           |                                                                                  | 29  
|                                              | REPAYMENT OF SENIOR SUBORDINATED NOTES                                           |     
|                                              | CREDIT FACILITY                                                                  |     
|LEGAL PROCEEDINGS                             |                                                                                  | 30  
|RISK FACTORS                                  |                                                                                  | 30  
|RATINGS                                       |                                                                                  | 30  
|                                              | MOODY'S INVESTOR SERVICES                                                        |     
|                                              | STANDARD & POOR'S                                                                |     
|DIVIDENDS                                     |                                                                                  | 30  
|NORMAL COURSE ISSUER BID                      |                                                                                  | 31  
|REGISTRAR AND TRANSFER AGENT                  |                                                                                  | 31  
|MARKET FOR SECURITIES                         |                                                                                  | 31  
|                                              | TRADING PRICE AND VOLUME OF CLASS A VOTING SHARES                                |     
|                                              | TRADING PRICE AND VOLUME OF CLASS B NON-VOTING SHARES                            |     
|MATERIAL CONTRACTS                            |                                                                                  | 32  
|                                              | INVESTMENT AGREEMENT                                                             |     
|CONFLICTS OF INTEREST                         |                                                                                  | 33  
|ADDITIONAL INFORMATION                        |                                                                                  | 33  
|APPENDIX 1                                    |                                                                                  | 35  
|                                              | AUDIT COMMITTEE CHARTER                                                          |     
|APPENDIX 2                                    |                                                                                  | 48  
|                                              | PROCEDURES FOR APPROVAL OF AUDIT AND NON-AUDIT SERVICES BY THE EXTERNAL AUDITORS |     

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This annual information form may contain forward-looking statements within the meaning of Canadian and U.S. securities laws. Such statements include, but
are not limited to, statements relating to anticipated financial and operating results, the Company's plans, objectives, expectations and intentions and other statements including words as such as
"anticipate", "believe", "plan", "estimate", "expect", "intend", "will", "should", "may", and other similar expressions. These forward-looking statements are based on certain assumptions and reflect
the Company's current expectations. The reader should not place undue reliance on them. They involve known and unknown risks, uncertainties and other factors that may cause them to differ materially
from the anticipated future results or expectations expressed or implied by such forward-looking statements. Some factors that could cause actual results to differ materially from those set forth in
the forward-looking statements are: audience acceptance of our filmed entertainment; our ability to attract advertising revenue; changes to the regulatory environment; actions of our competitors;
technological change that increases competition or facilitates the infringement of our intellectual property; cost of production financing; the loss of key personnel; and our relationship with filmed
entertainment content suppliers. Other risks and factors that could cause actual results to differ are described in Management's Discussion and Analysis of Financial Condition and Results of
Operations ("2005 MD&A") for the periods ended December 31, 2005, December 31, 2004 and December 31, 2003 under the headings "Industry Risk and Uncertainties" and "Market Risk".
Our 2005 MD&A is available on SEDAR at www.sedar.com. The company undertakes no obligation to publicly update or revise any forward-looking statements or information, whether as a result of new
information, future events or otherwise.

Unless
the context indicates otherwise, the information appearing herein is stated as at December 31, 2005, all dollar amounts referred to in this document are references to
Canadian dollars and references in this 2005 Annual Information Form to "the Company", "we", "us" and "our" and similar expressions, mean Alliance Atlantis Communications Inc. together with its
direct and indirect subsidiaries.

INCORPORATION

Alliance Atlantis Communications Inc. ("Alliance Atlantis") is incorporated under the Canada Business
Corporations Act(the "CBCA"). Our articles have been amended from time to time
to make certain changes, including changes to our share structure.

In
July of 1998, Alliance Communications Corporation ("Alliance") and Atlantis Communications Inc.
("Atlantis") entered into an agreement which provided for the business combination of Alliance and Atlantis and the integration of their operations by
way of a plan of arrangement (the "Merger"). The Merger was completed on September 21, 1998, at which time Atlantis became a wholly-owned
subsidiary of Alliance and Alliance changed its name to Alliance Atlantis Communications Inc.

Alliance
was formed under the CBCA by articles of incorporation on June 27, 1985. On May 5, 1995, the articles of Alliance were amended to create the Class A Voting
Shares and the Class B Non-Voting Shares, to convert each of the outstanding common shares into one-half of one Class A Voting Share and one-half of
one Class B Non-Voting Share, to cancel the existing class of common shares and to provide to the board of directors of Alliance the authority to appoint additional directors.

Our
registered and principal office is located at 121 Bloor Street East, Suite 1500, Toronto, Ontario M4W 3M5. We also operate offices in Montreal (Canada), Los
Angeles (United States), London (England), Dublin (Ireland), Madrid and Barcelona (Spain) and Sydney (Australia).

Principal Subsidiaries

The following is a list of our principal subsidiaries as at December 31, 2005, the jurisdiction of incorporation of each subsidiary and the percentage of
securities (both voting and non-voting) beneficially owned by us or over which we exercise control or direction:

1

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|Subsidiary                                           |  | Jurisdiction        |  | Percentage of Securities Owned by the Company
|---------------------------------------------------- |  | ------------------- |  | ---------------------------------------------
|Alliance Atlantis Broadcasting Inc.                  |  | Canada              |  | 100%                                         
|Alliance Atlantis International Distribution Limited |  | Republic of Ireland |  | 100%                                         
|Alliance Atlantis Entertainment, Inc.                |  | California          |  | 100%                                         
|Alliance Atlantis Productions Ltd.                   |  | Canada              |  | 100%                                         
|Motion Picture Distribution LP                       |  | Manitoba            |  | 51%(1)                                       

THE COMPANY

The Company is a broadcaster, creator and distributor of filmed entertainment content. We offer Canadians 13 well-branded specialty television
channels with targeted, high-quality programming. The Company also co-produces and distributes the highly successfulCSIfranchise and indirectly holds a 51% limited partnership interest in Motion Picture Distribution LP ("Distribution LP"), a leading
distributor of motion pictures in Canada, with a growing presence in motion picture distribution in the United Kingdom and Spain. The Company's common shares are listed on the Toronto Stock
Exchange ("TSX")  trading symbols AAC.A and AAC.NV.B(2). The Company's corporate website is
www.allianceatlantis.com.

The
Company's three principal business activities are: "Broadcasting", "Entertainment" and "Motion Picture Distribution". These core businesses are supported by the Company's "Corporate
and Other" segment. Over the past few years, the Company has transformed itself into a streamlined, broadcast-driven company, by investing in and growing its broadcast business and reducing the amount
of capital and other resources devoted to production and other related activities.

The
breakdown of the Company's consolidated revenues(3) by business activity in 2004 and 2005 is set out below:

|Year ended December 31,
(in millions of Canadian $) |                             | 2005 |         | 2004 
|--------------------------------------------------- | --------------------------- | ---- | ------- | -----
|                                                    | Broadcasting                |      | $       | 283.4
|                                                    | Entertainment               |      |         | 341.5
|                                                    | Motion Picture Distribution |      |         | 418.1
|                                                    | Corporate and Other         |      |         | 0.4  
|                                                    |                             |      |         |      
|Total Consolidated Revenues                         |                             | $    | 1,043.4 |      
|                                                    |                             |      |         |      

INDUSTRY OVERVIEW

Set out below is a brief overview of each of the three industries in which the Company operates: Broadcasting (with an emphasis on specialty television
broadcasting), Entertainment (which overview addresses production and distribution of television programs), and Motion Picture Distribution (which overview addresses the industry
Distribution LP competes in).

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2

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Broadcasting

The television viewing alternatives for Canadians include: the conventional broadcast networks (Canadian Broadcasting Corporation, CTV, and Global Television
Network), French-language networks, independent stations and a number of well-developed cable television channels. Viewers in Canada also have access to certain U.S. stations,
directly over the air, and via cable or satellite. The cable television market is made up of pay and certain specialty channels.



Canadian specialty television channels are licensed by the Canadian Radio-Television and Telecommunications Commission
(the "CRTC") and provide special interest programming, such as news, sports, arts, lifestyle and entertainment programming. Specialty television
channels are available to Canadians who subscribe to a particular service package of a
broadcasting distribution undertaking ("BDU"), i.e., cable, direct-to-home
("DTH") satellite, multipoint distribution systems and telephony distributors.

There
are both analog and digital specialty television channels in Canada. Analog specialty television channels are distributed either as part of a BDUs basic service, or as part of an
"extended" or "discretionary" tier, including other Canadian or non-Canadian specialty television channels. Specialty channels that are carried on a basic tier typically have a much higher
number of subscribers because all subscribers to a BDU receive the basic service. The number of subscribers to a specialty channel on a discretionary tier depends upon subscriber preference, the
extent to which a channel is packaged or tiered with other popular channels and pricing.

In
2000, the CRTC awarded 283 licences for specialty channels to be carried solely by BDU's on a digital basis. Of these licences, 21 were Category 1 (mandatory
carriage for a negotiated fee by digital services, with genre protection) and 262 were Category 2 (optional carriage for a negotiated fee by digital services, without genre protection).
Most Category 2 licences for digital channels that did not launch by November 24, 2004 have expired. Digital specialty services are offered as part of a discretionary tier of digital
only channels, marketed in theme packs, or individual pick a pack, or as pick and pay services.

The
industry is shifting from analog to digital transmission ("digital migration"), which provides a high-definition ("HD") TV
signal through a set-top box. See "Regulation  Broadcasting".

According
to the CRTC Individual Pay and Specialty Services Statistical and Financial Summaries 2000-2004, as of the end of the 2004 Broadcasting Year there were a total of
116 Canadian specialty services (including English, French and third-language services): 50 analog specialty services, 53 digital specialty services, five pay services and eight
pay per view services.

As
of May/June 2005 there were approximately 10 million customers with subscription television. Of these, 7.5 million, or 75%, were cable customers,
2.4 million, or 24% were DTH satellite customers and 1% or 77,000 were customers of telephone companies or 'telcos'. The penetration rate for analog channels is higher than digital, but
the penetration rate of the digital specialty networks is increasing. As of May/June 2005, approximately 47% or 4.7 million of the estimated 10 million total TV subscribers in
Canada received a digital TV service via a digital set-top box provided by their DTH satellite TV, cable, multipoint distribution system (wireless cable) or telephone provider. DTH
satellite accounted for 51% of all digital subscribers, cable had 47% of the digital subscribers while telcos gained 2% market share. The number of digital TV subscribers increased by about 15% or
623,498 from the year prior.(4)

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3

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The size of the specialty television market has grown rapidly. For the period from 1997 to 2004, subscription revenue for Canadian specialty
television channels grew from $515 million to $1.32 billion while advertising revenue grew from $180 million to $691 million. In 2004, specialty television reported total
revenues of $2.1 billion, up more than 9% from the prior year. Of this, total subscription revenues accounted for almost $1.32 billion, up 6.0% from a year earlier. Airtime sales
accounted for $691 million, a jump of 16.8%.(5)

Specialty
analog and digital television channels derive substantially all of their revenue from subscription fees and advertising. The BDUs that carry these channels pay specialty
service owners a monthly subscription fee, typically on a per subscriber basis. The wholesale subscriber fee payable to a channel owner for carriage of its service is regulated if it is carried as
part of the basic service, but is not regulated if it is carried on an extended or discretionary tier. In those instances, the rate would be negotiated with the BDU. The wholesale subscriber fee for
carriage of digital services is not regulated and as such, is negotiated with the BDU. Also, as carriage of Category 2 services is not mandated, carriage must be negotiated between the channel
and the distributor. Subscribers to extended or discretionary tiers pay monthly fees which reflect an amount for the basic service, plus an additional amount for the additional services for which they
subscribe on the extended or discretionary tiers, theme packs, pick a pack or individual pick and pay. As there are only a handful of large dominant BDUs, including Rogers Communications, Shaw
Communications, Cogeco, Videotron, Bell ExpressVu and Star Choice, which together make up approximately 90% of the market, it is important for broadcast licensees to obtain carriage agreements with
these players in order to obtain maximum household penetration. Broadcasters with multiple channels typically have more success negotiating carriage agreements than those with only one or two
channels.



As a result of technological changes and consumer demand, new digital products and services are now available to viewers. Three of these products and services are
set out below. Each of them provides both risks and opportunities to the Company. In addition to the description below, see the "Risk Factor" section.

Video-on-demand ("VOD")

VOD
allows digital cable subscribers to select video content which is then downloaded to a digital set-top box for viewing. This enables viewers to select particular
programming when they wish to watch it. This may create additional competition for the Company's specialty television networks. See "Competition". The increased popularity of VOD may also stimulate
the further roll-out of digital set-top boxes, which in turn could also increase demand for the Company's specialty networks. In addition, the emergence of VOD may provide an
opportunity to the Company to offer its content through VOD.

Personal video records ("PVRs") and other Digital Video Recording Devices

PVRs
record and play back television programming in a digital format. This allows a viewer to pause a program at any time and continue playing such program, to record a program for
viewing at a later date, or to fast-forward or rewind a recorded program. A PVR also allows viewers to search for content based on the type of program (e.g., sports, movies) and,
when viewing a recording, to pause, rewind or fast forward through the content. If the use of PVRs and similar embedded digital technologies to bypass commercials should become widespread, there could
be a negative impact on the Company's advertising revenue. PVRs could, however, increase demand for digital set-top boxes and as a result increase demand for the Company's specialty
networks. In addition, the convenience PVRs provide may increase viewership by the existing subscribers to the Company's specialty channels.

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High-definition television ("HDTV")

There
has been an increase in the popularity of HDTV technology, which provides a higher resolution, HD format picture. A continued increase in the consumer acceptance of HDTVs and
potential regulatory requirements may require the Company's networks to increasingly offer programming in HD format. This could cause the Company's costs for entertainment content to increase. In
addition, the CRTC has not yet confirmed whether genre protection will extend to HD format, meaning that it is possible that the Company's genre protected channels could face competition from a
competitor offering similar content, but in HD format.

Entertainment

The major U.S. and Canadian television broadcasters license the majority of their programming from major studios, with the balance from independent producers.
Prime time programming generates the highest licence fees in these markets and generally consists of a mix of hour-long drama series, TV movies and mini-series, situation
comedies, and reality and entertainment programming.

Generally,
television programs are produced under contracts that provide for licence fee revenue, which may not cover all anticipated production costs. Recovering the "gap" or production
deficit between these fees and production costs, and earning a profit, is typically dependent upon the producer's ability to distribute the programs in multiple geographic regions, including
international markets, or through multiple distribution channels. Most foreign broadcasters air a mix of both local programming, often to satisfy local content regulations, and popular international
programming which appeals to a wide audience. The introduction of sophisticated delivery technologies (including cable and satellite transmission), pay television, increased cable penetration and
growth in sales of digital video disks ("DVDs") and video cassettes have all contributed to growth in the exploitation of television programming.

Motion Picture Distribution

The motion picture industry consists of two principal activities: production and distribution. Production involves the development, financing and production of
feature-length motion pictures. Distribution involves the promotion and exploitation of motion pictures in a variety of distribution platforms, including theatrical exhibition, home entertainment,
television and ancillary markets.

The
first major distribution platform is theatrical exhibition. Revenues are derived from renting films to cinemas and sharing in box office receipts.

The
second major distribution platform for a motion picture is home entertainment. Revenues in this distribution platform are derived from consumers renting a DVD for a specified period
of time (rental revenue) or purchasing a DVD for home use (sell-through revenue). Home entertainment typically represents the single largest source of revenue for a motion picture
distributor.

Distribution
to ancillary markets involves granting licences in non-traditional markets such as to airlines, schools, libraries, hospitals, childcare centres and military
installations. These customers (other than airlines) tend to pay annual fees for access to the entire catalogue of motion pictures of a distributor.

After
a motion picture's initial theatrical exhibition, distribution to ancillary markets and home entertainment release, motion picture distributors generate revenues from television
distribution. This platform includes video-on-demand and pay-per-view, cable television, and free television.

Appropriately
tailored marketing activity is critical to the successful distribution of a motion picture. In addition to formulating and implementing promotional and advertising
strategies, the distributor will typically liaise with the media, produce or acquire all necessary promotional materials (publicity photos, artwork, posters, press kits), provide creative advice on
certain aspects of production (enhancing the marketability of the motion picture, casting, etc.), and provide financing for productions through minimum guarantees.

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GENERAL DEVELOPMENT OF THE COMPANY'S BUSINESS

Broadcasting

The Company has a controlling ownership interest in and operates 13 Canadian specialty television channels. It also has a 50% interest in two Canadian
French-language specialty television channels and a minority interest in three other English-language specialty television channels. The Company's channels are focused on two core
genres  "fact and fiction" and "lifestyle" programming.

The
channels earn revenue from two primary sources: money paid by advertisers who purchase advertising on the channel, and monthly fees paid by BDUs based on the number of subscriptions
to the channel. The Company sells advertising nation-wide through its in-house advertising sales team and retains 100% of the available advertising inventory of approximately
12 minutes per hour.



The following table describes all of the specialty channels in which we hold an interest:

|Specialty Channel                      |  | Analog/
Digital |  | Must Carry(4) |  | Equity Interest |  | Year of Launch
|-------------------------------------- |  | --------------- |  | ------------- |  | --------------- |  | --------------
|Channels We Operate:                   |  |                 |  |               |  |                 |  |               
|Showcase                               |  | Analog          |  | Yes           |  | 100.0%          |  | 1995          
|Life Network                           |  | Analog          |  | Yes           |  | 100.0%          |  | 1995          
|History Television                     |  | Analog          |  | Yes           |  | 100.0%          |  | 1997          
|HGTV Canada                            |  | Analog          |  | Yes           |  | 67.0%           |  | 1997          
|Food Network Canada                    |  | Analog          |  | Yes           |  | 51.0%           |  | 2000          
|Showcase Action                        |  | Digital         |  | No            |  | 100.0%          |  | 2001          
|Showcase Diva                          |  | Digital         |  | No            |  | 100.0%          |  | 2001          
|National Geographic Channel            |  | Digital         |  | No            |  | 50.0%           |  | 2001          
|BBC Canada                             |  | Digital         |  | No            |  | 50.0%           |  | 2001          
|BBC Kids                               |  | Digital         |  | No            |  | 50.0%           |  | 2001          
|Discovery Health Channel               |  | Digital         |  | Yes           |  | 65.0%           |  | 2001          
|IFC Canada                             |  | Digital         |  | Yes           |  | 100.0%          |  | 2001          
|Fine Living(1)                         |  | Digital         |  | No            |  | 67.0%           |  | 2004          
|Channels We Do Not Operate:            |  |                 |  |               |  |                 |  |               
|The Score(2)                           |  | Analog          |  | Yes           |  | 22.3%           |  | 1997          
|Historia(3)                            |  | Analog          |  | Yes           |  | 50.0%           |  | 2000          
|Series+(3)                             |  | Analog          |  | Yes           |  | 50.0%           |  | 2000          
|ONE: The Body, Mind and Spirit Channel |  | Digital         |  | Yes           |  | 29.9%           |  | 2001          
|Scream                                 |  | Digital         |  | No            |  | 49.0%           |  | 2001          

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Notes:

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Total paid subscribers for the specialty channels in which the Company holds a controlling ownership grew 10.1% to 40.2 million subscribers
at December 31, 2005 compared to 36.5 million subscribers at December 31, 2004, which was 9% more subscribers than at December 31, 2003.

Set
out below is a short description of each of the analog specialty channels the Company operates and has a controlling interest in:



Revenue
from our analog channels was $240.6 million for 2005, an 11.7% increase over the revenue for the year ended December 31, 2004 which was $215.4 million.
(Pro forma) revenue from our analog channels for the year ended December 31, 2003 was $188.7 million.

Set
out below is a short description of each of the digital specialty channels the Company operates and has a controlling interest in:



The
Company has signed carriage agreements for all of its digital channels which have resulted in each of them being available to almost every digital household in Canada. Our digital
channels enjoy strong subscriber levels, each with between 950,000 and 1.3 million subscribers (with the exception of Fine Living Canada which launched later than the other channels).

For
the year ended December 31, 2005, the revenue for our digital specialty television channels increased by $12.3 million or 40.3% from $30.5 million to
$42.8 million. (Pro forma) revenue for our digital specialty channels for the year ended December 31, 2003 was $23.1 million. Subscriber revenue for our digital channels
increased by 35.1% for the year ended December 31, 2005 compared to 2004 partially due to a retroactive adjustment payment from one of the Company's BDUs. Advertising revenue for the digital
channels increased by 61.7% for the year ended December 31, 2005 compared to 2004.

In
addition to the specialty channels the Company owns an interest in, and which are currently operating, the Company also holds licences for several Category 2 digital services.
In 2005 the Company reapplied and received licences for five Category 2 digital services: D.I.Y. Television, Parent TV, ZTV, Military Television and Girls TV.

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Entertainment

The Entertainment segment is the television production and distribution business of the Company. The Company co-owns and co-produces the
highly successfulCSIfranchise, in partnership with CBS Productions. The Company also distributes the CSIfranchise in all territories outside the
United States. It also acquires and distributes television programs to broadcasters worldwide,
video/DVD distributors, and sub-distributors throughout the world.

Over
the past five years the Company has virtually exited its capital-intensive production activities, with the exception of theCSIfranchise. See "General Development of the Company's Business  Reorganizations  Restructuring of the Entertainment
Business". In fiscal 1999, the Company delivered over 325 hours of prime-time drama production, none of which was part of theCSIfranchise. In the year ended December 31, 2005, the Company produced 72 hours of prime-time drama, all of which related to the CSIfranchise.

CSI: Crime Scene Investigation, now in its sixth season with over 132 episodes delivered, has been the #1 dramatic series on
U.S. television for the 2005/06 Broadcast Season(6), with an average weekly audience of more than 25.8 million viewers for initial episode telecasts. CSI: Miami, now in its
fourth season with over 88 episodes delivered, has been one of the top five dramatic series on U.S. television, and
remains the #1 show on Monday nights for the 2005/06 Broadcast Season(7).CSI: Miamiwas named in February, 2006 as 2005's
biggest hit television series on a global basis(8).CSI: NY, now in its second season, was the #1 new show for CBS during the
2004/05 Broadcast Season, and has been the #1 show for its timeslot this season(9). The Company continues to aggressively license this valuable franchise in all available
international markets.

The
Company also licenses its library of approximately 1,000 titles representing approximately 5,500 hours of programming rights to broadcasters, distributors and other
users in various territories throughout the world.

Entertainment
revenue increased to $341.5 million for the year ended December 31, 2005 from $258.7 million for the year ended December 31, 2004. This
represents an increase of $82.8 million or 32%. (Pro forma) Entertainment revenue for the year ended December 31, 2003 was $260.7 million.

Motion Picture Distribution



In October 2003, we transferred substantially all of the assets and certain liabilities of our motion picture distribution business into
Distribution LP in exchange for subordinated units of Distribution LP, ordinary units of Distribution LP and a promissory note. Distribution LP is a leading distributor of
motion pictures in Canada, with a growing presence in the United Kingdom through Momentum Pictures ("Momentum") and Spain through Aurum
Producciones, S.A. ("Aurum"). We indirectly own a 51% limited partnership interest in Distribution LP. Movie Distribution Income Fund
(the "Fund"), which trades on the TSX under the symbol FLM.UN, indirectly owns a 49% limited partnership interest in Distribution LP.
Monthly cash distribution on the units of the Fund are paid out of the distributable cash generated by the motion picture distribution business of Distribution LP.

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Pursuant to the terms of the securityholders' agreement, we are entitled to appoint a majority of the board of directors of Motion Picture
Distribution Inc., the general partner of Distribution LP (the "General Partner") as long as we own at least a 50% interest in
Distribution LP. Also, as long as we own, directly or indirectly, at least 331/3% of the outstanding units of Distribution LP, we have certain approval rights with respect
to significant transactions contemplated by Distribution LP.



In addition to Distribution LP having its own senior management team, we continue to have an ongoing business relationship with Distribution LP.
Five of the nine directors of the General Partner are nominees of Alliance Atlantis, including the Chief Executive Officer and Chief Financial Officer of Alliance Atlantis. See
" Recent Developments  Management & Board Changes  The General Partner". The Fund and
Distribution LP are able to draw upon the industry knowledge of our management personnel. Management of Distribution LP has met at least annually with managers in our Broadcasting
business, in order to determine Broadcasting's content requirements that may be satisfied by purchases from Distribution LP's motion picture catalogue. The commercial arrangements for acquiring
this content are on market terms and are negotiated on an arm's length basis.



Pursuant to the terms of an administrative services agreement which we entered into with the General Partner and Distribution LP, we will continue to
provide those management, administrative and support services to the General Partner, Distribution LP and its subsidiaries that we provided to our motion picture distribution business prior to
its transfer to Distribution LP.



Distribution LP generates revenue from the theatrical distribution of motion pictures, the licencing of rights to motion pictures and television programs
to conventional and specialty broadcasters, the sale of DVDs and video cassettes, and from the exhibition of motion pictures through its cinemas. Distribution LP does not produce motion
pictures. Over each of the past five years Distribution LP has released an average of 81 theatrical motion pictures and 186 DVD titles in Canada. By releasing a large number of
motion pictures through multiple distribution platforms, Distribution LP creates a diversified portfolio of releases. It also distributes a catalogue of approximately 5,000 titles. This
library is available for exploitation in DVD, television and other media.

Distribution LP
obtains distribution rights for motion pictures through agreements with production companies, primarily output agreements. In Canada, Distribution LP has
exclusive output agreements with a diverse group of leading independent studios, including New Line Cinema, The Weinstein Company, Focus Features, Miramax Films, IFC Films and Remstar. It also
obtains distribution rights for motion pictures from independent producers and distributors in the United States, Canada and around the world. In Europe, Momentum and Aurum primarily acquire
rights for motion pictures one motion picture at a time and have entered into multi-jurisdictional and multi-picture agreements. Motion Picture Distribution typically distributes those motion pictures
for theatrical exhibition, for home entertainment, television viewing and ancillary markets.

Distribution LP
also holds a 51% interest in Alliance Atlantis Cinemas, a partnership with Cineplex Entertainment LP that currently operates three movie cinemas in Toronto.
During the year ended December 31, 2005, Distribution LP and its cinemas business partner closed one and sold two of the cinemas formerly owned and operated by the partnership.

Monthly
cash distributions to owners of the units of Distribution LP are paid out of the distributable cash generated by the business. As noted above, a portion of our 51%
interest in Distribution LP is in the form of subordinated units. If the funds available for distribution to limited partners of Distribution LP are insufficient, the subordinated units
would have their distribution reduced to zero before ordinary units would have their distributions reduced at all.

9

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For
more information on Distribution LP's business and on the arrangements between us and Distribution LP, see the 2005 Annual Information Form of the Fund available on
SEDAR at www.sedar.com. That Annual Information Form is not incorporated by reference into this document.

Reorganizations



In December 2003, the Company conducted an extensive review of its Entertainment operations and concluded that it would significantly reduce the size and
scope of its production business, eliminate certain functions and certain categories of production, reduce its staffing levels and close certain offices. As a result, the Company has virtually exited
its capital-intensive production activities, with the exception of theCSIfranchise. Since then the Company has largely focused on the acquisition of
distribution and other rights to content, rather than in-house production.

As
part of the restructuring, we reduced our staffing in Entertainment by approximately 70 positions and closed production-related offices in Toronto, Edmonton, Halifax, Vancouver
and London, England. We also streamlined our operating structure during 2004 to reflect our decision to exit virtually all in-house production and focus on growth in the broadcast sector.
The new operating structure combined the Broadcast, Entertainment and Corporate segments into one integrated entity. It did not affect Distribution LP.



On March 18, 2005, the Company completed a re-organization with four individual shareholders to simplify their holdings by converting certain
of the Company's Class A Voting Shares held indirectly by them into Class B Non-Voting Shares held directly by three of the shareholders. Consistent with the structure of the
previous holding company, as a result of the re-organization, two of the individual shareholders will continue to jointly control the Company through a holding company that holds
670,995 Class A Voting Shares of the Company, representing 66.7% of the Class A Voting Shares outstanding.

The
re-organization was the final step in a series of transactions that commenced in December 2003 when two of the individual shareholders, who were former senior
officers of the Company, ceased to be employed by the Company. Their departure triggered certain obligations under contractual arrangements between the four individual shareholders, including the
obligation to sell or convert certain of their shares in the Company.

The
reorganization was reviewed and approved by the Company's Corporate Governance and Nominating Committee composed of three independent directors, as well as Alliance Atlantis's board
of directors. The Company received regulatory approvals for the re-organization from the CRTC, the Ontario Securities Commission ("OSC"),
the TSX and the NASDAQ National Market ("Nasdaq").

Significant Acquisitions

On May 12, 2004, a subsidiary of Distribution LP acquired Aurum for a purchase price of $55.2 million including $1.8 million in cash
expenses and a Business Acquisition Report ("BAR") was filed in August 2004. On December 30, 2005 the Fund on behalf of
Distribution LP filed an amended and revised BAR relating to its acquisition of Aurum. The amendments to the BAR related primarily to adjustments to the financial statements for periods prior
to the acquisition to properly reflect liabilities and certain related party transactions that were improperly accrued. Distribution LP is pursuing a number of matters related to the
acquisition of Aurum and recovery of certain amounts. The amounts being claimed represent a significant portion of the purchase price and relate primarily to misrepresentation of financial and other
information contained in the agreement of purchase and sale. Any recovery will result in a change in the purchase price allocation.

10

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An
arbitration procedure under the rules of the London Court of International Arbitration has been initiated pursuant to the terms of the agreement of purchase and sale.
Distribution LP expects to have a determination from the arbitration during 2006.

Recent Developments





The changes below were made to the senior management and Board structure of the General Partner of Distribution LP and became effective as of
February 1, 2006, unless otherwise indicated.



11

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For
more information on recent developments regarding Distribution LP, see the 2005 Annual Information Form of the Fund available on SEDAR at www.sedar.com. That Annual
Information Form is not incorporated by reference into this document.

COMPETITION

The businesses of operating specialty television channels, producing and distributing television programs and distributing motion pictures is highly competitive.
The Company faces intense competition from other Canadian and international broadcasters, producers and distributors, many of whom are substantially larger and have greater financial resources than
the Company.

Broadcasting

The Company directly competes for subscriber and advertising revenues with other operators of television channels in Canada, including Canwest Global, Bell
Globemedia, CHUM Group, CBC, Astral Communications Inc., Corus Entertainment and Quebecor Inc. The specialty television market is also fairly consolidated, with the top six operators,
the Company, CHUM, Corus, Rogers, Bell Globemedia and Astral Media, accounting for approximately 80% of the industry's total revenues in the 2004 Broadcasting Year. As the CRTC licenses or authorizes
carriage of additional television channels in Canada, the television audience is further fragmented, increasing competition for viewers and advertising dollars and creating downward pressure on
program licence fees. The launch of approximately 50 new digital specialty services in 2001 resulted in an increase in these competitive pressures.

The
emergence of new technologies: video on mobile phones, video streaming over the Internet, and downloads of video content to portable devices may increase the competition the Company
faces and provide opportunities as well. See "Industry Overview  Broadcasting  New Digital Products and Services".
The emergence of VOD services by cable companies and certain channels will present additional competition to the Company's specialty television channels. VOD services allow digital cable subscribers
to select video content which is then downloaded to a digital set-top box for viewing. Should these content experiences include the content available on the Company's specialty channels,
it would diminish the value of the Company's programming investment and potentially the viewing audience.

12

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The
Company's specialty television services also face competition from "grey market" and "black market" satellite services that broadcast unauthorized programming.

Entertainment

The business of producing and distributing television programs is highly competitive. We face intense competition from other producers and distributors, including
the Hollywood studios, many of which are substantially larger and have greater financial resources than we do and some of which own their own television networks. The Company also competes with other
television and production companies for ideas and story lines created by third parties as well as for actors, directors and other personnel required for production.

Motion Picture Distribution

The major U.S.-based motion picture studios are Distribution LP's main competitors in Canada. All other Canadian motion picture distributors in the
aggregate have historically represented less than a 10% share of theatrical box office receipts. In the United Kingdom and Spain, where Distribution LP's market share is smaller, its
main competitors also include several locally-based independent distributors in addition to the U.S.-based studios.

REGULATION

Broadcasting

All of the specialty television services we own and operate or have ownership interests in are regulated by the CRTC pursuant to the Broadcasting
Act(Canada) (the "Broadcasting Act") and the relevant regulations enacted
thereunder, including the Specialty Services Regulations, 1990 (the "Specialty Regulations"). Under the Broadcasting Act, the CRTC is responsible
for regulating and supervising all aspects of the Canadian broadcasting system with a view to ensuring compliance with certain broadcasting policy objectives set out in the Broadcasting Act.



The CRTC is empowered under the Broadcasting Act to issue licences. Typically, the CRTC issues licences with terms of up to seven years and will only issue
licences to operate television channels to eligible entities. It also has the power to renew, suspend or revoke licences and to consider amendments to licence conditions. Licensees must comply with
the Broadcasting Act and its regulations, conditions and expectations established in their licence, and the general policies and decisions of the CRTC as issued from time to time. However, licence
conditions may be changed by the CRTC upon renewal.

13

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The table below sets out the specialty channels the Company owns and operates and the expiry date of each channel's licence.

|Specialty Channel           |  | Licence Expiry Date
|--------------------------- |  | -------------------
|Showcase                    |  | August 31, 2007    
|Life Network                |  | August 31, 2007    
|History Television          |  | August 31, 2010    
|HGTV Canada                 |  | August 31, 2010    
|Food Network Canada         |  | August 31, 2006    
|Showcase Action             |  | August 31, 2007    
|Showcase Diva               |  | August 31, 2007    
|National Geographic Channel |  | August 31, 2007    
|BBC Canada                  |  | August 31, 2007    
|BBC Kids                    |  | August 31, 2007    
|Discovery Health Channel    |  | August 31, 2007    
|IFC Canada                  |  | August 31, 2007    
|Fine Living Canada          |  | August 31, 2007    

The
renewal application for Food Network has been filed with the CRTC. The renewal applications for Life Network, Showcase and the Company's eight digital specialty channels will be
filed during 2006. The licences for the analog French-language specialty channelSeries+andHistoria,in which the Company holds a 50% equity interest, but does not operate, were each renewed during 2005 for a seven year term.

The
conditions of licence for all specialty services, among other things, restrict the types of programming the service may exhibit, and contain minimum Canadian content exhibition
requirements. The percentage of programming that must be Canadian varies with each channel depending on a number of factors, including the nature of the service, and are generally highest for our
English-language analog services and lowest for our Category 2 digital specialty channels. Canadian analog and Category 1 digital services are also required under their conditions of
licence to spend a minimum percentage of the previous year's revenues on Canadian programming.

Conditions
of licence for most of the Company's analog and Category 1 digital services also have obligations to acquire a certain amount of Canadian programming from unrelated
production companies (defined as ones in which the licensee or any of its shareholders owns less than 30% of the equity).

We
believe that each of our licences is in full compliance with all the conditions of licence and all applicable legislation and regulations and that all licences will be renewed when
they come due. The CRTC may, however, impose different conditions at the time of renewal which cannot be anticipated and may have an impact on the profitability of the affected specialty television
service.



On February 28, 2006, the CRTC released its digital migration framework. That framework has been designed to maximize the benefits and encourage the
rollout of digital technology, while ensuring that individual analog services are not unduly affected during the transition period over the next four to seven years and that such individual analog
services can continue to make significant contributions to the broadcasting system.

The
digital migration framework evolved from a CRTC process which began in January 2005. Canada's major broadcasters including the Company and Rogers Cable
Communications Inc., Canada's largest BDU, developed a consensus position and memorandum of understanding on the rules that should guide digital migration. The submission by all these parties
encouraged the CRTC to adopt these transition principles so that they may serve as a template for other BDUs. The CRTC stated in its digital migration framework decision that the memorandum of
understanding offered a useful reference point and commended it as a model for negotiations between individual programmers and BDUs.

While
the CRTC has taken a balanced approach to the transition in its digital migration framework, there are risks for operators of analog specialty services because the framework allows
for standalone offerings of analog services by BDUs. There is a risk that current subscribers to one or more of the Company's analog channels who currently receive the channel as part of a cable tier
may not choose to subscribe to the Company's channels once they are available in digital format and as new packaging options become available to them.

14

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The federal government has issued a direction (the "Direction") to the CRTC not to issue broadcasting
undertaking licences to, or renew broadcast undertaking licences issued to, applicants who are not "Canadian" within the meaning of the Direction. Pursuant to the Direction, a corporation is deemed to
be "Canadian" if (a) it is incorporated or continued under the laws of Canada or a province thereof; (b) the chief executive officer is a resident Canadian; (c) not less than 80%
of the directors are resident Canadians; (d) Canadians beneficially own and control not less than 80% of the issued and outstanding voting shares and not less than 80% of the votes; and
(e) it is not otherwise controlled in fact by non-Canadians, a question of fact which may be determined by the CRTC in its discretion.

Where
a licensee is a subsidiary corporation, its parent corporation must also be incorporated or continued under the laws of Canada or a province thereof and Canadians must beneficially
own and control not less than 662/3% of the issued and outstanding voting shares and not less than 662/3% of the votes. In addition, unless Canadians own and control not
less than 80% of the issued and outstanding voting shares and not less than 80% of the votes of the parent corporation and unless its chief executive officer and 80% of its directors are resident
Canadians, neither the parent corporation, nor its directors, may exercise any control or influence over any programming decisions of the licenced subsidiary. Alliance Atlantis is not a direct
licensee of any specialty television channel, but is the parent of subsidiary licensee corporations.

In
order to ensure that we and our licenced subsidiaries comply with the requirements of the Direction, our articles include provisions pursuant to which our directors may refuse to
allow the issue or to register the transfer of any of our shares, where such issuance or transfer would, in their opinion, negatively affect our rights or those of our subsidiaries to obtain, maintain
or renew any CRTC licence. See "Description of Share Capital  Class A Voting Shares and Class B Non-Voting Shares".



The CRTC also imposes restrictions on the transfer of ownership and control of specialty television channel licences. Pursuant to the Specialty Regulations, a
holder of a specialty television channel licence must obtain prior approval of the CRTC with respect to any act, agreement or transaction that directly or indirectly would result in a material change
of ownership or effective control of the licensee, or of a person who has, directly or indirectly, effective control of the licensee. Transferees of ownership or control of a licensee must demonstrate
to the CRTC that the transfer is in the public interest and are required to provide a specific package of tangible benefits to the Canadian broadcasting system and the communities served by the
licensee representing a financial contribution of 10% of the value of the transaction as accepted by the CRTC.



Under CRTC regulations, a television licensee may generally broadcast a maximum of twelve minutes of advertising in each clock hour. Where the program occupies
time in more than one clock hour, the advertising minutes may be averaged over the course of the broadcast hours during which the program airs. Unpaid public service announcements and promotions of
Canadian programming are not considered advertising time under the CRTC regulations. In addition, certain advertising content is regulated by the CRTC and by various other legislation and regulations,
as well as by industry codes and standards.

As
an incentive to induce Canadian broadcasters to broadcast more original Canadian dramatic programming, the CRTC introduced an incentive program in 2004 which provides broadcasters
with additional advertising minutes for each additional hour of original Canadian programming it airs over the amount mandated by its licence. The broadcaster is entitled use them to add commercial
time to any programming it chooses, including non-Canadian programming, provided that no more that fourteen minutes of advertising may be broadcast in each hour. Each of Showcase,History Television,IFC Canadaand BBC Canadahas been granted the additional condition of licence necessary to access
this incentive program.

15

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For any service carried as part of the basic cable package, the rates that may be charged to subscribers are regulated by the CRTC and set forth as a condition of
licence. Most cable systems in Canada carry one or more of our analog services as part of their basic package.



Canadian copyright collectives representing copyright owners of music are entitled to collect royalties in respect of the music broadcast on our services. These
royalties are established by the Copyright Board and paid by broadcasting services and BDUs, as set forth in theCopyright Act(Canada). The Copyright
Board released during 2005 its decision on royalties payable to the Society of Composers, Authors and Music Publishers of Canada ("SOCAN") for the
performance of music by specialty television services for the years 2001 - 2004. In previous years, the Tariff 17 royalty was calculated using the aggregate revenues
of all specialty services to arrive at a rate per subscriber payable on the total number of subscribers of BDUs. In its 2005 decision, the Board changed its method of calculating royalties to one
based on a percentage of each individual service's revenues. Although the overall Tariff 17 royalty amount payable to SOCAN has increased, we anticipate the change in calculation will result in
a small reduction in the proportionate amount of the Tariff 17 royalty payable in respect of our services. In the future, our Tariff 17 royalty obligations could increase or decrease
depending on the decision of the Copyright Board, the outcome of negotiations with SOCAN on royalties payable after 2004, or the outcome of negotiations with BDUs.

Motion Picture Distribution

In most Canadian provinces and territories, a licence to engage in the motion picture distribution business must be obtained from applicable provincial regulatory
authorities. In all of these jurisdictions, other than Québec, there are limited requirements associated with the issue and renewal of such licences. Pursuant to the Cinema Act(Québec),
only companies whose "principal place of business" is located in Québec can hold a general
distribution licence in Québec. Distribution LP's Vivafilm subsidiary was granted a general distribution licence in 1998.

Under
theInvestment Canada Act(Canada) an application must be made to each of the Ministry of Canadian Heritage and the Investment
Review of Industry Canada in respect of proposed investments or acquisitions in excess of $5 million that could result in the foreign ownership and control of Canadian cultural businesses,
including motion picture distribution. If the proposed investment or acquisition is for less than $5 million, a notification must be sent to each of the Ministry of Canadian Heritage and the
Investment Review of Industry Canada. These restrictions on foreign ownership
and control do not preclude a non-Canadian (including a U.S.-based studio) from distributing a motion picture produced by that person or its affiliates.



The Canadian federal government's financing support to the Canadian film industry is provided through the "Canada Feature Film Fund". Financing is available to
motion picture distributors for Canadian theatrical release costs ranging from test marketing and campaign creation to prints and advertising. Financing provided by Telefilm Canada pursuant to the
Canada Feature Film Fund is in the form of a non-interest bearing advance of up to 75% of the eligible Canadian marketing costs for the release of the film.

16

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INTELLECTUAL PROPERTY

We use a number of trademarks for our products and services as well as trademarks, logos and other representations of characters used in our productions. Many of
these trademarks are registered by us and those trademarks that are not registered are protected by common law. We have taken affirmative legal steps to protect our trademarks and we believe our
trademark position is adequately protected. We also believe that our trademarks are generally well recognized by consumers of our products and are associated with a high level of quality and value.
Through our partnerships with owners of some of the leading channel brands in the world, we have licensed the use of certain trademarks and related intellectual property rights for our specialty
channels from National Geographic, the BBC and Discovery Communications.

In
October 2003, we entered into a trademark licence agreement with the Fund and Distribution LP pursuant to which Distribution LP and the Fund have been granted a
licence by us to use certain of our trademarks for use only in connection with the distribution and exhibition of motion pictures.

Distribution
rights to television programming and motion pictures are granted legal protection under the copyright laws of Canada, the United States and most foreign countries,
which impose substantial civil and criminal sanctions for unauthorized duplication and exhibition of motion pictures and television programming. From time to time, various third parties contest or
infringe upon our intellectual property rights. We believe that we take, and plan to continue taking, all appropriate and reasonable measures to secure, protect and maintain or obtain agreements from
licensees to secure, protect and maintain copyright protection for all of the motion pictures and television programming produced and distributed by us under the laws of all applicable jurisdictions.
We can give no assurance that our actions to establish and protect our trade-marks and other proprietary rights will be adequate to prevent imitation or copying of our filmed entertainment by others
or to prevent third parties from seeking to block sales of our filmed entertainment as a violation of their trade-marks and proprietary rights.

Moreover,
we can give no assurance that others will not assert rights in, or ownership of, our trade-marks and other proprietary rights, or that we will be able to successfully resolve
these conflicts. In addition, the laws of certain foreign countries may not protect proprietary rights to the same extent as do the laws of the United States or Canada. See "Risk Factors".

PROPERTIES AND FACILITIES

We have offices in Toronto and Montreal (Canada), Los Angeles (U.S.), Sydney (Australia), London (England), Dublin (Ireland) and Madrid and Barcelona (Spain). Our
corporate head office is located at 121 Bloor Street East, Suite 1500, Toronto, Ontario, Canada. We believe that our properties are in good condition and sufficient for our purposes.

As
of December 31, 2005, we leased the following properties:

|Address                                                            |  | Amount of Space |  | Expiration Date           
|------------------------------------------------------------------ |  | --------------- |  | --------------------------
|121 Bloor Street East, Suite 1500
Toronto, Ontario
M3W 3M5, Canada |  | 163,546 sq. ft. |  | June 2018                 
|175 Bloor Street East
Toronto, Ontario
M4W 3V3, Canada             |  | 65,000 sq. ft.  |  | March 2006  December 2006
|65 Heward Avenue
Toronto, Ontario
M4M 2T5, Canada                  |  | 50,185 sq. ft.  |  | March 2006 & March 2009   

17

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|Address                                                                  |  | Amount of Space |  | Expiration Date
|------------------------------------------------------------------------ |  | --------------- |  | ---------------
|255 St.-Antoine West, Suite 300
Montreal, Quebec
H2Z 1J1, Canada         |  | 12,325 sq. ft.  |  | November, 2015 
|1649 Brunswick Street, Suite 103
Halifax, Nova Scotia
B3J 2A2, Canada    |  | 1,000 sq. ft.   |  | December, 2007 
|5091 Terminal Road
Halifax, Nova Scotia
B3J 2A2, Canada                  |  | 66,415 sq. ft.  |  | November, 2007 
|808 Wilshire Blvd., Suite 300
Santa Monica, California
90401-1810 U.S.A. |  | 32,027 sq. ft.  |  | February, 2006 
|184-192 Drummond Street
Second Floor
London NW1 3HP England              |  | 6,820 sq. ft.   |  | January, 2008  
|21-22 Warwick Street
Third Floor
London W1B 5NF England                  |  | 1,300 sq. ft.   |  | December, 2010 
|40 Westland Row
Dublin, Ireland                                          |  | 5,000 sq. ft.   |  | September, 2006
|401 Darling Street, Suite 2
Balmain, Sydney NSW 2041
Australia           |  | 1,535 sq. ft.   |  | June, 2008     
|12 Avenida de Burgos
Floors 10 and 11
Madrid, Spain                      |  | 9,700 sq. ft.   |  | November, 2006 
|Rambla de Catalunya 98
Third Floor
Barcelona, Spain                      |  | 330 sq. ft.     |  | February, 2008 

Effective
February 3, 2006, we moved our Santa Monica Office from the address noted above to 1543-7th Street, 3rd Floor, Santa Monica,
California 90401 where we have leased approximately 4,800 square feet. The current lease expires in November, 2015.

Effective
February 13, 2006 we have established an office in New York City located at 1120 Avenue of the Americas, 4th Floor, New York, NY
10036 where we have leased approximately 300 square feet on a month to month basis.

Information
regarding additional properties leased by Distribution LP, through the Alliance Atlantis Cinemas partnership may be found in the 2005 Annual Information Form of the
Fund available on SEDAR at www.sedar.com. That Annual Information Form is not incorporated by reference into this document.

EMPLOYEES

As at December 31, 2005, we employed 788 full-time employees in Canada, the United States, Europe and Australia broken down by
business segment as follows:

18

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|Broadcasting                |  | 388
|--------------------------- |  | ---
|Entertainment               |  | 75 
|Motion Picture Distribution |  | 198
|Corporate and Other         |  | 127
|                            |  |    
|Total:                      |  | 788
|                            |  |    

In
July, 2005, the Canadian Media Guild applied for certification of a bargaining unit comprising approximately 100 of our employees in the Operations area of our Broadcasting business.
Pursuant to a secret ballot conducted by the Canadian Industrial Relations Board on December 7, 2005, a majority of those employees who voted elected to have the Canadian Media Guild represent
them as their bargaining agent for the purpose of collective bargaining with the Company. We have not as of the date hereof been served with notice to bargain.

In
addition, like any entertainment company, from time to time we employ the services of a variety of individuals, many of whom are engaged under collective bargaining agreements
negotiated with various guilds and unions.

DIRECTORS AND OFFICERS

Board of Directors

As of December 31, 2005, the board of directors of Alliance Atlantis consisted of 12 directors. During 2005 two persons were appointed to Alliance
Atlantis's board of directors: Robert Steacy was appointed to the Board effective as of March 30, 2005; and Ms. Yaffe was appointed to the Board on November 10, 2005. Subsequent
to the year end, on March 2, 2006, Rupert Duchesne was added to increase the Board to 13 directors. Pierre DesRoches has informed the Board that he wishes to retire from the Board and
therefore will not stand for re-election at the Company's 2006 Annual General Meeting of Shareholders ("AGM"). Each of our directors holds
office until the next annual meeting of our shareholders or until a successor is elected or appointed. Our board of directors has established an Audit Committee, an Executive Committee, a Corporate
Governance and Nominating Committee ("CG Committee") and a Human Resources and Compensation Committee ("HR
Committee"). Particulars relating to each of the directors, as well as their memberships on Board committees, are set out below. Each of the directors has held the principal
occupations listed below for the preceeding five years except where otherwise noted.

|Director                                 |  | Director Since |  | Committee Memberships
|---------------------------------------- |  | -------------- |  | ---------------------
|ANTHONY F. GRIFFITHS(1)(2)
Lead Director |  | January 1996   |  | Audit
Executive      

Anthony
Griffiths resides in Toronto, Ontario. Since 1993, Mr. Griffiths has been associated with various companies acting as an independent consultant. Mr. Griffiths is the Chairman of
the board of directors of Russel Metals Inc. and Novadaq Technologies Inc. Mr. Griffiths is also a director of Jaguar Mining Inc., Vitran Corporation, Fairfax Financial
Holdings Limited, Northbridge Financial Corporation, PreMD Inc., Hub International Limited, Lindsey Morden Group Inc. and Odyssey Re Holdings Corp. Formerly, Mr. Griffiths was
President and Chief Executive Officer of Jonlab Investments, Chairman and Chief Executive Officer of Canadian Cablesystems Ltd., Chairman, President and Chief Executive Officer of Mitel Corp
and Vice Chairman and Chief Executive Officer of Harding Carpets.

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|Director         |  | Director Since |  | Committee Memberships
|---------------- |  | -------------- |  | ---------------------
|PIERRE DESROCHES |  | September 1995 |  | CG                   

Pierre
DesRoches resides in Saint Lambert, Quebec. Mr. DesRoches is a business consultant to the communications industry. Over the last several years he has provided advice to the Department of
Canadian Heritage, the Canadian Broadcasting Corporation and the Société des entreprises culturelles de Québec. Formerly, Mr. DesRoches was the
Executive Director of Telefilm Canada, the Executive Vice President of the Canadian Broadcasting Corporation, the President of the North American National Broadcasters Association and the President of
the French-speaking community of public broadcasters. Mr. DesRoches has been a director of Telesat Canada, the Montreal Opera Company and the Banff Television Festival. He has been honoured by
the French government who named him officier of l'Ordre des arts et des lettres de France.

|RUPERT DUCHESNE(3) |  | March 2006 |  | None
|------------------ |  | ---------- |  | ----

Rupert
Duchesne resides in Montreal, Quebec. Mr. Duchesne is the President & Chief Executive Officer of Aeroplan GP and the Aeroplan Income Fund which was spun-off by
ACE Aviation Holdings in an IPO in June 2005. He has been President and Chief Executive Officer of Aeroplan since August 2000. Prior to his current position, Mr. Duchesne served
as Chief Integration Officer, overseeing the merger of Air Canada and Canadian Airlines International. He has also served Air Canada as Senior Vice President, International and Vice President,
Marketing. He is a member of the Board of Trustees of the Art Gallery of Ontario where he was recently elected Vice President of the Board, is a member of the Executive Committee, and chairs the
Public Affairs Committee. He is also a member of the Boards of the NeuroScience Canada Partnership and NeuroScience Canada Foundation.

|HAROLD "SONNY"
GORDON, Q.C. |  | December 1992 |  | CG
|--------------------------- |  | ------------- |  | --

Sonny
Gordon resides in Sunny Isles, Florida. In November 2001, Mr. Gordon was appointed Chairman of the board of directors of Dundee Corporation (formerly, Dundee Bancorp Inc.)
Mr. Gordon has previously worked as a special assistant to a Minister of the Federal Government of Canada, was a managing partner of Stikeman Elliott LLP during his 28-year
career as a practicing lawyer and was most recently Vice Chairman of Hasbro Inc. Mr. Gordon serves as a director of Dorel Industries Limited, Dundee Corporation, PetHealth Inc.,
Madacy Holding Inc. and Transcontinental Limited and is Chairman of the Sauve Scholars Foundation.

|ELLIS JACOB |  | December 1992 |  | Audit  Chair
Executive
|----------- |  | ------------- |  | -----------------------

Ellis
Jacob resides in Toronto, Ontario. Mr. Jacob is the President and Chief Executive Officer, and Director, General Partner of Cineplex Entertainment LP, Canada's largest motion
picture exhibitor. From 1999 to November 2003, Mr. Jacob was the Chief Executive Officer and co-founder of Galaxy Entertainment Inc., a movie theatre circuit
concentrated in mid-size Canadian markets. From September 1998 to October 2000, Mr. Jacob was a consultant to the Company and prior to September 1998,
Mr. Jacob was the Executive Vice President and then Chief Operating Officer of Cineplex Odeon Corporation. Mr. Jacob is a director of the Toronto International Film Festival Group, the
Motion Picture Theatre Associations of Canada and various charitable boards and committees.

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|Director            |  | Director Since |  | Committee Memberships
|------------------- |  | -------------- |  | ---------------------
|ALLEN KARP, Q.C.(4) |  | March 1992     |  | Executive
HR  Chair 

Allen
Karp resides in Toronto, Ontario. Mr. Karp is currently a director of several companies. Mr. Karp was a partner in the law firm of Goodman and Carr LLP, where he practiced
law from 1966 until 1986. Mr. Karp had been with Cineplex Odeon Corporation since 1986, where he retired as Chairman and Chief Executive Officer in 2002; and as Chairman Emeritus in 2005.
Mr. Karp: sits on the board of directors of Teknion Corporation, where he is lead director and sits on all major committees; is a Trustee of Royal LePage Franchise Services Fund and a director
of its management company, the Chair of its corporate governance committee and sits on the audit committee; is Chairman of IBI Income Fund and is Chair of the corporate governance committee; is a
Director of TuCows Inc. and sits on the audit committee; and is Chairman of the Toronto International Film Festival Group and a member of all major committees.

|DAVID J. KASSIE |  | December 1992 |  | Executive
HR
|--------------- |  | ------------- |  | ------------

David
Kassie resides in Toronto, Ontario. Mr. Kassie is a Principal, Chairman and Chief Executive Officer of Genuity Capital Markets. He was the Chairman of Carem Merchant Bank in 2004. Prior
to February, 2004, he was the Chairman and Chief Executive Officer of CIBC World Markets and the Vice Chairman of CIBC. Mr. Kassie has extensive experience as an advisor, underwriter and
principal. Mr. Kassie is actively involved in community and charitable organizations and is on the board of directors of the Shoah Foundation, the Hospital for Sick Children and the Ivey School
of Business. He is a past board member of Women in Capital Markets and he was: Chairman of the University of Guelph Campaign; and was the Patrons' Council Chair for An Evening with Rudolph Giuliani in
November, 2002.

|MICHAEL I. M. MACMILLAN |  | May 1978 |  | Executive  Chair
|----------------------- |  | -------- |  | -----------------

Michael
MacMillan resides in Toronto, Ontario. Mr. MacMillan is the Executive Chairman of Alliance Atlantis. Up until June 2005, Mr. MacMillan was also the Chief Executive Officer
of Alliance Atlantis. Mr. MacMillan has served on various corporate boards and has participated in a number of community focused organizations over many years. He is currently on the boards of
the Canadian Club of Toronto, the Ontario Trillium Foundation and the Toronto International Film Festival, and is a Vice-Chair of Upper Canada College.

|DR. MARGOT NORTHEY |  | September 2001 |  | Audit
HR
|------------------ |  | -------------- |  | --------

Dr. Margot
Northey resides in North Saanich, British Columbia. Dr. Northey was a Professor and Dean of Queen's School of Business at Queen's University in Kingston, Ontario from
September 1995 to June 2002. Dr. Northey is currently on the Board of Directors of Stressgen Biotechnologies, Norbord Inc., British Columbia Transmission Corp., Wawanesa
Insurance Company and Fraser Papers Inc. Dr. Northey has been a Vice President of the International Association of Business Communicators and a Director of the Association to Advance
Collegiate Schools of Business. Dr. Northey has also served on the selection committee for the CEO of the Year Award and for the Ontario Rhodes Scholarships. Dr. Northey is the author of
five books and many articles.

21

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|Director           |  | Director Since |  | Committee Memberships
|------------------ |  | -------------- |  | ---------------------
|BARRY J. REITER(5) |  | September 1993 |  | CG  Chair
Executive 

Barry
Reiter resides in Toronto, Ontario. Mr. Reiter is a senior partner, Chairman of the Technology Group and Co-Chair of the Corporate Governance practice of Torys LLP, a
law firm based in New York and Toronto. Mr. Reiter is also a director of Avotus Corporation, Skypower Corporation, RBC Technology Ventures Inc., Park Avenue Investment
Corporation, Motion Picture Distribution Inc., and 724 Solutions Inc., and is a member of the Advisory Board of Hunter Keilty Muntz & Beatty and the Centre for Innovation
Law and Policy.

|DONALD R. SOBEY |  | September 1996 |  | Audit
HR
|--------------- |  | -------------- |  | --------

Donald
Sobey resides in Stellarton, Nova Scotia. Mr. Sobey is the Chairman Emeritus of Empire Company Limited. He was Chairman of Empire Company Limited from 1985 to 2004. Mr. Sobey sits
on several Boards of Directors including Sobeys Inc., Stora Enso Port Hawkesbury, and World Wildlife Fund. Mr. Sobey is the current Chair of the National Gallery of Canada and a member
of the Supervisory Board of Trader Classified Media.

|ROBERT J. STEACY(6) |  | March 2005 |  | Audit
|------------------- |  | ---------- |  | -----

Robert
Steacy resides in Toronto, Ontario. Robert J. Steacy retired in May 2005 as Executive Vice President and Chief Financial Officer of Torstar Corporation, where he served as the senior
financial officer for 16 years. He currently serves as a Director of Domtar Inc. and of the University of Toronto Press. He is also a Trustee of Cineplex Galaxy Income Fund and Somerset
Entertainment Income Fund. Mr. Steacy serves on the audit committees for all five organizations and is the Chairman of the audit committees of Cineplex Galaxy and Somerset Entertainment Income
Funds.

|PHYLLIS YAFFE |  | November 2005 |  | None
|------------- |  | ------------- |  | ----

Phyllis
Yaffe resides in Toronto, Ontario. Ms. Yaffe is Chief Executive Officer, and Director of Alliance Atlantis. Ms. Yaffe was appointed Chief Executive Officer in June 2005.
From April 2004 to May 2005, Ms. Yaffe was the Chief Operating Officer of Alliance Atlantis. Prior to her role as COO, between February 2001 to April 2004,
Ms. Yaffe was the Chief Executive Officer of Alliance Atlantis Broadcasting Inc. Previously, between August 1999 to February 2001, Ms. Yaffe served as the President
of Alliance Atlantis Broadcasting Inc. Ms. Yaffe presently sits on the Radio Arts Advisory Committee at Ryerson University, the Ryerson University Board, the World Wildlife Fund Board
and is Chair of the Canadian Abilities Foundation Board.

---

Notes:

22

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Audit Committee

As of December 31, 2005, our Audit Committee consisted of Ellis Jacob, Anthony Griffiths, Donald Sobey, Margot Northey and Robert Steacy. Each of these
individuals is "independent", and "financially literate", as those terms are defined in relevant Canadian securities legislation. The following is the education and experience of each Audit Committee
member that is relevant to his or her skills at: (a) understanding accounting principles used by the Company to prepare its financial statements; (b) assessing the general application of
such accounting principles in connection with the accounting for estimates, accruals and reserves; (c) preparing, auditing, analyzing and evaluating financial statements that present a breadth
and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the Company's financial statements,
or actively supervising one or more persons engaged in such activities; and (d) understanding of internal controls and procedures for financial reporting.

23

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The
Audit Committee Terms of Reference sets out explicitly the roles and responsibilities of the Audit Committee and is reviewed annually by the Board. It is attached as Appendix 1. In addition, to
safeguard the continued independence of its external auditors, the Audit Committee requires that all audit and
non-audit services to be rendered by the external auditors to the Company and any of our related entities must be the subject of pre-approval by the Audit Committee. Such
pre-approval will be based on the detailed policies and procedures established by the Audit Committee which are attached as Appendix 2.



The following table provides information about the fees billed to the Company for professional services rendered by PricewaterhouseCoopers LLP during 2005
and 2004, which amounts also include the audit fees for Distribution LP:

|                   |  | 2005 |           | 2004
|------------------ |  | ---- | --------- | ----
|Audit Fees         |  | $    | 4,632,010 |     
|Audit-Related Fees |  | $    | 1,472,327 |     
|Tax Fees           |  | $    | 544,965   |     
|All Other Fees     |  | $    | 75,376    |     
|                   |  |      |           |     
|Total              |  | $    | 6,724,678 |     
|                   |  |      |           |     

Audit Fees.Audit fees consist of fees for the audit of the registrant's annual financial statements or services that are
normally provided in connection with statutory and regulatory filings or engagements.

Audit-Related Fees:Audit-Related Fees consist of fees related to contract compliance audits, accounting assistance related
to the adoption of new CICA Handbook pronouncements and new business ventures, assistance with the review of correspondence with regulatory authorities and prospectus preparation.

Tax Fees.Tax fees consist of fees for tax compliance services, tax advice, tax planning and transfer pricing services. The
services provided in this category included assistance and advice in relation to the preparation of corporate income tax returns and income tax provisions included in the financial statements.

All Other Fees.The services provided in this category included those related to research and foreign currency risk
management review.

Executive Officers

The names of the executive officers of Alliance Atlantis (other than executive officers who are also directors) as at December 31, 2005, their municipality
of residence, their current offices and other principal occupations during the last five years are set out below:

|Name and Municipality of Residence |  | Office                          |  | Principal Occupations and Positions During the Last Five Years                                                               
|---------------------------------- |  | ------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------
|Brad Alles
Toronto, Ontario        |  | Executive Vice President, Sales |  | Mr. Alles has held a number of positions with the Company since joining in 1994. He has held his current position since 2004.

24

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|Name and Municipality of Residence       |  | Office                                                                 |  | Principal Occupations and Positions During the Last Five Years                                                                                                                                                                                                                                                                 
|---------------------------------------- |  | ---------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Susan Berger
Toronto, Ontario            |  | Treasurer                                                              |  | Ms. Berger has been with the Company since 1998 in her current position.                                                                                                                                                                                                                                                       
|Norm Bolen(10)
Toronto, Ontario          |  | Executive Vice President, Content                                      |  | Mr. Bolen joined the Company as Vice President, Programming for History Television in 1997. Since that time he has held various positions. From 2001 to September 2005. He was Executive Vice President, Programming and in September 2005
he was appointed to his current position.                                           
|Andrew Callum
Toronto, Ontario           |  | Senior Vice President, Strategy                                        |  | Mr. Callum joined the Company in 2002 and has held his current position since November, 2005. He held the position of Senior Vice President, Operational Finance from September 2002 to November, 2005. Prior to joining the Company he held the
position of Chief Financial Officer of Captiva Finance Ltd. from 2000 to 2002.
|Heather Conway
Toronto, Ontario          |  | Executive Vice President, Marketing Creative Services & Public Affairs |  | Ms. Conway has held her current position since July, 2001. From 1999 to June, 2001 she was Executive Vice President Corporate and Public Affairs, at TD Bank Financial Group.                                                                                                                                                  
|David Lazzarato(11)
Mississauga, Ontario |  | Executive Vice President & Chief Financial Officer                     |  | Mr. Lazzarato joined the Company in his current position on May 30, 2005. From June to August 2004 he was Chief Corporate Officer of MTS Allstream. From 1999 to June 2004 he was Executive Vice President and CFO of Allstream
(previously AT&T Canada Inc.)                                                                  
|Rita Middleton
Grimsby, Ontario          |  | Senior Vice President, Finance & Information Technology Services       |  | Ms. Middleton has been with the Company since 1994 and has held her current position since November 2005. She held the position of Senior Vice President Finance in the Corporate Group since 2002. From 2000 to 2001 she was Senior Vice
President, Finance and Corporate Development of the Broadcast group of the Company.  

---

25

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|Name and Municipality of Residence |  | Office                                                          |  | Principal Occupations and Positions During the Last Five Years                                                                                                                                                                                                                                                                                                                                              
|---------------------------------- |  | --------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Ted Riley
Dublin, Ireland          |  | Executive Managing Director, International Content Distribution |  | Mr. Riley has held various positions with the Company and has held his current position since July 2004. From September 1998 to January 2002 he was President of Television Distribution and from
January 2002 to July 2004 he was President, Distribution, Entertainment Group.                                                                                                                            
|Jacquelyn Saad
Toronto, Ontario    |  | Senior Vice President, Human Resources                          |  | Ms. Saad joined the Company in September 2005 in her current position. From October 1993 to February 2002, Ms. Saad was Senior Vice President & Director, Human Resources of Bank of America Canada. From April, 2002 to
December 31, 2003 she was Vice President, Organizational Development for Hemolso. Ms. Saad ran Inter-Change consulting from the end of 2003 through to when she joined the Company.
|Andrea Wood
Toronto, Ontario       |  | Executive Vice President, General Counsel & Secretary           |  | Ms. Wood has held a number of positions with the Company since joining in 1992. She was appointed General Counsel in June of 2005.                                                                                                                                                                                                                                                                          
|Angela Young Toronto, Ontario      |  | Senior Vice President, Internal Audit                           |  | Ms. Young joined the Company in her current position in March 2005. Previously she was Business Risk Services Manager with Ernst & Young LLP from November 2004. From October 1997 through to July 2004,
Ms. Young was Regional Finance Manager  North Asia, for BAT Ltd. and subsequently Regional Finance Controller  Asia Pacific, BAT Ltd.                                                            

As
of December 31, 2005, the directors and executive officers of Alliance Atlantis beneficially owned, directly or indirectly, or exercised control or direction over approximately
823,228 Class A Voting Shares, representing approximately 82% of the outstanding Class A Shares and approximately 642,904 Class B Non-Voting Shares
representing approximately 1.5% of the outstanding Class B Non-Voting Shares. The foregoing ownership figures have been provided to us by the individuals indicated and have not been
independently verified by us.

DESCRIPTION OF SHARE CAPITAL

The following chart sets out our authorized share capital.

|Shares                    |  | Authorized
|------------------------- |  | ----------
|Class A Voting Shares     |  | Unlimited 
|Class B Non-Voting Shares |  | Unlimited 

26

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Our share capital formerly authorized 275,000 Class C Special Voting Shares and one Class D Special Non-Voting Share. None of these shares are
outstanding and no further shares of these classes can be issued.

The
following description refers only to the share capital of Alliance Atlantis and not to any of our subsidiaries.

Class A Voting Shares and Class B Non-Voting Shares

Voting Rights.The Class A Voting Shares entitle the holders thereof to one vote per share.
The Class B Non-Voting Shares do not entitle the holders thereof to any votes at meetings of our shareholders, subject to the condition that the Class B
Non-Voting Shares entitle the holders thereof to one vote per share on any vote in respect of our liquidation, dissolution or winding-up or the sale, lease or exchange of all
or substantially all of our property and as otherwise provided by law.

Payment of Dividends.The holders of Class A Voting Shares and Class B
Non-Voting Shares participate equally with each other in respect of the payment of dividends, including the amount per share of the dividend.

Distribution of Assets.The Class A Voting Shares and Class B Non-Voting
Shares rank equally with each other in respect of the return of capital in the event of the liquidation, dissolution or other distribution of our assets for the purpose of winding up our affairs.

Preservation of Rights.If either of the Class A Voting Shares or Class B
Non-Voting Shares are subdivided, consolidated, reclassified or otherwise changed, appropriate adjustments shall be made at the same time to the rights attaching to the shares of the other
class to ensure the preservation of the rights of each class in relation to those of the other.

Conversion Rights.Each Class A Voting Share is convertible at any time, at the holder's
option, into one fully paid and non-assessable Class B Non-Voting Share.

If
an offer (the "Offer") is made to purchase Class A Voting Shares and the Offer is one which must, pursuant to applicable
securities legislation or the rules of a stock exchange on which the Class A Voting Shares are then listed, be made to all or substantially all of the holders of Class A Voting Shares in
a province of Canada to which the requirement applies, each Class B Non-Voting Share will become convertible at the option of the holder, at any time commencing eight days after the
Offer is made and ending at the expiration of the Offer, into one Class A Voting Share. The conversion right may be exercised only for the purpose of depositing the resulting Class A
Voting Shares in response to the Offer and our transfer agent (the "Transfer Agent") will deposit the resulting Class A Voting Shares on
behalf of the shareholder. No share certificates representing the Class A Voting Shares will be delivered to the shareholder.

If
(a) Class A Voting Shares resulting from the conversion and deposited pursuant to the Offer are withdrawn by the shareholder or are not taken up by the offeror or
(b) the Offer is abandoned or withdrawn by the offeror, the Class A Voting Shares will be re-converted into Class B Non-Voting Shares and a share
certificate representing the Class B Non-Voting Shares will be sent to the shareholder by the Transfer Agent.

If
the offeror takes up and pays for the Class A Voting Shares resulting from conversion, the Transfer Agent shall deliver to the holders thereof the consideration paid for such
shares by the offeror.

There
is no right to convert the Class B Non-Voting Shares into Class A Voting Shares in the following cases:

27

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Each
Class B Non-Voting Security will be automatically converted into one Class A Voting Share in the event that Alliance Atlantis fails to deliver to the
Company's Transfer Agent, within 140 days of the end of the immediately preceding fiscal year of the Company, a certificate, signed by the Chairman of the board of directors, that an
independent committee of the Board has determined that it continues to be necessary for Alliance Atlantis to be Canadian controlled, or that there be limitations on the number of shares held by
non-Canadians, for the purpose of determining the eligibility of Alliance Atlantis for financial incentives or assistance or licences from any Canadian federal or provincial government or
agency or for any other regulatory purpose. Such certificate has been delivered to the Company's Transfer Agent in respect of the year ended December 31, 2005.

Constraints on Ownership of Securities.Applicable laws and the nature of the Company's business
(principally in connection with the ownership of interests in broadcast licences) require that it ensure that the level of non-Canadian ownership be monitored and limited. Accordingly, the
articles of the Company contain a provision which permits the Company to prohibit the issuance or transfer of its shares to any person who is not a "Canadian" (within the meaning of any applicable
statute, regulation, guideline or policy) if the issue or transfer would cause the Company to cease to be qualified to carry on any relevant business. The current limit on non-Canadian
ownership of the Company 's shares in the aggregate is shares representing not more than 331/3% of all issued and outstanding voting shares and not more than 331/3% of
the votes attached to all issued and outstanding voting shares.

Before
an issue or transfer of shares is recorded in the register of the Company 's shareholders, the purchaser or transferee, as the case may be, may be required to submit to the
Company or its agents a declaration as to the purchaser's or transferee's beneficial ownership of shares of the Company, its citizenship and such other matters as the Board may deem relevant in order
to determine whether the registration of the purchaser or transferee should be prohibited. Such a declaration may also be required at any time when proxies are being solicited from shareholders,
before or at any meeting of shareholders or at any time when, in the opinion of the directors of the Company, the holding of shares by any non-Canadian person should be prohibited. The
Company 's shareholders are, therefore, restricted from selling their shares to non-Canadians to the extent that the resulting holdings would result in a breach of these restrictions. In
addition, the directors of the Company may refuse to register a transfer of any shares of the Company if such transfer could require the prior approval of the CRTC or any other governmental body or
authority having or purporting to have jurisdiction.

28

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DESCRIPTION OF CERTAIN INDEBTEDNESS

Repayment of Senior Subordinated Notes

On December 21, 2004, we repaid holders of our outstanding 13% senior subordinated notes due December 15, 2009. The holders were paid at 106.5% of
the U.S.$300 million principal amount, plus accrued and unpaid interest. We believe the annual interest savings from the payment of the holders of the 13% senior subordinated notes during 2005
was substantial.

Credit Facility

On December 20, 2004, the Company entered into new secured credit facilities with a syndicate of Canadian and U.S. lenders, that consisted of a
five-year C$175 million (or equivalent U.S.$) revolving credit facility, a five-year Term Loan A credit facility for U.S.$108.6 million, and a
seven-year Term Loan B credit facility for U.S.$250 million. Advances under the revolving credit facility and the Term Loan A credit facility bear interest at the Bankers'
Acceptance or LIBOR rate (for Canadian and U.S. dollar advances respectively) plus a margin ranging between 75 and 175 basis points. Advances under the Term Loan B credit facility
bear interest at the Bankers' Acceptance or LIBOR rate plus a margin of 175 basis points. The margin payable on the revolving credit facility and the Term Loan A credit facility is subject to
change based on our leverage ratio. We used the new credit facilities to repay the balance on our previous credit facility in addition to financing the repayment to the holders of the notes referenced
above.

In
December, 2005, certain amendments were made to the credit facilities, including the replacement of Term Loan B with Term Loan C, a decrease in the margin on the new Term Loan C
facility to 150 basis points, an increase in the senior leverage covenant, changes to the Sale of Assets covenant and changes to the Restricted Payments covenant.

These
credit facilities are separate from and have no effect on the financing structure of Distribution LP or the Fund.

For
purposes of this description of the credit facilities, references in this section to the "Company", "we", "us" and "our" refer to Alliance Atlantis only and not to any of its
subsidiaries.

Borrowings
under the credit facilities are secured by a first ranking lien against substantially all of the assets of the Company. Our obligations under the credit facilities are
guaranteed by substantially all of our material wholly owned subsidiaries and secured by first ranking liens on substantially all of the property and assets of those subsidiaries and are also secured
by liens against the property and assets of certain of our non-wholly owned subsidiaries.

The
credit facilities contain covenants imposing certain operating and financial restrictions on us and our subsidiaries as well as customary affirmative covenants and industry-specific
covenants. The terms of the credit facilities restrict, among other things, our ability to: (a) declare dividends, redeem or repurchase capital stock or make other distributions to our
shareholders; (b) prepay or redeem debt; (c) grant liens; (d) make loans, acquisitions and investments; (e) incur more debt; (f) engage in mergers, reorganizations
and asset sales out of the ordinary course of business; (g) change our core business; (h) engage in transactions with related parties; and (i) enter into certain sale leaseback
transactions.

Events
of default under the credit facilities include: (a) a change of control of the Company; (b) failure to pay principal, interest or other amounts when due;
(c) breach of any covenant or representation and warranty contained in the loan documents; (d) cross-default provisions to other material indebtedness; (e) customary events of
bankruptcy, insolvency or dissolution of the Company or its subsidiaries; and (f) the enforcement of certain judgments against the Company, its subsidiaries or their assets or the seizing of
material assets by other creditors. Upon the occurrence and continuance of an event of default under the credit facilities, the lenders are entitled to terminate their commitments to lend and declare
the outstanding advances due and payable.

29

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LEGAL PROCEEDINGS

We are involved from time to time in various claims and lawsuits incidental to the ordinary course of our business, including intellectual property actions.
Adverse determinations in litigation could result in the loss of our proprietary rights, subject us to significant liabilities, or require us to seek licences from third parties, any one of which
could have an adverse effect on our business and results of operations. Actions which are incidental to our business are typically covered by insurance and management has estimated the potential
liability and expensed the amount on its financial statements. While no assurance can be given that these proceedings will be favourably resolved, we do not believe that the outcome of these legal
proceedings will have a materially adverse impact on our financial position or results of operations.

RISK FACTORS

Please see the "Industry Risk and Uncertainties" and "Market Risk" sections of our 2005 MD&A, which are incorporated by reference herein. Our 2005 MD&A is
available on SEDAR at www.sedar.com.

RATINGS

A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the rating organization. No
approved rating agency currently rates any of the Company's outstanding securities. The following is a description of certain debt ratings of the Company.

Moody's Investor Services

In October, 2004, Moody's Investors Service ("Moody's") affirmed the Company's Ba2 Corporate Family rating
(formerly Senior Implied rating) and assigned a Ba2 rating to the Company's new Senior Secured credit facility. At the same time Moody's also changed the outlook of all ratings to positive from
stable. Moody's credit ratings are on a long-term debt rating scale that ranges from Aaa to C, which represents the range from highest to lowest quality of such securities rated. A rating
of Ba is the fifth highest of nine categories and denotes obligations judged to have speculative elements and which are subject to substantial credit risk. The addition of a 1, 2 or 3 modifier
after a rating indicates the relative standing within a particular rating category. The modifier 1 indicates that the issue ranks in the higher end of its generic rating category, the modifier
2 indicates a mid-range ranking and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category.

Standard & Poor's

In September 2005, Standard & Poor's ("S&P") affirmed its 'BB' bank loan rating on the Company. A
recovery rating of '3' assigned to the loan was also affirmed, meaning S&P expects a meaningful recovery of principal (50%-80%) in the event of default. S&P's credit ratings are on a
long-term debt rating scale that ranges from AAA to D, which represents the range from highest to lowest quality of such securities rated. The BB category is the fifth highest of S&P's
eleven categories. According to the S&P rating system, debt securities rated BB have significant speculative characteristics but are less vulnerable in the near term than other lower rated
obligations. However, an obligor rated BB faces major ongoing uncertainties and exposure to adverse business, financial or economic conditions which could lead to the obligor's inadequate capacity to
meet its financial commitments.

DIVIDENDS

We have not paid any dividends on our Class A Voting Shares or Class B Non-Voting Shares and our current policy is to not pay dividends.
In addition, our credit facility contains certain restrictions on the payment of dividends. Any future determination by us to pay dividends will be at the discretion of our board of directors and in
accordance with the terms and conditions of our credit facility and any other indebtedness and will depend upon our financial condition, results of operations, capital requirements and other relevant
factors.

30

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NORMAL COURSE ISSUER BID

On December 16, 2005 the TSX renewed our normal course issuer bid for a period beginning December 20, 2005 and ending no later than
December 19, 2006. Under the new bid we can purchase on the TSX up to 50,272 of our Class A Voting Shares, representing approximately 5% of our issued and outstanding Class A
Voting Shares and up to 4,093,942 Class B Non-Voting Shares, representing approximately 10% of the public float of our Class B Non-Voting Shares. We intend
to repurchase shares under the new bid to meet our capital structure objectives. We repurchased 496,500 Class B Non-Voting Shares during 2005 under the previous normal course
issuer bid. The shares were repurchased at an average price of $34.29 per share and were cancelled.

REGISTRAR AND TRANSFER AGENT

The transfer agent and registrar for the Company's Class A Voting Shares and Class B Non-Voting Shares is Computershare Investor
Services Inc. (formerly named Computershare Trust Company of Canada), at its principal office in Toronto, Ontario.

MARKET FOR SECURITIES

Our publicly-traded securities are listed on the TSX under the symbols shown below:

|Security                  |  | Symbol  
|------------------------- |  | --------
|Class A Voting Shares     |  | AAC.A   
|Class B Non-Voting Shares |  | AAC.NV.B

The
Company had listed its Class B Non-Voting Shares on Nasdaq under the symbol AACB but the Company voluntarily delisted them, effective as of July 7, 2005,
because the ongoing listing and administrative costs could not be justified in light of the low trading volume.

The
TSX announced in December, 2005 that it will be discontinuing its symbol extension program. As a result, we have been notified that our Class B Non-Voting Shares
will, effective as of May 10, 2006, trade under the symbol "AAC.B".

Trading Price and Volume of Class A Voting Shares

|Month          |  | High
($) |  | Low
($) |  | Trading Volume
(Units)
|-------------- |  | -------- |  | ------- |  | ----------------------
|January, 2005  |  | 33.39    |  | 31.15   |  | 6,345                 
|February, 2005 |  | 36.26    |  | 32.74   |  | 17,279                
|March, 2005    |  | 37.84    |  | 34.36   |  | 5,802                 
|April, 2005    |  | 31.17    |  | 29.41   |  | 14,414                

31

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|Month           |  | High
($) |  | Low
($) |  | Trading Volume
(Units)
|--------------- |  | -------- |  | ------- |  | ----------------------
|May, 2005       |  | 30.36    |  | 28.30   |  | 3,900                 
|June, 2005      |  | 30.70    |  | 28.89   |  | 5,991                 
|July, 2005      |  | 31.68    |  | 29.15   |  | 9,334                 
|August, 2005    |  | 31.40    |  | 29.27   |  | 3,865                 
|September, 2005 |  | 32.69    |  | 29.63   |  | 4,250                 
|October, 2005   |  | 32.60    |  | 30.33   |  | 3,535                 
|November, 2005  |  | 34.97    |  | 29.63   |  | 12,623                
|December, 2005  |  | 34.69    |  | 33.65   |  | 1,160                 

Trading Price and Volume of Class B Non-Voting Shares

|Month           |  | High
($) |  | Low
($) |  | Trading Volume
(Units)
|--------------- |  | -------- |  | ------- |  | ----------------------
|January, 2005   |  | 34.01    |  | 30.50   |  | 3,270,703             
|February, 2005  |  | 36.51    |  | 32.70   |  | 2,462,103             
|March, 2005     |  | 38.15    |  | 29.50   |  | 4,910,160             
|April, 2005     |  | 31.25    |  | 29.00   |  | 3,507,535             
|May, 2005       |  | 31.69    |  | 27.50   |  | 3,118,955             
|June, 2005      |  | 31.00    |  | 28.58   |  | 2,075,509             
|July, 2005      |  | 32.20    |  | 28.44   |  | 1,651,489             
|August, 2005    |  | 31.15    |  | 28.40   |  | 2,414,124             
|September, 2005 |  | 32.94    |  | 29.21   |  | 3,565,724             
|October, 2005   |  | 32.42    |  | 28.02   |  | 1,114,008             
|November, 2005  |  | 35.25    |  | 28.75   |  | 3,030,352             
|December, 2005  |  | 35.49    |  | 32.81   |  | 1,911,873             

MATERIAL CONTRACTS

The following are the material contracts which have been entered into by the Company within the three most recently completed financial years, or before the most
recently completed financial year but are still in effect, other than contracts entered into in the ordinary course of business:

Contracts Relating to Distribution LP

Investment Agreement

On October 2, 2003, the Fund, Movie Distribution Holding Trust ("Holding Trust"), Distribution LP,
Alliance Atlantis and 4192231 Canada Limited (a predecessor company of Alliance Atlantis Productions Ltd. ("AAPL")) entered into
the Investment Agreement. The Investment Agreement provided, among other things, for the investment by the Fund and Holding Trust of the proceeds of the offering from the Fund's initial public
offering in Distribution LP and for the acquisition of Alliance Atlantis's motion picture distribution business (the "MPD Business") by
Distribution LP.

32

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Alliance
Atlantis and AAPL have agreed to indemnify Distribution LP, the Fund and Holding Trust, and Distribution LP has indemnified the Fund and Holding Trust, in respect
of breaches of their respective representations and warranties. The maximum aggregate liability of Alliance Atlantis and AAPL under their indemnity in the Investment Agreement and the underwriting
agreement entered into with the underwriters in connection with the Offering (the "Underwriting Agreement") is equal to the purchase price of the
MPD Business. The maximum aggregate liability of the General Partner and Distribution LP under their indemnity in the Investment Agreement and the Underwriting Agreement is not limited. All
claims for indemnification under the Investment Agreement are subject to an aggregate deductible in the amount of $100,000 and to a minimum individual claim amount of $5,000.

Under
the terms of the Investment Agreement, Alliance Atlantis agreed that, in connection with the assignment of certain of the output agreements to Distribution LP, it will
continue to be liable to the content supplier for the performance of all of Distribution LP's obligations under the relevant agreements, and the content supplier may exercise its remedies under
the relevant agreement as against Alliance Atlantis, Distribution LP, or both, at its election. Distribution LP has agreed to indemnify Alliance Atlantis in respect of any liabilities or
expenses that are incurred by Alliance Atlantis in connection with its continuing obligations under these output agreements, which relate to claims arising at any time that Alliance Atlantis is not
entitled to appoint a majority of the members of the board of directors of the General Partner.

CONFLICTS OF INTEREST

To
the Company's knowledge, there are no existing material conflicts of interest between the Company and any director or officer of the Company. However, certain of the members of Alliance Atlantis's
Board have principal occupations with a company or firm that has, or had, a business relationship with the Company. Mr. Jacob is President and Chief Executive Officer of Cineplex
Entertainment LP, which is an exhibitor of Distribution LP's theatrical releases in Canada. Mr. Steacy chairs the audit committee and is a trustee of Cineplex Galaxy Income Fund,
which holds an approximate 50.6% interest in Cineplex Entertainment LP. Mr. Kassie is the Chairman and Chief Executive Officer of Genuity Capital Markets, which has provided investment
banking services to the Company. Mr. Reiter is a partner of Torys LLP, which provides legal advice to the Company although Mr. Reiter is not generally personally involved in
providing such legal advice. Mr. Sobey is a major shareholder and is on the board of directors of Empire Company Limited, the parent company of Empire Theatres Limited, which is an exhibitor of
Distribution LP's theatrical releases in Canada.

There
are circumstances where potential material conflicts of interest between a Board member, including those listed above, and the Company could arise in the future. In these
situations all directors are aware of their responsibility to take all necessary steps to avoid acting at a time when he or she is in a potential conflict of interest with the Company, including
recusing themselves from Board discussions and decisions relating to any such matters.

Certain
officers of Alliance Atlantis are also directors of the General Partner. As part of the transactions undertaken in conjunction with the Fund's initial public offering, and as
part of the ongoing business relationship between Distribution LP and Alliance Atlantis, we have entered into agreements with Distribution LP. In some cases, fees or other amounts are
payable in connection with such agreements.

ADDITIONAL INFORMATION

Additional information relating to the Company may be found on SEDAR at www.sedar.com. Additional information, including directors' and officers' remuneration and
indebtedness, principal holders of Alliance Atlantis' securities, options to purchase securities and interests of insiders in material transactions, where applicable, will be contained in the
Company's management information circular (the "Circular") for its 2006 AGM.

33

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Additional
financial information is provided in the Company's financial statements for the most recently completed financial year ("2005 Financial
Statements") and the 2005 MD&A.

Copies
of:



may
be obtained upon request from the Corporate Secretary of Alliance Atlantis, 121 Bloor Street East, Suite 1500, Toronto, Ontario, M4W 3M5 Canada. If the securities of Alliance
Atlantis are in the course of a distribution pursuant to a short form prospectus or a preliminary short form prospectus, copies of the foregoing documents are available free of charge. At all other
times, a reasonable fee may be charged if the request for copies is made by a person who is not a security holder of Alliance Atlantis.

34

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APPENDIX 1

AUDIT COMMITTEE CHARTER

ALLIANCE ATLANTIS COMMUNICATIONS INC.

---

AUDIT COMMITTEE
TERMS OF REFERENCE

---

January 25, 2006

35

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ALLIANCE ATLANTIS COMMUNICATIONS INC.  AUDIT COMMITTEE  TERMS OF REFERENCE

Statement of Purpose

The Audit Committee (the "Committee") will assist the Board of Directors (the "Board") of the Corporation in fulfilling its stewardship
responsibilities through the oversight of:



provided
that with respect to the Corporation's subsidiary Motion Picture Distribution LP ("MPDLP"), the Committee will be entitled to rely on MPDLP's audit committee.

Membership

Number



Composition



Qualifications



36

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Chair



Ex Officio Members and Management Attendance



Removal and Vacancies



Tenure



Meetings

Notice of Meetings



37

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Times and Places of Meetings



Agenda



Quorum



Procedure



Secretary



Minutes of Meetings



Transaction of Business



Exercise of Power Between Meetings



Duties and Responsibilities

I.     Relations With the Auditors

The Auditors will report directly to the Committee and the Committee will:

38

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39

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II.    Audit and Financial Reporting

The Committee will be primarily responsible for satisfying itself and on behalf of the Board, that the Corporation (including its subsidiaries) fulfils all of its
audit and financial reporting obligations, and will:



40

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41

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III.  Internal Controls and Internal Audit

The internal audit function will report directly to the Committee (with a dotted reporting line to the CFO and the CEO). The Committee will oversee management's
design and implementation of an adequate and effective system of internal controls, and will:



42

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IV.    Risk Management

The Committee will discuss the guidelines and policies to govern the process by which the Corporation undertakes risk assessment and management, and will:



V.     Relations with Management

The Committee will coordinate with management on audit and financial matters, and will:



43

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Access to Records

The Committee will be permitted access to all records and corporate information that it determines to be required in order to perform its duties.

44

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APPENDIX I TO THE AUDIT COMMITTEE CHARTER    DEFINITIONS

"Audit Committee Financial Expert"shall mean a person who has acquired the following attributes through any one
or more of the following: (i) education and experience as a principal financial officer, principal accounting officer, controller, public accountant or auditor, or experience in one or more
positions that involve the performance of similar functions; (ii) experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant or
auditor, or person performing similar functions; (iii) experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing or evaluation of
financial statements; or (iv) other relevant experience:

"Financially Literate"shall mean:

An
individual who has the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable
to the breadth and complexity of the issues expected to be raised by the issuer's financial statements. A comprehensive knowledge of GAAP and generally accepted auditing standards is not required

"Independent"shall mean:

45

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"Prohibited Non-Audit Services"means services which an auditing firm is prohibited from supplying to the Corporation
contemporaneously with an audit and professional engagement, and include:

Also
prohibited are services that could conflict with auditor independence as set out under Regulation S-X, namely an auditor should not:

46

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The
pre-approval requirement is waived for non-audit services that (i) were not recognized to be non-audit services at the time of engagement,
(ii) constitutes less than 5% of the total revenues paid to the Auditors during the same fiscal year, and (iii) are promptly brought to the attention of the audit committee and approved
prior to completion of the audit

47

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APPENDIX 2    ALLIANCE ATLANTIS COMMUNICATIONS INC. AND SUBSIDIARIES    PROCEDURES FOR APPROVAL OF AUDIT AND NON-AUDIT  SERVICES BY THE EXTERNAL AUDITORS

I.     Audit Committee Pre-Approval of Services

In accordance with the requirements of securities regulations to which the Company is subject and to safeguard the continued independence of its external
auditors, all audit and non-audit services to be rendered by Alliance Atlantis Communications Inc.'s external auditors and any related entities (the "Auditors") to Alliance
Atlantis Communications Inc. (the "Company"), and its subsidiaries (collectively "Alliance Atlantis") must be the subject of pre-approval by the Audit Committee of the Board.

Such
pre-approval shall be based on the following detailed policies and procedures established by the Audit Committee.

II.    Services that the Auditors may not Provide

The Auditors may not act in any capacity where they could reasonably be seen to:



Except
as otherwise permitted and pre-approved hereby, the Auditors will not be asked to provide any services in the following areas (in each case as more fully
defined in applicable corporate and securities regulations or the regulations and guidelines of the appropriate oversight authorities governing the accounting and auditing profession):

Bookkeeping
and related functions;

Financial
information systems design and implementation;

Appraisal,
valuation, fairness opinions or contribution-in-kind reports;

Actuarial
services;

Internal
audit outsourcing;

Management
functions and human resources functions;

Broker-dealer,
investment advisor or investment banking services;

Legal
services; and

Expert
services.

48

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III.  Pre-Approval of a Range of Services

The engagement for the annual audit of the Company's consolidated financial statements is specifically approved on an annual basis by the execution of the audit
engagement letter with the Auditors. Subject to paragraph IV below, engagements of the Auditors involving services for any of the Alliance Atlantis entities that fall into the following service
definitions are pre-approved by the Audit Committee:

|Type of Service        |                                                                          | Description                                                                         
|---------------------- | ------------------------------------------------------------------------ | ------------------------------------------------------------------------------------
|Audit Services         |                                                                          |                                                                                     
|                       | Financial statement audit                                                |                                                                                     
|                       |                                                                          | Quarterly reviews.                                                                  
|                       |                                                                          | Quarterly specified procedures.                                                     
|                       |                                                                          | Review of tax provision reported in the consolidated and other financial statements.
|                       | Regulatory financial filings                                             |                                                                                     
|                       |                                                                          | Statutory and regulatory filings including prospectuses and registration statements.
|                       | 404 attestation services                                                 |                                                                                     
|Audit Related Services |                                                                          |                                                                                     
|                       | Employee benefit plan audits                                             |                                                                                     
|                       | Financial due diligence in connection with acquisitions and divestitures |                                                                                     
|                       |                                                                          | Accounting consultation and audits in connection with acquisitions and divestitures.
|                       | Other attest services                                                    |                                                                                     

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|Type of Service |                                         | Description
|--------------- | --------------------------------------- | -----------
|                | Application and general control reviews |            
|                | Consultation regarding GAAP             |            
|Tax Services    |                                         |            
|                | Tax compliance                          |            
|                | Tax consulting                          |            
|                | Transfer pricing                        |            
|                | Customs and duties                      |            
|                | Expatriate tax services                 |            

50

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|Type of Service |           | Description
|--------------- | --------- | -----------
|Other Services  |           |            
|                | Valuation |            
|                | Other     |            
|                | Other     |            
|                | Other     |            

IV.    Limits on the Pre-Approval of a Range of Services

In the case of proposed engagements of the Auditors involving any of the services covered under the range of services under paragraph III where the fees
(excluding disbursements and applicable taxes) for a particular engagement are expected to exceed a total of CDN $25,000, specific pre-approval must be obtained therefor under the
provisions of paragraph V hereof.

The
general pre-approval of the range of services covered under paragraph III will be brought to the Audit Committee for review and, if thought appropriate, renewal on
an annual basis.

In
respect of services under paragraph III where the fees (excluding disbursements and applicable taxes) for a particular engagement are expected to be less than or equal to a
total of CDN $25,000, the Chairman of the Audit Committee shall be notified expeditiously of any such services commenced by the Auditors.

In
the event that services under paragraph III are commenced by the Auditors where the fees (excluding disbursements and applicable taxes) for a particular engagement were
expected to be less than or equal to a total of CDN $25,000, specific pre-approval must be obtained therefore under the provisions of paragraph V hereof if such fees are later
expected to exceed a total of CDN $30,000.

V.     Pre-Approval of Individual Services

Alliance Atlantis management and/or the Auditors may seek pre-approval by the Audit Committee of the engagement of the Auditors to provide particular
services in certain cases. Where particular pre-approval is required, the Audit Committee has delegated the authority to effect such pre-approval to the Chairman of the
Committee.

Under
no circumstances may the Audit Committee delegate its responsibilities to Alliance Atlantis management.

51

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For
greater certainty, if an engagement with the Auditors for a particular service is contemplated that is neither prohibited under paragraph II hereof, nor covered under
the range of services under paragraph III hereof, in order for such engagement to proceed it must be the subject of individual pre-approval under this paragraph.

It
is the responsibility of management to determine whether a particular service is covered by the pre-approved range of services. Management should seek the guidance of the
Audit Committee Chair where there is any ambiguity about whether a particular service is pre-approved.

VI.   Engagement Letters

Pre-approved non-audit services shall be provided by the Auditors pursuant to an engagement letter with the appropriate Alliance Atlantis
entity, a copy of which will be provided to the Chair of the Audit Committee, that satisfies each of the following requirements:



VII. Reports of Services to the Audit Committee

At every regularly-scheduled meeting of the Audit Committee, management shall report on all new pre-approved engagements of the Auditors since the
last such report. The Auditors may comment on the report if they wish to do so. All engagement letters entered into pursuant hereto shall be made available to the Audit Committee upon demand.

VIII. Effective Date

The effective date of these policies and procedures is the date of adoption by the Audit Committee.

52

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LOGO

---

Management's Discussion and Analysis
of Financial Condition and Results of Operations
For the Periods Ended December 31, 2005, December 31, 2004
and December 31, 2003
AND
Consolidated Financial Statements
For the Years Ended December 31, 2005 and December 31, 2004,
and the Nine Months Ended December 31, 2003

---

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TABLE OF CONTENTS

|                                                          |                             | Page 
|--------------------------------------------------------- | --------------------------- | -----
|VISION                                                    |                             | 3    
|OVERVIEW OF CORE BUSINESSES                               |                             | 3-5  
|KEY PERFORMANCE INDICATORS                                |                             | 5    
|OPERATING AND FINANCIAL HIGHLIGHTS                        |                             | 6-7  
|CONSOLIDATED RESULTS OF OPERATIONS                        |                             | 8-9  
|SUMMARY OF QUARTERLY RESULTS                              |                             | 10   
|CORE BUSINESS STRATEGY, OPERATING PERFORMANCE AND OUTLOOK |                             | 11-23
|                                                          | BROADCASTING                |      
|                                                          | ENTERTAINMENT               |      
|                                                          | MOTION PICTURE DISTRIBUTION |      
|                                                          | CORPORATE AND OTHER         |      
|OTHER STATEMENT OF EARNINGS ITEMS                         |                             | 23-25
|LIQUIDITY AND CAPITAL RESOURCES                           |                             | 25-29
|SUBSEQUENT EVENT                                          |                             | 29   
|RELATED PARTY TRANSACTIONS                                |                             | 29-30
|OUTSTANDING SHARES                                        |                             | 31   
|OFF BALANCE SHEET ARRANGEMENTS                            |                             | 31   
|MARKET RISK                                               |                             | 32   
|CRITICAL ACCOUNTING POLICIES AND ESTIMATES                |                             | 32-34
|ACCOUNTING CHANGES AND RECENT ACCOUNTING PRONOUNCEMENTS   |                             | 34-38
|FINANCIAL INSTRUMENTS                                     |                             | 38   
|INDUSTRY RISK AND UNCERTAINTIES                           |                             | 38-43
|DISCLOSURE CONTROLS AND PROCEDURES                        |                             | 43-44
|USE OF NON-GAAP FINANCIAL MEASURES                        |                             | 44-49

2

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's discussion and analysis of the financial position and results of operations is prepared at March 2, 2006, and should
be read in conjunction with the accompanying audited consolidated financial statements and the notes therein.

This report covers the year ended December 31, 2005, referred to as Fiscal 2005. The year ended December 31, 2004 is referred to as Calendar 2004.
In December 2003, the Company changed its fiscal year end. (see note 1 of the Company's consolidated financial statements). The nine-month period from April 1,
2003 through December 31, 2003 is referred to as Fiscal 2004. This Management's Discussion and Analysis of Financial Condition and Results of Operations compares the three months and year ended
December 31, 2005 with the three months and year ended December 31, 2004.

This discussion may contain forward-looking statements within the meaning of Canadian and U.S. securities laws. Such statements include, but are not
limited to, statements relating to anticipated financial and operating results, the Company's plans, objectives, expectations and intentions and other statements including words such as "anticipate",
"believe", "plan", "estimate", "expect", "intend", "will", "should", "may", and other similar expressions. These forward-looking statements are based on certain assumptions and reflect the Company's
current expectations. The reader should not place undue reliance on them. They involve known and unknown risks, uncertainties and other factors that may cause them to differ materially from the
anticipated future results or expectations expressed or implied by such forward-looking statements. Some factors that could cause actual results to differ materially from those set forth in the
forward-looking statements are: audience acceptance of our filmed entertainment; our ability to attract advertising revenue; changes to the regulatory environment; actions of our competitors;
technological change that increases competition or facilitates the infringement of our intellectual property; cost of production financing; the loss of key personnel; and our relationship with filmed
entertainment content suppliers. Other risks and factors that could cause actual results to differ are described in this discussion under the headings "Industry Risk and Uncertainties" and "Market
Risk". The company undertakes no obligation to publicly update or revise any forward-looking statements or information, whether as a result of new information, future events or
otherwise.

All dollar amounts are expressed in millions of Canadian dollars unless otherwise noted.

Vision

The Company is committed to expanding the way it delivers content to viewers by building on the strength of its brands and identifying new technologies that
create innovative opportunities to deliver content. Through its strong relationships with international broadcasting partners and its innovative approach to marketing and programming, the Company is
proud to bring viewers the best in Canadian and international content.

Overview of Core Businesses

The Company's principal business activities are Broadcasting, Entertainment and Motion Picture Distribution. These core businesses are supported by the Company's
Corporate and Other segment. Over the past few years, the Company has transformed itself into a streamlined, broadcast-driven company, by investing in and growing its broadcast business and reducing
the amount of capital and other resources devoted to production and other related activities.

In
an effort to maximize shareholder value, and to determine appropriate uses of free cash flow, during 2005 the Company reviewed its capital structure. Following the review, the Company
has established target debt levels for the business and determined appropriate uses of free cash flow beyond current reinvestment opportunities. The Company will target a Net Debt to EBITDA
(see note on non-GAAP measures on page 40) ratio in the range of 1.5x to 2.5x, excluding its Motion Picture Distribution business. At December 31, 2005, the Company's
Net Debt to EBITDA ratio was 1.98, excluding its Motion Picture Distribution business. The Company plans to monitor its capital structure and maintain this range by repurchasing shares under its
normal course issuer bid. The Company has been successful in its debt reduction objectives, and remains keenly focused

3

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on
free cash flow generation, and has determined these capital structure objectives to be a complementary way to enhance shareholder value.

Broadcasting

The Company has a controlling ownership interest in and operates 13 Canadian specialty television
channels  Showcase, Life Network, History Television, HGTV Canada, Food Network Canada, Showcase Action, Showcase Diva, National Geographic Channel, BBC Canada,
BBC Kids, Discovery Health Channel, IFC Canada and Fine Living. Each of these channels carries a strong, clear brand which, the Company believes, enables it to distinguish itself and excel in a
competitive marketplace. The channels are aligned in two core genres ("fact and fiction" and "lifestyle") and are supported by a supply of high quality content acquired from leading domestic and
international producers. The Company also has a 50% interest
in two established Canadian French-language specialty television channels (Series+ and Historia) and a minority interest in three other English-language specialty channels (ONE: The Body, Mind and
Spirit Channel, Scream and The Score).

Entertainment

The Company is a 50% co-owner and co-producer of the successfulCSIfranchise, in
partnership with CBS Productions. The Company also distributes theCSIfranchise in all territories outside the United States. CSI: Crime Scene Investigation, now in its sixth season, with over 132 episodes delivered is currently the #1 dramatic series on
U.S. television (National Nielsen Ratings: Primetime Season to Date Rank-Regular Programs for Demographic PER2+ for 09/19/05  02/05/06), with
an average weekly audience of more than 25.8 million viewers for initial episode telecasts.CSI: Miami, now in its fourth season, with over
88 episodes delivered is one of the top five dramatic series on U.S. television, and remains the #1 show on Monday nights (National Nielsen Ratings: Primetime Season to Date
Rank-Regular Programs for Demographic PER2+ for 09/19/05  02/05/06).CSI: Miamiwas named 2005's
biggest hit television series on a global basis ("Global TV Acquisitions" report, Informa Telecoms & Media, February 15, 2006, based on the number of times a program was listed in
year-end Top 10 rankings worldwide).CSI: NY, now in its second season, was the #1 new show for CBS during the
2004/05 Broadcast Season, and remains the #1 show for its timeslot (National Nielsen Ratings: Primetime Season to Date Rank-Regular Programs for Demographic PER2+demo for
09/19/05  02/05/06). The Company continues to aggressively licence this valuable franchise in all available international markets.

The
Company also licences its library of approximately 1,000 titles representing approximately 5,500 hours of programming rights to broadcasters, distributors and other
users in various territories throughout the world.

Motion Picture Distribution

The Company's Motion Picture Distribution business, through its 51% indirect ownership interest in Motion Picture Distribution LP
("Distribution LP"), is a leading distributor of motion pictures in Canada, with a growing presence in the United Kingdom through its subsidiary Momentum Pictures ("Momentum"), and in
Spain through its subsidiary Aurum Producciones, S.A. ("Aurum").

The
Company indirectly owns a 51% limited partnership interest in Distribution LP. Movie Distribution Income Fund (the "Fund"), which is traded on The Toronto Stock
Exchange under the symbol FLM.UN, indirectly owns a 49% limited partnership interest in Distribution LP.

Distribution LP
distributes motion pictures for theatrical release, in video/DVD format and to television broadcasters (conventional/cable/Video on Demand ("VOD")/Subscription
Video on Demand ("SVOD")). In Canada, Distribution LP has exclusive output agreements with a diverse group of leading independent studios, including New Line Cinema, The Weinstein
Company, Focus Features, Dimension Films, Miramax Films, IFC Films and Remstar. The Company also distributes a catalogue of approximately 5,000 titles. This library is available for
exploitation in video/DVD and television. By releasing a large number of motion pictures through multiple distribution platforms, Distribution LP creates a diversified portfolio of releases.
Monthly cash distributions to owners of the units of Distribution LP are paid out of the distributable cash generated by the business.

4

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Corporate and Other

The Company's Corporate and Other segment is primarily a corporate services group providing support to the operating segments for information technology, finance,
internal audit, human resources, legal, investor relations and other corporate services. Corporate and Other also holds corporate investments, as well as corporate activities that are being wound
down.

Key Performance Indicators

The Company measures the success of its strategies using a number of key performance indicators. These have been outlined below, including a discussion as to
their relevance, definitions, calculation methods and underlying assumptions. With the exception of revenue, direct operating expenses and selling, general and administrative expenses, the following
key performance indicators are not measurements in accordance with Canadian generally accepted accounting principles ("GAAP") and should not be considered as an alternative to net income or any other
measure of performance under Canadian GAAP.

RevenueRevenue is a measurement defined by Canadian GAAP. Revenue is the inflow of cash, receivables
or other consideration arising from the sale of product and services and is net of items such as trade or volume discounts and certain excise and sales taxes. It is one of the bases on which free cash
flow, a key performance indicator defined below, is determined; therefore, it measures the potential to deliver free cash flow as well as indicates the level of growth in a competitive marketplace.
The primary sources of revenues for the Company are outlined within the discussion of operating performance for each of the Company's principal businesses.

Direct operating expensesDirect operating costs includes amortization of investment in film and
television programs (costs of programming intended for broadcast, from which advertising and subscriber fee revenues are derived) and costs associated with internally produced and acquired film and
television programming,
from which distribution and licensing revenues are derived. (see note 25 of the Company's consolidated financial statements for further details).

Direct profitDirect profit is defined as revenue less direct operating expenses. Management uses
this key performance indicator to measure operating performance for each business segment.

Selling, general and administrative expensesSelling, general and administrative expenses include
period costs that are not directly attributable to the film and television program or specialty television channel. These include such costs as employee remuneration, professional fees, regulatory
license fees, occupancy costs and overhead costs.

Earnings (loss) before undernoted (EBITDA)The Company believes this is an important measure as it
allows the Company to evaluate the operating performance of its three principal business activities representing Broadcasting, Entertainment and Motion Picture Distribution, and its ability to service
and/or incur debt. It is calculated before (i) interest on long-term debt, (ii) non-cash expenses such as depreciation and amortization, except for amortization
of investment in film and television programs and (iii) items not indicative of the Company's core operating results, and not used in management's evaluation of the business segments'
performance, such as investment gains and losses and foreign exchange gains and losses. See note on non-GAAP measures on page 44 for calculation.

Free cash flowFree cash flow allows the Company to fund its operations, and manage and maintain a
flexible capital structure. See note on non-GAAP measures on page 44 for calculation.

Net indebtednessNet indebtedness comprises the revolving credit facility and term loans net of cash
and cash equivalents. This is an important measure as it allows the Company to evaluate its ability to fund the Company's operations and commitments for the foreseeable future. The Company has been
successful in its debt reduction objectives, and remains keenly focused on free cash flow generation, and has assessed its capital structure objectives to be a complementary way to enhance shareholder
value.

5

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Operating and Financial Highlights

The following table provides selected information of the Company for the years ended December 31, 2005 and 2004 and the nine months ended
December 31, 2003 (in millions of Canadian dollars except per share amounts):

|                                                                |         | Year ended December 31,
2005 |         | Year ended December 31,
2004 |  | Nine months ended December 31,
2003 |     
|--------------------------------------------------------------- | ------- | ---------------------------- | ------- | ---------------------------- |  | ----------------------------------- | ----
|Revenue                                                         |         |                              | 1,043.4 |                              |  | 1,017.5                             |     
|Direct profit (loss)                                            |         |                              | 366.2   |                              |  | 312.0                               |     
|Earnings (loss) before undernoted and discontinued operations   |         |                              | 192.9   |                              |  | 159.5                               |     
|Net earnings (loss) before discontinued operations              |         |                              | 70.9    |                              |  | 33.8                                |     
|Net earnings (loss)                                             |         |                              | 70.9    |                              |  | 29.7                                |     
|Earnings (loss) per Common Share before discontinued operations |         |                              |         |                              |  |                                     |     
|                                                                | Basic   |                              | $       | 1.63                         |  | $                                   | 0.78
|                                                                | Diluted |                              | $       | 1.61                         |  | $                                   | 0.78
|Earnings (loss) per Common Share                                |         |                              |         |                              |  |                                     |     
|                                                                | Basic   |                              | $       | 1.63                         |  | $                                   | 0.69
|                                                                | Diluted |                              | $       | 1.61                         |  | $                                   | 0.68
|Total assets                                                    |         |                              | 1,586.9 |                              |  | 1,620.9                             |     
|Total long-term financial liabilities*                          |         |                              | 448.1   |                              |  | 503.6                               |     
|Free Cash Flow                                                  |         |                              | 120.1   |                              |  | (23.1                               | )   
|Cash dividends declared per-share                               |         |                              |        |                              |  |                                    |     

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Period over period factors affecting presentation include the acquisition of Aurum in May 2004, the sale of a 49% interest in the motion
picture distribution business in October 2003 and the substantial exit of the capital intensive production business in December 2003.

Highlights for Fiscal 2005

Operating Highlights



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6

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Financial Highlights



7

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Consolidated Results of Operations

The following table presents a consolidated summary of the Company's operations for the years ended December 31, 2005 and 2004 and the nine months ended
December 31, 2003 (in millions of Canadian dollars):

|                                                                                                             |  |         |   |       |  |         |   |       |  |        |   |        |   | % Increase (decrease) |  
|------------------------------------------------------------------------------------------------------------ |  | ------- | - | ----- |  | ------- | - | ----- |  | ------ | - | ------ | - | --------------------- | -
|
|Revenue                                                                                                      |  |         |   |       |  |         |   |       |  |        |   |        |   |                       |  
|Broadcasting                                                                                                 |  | 283.4   |   | 27.2  |  | 245.9   |   | 24.2  |  | 162.4  |   | 25.4   |   | 15.3                  |  
|Entertainment                                                                                                |  | 341.5   |   | 32.7  |  | 258.7   |   | 25.4  |  | 169.8  |   | 26.5   |   | 32.0                  |  
|Motion Picture Distribution                                                                                  |  | 418.1   |   | 40.1  |  | 512.1   |   | 50.3  |  | 307.8  |   | 48.1   |   | (18.4                 | )
|Corporate and Other                                                                                          |  | 0.4     |   |      |  | 0.8     |   | 0.1   |  | 0.2    |   |       |   | (50.0                 | )
|                                                                                                             |  |         |   |       |  |         |   |       |  |        |   |        |   |                       |  
|                                                                                                             |  | 1,043.4 |   | 100.0 |  | 1,017.5 |   | 100.0 |  | 640.2  |   | 100.0  |   | 2.5                   |  
|                                                                                                             |  |         |   |       |  |         |   |       |  |        |   |        |   |                       |  
|Direct operating expenses                                                                                    |  |         |   |       |  |         |   |       |  |        |   |        |   |                       |  
|Broadcasting                                                                                                 |  | 124.2   |   | 43.8  |  | 113.2   |   | 46.0  |  | 69.8   |   | 43.0   |   | 9.7                   |  
|Entertainment                                                                                                |  | 223.3   |   | 65.4  |  | 183.9   |   | 71.1  |  | 339.7  |   | 200.1  |   | 21.4                  |  
|Motion Picture Distribution                                                                                  |  | 329.7   |   | 78.9  |  | 408.4   |   | 79.8  |  | 246.8  |   | 80.2   |   | (19.3                 | )
|Corporate and Other                                                                                          |  |        |   |      |  |        |   |      |  |       |   |       |   |                      |  
|                                                                                                             |  |         |   |       |  |         |   |       |  |        |   |        |   |                       |  
|                                                                                                             |  | 677.2   |   | 64.9  |  | 705.5   |   | 69.3  |  | 656.3  |   | 102.5  |   | (4.0                  | )
|                                                                                                             |  |         |   |       |  |         |   |       |  |        |   |        |   |                       |  
|Direct profit(2)                                                                                             |  |         |   |       |  |         |   |       |  |        |   |        |   |                       |  
|Broadcasting                                                                                                 |  | 159.2   |   | 56.2  |  | 132.7   |   | 54.0  |  | 92.6   |   | 57.0   |   | 20.0                  |  
|Entertainment                                                                                                |  | 118.2   |   | 34.6  |  | 74.8    |   | 28.9  |  | (169.9 | ) | (100.1 | ) | 58.0                  |  
|Motion Picture Distribution                                                                                  |  | 88.4    |   | 21.1  |  | 103.7   |   | 20.2  |  | 61.0   |   | 19.8   |   | (14.8                 | )
|Corporate and Other                                                                                          |  | 0.4     |   | 100.0 |  | 0.8     |   | 100.0 |  | 0.2    |   | 100.0  |   | (50.0                 | )
|                                                                                                             |  |         |   |       |  |         |   |       |  |        |   |        |   |                       |  
|                                                                                                             |  | 366.2   |   | 35.1  |  | 312.0   |   | 30.7  |  | (16.1  | ) | (2.5   | ) | 17.4                  |  
|                                                                                                             |  |         |   |       |  |         |   |       |  |        |   |        |   |                       |  
|Selling, general and administrative                                                                          |  | 161.2   |   | 15.4  |  | 135.8   |   | 13.4  |  | 123.0  |   | 19.2   |   | 18.7                  |  
|Stock based compensation                                                                                     |  | 12.1    |   | 1.2   |  | 16.7    |   | 1.6   |  | 1.7    |   | 0.3    |   | (27.5                 | )
|                                                                                                             |  |         |   |       |  |         |   |       |  |        |   |        |   |                       |  
|Operating Expenses                                                                                           |  | 173.3   |   | 16.6  |  | 152.5   |   | 15.0  |  | 124.7  |   | 19.5   |   | 13.6                  |  
|                                                                                                             |  |         |   |       |  |         |   |       |  |        |   |        |   |                       |  
|Earnings (loss) before undernoted (EBITDA(2))                                                                |  |         |   |       |  |         |   |       |  |        |   |        |   |                       |  
|Broadcasting                                                                                                 |  | 90.7    |   | 32.0  |  | 73.3    |   | 29.8  |  | 50.4   |   | 31.0   |   | 23.7                  |  
|Entertainment                                                                                                |  | 94.1    |   | 27.6  |  | 50.2    |   | 19.4  |  | (198.3 | ) | (116.8 | ) | 87.5                  |  
|Motion Picture Distribution                                                                                  |  | 46.0    |   | 11.0  |  | 72.9    |   | 14.2  |  | 43.7   |   | 14.2   |   | (36.9                 | )
|Corporate and Other                                                                                          |  | (37.9   | ) |       |  | (36.9   | ) |       |  | (36.6  | ) |        |   | (2.7                  | )
|                                                                                                             |  |         |   |       |  |         |   |       |  |        |   |        |   |                       |  
|                                                                                                             |  | 192.9   |   | 18.5  |  | 159.5   |   | 15.7  |  | (140.8 | ) | (22.0  | ) | 20.9                  |  
|                                                                                                             |  |         |   |       |  |         |   |       |  |        |   |        |   |                       |  
|Earnings (loss) from operations before undernoted and discontinued operations (operating earnings (loss)(2)) |  | 124.2   |   | 11.9  |  | 9.8     |   | 1.0   |  | (276.5 | ) | (43.2  | ) | 1,167.3               |  
|                                                                                                             |  |         |   |       |  |         |   |       |  |        |   |        |   |                       |  
|Net operating earnings (loss)(2)                                                                             |  | 76.4    |   | 7.3   |  | 16.8    |   | 1.7   |  | (290.2 | ) | (45.3  | ) | 354.8                 |  
|                                                                                                             |  |         |   |       |  |         |   |       |  |        |   |        |   |                       |  
|Net earnings (loss)                                                                                          |  | 70.9    |   | 6.8   |  | 29.7    |   | 2.9   |  | (169.6 | ) | (26.5  | ) | 138.7                 |  
|                                                                                                             |  |         |   |       |  |         |   |       |  |        |   |        |   |                       |  
|Adjusted EBITDA(2)                                                                                           |  | 192.9   |   | 18.5  |  | 160.8   |   | 15.8  |  | 25.2   |   | 3.9    |   | 20.0                  |  
|                                                                                                             |  |         |   |       |  |         |   |       |  |        |   |        |   |                       |  
|Adjusted operating earnings (loss)(2)                                                                        |  | 123.4   |   | 11.8  |  | 49.1    |   | 4.8   |  | (67.7  | ) | (10.6  | ) | 151.3                 |  
|                                                                                                             |  |         |   |       |  |         |   |       |  |        |   |        |   |                       |  
|Adjusted net operating earnings (loss)(2)                                                                    |  | 75.9    |   | 7.3   |  | 41.9    |   | 4.1   |  | (156.5 | ) | (24.4  | ) | 81.1                  |  
|                                                                                                             |  |         |   |       |  |         |   |       |  |        |   |        |   |                       |  

---

Notes:

8

---



Consolidated Results of Operations

The following table presents a consolidated summary of the Company's operations for the three months ended December 31, 2005 and 2004 (in millions
of Canadian dollars):

|                                                                                               |  | December 2005 |   | %(1)  |  | December 2004 |   | %(1)  |   | % Increase (decrease) |  
|---------------------------------------------------------------------------------------------- |  | ------------- | - | ----- |  | ------------- | - | ----- | - | --------------------- | -
|Revenue                                                                                        |  |               |   |       |  |               |   |       |   |                       |  
|Broadcasting                                                                                   |  | 84.2          |   | 28.9  |  | 72.6          |   | 22.4  |   | 16.0                  |  
|Entertainment                                                                                  |  | 93.9          |   | 32.3  |  | 104.0         |   | 32.1  |   | (9.7                  | )
|Motion Picture Distribution                                                                    |  | 113.2         |   | 38.8  |  | 147.2         |   | 45.5  |   | (23.1                 | )
|Corporate and Other                                                                            |  | 0.1           |   |      |  | 0.1           |   |      |   |                      |  
|                                                                                               |  |               |   |       |  |               |   |       |   |                       |  
|                                                                                               |  | 291.4         |   | 100.0 |  | 323.9         |   | 100.0 |   | (10.0                 | )
|                                                                                               |  |               |   |       |  |               |   |       |   |                       |  
|Direct operating expenses                                                                      |  |               |   |       |  |               |   |       |   |                       |  
|Broadcasting                                                                                   |  | 31.0          |   | 36.8  |  | 34.0          |   | 46.8  |   | (8.8                  | )
|Entertainment                                                                                  |  | 58.1          |   | 61.9  |  | 76.3          |   | 73.4  |   | (23.9                 | )
|Motion Picture Distribution                                                                    |  | 82.8          |   | 73.1  |  | 115.6         |   | 78.5  |   | (28.4                 | )
|Corporate and Other                                                                            |  |              |   |      |  |              |   |      |   |                      |  
|                                                                                               |  |               |   |       |  |               |   |       |   |                       |  
|                                                                                               |  | 171.9         |   | 59.0  |  | 225.9         |   | 69.7  |   | (23.9                 | )
|                                                                                               |  |               |   |       |  |               |   |       |   |                       |  
|Direct profit(2)                                                                               |  |               |   |       |  |               |   |       |   |                       |  
|Broadcasting                                                                                   |  | 53.2          |   | 63.2  |  | 38.6          |   | 53.2  |   | 37.8                  |  
|Entertainment                                                                                  |  | 35.8          |   | 38.1  |  | 27.7          |   | 26.6  |   | 29.2                  |  
|Motion Picture Distribution                                                                    |  | 30.4          |   | 26.9  |  | 31.6          |   | 21.5  |   | (3.8                  | )
|Corporate and Other                                                                            |  | 0.1           |   |      |  | 0.1           |   |      |   |                      |  
|                                                                                               |  |               |   |       |  |               |   |       |   |                       |  
|                                                                                               |  | 119.5         |   | 41.0  |  | 98.0          |   | 30.3  |   | 21.9                  |  
|                                                                                               |  |               |   |       |  |               |   |       |   |                       |  
|Selling, general and administrative                                                            |  | 40.7          |   | 14.0  |  | 37.3          |   | 11.5  |   | 9.1                   |  
|Stock based compensation                                                                       |  | 6.7           |   | 2.3   |  | 9.9           |   | 3.1   |   | (32.3                 | )
|                                                                                               |  |               |   |       |  |               |   |       |   |                       |  
|Operating Expenses                                                                             |  | 47.4          |   | 16.3  |  | 47.2          |   | 14.6  |   | 0.4                   |  
|                                                                                               |  |               |   |       |  |               |   |       |   |                       |  
|Earnings (loss) before undernoted (EBITDA(2))                                                  |  |               |   |       |  |               |   |       |   |                       |  
|Broadcasting                                                                                   |  | 35.2          |   | 41.8  |  | 22.9          |   | 31.5  |   | 53.7                  |  
|Entertainment                                                                                  |  | 28.2          |   | 30.0  |  | 22.2          |   | 21.3  |   | 27.0                  |  
|Motion Picture Distribution                                                                    |  | 19.9          |   | 17.6  |  | 20.1          |   | 13.7  |   | (1.0                  | )
|Corporate and Other                                                                            |  | (11.2         | ) |      |  | (14.4         | ) |      |   | 22.2                  |  
|                                                                                               |  |               |   |       |  |               |   |       |   |                       |  
|                                                                                               |  | 72.1          |   | 24.7  |  | 50.8          |   | 15.7  |   | 41.9                  |  
|                                                                                               |  |               |   |       |  |               |   |       |   |                       |  
|Earnings from operations before undernoted and discontinued operations (operating earnings(2)) |  | 40.5          |   | 13.9  |  | (10.4         | ) | (3.2  | ) | 489.4                 |  
|                                                                                               |  |               |   |       |  |               |   |       |   |                       |  
|Net operating earnings(2)                                                                      |  | 24.9          |   | 8.5   |  | (2.9          | ) | (0.9  | ) | 958.6                 |  
|                                                                                               |  |               |   |       |  |               |   |       |   |                       |  
|Net earnings                                                                                   |  | 24.8          |   | 8.5   |  | 9.6           |   | 3.0   |   | 158.3                 |  
|                                                                                               |  |               |   |       |  |               |   |       |   |                       |  
|Adjusted EBITDA(2)                                                                             |  | 72.1          |   | 24.7  |  | 50.8          |   | 15.7  |   | 41.9                  |  
|                                                                                               |  |               |   |       |  |               |   |       |   |                       |  
|Adjusted operating earnings(2)                                                                 |  | 39.7          |   | 13.6  |  | 25.7          |   | 7.9   |   | 54.5                  |  
|                                                                                               |  |               |   |       |  |               |   |       |   |                       |  
|Adjusted net operating earnings(2)                                                             |  | 24.4          |   | 8.4   |  | 20.2          |   | 6.2   |   | 20.8                  |  
|                                                                                               |  |               |   |       |  |               |   |       |   |                       |  

---

Notes:

9

---



Summary of Quarterly Results

The following table presents an unaudited consolidated summary of our operating results on a quarterly basis for the years ended December 31, 2005 and
December 31, 2004 (in millions of Canadian dollars except for per share amounts):

|                                                                                                      |         | Quarter Ended |       | Quarter Ended | 
|----------------------------------------------------------------------------------------------------- | ------- | ------------- | ----- | ------------- | 
|
|Revenue                                                                                               |         |               | 291.4 |               | 
|Direct profit(1)                                                                                      |         |               | 119.5 |               | 
|Earnings                                                                                              |         |               |       |               | 
|Earnings before undernoted (EBITDA)(1)                                                                |         |               | 72.1  |               | 
|Earnings (loss) from operations before undernoted and discontinued operations (operating earnings)(1) |         |               | 40.5  |               | 
|Net earnings (loss) before discontinued operations                                                    |         |               | 24.8  |               | 
|Net earnings (loss)                                                                                   |         |               | 24.8  |               | 
|Earnings (loss) per Common Share before discontinued operations                                       |         |               |       |               | 
|                                                                                                      | Basic   |               | $     | 0.57          | 
|                                                                                                      | Diluted |               | $     | 0.56          | 
|Earnings (loss) per Common Share                                                                      |         |               |       |               | 
|                                                                                                      | Basic   |               | $     | 0.57          | 
|                                                                                                      | Diluted |               | $     | 0.56          | 

---

Results of operations for any period are dependent on the number, timing and commercial success of television programs and motion pictures
delivered or made available to various media, none of which can be predicted with certainty. Consequently, our results of operations may fluctuate materially from period to period and the results of
any one period are not necessarily indicative of results for future periods. Cash flows may also fluctuate and are not necessarily closely correlated with revenue recognition.

TheCSIsegment's revenues are generally highest in the first, second, and, particularly, the fourth calendar quarter. Revenues in the
first and fourth calendar quarter are driven primarily by deliveries of first windowCSIepisodes to US and other English language broadcasters. Second
calendar quarter revenues are driven by international foreign language first window sales ofCSI, which generally lag US and other English language
sales. The other revenue streams, including second window revenues, video/DVD and merchandising and licensing, are less seasonal but can have significant variations from period to period.

Revenues
in the Entertainment  Other segment are dependent on the timing and number of film and television programs delivered to broadcasters and
do not necessarily correlate to broadcast seasons. Consequently, results of operations for this segment may fluctuate significantly from period to period.

For
Broadcasting, advertising revenue is generally highest in the fourth calendar quarter, and lowest in the third calendar quarter whereas revenue derived from subscribers to the
Company's specialty television channels is earned relatively evenly throughout the year.

A
more detailed discussion of core business results follows on pages 11 to 23.

10

---



Core Business Strategy, Operating Performance and Outlook(1)

The Company's principal business activities are Broadcasting, Entertainment and Motion Picture Distribution.

---

Broadcasting

The Company has a controlling ownership interest in and operates 13 Canadian specialty television channels. It also has a 50% interest in two Canadian
French-language specialty television channels and a minority interest in three other English-language specialty television channels. Canadian specialty television channels are niche programming
services, centred around a specific genre or theme, that are available to viewers only upon payment of a subscription fee to a distribution undertaking (i.e., cable,
direct-to-home satellite ("DTH"), telecommunications system, or multipoint
distribution system). The Company's channels are focused on two core genres  "fact and fiction" and "lifestyle" programming.

The
Company is committed to growing its broadcasting presence by focusing on four key areas: (i) strong channel brands, (ii) innovative and high quality programming,
(iii) innovative and exceptional sales and marketing and (iv) selectively pursuing new ways of exploiting content.



The
channels earn revenue from two primary sources: money paid by advertisers who purchase advertising on the channel, and monthly fees paid by distribution undertakings based on the
number of subscriptions to the channel. The Company sells advertising nation-wide through its in-house advertising sales team and retains 100% of the available advertising
inventory of approximately 12 minutes per hour. Where the Company's specialty services are carried as part of the basic cable package, the subscriber fees are regulated by the CRTC.

11

---



Where
the Company's specialty services are carried on a discretionary tier rates are not regulated and are negotiated directly with the signal distributors. Additionally, other Broadcasting revenues
are generated from the rental of facilities and licence fees earned on the distribution of certain programming.

The
Company has signed carriage agreements for all of its digital channels which have resulted in each of them being available to almost every digital household in Canada. Our digital
channels enjoy strong subscriber levels, each with between 950,000 and 1.3 million subscribers (with the exception of Fine Living Canada which was launched later than the other channels).

The
Company expects its seven established analog channels to demonstrate continued growth in advertising sales. Also, with the number of households in Canada equipped with digital
technology projected to continue to grow, growth for the Company's eight digital specialty television channels is expected to be strong in terms of subscriber revenues, as well as in terms of audience
growth and advertising revenues.

Results of Operations

The following table presents a summary of Broadcasting operations for the three months and year ended December 31, 2005 and 2004 (in millions of
Canadian dollars):

|                                    |  | 2005 |  | 2004 |  | $ Increase (decrease) |   | % Increase (decrease) |  
|----------------------------------- |  | ---- |  | ---- |  | --------------------- | - | --------------------- | -
|Three months ended December 31,     |  |      |  |      |  |                       |   |                       |  
|Revenue                             |  | 84.2 |  | 72.6 |  | 11.6                  |   | 16.0                  |  
|Direct operating expenses           |  | 31.0 |  | 34.0 |  | (3.0                  | ) | (8.8                  | )
|                                    |  |      |  |      |  |                       |   |                       |  
|Direct profit                       |  | 53.2 |  | 38.6 |  | 14.6                  |   | 37.8                  |  
|Operating expenses                  |  | 18.0 |  | 15.7 |  | 2.3                   |   | 14.6                  |  
|                                    |  |      |  |      |  |                       |   |                       |  
|Earnings before undernoted (EBITDA) |  | 35.2 |  | 22.9 |  | 12.3                  |   | 53.7                  |  
|                                    |  |      |  |      |  |                       |   |                       |  

|
|

|                                    |  | 2005  |  | 2004  |  | $ Increase |  | % Increase
|----------------------------------- |  | ----- |  | ----- |  | ---------- |  | ----------
|Year ended December 31,             |  |       |  |       |  |            |  |           
|Revenue                             |  | 283.4 |  | 245.9 |  | 37.5       |  | 15.3      
|Direct operating expenses           |  | 124.2 |  | 113.2 |  | 11.0       |  | 9.7       
|                                    |  |       |  |       |  |            |  |           
|Direct profit                       |  | 159.2 |  | 132.7 |  | 26.5       |  | 20.0      
|Operating expenses                  |  | 68.5  |  | 59.4  |  | 9.1        |  | 15.3      
|                                    |  |       |  |       |  |            |  |           
|Earnings before undernoted (EBITDA) |  | 90.7  |  | 73.3  |  | 17.4       |  | 23.7      
|                                    |  |       |  |       |  |            |  |           

12

---



For
comparative purposes, the following table outlines supplemental information on the Company's Broadcasting revenue that has not been shown on the consolidated statements of earnings
(in millions of Canadian dollars):

|                   |  | Three months ended December 31, |  | Year ended December 31,
|------------------ |  | ------------------------------- |  | -----------------------
|
|Analog channels    |  |                                 |  |                        
|Subscriber         |  | 23.5                            |  | 22.0                   
|Advertising        |  | 46.0                            |  | 40.0                   
|Other              |  | 1.4                             |  | 1.3                    
|                   |  |                                 |  |                        
|                   |  | 70.9                            |  | 63.3                   
|                   |  |                                 |  |                        
|Digital channels   |  |                                 |  |                        
|Subscriber         |  | 10.4                            |  | 7.0                    
|Advertising        |  | 2.9                             |  | 2.3                    
|                   |  |                                 |  |                        
|                   |  | 13.3                            |  | 9.3                    
|                   |  |                                 |  |                        
|Total Broadcasting |  | 84.2                            |  | 72.6                   
|                   |  |                                 |  |                        

For
the three months ended December 31, 2005, the analog channels recorded a 12.0% growth in revenue from $63.3 million to $70.9 million. For the year ended
December 31, 2005, the analog channels recorded an 11.7% growth in revenue from $215.4 million to $240.6 million. These increases were primarily the result of growth in
advertising revenues, as the Company continues to be a leader in the shift of Canadian television viewers toward Specialty and Pay television channels from conventional broadcast channels. Total
advertising revenues increased by 15.6% in the current quarter and 19.9% for the year ended December 31, 2005. The advertising revenue for analog channels increased by 15.0% for the quarter and
by 17.9% for the year ended December 31, 2005 compared to the equivalent periods in the prior year. The growth in advertising revenue reflects strong growth in audiences, with particularly
strong growth for Showcase, Food Network Canada and HGTV Canada. The growth in advertising revenue in the Company's analog channels was driven by growth in the inventory sell-out rate and
by maximizing the value of the demographics the Company captures with its channels. The Company expects growth in specialty television's share of total television advertising revenue going forward.
According to the Television Bureau of Canada, Canadian specialty television channels accounted for only 26% of total Canadian television advertising revenue in 2004/2005 even though the English
language specialty and pay television audience share in Canada (for both Canadian services and U.S. services such as CNN and A&E) was 53% in 2004/2005 (Neilson Media).

The
contribution to revenue by the digital specialty television channels was $13.3 million for the three months ended December 31, 2005 compared to $9.3 million for
the three months ended December 31, 2004, representing a 43.0% growth in revenue. For the year ended December 31, 2005, the revenue for digital specialty television channels increased by
$12.3 million or 40.3% to $42.8 million. Subscriber revenue for the digital channels increased by 48.6% for the quarter and by 35.1% for the year ended December 31, 2005 compared
to the equivalent periods in the prior year partially due to a retroactive adjustment payment of $2.3 million from one of the Company's distributors. Advertising revenue for the digital
channels increased by 26.1% for the quarter and by 61.7% for the year ended December 31, 2005 compared to the equivalent periods in the prior year. These favourable variances are a result of an
increase in the number of subscribers across all channels in which the Company holds a controlling ownership. As mentioned above, our digital channels enjoy strong subscriber levels, each with between
950,000 and 1.3 million subscribers (with the exception of Fine Living Canada which was launched later than the other channels). The Company's digital specialty television channels' advertising
revenue growth was driven by volume as these newer channels continue to attract a growing number of audiences and generate a growing demand from advertisers. The Company's digital specialty television
channels were launched towards the end of the September 2001 quarter. As previously noted, the Company has five digital networks ranked in the top 10.

13

---



Total
paid subscribers for the channels in which the Company holds a controlling ownership grew to 40.2 million subscribers at December 31, 2005, 10.1% over the
36.5 million subscribers at December 31, 2004.

Broadcasting
direct profit increased 37.8% for the three months ended December 31, 2005 over the three months ended December 31, 2004 as a result of increases in
advertising revenues realized by the Company's analog and digital channels as well as an increase in the number of subscribers, mainly in the digital channels, as previously explained and reduced
direct costs in the current quarter due to the timing of certain programming costs in the prior year. For the year ended December 31, 2005, Broadcasting direct profit increased by 20.0% over
the prior year as a result of increases in advertising and subscriber revenues realized by the Company's analog and digital channels as previously explained. These revenue gains were offset by
increased amortization of broadcast rights as a result of the Company's planned incremental programming investment to drive ratings, as well as increased program expenditure requirements due to
revenue growth in the prior year.

Broadcasting
direct margin increased to 63.2% in the three months ended December 31, 2005 compared to 53.2% in the three months ended December 31, 2004, and increased to
56.2% for the year ended December 31, 2005 compared to 54.0% for the year ended December 31, 2004. The increase in the quarter is the result of higher revenues and lower direct operating
expenses as explained earlier. The increase in the margin for the year is the result of higher revenues partially offset by the growth in direct operating expenses due, in part, to regulated program
expenditure requirements, as well as the planned programming investment to drive ratings.

Broadcasting
operating expenses were higher than the prior year's quarter and the year ended December 31, 2004. Broadcasting operating expenses were $18.0 million for the
quarter ended December 31, 2005 compared to $15.7 million for the three months ended December 31, 2004, and $68.5 million for the year ended December 31, 2005
compared to $59.4 million for the year ended December 31, 2004. The net change in operating expenses is related to increased advertising and promotion costs to drive ratings and
ultimately
drive increased advertising revenue, increased salary and benefit costs, increased signal delivery costs as well as higher regulatory fees driven primarily by revenue growth, and offset in part by
small decreases in a number of other operating expenses.

The
factors noted above contributed to a 53.7% and 23.7% increase in EBITDA in the quarter and year ended December 31, 2005, respectively, compared to the same periods in the
prior year.

Entertainment

The Entertainment business co-owns and co-produces the highly successfulCSIfranchise.
The Company also distributes theCSIfranchise in all territories outside the United States. It also acquires and distributes television programs
to broadcasters worldwide, video/DVD distributors, and sub-distributors throughout the world.

Over
the past five years the Company has virtually exited its capital-intensive production activities, as the international market for the type of production the Company traditionally
produced has changed fundamentally. In fiscal 1999, the Company delivered over 325 hours of prime-time drama production, none of which was part of the CSIfranchise. In the year ended
December 31, 2005, the Company produced 72 hours of prime-time drama, all of which related to
theCSIfranchise.

The
Company's Entertainment business is focused on (i) maximizing the value of theCSIfranchise and (ii) exploiting its
library of programming rights worldwide.



14

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As
discussed in note 28 to the Company's consolidated financial statements, in December 2003 the Company conducted an extensive review of its Entertainment
operations and took decisive action to restructure the Entertainment segment. Under the restructuring plan, Entertainment materially reduced the size and scope of its production business by
eliminating entire categories of production such as new prime-time drama series (with the exception of theCSIfranchise),
movies-of-the-week and miniseries and in-house feature films. The restructuring is complete. The total impact of the restructuring on the Company's
pre-tax earnings was $226.8 million. Following the significant review that was announced in December 2003, Entertainment is now primarily an international distributor of
television content with limited involvement in the creation of content, except for theCSIfranchise.

Entertainment
generates revenue from the production and distribution of theCSIfranchise domestically and internationally, the
distribution of previously produced and acquired television programming and from the licencing of a limited amount of factual and kids programming.

The
Entertainment business comprises two reportable segments,CSIand Other.

The
Company's interest in the threeCSItelevision series as co-producer is accounted for as a 50% jointly controlled
production.

The
Company is responsible for its share of the production costs for the threeCSIseries, which is recorded as an increase in the
Company's investment in film and television programs, and is amortized in accordance with the individual film forecast method prescribed by AICPA Statement of Position 00-2, "Accounting By
Producers and Distributors of Film" ("SoP 00-2"). Other direct operating expenses include distribution expenses (prints and advertising and other direct costs), third party
participation costs, including royalties and residuals, and the co-producer's share of net profits recognized by the Company arising from the three CSIseries. Reimbursements of previously incurred
production costs are recorded when the contractual conditions for reimbursement are met, the amount is
determinable and collection is reasonably assured. The amounts are collected over a period exceeding one year and are recorded at fair value as an increase in accounts receivable, a reduction of
investment in film and television programs, and direct operating expense, to the extent the investment in the related television program is reduced to nil. These reductions result in sales of the CSIseries generating higher margins in future periods.

The
Company is the distributor of theCSIfranchise for territories outside of the United States. These sales are recorded as
revenue when the relevant revenue recognition criteria are met. The Company benefits from United States exploitation by recording its 50% interest in first window United States network
license fees as revenue upon delivery, and its 50% interest in United States after sales (including second window cable sales, weekend syndication, video/DVD, merchandising & licensing),
net of distribution fees, expenses and third party participation costs, including royalties and residuals, as revenue when the amounts are reported to the Company by the co-producer. The
co-producer holds the distribution rights for United States after sales.

Given
the variability of timing in the recognition of revenues, costs, and reimbursements of previously incurred production costs associated with the CSIseries, revenue, direct operating expenses and direct
profit may vary significantly from period to period.

15

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Results of Operations

The following table presents a summary of Entertainment operations for the three months and year ended December 31, 2005 and 2004 (in millions of
Canadian dollars):

|                                    |  | 2005  |  | 2004  |  | $ Increase (decrease) |   | % Increase (decrease) |  
|----------------------------------- |  | ----- |  | ----- |  | --------------------- | - | --------------------- | -
|Three months ended December 31,     |  |       |  |       |  |                       |   |                       |  
|Revenue                             |  | 93.9  |  | 104.0 |  | (10.1                 | ) | (9.7                  | )
|Direct operating expenses           |  | 58.1  |  | 76.3  |  | (18.2                 | ) | (23.9                 | )
|Direct profit                       |  | 35.8  |  | 27.7  |  | 8.1                   |   | 29.2                  |  
|Operating expenses                  |  | 7.6   |  | 5.5   |  | 2.1                   |   | 38.2                  |  
|Earnings before undernoted (EBITDA) |  | 28.2  |  | 22.2  |  | 6.0                   |   | 27.0                  |  
|Year ended December 31,             |  |       |  |       |  |                       |   |                       |  
|Revenue                             |  | 341.5 |  | 258.7 |  | 82.8                  |   | 32.0                  |  
|Direct operating expenses           |  | 223.3 |  | 183.9 |  | 39.4                  |   | 21.4                  |  
|Direct profit                       |  | 118.2 |  | 74.8  |  | 43.4                  |   | 58.0                  |  
|Operating expenses                  |  | 24.1  |  | 24.6  |  | (0.5                  | ) | (2.0                  | )
|Earnings before undernoted (EBITDA) |  | 94.1  |  | 50.2  |  | 43.9                  |   | 87.5                  |  

The
following table presents additional information for the Entertainment business segments for the three months and year ended December 31, 2005 and 2004 (in millions of
Canadian dollars):

|                                     |  | CSI  |  | Other |   | Total
|------------------------------------ |  | ---- |  | ----- | - | -----
|Three months ended December 31, 2005 |  |      |  |       |   |      
|Revenue                              |  | 82.0 |  | 11.9  |   | 93.9 
|Direct profit                        |  | 30.0 |  | 5.8   |   | 35.8 
|Three months ended December 31, 2004 |  |      |  |       |   |      
|Revenue                              |  | 93.6 |  | 10.4  |   | 104.0
|Direct profit                        |  | 39.5 |  | (11.8 | ) | 27.7 

|
|

|                             |  | CSI   |  | Other |  | Total
|---------------------------- |  | ----- |  | ----- |  | -----
|Year ended December 31, 2005 |  |       |  |       |  |      
|Revenue                      |  | 288.4 |  | 53.1  |  | 341.5
|Direct profit                |  | 112.2 |  | 6.0   |  | 118.2
|Year ended December 31, 2004 |  |       |  |       |  |      
|Revenue                      |  | 205.1 |  | 53.6  |  | 258.7
|Direct profit                |  | 73.4  |  | 1.4   |  | 74.8 

Entertainment
revenue for the quarter ended December 31, 2005 decreased by $10.1 million when compared to the prior year period. This decrease is the result of an
$11.6 million decrease inCSIrevenue, partially offset by an increase in Other revenue of $1.5 million. The decrease in CSIrevenue is primarily
due to the timing of revenue recognized on United States after sales. As described on page 15, the Company
records its 50% interest in United States after sales as revenue when the amounts are reported to the Company by the co-producer. This leads to variability in revenues from quarter
to quarter. The increase in Other revenue from $10.4 million for the three months ended December 31, 2004 to $11.9 million for the three months ended December 31, 2005 is
the result of increased international sales from the Company's library of film and television programs.

Entertainment
revenue increased to $341.5 million for the year ended December 31, 2005 from $258.7 million for the year ended December 31, 2004. This 32.0%,
or $82.8 million, increase in revenues is attributable toCSIand is offset by a slight decrease in Other revenues. The CSIfranchise accounted for
$83.3 million of the increase in revenue over the prior year. The increase in CSIrevenue is primarily the result of

16

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the
delivery of an increased number of episodes in total, which now includes the addition ofCSI: NYto the franchise, as well as increased license fees
and international sales.CSI:NYcomprised 24 of the 72 total deliveries for the year ended December 31, 2005, compared to 10 of the
58 total deliveries for the year ended December 31, 2004. International sales for theCSIfranchise increased in comparison to the prior
year due to the addition ofCSI: NYto the franchise and additional seasons ofCSI: Crime Scene
InvestigationandCSI:Miamibeing available for sale.

Direct
profit for the quarter ended December 31, 2005 increased by $8.1 million compared to the prior year period. This increase was the result of a $17.6 million
increase in Other direct profit which was partially offset by a $9.5 million decrease inCSIdirect profit. The increase in Other direct profit
is partly attributable to higher margins recognized on sales of the Company's library of film and television programs during the current quarter resulting from strong ultimate revenue estimates for
the library. Also contributing to the improvement is lower participation costs in the period. The decrease inCSIdirect profit is due to the timing of
revenue recognized on United States after sales as previously explained as well as the strengthening of the Canadian dollar.

Direct
profit for the year ended December 31, 2005 increased to $118.2 million from $74.8 million in the prior year. CSIdirect profit increased from $73.4 million for the year ended
December 31, 2004 to $112.2 million for the year ended
December 31, 2005. The increase inCSIdirect profit is due to increased deliveries ofCSI: NYas
well as increased license fees and higher international and syndication revenue. Other direct profit increased from $1.4 million for the year ended December 31, 2004 to
$6.0 million for the year ended December 31, 2005. The increase is attributable to higher margins recognized on sales of the Company's produced library of film and television programs
and lower participation costs.

Direct
margin increased from 26.6% in the quarter ended December 31, 2004 to 38.1% in the current quarter. This increase in direct margin is attributable to an increase in Other
direct margin which was
partially offset by a decrease inCSIdirect margin. The decrease inCSIdirect margin is primarily due
to the timing of revenue recognized on United States after sales as previously explained.

Direct
margin increased from 28.9% for the year ended December 31, 2004 to 34.6% for the year ended December 31, 2005.CSIdirect margin increased from 35.8% in the year ended December 31, 2004 to 38.9% in the year ended December 31, 2005. This increase in direct margin is due to lower third party
participation costs recorded during the current year. Other direct margin increased from 2.6% in the year ended December 31, 2004 to 11.3% in the current year. This increase is mainly due to
strong revenue estimates which resulted in higher margins in the current year and lower participation costs.

Entertainment
operating expenses were $7.6 million and $24.1 million in the three months and year ended December 31, 2005, respectively, compared to
$5.5 million and $24.6 million in the same periods in the prior year. The increase of $2.1 million for the quarter compared to the prior year's quarter is primarily the result of
the timing of recognition of business taxes. The decrease of $0.5 million for the year ended December 31, 2005 is due to continued cost savings from the restructuring undertaken in
December 2003 partially offset by increased business taxes.

The
factors noted above contributed to an increase of 27.0%, and a 87.5% increase in EBITDA in the quarter and year ended December 31, 2005, respectively, compared to the same
periods in the prior year.

Motion Picture Distribution

The Company's Motion Picture Distribution business, through its 51% ownership interest in Distribution LP, is a leading distributor of motion pictures in
Canada, with a strong and growing presence in the United Kingdom through its wholly-owned subsidiary Momentum and in Spain through the acquisition of Aurum. The Motion Picture Distribution
business comprises four reportable segments: Domestic Distribution, Momentum, Aurum and Cinemas. (see note 25 of the consolidated financial statements).

Distribution LP
generates revenue from the theatrical distribution of motion pictures, the licencing of rights to conventional and specialty broadcasters, the sale of videos and
DVDs, and from the exhibition of motion pictures through its cinemas.

17

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Distribution LP
is a leading distributor of motion pictures in Canada. Over each of the past five years Distribution LP has released an average of 81 theatrical
motion pictures and 186 DVD titles in Canada. Distribution LP has exclusive Canadian distribution arrangements with New Line Cinema, The Weinstein Company, Focus Features,
Dimension Films, Miramax Films, IFC Films and Remstar.

Management
believes Distribution LP is the only independent distributor operating in three key territories (Canada, U.K., and Spain) that can collectively represent up to 18% of
the global box office. This platform provides it with enhanced access to high quality content, economies of scale with respect to theatrical print and video/DVD duplication costs, as well as spreading
fixed costs over a broader base. Distribution LP's strategy is to (i) maintain a leading market position in Canada, (ii) grow its U.K. and Spanish operations and opportunistically
expand in certain selected territories, and (iii) leverage its large library of titles.



Domestic
Distribution obtains distribution rights for motion pictures primarily through its aforementioned output agreements with New Line Cinema, The Weinstein Company, Focus
Features and Miramax Films, four of the leading U.S. based independent studios, as well as from smaller independent producers and distributors based in the United States, Canada and
around the world. In Europe, Momentum and Aurum primarily acquire theatrical, home entertainment and television distribution rights for motion pictures one motion picture at a time and, on occasion,
have entered into multi-jurisdictional agreements. Distribution LP typically distributes motion pictures for theatrical exhibition, for home entertainment, television viewing and ancillary
markets. Distribution LP also holds a 51% interest in Alliance Atlantis Cinemas ("Cinemas"), a partnership with Cineplex Entertainment LP that currently operates three movie cinemas in
Toronto. During the year ended December 31, 2005, Distribution LP and its cinemas business partner closed one and sold two of the cinemas formerly owned and operated by the partnership.

The
Company completed an initial public offering for units of the Fund on October 15, 2003. The Company received gross proceeds of $254.0 million on the closing of the
offering from the sale of a 49.0% interest in its motion picture distribution business. This sale was concluded through an initial sale of a 42.6% interest in the business to Distribution LP in
exchange for 57.4% of the total outstanding LP units plus a promissory note, and then a further sale of a 6.4% interest was completed on the exercise of an over-allotment option by
the underwriting group of the Fund. Distribution LP repaid the
promissory note from net proceeds it received from the sale of LP units to the Fund, together with drawings on a new term loan from a group of financial institutions.

In
May, 2004, a subsidiary of Distribution LP completed the acquisition of Spanish film distributor Aurum for cash consideration of $55.2 million including
$1.8 million in cash expenses. The purchase price was funded through increased borrowing under Distribution LP's credit facility and the issuance of Class A Ordinary Limited
Partnership Units ("Ordinary LP Units"). Distribution LP entered into an amended and restated credit agreement with its lenders to increase the authorized borrowing amount under its
credit facility from $100.0 million to $125.0 million. The Fund completed a private placement of 1,436,000 Units from treasury at

18

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$10.45
per unit, through a syndicate of agents. The Fund applied the gross proceeds of the private placement to acquire Ordinary LP Units of Distribution LP. The Company exercised its
preemptive rights and in doing so maintained its 51% interest in Distribution LP, by acquiring 1,494,612 Ordinary LP Units of Distribution LP at $10.45 per unit, such that
Distribution LP realized combined gross proceeds of $30.6 million from the offering of Ordinary LP Units. Aurum is an independent film distributor in Spain.

Distribution LP
is pursuing resolution of certain matters relating to the acquisition of Aurum and potential recovery of certain amounts. The amount of recovery, if any, cannot be
determined at this time but may be material. Any recovery will, in addition to contributing cash to Distribution LP, result in a change in the purchase price allocation that will principally go
to reduce goodwill. Should the recovery be materially less than Distribution LP anticipates, an impairment of goodwill associated with the acquisition may be required. An arbitration procedure
under the rules of the London Court of International Arbitration has been initiated pursuant to the terms of the agreement of purchase and sale. Distribution LP expects to have a determination
from the arbitration during 2006.

The
Company continues to consolidate the operations of Distribution LP into its results. Net earnings and earnings per share are both reduced by amounts accrued to the 49.0%
interest from the date of completion of the sale. Although an authorized credit facility, including a $50.0 million term loan, a $25.0 million revolving credit facility, and a
$50.0 million revolving term credit facility, that has been secured by Distribution LP is non-recourse to the Company, the portion, if any, of the facility that has been
drawn is included in the Company's reported consolidated total indebtedness. The Company's future cash flows will be impacted by the expected monthly distributions to holders of Distribution
LP Units.

Results of Operations

The following table presents a summary of Motion Picture Distribution operations for the three months and year ended December 31, 2005 and 2004
(in millions of Canadian dollars):

|                                    |  | 2005  |  | 2004  |  | $ Increase (decrease) |   | % Increase (decrease) |  
|----------------------------------- |  | ----- |  | ----- |  | --------------------- | - | --------------------- | -
|Three months ended December 31,     |  |       |  |       |  |                       |   |                       |  
|Revenue                             |  | 113.2 |  | 147.2 |  | (34.0                 | ) | (23.1                 | )
|Direct operating expenses           |  | 82.8  |  | 115.6 |  | (32.8                 | ) | (28.4                 | )
|                                    |  |       |  |       |  |                       |   |                       |  
|Direct profit                       |  | 30.4  |  | 31.6  |  | (1.2                  | ) | (3.8                  | )
|Operating expenses                  |  | 10.5  |  | 11.5  |  | (1.0                  | ) | (8.7                  | )
|                                    |  |       |  |       |  |                       |   |                       |  
|Earnings before undernoted (EBITDA) |  | 19.9  |  | 20.1  |  | (0.2                  | ) | (1.0                  | )
|                                    |  |       |  |       |  |                       |   |                       |  
|Year ended December 31,             |  |       |  |       |  |                       |   |                       |  
|Revenue                             |  | 418.1 |  | 512.1 |  | (94.0                 | ) | (18.4                 | )
|Direct operating expenses           |  | 329.7 |  | 408.4 |  | (78.7                 | ) | (19.3                 | )
|                                    |  |       |  |       |  |                       |   |                       |  
|Direct profit                       |  | 88.4  |  | 103.7 |  | (15.3                 | ) | (14.8                 | )
|Operating expenses                  |  | 42.4  |  | 30.8  |  | 11.6                  |   | 37.7                  |  
|                                    |  |       |  |       |  |                       |   |                       |  
|Earnings before undernoted (EBITDA) |  | 46.0  |  | 72.9  |  | (26.9                 | ) | (36.9                 | )
|                                    |  |       |  |       |  |                       |   |                       |  

19

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The
following table outlines further information on Motion Picture Distribution's revenue, direct profit, and earnings (loss) before undernoted that has not been shown on the
consolidated statements of earnings (in millions of Canadian dollars):

|                                           |  | Domestic Distribution |  | Momentum |  | Aurum |   | Cinemas |  | Total
|------------------------------------------ |  | --------------------- |  | -------- |  | ----- | - | ------- |  | -----
|Three months ended December 31, 2005       |  |                       |  |          |  |       |   |         |  |      
|Revenue                                    |  | 62.1                  |  | 35.9     |  | 12.9  |   | 2.3     |  | 113.2
|Direct profit                              |  | 14.2                  |  | 13.9     |  | 2.0   |   | 0.3     |  | 30.4 
|Earnings before undernoted (EBITDA)        |  | 7.6                   |  | 12.2     |  |      |   | 0.1     |  | 19.9 
|Three months ended December 31, 2004       |  |                       |  |          |  |       |   |         |  |      
|Revenue                                    |  | 85.4                  |  | 28.0     |  | 30.0  |   | 3.8     |  | 147.2
|Direct profit                              |  | 21.9                  |  | 7.8      |  | 1.6   |   | 0.3     |  | 31.6 
|Earnings (loss) before undernoted (EBITDA) |  | 13.7                  |  | 6.5      |  | (0.4  | ) | 0.3     |  | 20.1 

|
|

|                                    |  | Domestic Distribution |  | Momentum |  | Aurum |  | Cinemas |  | Total
|----------------------------------- |  | --------------------- |  | -------- |  | ----- |  | ------- |  | -----
|Year ended December 31, 2005        |  |                       |  |          |  |       |  |         |  |      
|Revenue                             |  | 271.4                 |  | 93.7     |  | 41.4  |  | 11.6    |  | 418.1
|Direct profit                       |  | 57.0                  |  | 22.9     |  | 7.1   |  | 1.4     |  | 88.4 
|Earnings before undernoted (EBITDA) |  | 27.4                  |  | 16.9     |  | 1.0   |  | 0.7     |  | 46.0 
|Year ended December 31, 2004        |  |                       |  |          |  |       |  |         |  |      
|Revenue                             |  | 341.8                 |  | 92.4     |  | 62.9  |  | 15.0    |  | 512.1
|Direct profit                       |  | 79.4                  |  | 15.5     |  | 6.2   |  | 2.6     |  | 103.7
|Earnings before undernoted (EBITDA) |  | 58.6                  |  | 9.8      |  | 2.5   |  | 2.0     |  | 72.9 

The
following table outlines further information on Motion Picture Distribution's revenue that has not been shown on the consolidated statements of earnings (in millions of
Canadian dollars)(1).

---

|                                     |  | Theatrical |  | Video/DVD |  | Television |  | Total
|------------------------------------ |  | ---------- |  | --------- |  | ---------- |  | -----
|Three months ended December 31, 2005 |  |            |  |           |  |            |  |      
|Domestic Distribution                |  | 10.1       |  | 37.7      |  | 14.3       |  | 62.1 
|Momentum Pictures                    |  | 3.4        |  | 26.7      |  | 5.8        |  | 35.9 
|Aurum                                |  | 1.6        |  | 9.6       |  | 1.7        |  | 12.9 
|Cinemas                              |  | 2.3        |  |          |  |           |  | 2.3  
|                                     |  |            |  |           |  |            |  |      
|                                     |  | 17.4       |  | 74.0      |  | 21.8       |  | 113.2
|                                     |  |            |  |           |  |            |  |      
|Three months ended December 31, 2004 |  |            |  |           |  |            |  |      
|Domestic Distribution                |  | 14.1       |  | 55.5      |  | 15.8       |  | 85.4 
|Momentum Pictures                    |  | 0.4        |  | 25.2      |  | 2.4        |  | 28.0 
|Aurum                                |  | 3.0        |  | 25.8      |  | 1.2        |  | 30.0 
|Cinemas                              |  | 3.8        |  |          |  |           |  | 3.8  
|                                     |  |            |  |           |  |            |  |      
|                                     |  | 21.3       |  | 106.5     |  | 19.4       |  | 147.2
|                                     |  |            |  |           |  |            |  |      

20

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|
|

|                             |  | Theatrical |  | Video/DVD |  | Television |  | Total
|---------------------------- |  | ---------- |  | --------- |  | ---------- |  | -----
|Year ended December 31, 2005 |  |            |  |           |  |            |  |      
|Domestic Distribution        |  | 56.8       |  | 157.2     |  | 57.4       |  | 271.4
|Momentum Pictures            |  | 9.7        |  | 66.7      |  | 17.3       |  | 93.7 
|Aurum                        |  | 7.5        |  | 18.5      |  | 15.4       |  | 41.4 
|Cinemas                      |  | 11.6       |  |          |  |           |  | 11.6 
|                             |  |            |  |           |  |            |  |      
|                             |  | 85.6       |  | 242.4     |  | 90.1       |  | 418.1
|                             |  |            |  |           |  |            |  |      
|Year ended December 31, 2004 |  |            |  |           |  |            |  |      
|Domestic Distribution        |  | 72.1       |  | 213.3     |  | 56.4       |  | 341.8
|Momentum Pictures            |  | 12.8       |  | 71.0      |  | 8.6        |  | 92.4 
|Aurum                        |  | 7.9        |  | 48.1      |  | 6.9        |  | 62.9 
|Cinemas                      |  | 15.0       |  |          |  |           |  | 15.0 
|                             |  |            |  |           |  |            |  |      
|                             |  | 107.8      |  | 332.4     |  | 71.9       |  | 512.1
|                             |  |            |  |           |  |            |  |      

Revenue
for the three months ended December 31, 2005 decreased $34.0 million, or 23.1% to $113.2 million due to decreases in Domestic Distribution and Aurum
partially offset by an increase in Momentum in the quarter. Revenue was $418.1 million for the year ended December 31, 2005 compared with $512.1 million for the year ended
December 31, 2004, representing a decrease of $94.0 million or 18.4%. Revenue decreased in Domestic Distribution and Aurum and was partially offset by a slight increase in Momentum.

Domestic
Distribution's revenue for the three months ended December 31, 2005 decreased $23.3 million to $62.1 million. This decrease in revenue is attributable to
declines in all media. Theatrical revenue declined by $4.0 million primarily due to a stronger Christmas slate in 2004 which includedAfter the Sunset, Blade:
TrinityandShall we Dance? Other current quarter theatrical releases includedDerailed, A History of
ViolenceandJust Friends. Video/DVD revenue decreased $17.8 million largely due to the absence of a video/DVD release of Lord of the
Rings. Video/DVD revenues in the fourth quarter benefited from the sales ofThe Brothers Grimm, Unleashed, Sin
CityandTrailer Park Boys Christmas Special. Television revenue was comparable to the prior year with a slight decrease of
$1.5 million.

Domestic
Distribution's revenue for the year ended December 31, 2005 decreased $70.4 million or 20.6% to $271.4 million from the prior year. The decrease in revenue
is due to decreases in theatrical and video/DVD revenue partially offset by an increase in television revenues. Theatrically, Domestic Distribution had a solid performance in 2005 with the summer hit Wedding Crashers,Frank Miller'sSin City, Monster-in-LawandAurorewhich was the number two
theatrical hit in Quebec for
the year. The theatrical slate in 2005, however, was up against stronger comparatives in 2004, which included the last installment ofLord of the Rings: The Return of the
King,The NotebookandFahrenheit 9/11, leading to an overall decline of
$15.3 million. Video/DVD revenue decreased $56.1 million largely due to the absence of a video/DVD release ofLord of the Ringsin 2005.
The video/DVD slate for 2005 included Frank Miller'sSin City, The Notebook, Blade: Trinity, Monster-in-lawand Shall we Dance?Television revenue
increased slightly by $1.0 million.

Momentum's
revenue for the three months ended December 31, 2005 increased $7.9 million or 28.2% to $35.9 million as a result of increases in all media. Theatrically,
Momentum released three notable titles in the quarter,Lord of War, Broken FlowersandWhere the Truth
Liescompared to only one notable title in the prior year's quarter leading to an increase of $3.0 million. Video/DVD revenue increased $1.5 million due to the
continued sales onCreature ComfortsandYogalates. Television revenue increased $3.4 million
from the prior year's quarter and can be attributed to strong sales ofVera Drake, Equilibrium,DownfallandWicker Park.

Revenue
for Momentum increased $1.3 million or 1.4% to $93.7 million for the year ended December 31, 2005. The increase is due to an increase in television revenues
partially offset by declines in theatrical and video/DVD revenue. Theatrical revenue decreased by $3.1 million as the current year's slate which includedRacing Stripes,
Vera Drake, Downfall, Lord of WarandBroken Flowerswas up against stronger comparatives from 2004 which included Lost in TranslationandEternal Sunshine of the Spotless Mind. Video/DVD revenue was also

21

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impacted
by the stronger 2004 comparatives ofLost in Translation, Eternal Sunshine of the Spotless MindandFootball
Factoryleading to a decline of $4.3 million. The current year's video/DVD slate includedRacing Stripes, Creature
ComfortsandDownfall.Television revenue increased $8.7 million due to strong television sales to broadcasters including Eternal Sunshine of the
Spotless Mind,Vera DrakeandWicker
Park.

Aurum's
revenue decreased $17.1 million or 57.0% to $12.9 million from the prior year's quarter largely as a result of the decline in video/DVD revenue. The decline of
$1.4 million in theatrical revenue reflects the delay of a few theatrical titles to 2006. The decline of $16.2 million in video/DVD revenue reflects the strong 2004 comparatives with Lord of the Rings: The Return of
the KingandThe Passion of Christ. The current quarter's slate
includes a strong contribution fromValiant. Television revenue saw a slight increase of $0.5 million.

Aurum's
revenues decreased $21.5 million or 34.2% to $41.4 million from the prior year's period from May 2004 to December 2004. The decrease in revenue can be
attributed to declines in theatrical and video/DVD revenue partly offset by an increase in television revenue. Theatrical revenues declined $0.4 million from the prior year as a result of the
slow theatrical release pattern in 2005 and the delay of
some titles to 2006 includingDomino, PrimeandJust Friends. The current year's theatrical slate
includedValiant, Sound of ThunderandThe Dark. Although Valiantvideo/DVD sales were strong in 2005, the
comparatives for 2004 were much stronger with a video/DVD release ofLord of
the Rings: The Return of the King. This led to an overall decline in video/DVD revenue of $29.6 million. Television revenues increased $8.5 million from the prior
year's period with strong sales ofMy Big Fat Greek Wedding, Boat TripandThe Passion of Christ.

Revenue
for Cinemas decreased $1.5 million to $2.3 million compared to $3.8 million in the prior year's quarter. The decrease reflects the reduced number of
operating theatres as a result of the sale of two theatres during the year.

Revenue
for Cinemas decreased $3.4 million or 22.7% to $11.6 million from the prior year. The decrease primarily reflects the closure of one and the sale of two theatres
during the year.

Direct
profit for the three months ended December 31, 2005 decreased $1.2 million, or 3.8% to $30.4 million. Direct profit for the year ended December 31,
2005 decreased $15.3 million or 14.8% to $88.4 million.

Direct
profit for Domestic Distribution for the three months ended December 31, 2005 decreased by $7.7 million to $14.2 million reflecting a direct margin of 22.9%
in the current quarter compared to a 25.6% margin in the prior year's quarter. The decrease can be attributed to the lower revenues as previously discussed.

Direct
profit for Domestic Distribution decreased $22.4 million or 28.2% to $57.0 million for the year ended December 31, 2005 reflecting a direct margin of 21.0%
compared to 23.2% in the prior year. The decline in direct profit reflects the lower revenues as previously noted and the less than expected performances of a few theatrical titles in Domestic
Distribution's current year release slate includingCursed, Son of the Mask, Underclassman, The ManandThe Great
Raid.

Momentum's
direct profit increased by $6.1 million to $13.9 million for the three months ended December 31, 2005 reflecting a direct margin of 38.7% compared to
27.9% in the prior year's quarter. The increase is primarily due to the $3.0 million one time benefit from a settlement with a supplier, increased revenues as previously noted and the increased
weighting of video/DVD and television revenues which have higher margins.

Direct
profit for Momentum for the year ended December 31, 2005 increased $7.4 million or 47.7% to $22.9 million reflecting a direct margin of 24.4% compared to
16.8% in the prior year. The margin improvement can primarily be attributed to the $3.0 million one time benefit from a settlement with a supplier and higher revenues as previously noted
combined with the higher weighting of television and video/DVD revenue. Television and video/DVD margins tend to be higher than theatrical margins as there are fewer marketing costs associated with
television and video/DVD sales.

Direct
profit for Aurum increased $0.4 million in the current quarter to $2.0 million as compared to $1.6 million in the prior year's quarter. Direct margin was
15.5% as compared to 5.3% in the prior year's quarter. The increase is largely due to the higher weighting on television product.

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Direct
profit for Aurum increased $0.9 million or 14.5% to $7.1 million for the year ended December 31, 2005 reflecting a direct margin of 17.1% compared to 9.9% in
the prior year. The increase in direct profit is largely due to the mix in product in the current year's slate which was heavily weighted towards increased television product with higher margins. In
addition the video/DVD margins have started to reflect the improved margins as a result of a new video and DVD sub-distribution agreement and the new agreements for DVD replication, film
prints and media buying.

Operating
expenses decreased by $1.0 million to $10.5 million for the three months ended December 31, 2005 compared to $11.5 million for the three months
ended December 31, 2004. The decrease is a result of a decrease in Domestic Distribution. Operating expenses increased to $42.4 million for the year ended December 31, 2005
compared to $30.8 million for the prior year. The increase is due to increases in each of Domestic Distribution, Momentum and Aurum. As Aurum was acquired in May 2004, the length of the
periods being analyzed is not comparable.

The
decrease in Domestic Distribution's operating expenses of $1.6 million for the three months ended December 31, 2005 is primarily due to a decrease in the LTIP Plan
offset by an increase in employee costs relating to the Capital Pool Plan, the Equity Pool Plan and the Consideration Pool Plan (refer to note 13 of the Company's consolidated financial
statements for further details of Distribution LP's compensation plans). The increase for the year in Domestic Distribution's operating expenses of $8.8 million is primarily due to the
increase in employee costs relating to the Capital Pool Plan, the Equity Pool Plan and the Consideration Pool Plan offset by a decrease in the LTIP plan. The prior year includes $0.2 million of
costs relating to these compensation plans. Also included in operating expenses are due diligence costs relating to an unsuccessful acquisition, as well as an increase related to professional fees and
increased employee costs.

The
increase in the year of $2.4 million in Aurum's operating expenses is primarily related to the difference in lengths of the periods being compared. In addition, the increase
can be attributed to higher professional fees and the closure of the international sales department which led to increased severance costs.

The
factors noted above contributed to decreases of 1.0% and 36.9% in EBITDA in the three months and year ended December 31, 2005, respectively, compared to the same periods in
the prior year.

Corporate and Other

Corporate and Other is primarily a corporate services group providing support to the operating segments for information technology, finance, internal audit, human
resources, legal, investor relations and other corporate services. Corporate and Other also holds corporate investments, which generate small revenue streams as well as corporate activities that are
being wound down.

Operating
expenses in Corporate and Other were $11.3 million and $38.3 million in the three months and year ended December 31, 2005, respectively, compared to
$14.5 million and $37.7 million in the same periods in the prior year. The decrease in the quarter is mostly related to a decrease in stock based compensation costs related to lower
Performance Share Appreciation Plan costs. The increase for the year is primarily related to increases in professional fees, some of which is related to management's review and assessment of internal
controls as required under Sarbanes Oxley and Bill C-198, audit services and a retirement allowance offset in large part by lower stock based compensation costs.

Other Statement of Earnings Items

AmortizationAmortization includes amortization of property and equipment, amortization of other
assets and development costs charges. Amortization was $8.0 million for the quarter ended December 31, 2005 compared to $4.8 million for the quarter ended December 31,
2004, representing an increase of $3.2 million. For the year ended December 31, 2005, amortization decreased by $3.3 million to $18.0 million. The increase in the quarter
ended December 31, 2005 is due to impairment charges related to certain broadcast intangible assets totaling $5.0 million. The decrease over the prior year is mainly due to a reduction
of development costs charges as a result of the restructuring of our Entertainment operations in December 2003. For the year ended December 31, 2005, development costs charges were
$1.2 million, compared to $4.4 million in the prior year. Also contributing to the decrease is the prior year including additional amortization of costs related to certain broadcast
intangibles, which are now fully amortized.

23

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InterestInterest expense decreased $2.6 million to $9.3 million for the three
months
ended December 31, 2005 compared to $11.9 million for the three months ended December 31, 2004. For the year ended December 31, 2005 interest expense decreased
$31.9 million to $26.3 million compared to $58.2 million for the year ended December 31, 2004.

The
decrease in interest expense for both the three months and year ended December 31, 2005 is primarily the result of the comprehensive debt refinancing undertaken by the Company
in December 2004 and lower net indebtedness. Lower interest costs were driven by lower average interest rates due to the replacement of the Company's 13% U.S. dollar Senior Subordinated
Notes. Also, interest income increased, reducing net interest expense, as a result of interest recognized with respect to long-term receivables held by the Company. The Company's average
cost of borrowing in the quarter was 6.1% as compared to 10.4% in the prior year's quarter. As explained above, interest expense decreased in the quarter, however, this decline is offset in part by
interest incurred relating to the settlement of various government tax audits during the quarter. The Company's average cost of borrowing during the year was 5.2% as compared to 11.1% in the prior
year.

Net
indebtedness (indebtedness less cash and cash equivalents) decreased from $428.6 million at December 31, 2004 to $331.9 million at December 31, 2005, a
decrease of $96.7 million. The decrease results from improvements in the Company's operating cash flow, driven by operational improvements and interest savings from the refinancing of
substantially all of its existing credit facilities in December 2004. Also, a portion of the reduction in net indebtedness relates to the impact of the strengthening Canadian dollar relative to
the U.S. dollar on the Company's U.S. dollar denominated debt.

Equity Losses in AffiliatesEquity losses in affiliates for the quarter ended December 31,
2005 was $2.8 million compared to nil for the quarter ended December 31, 2004. For the year ended December 31, 2005, equity losses was $2.7 million compared to the prior
year equity losses of $0.1 million. The current quarter loss relates to the recognition of the cumulative equity losses of one of the digital specialty channels in which the Company is able to
exert significant influence. Equity earnings and losses in affiliates include the Company's share of earnings and losses from its investments in digital specialty television channels, One: The Body,
Mind and Spirit Channel and Scream.

Minority InterestMinority interest primarily represents the 49% interest of Movie Distribution
Income Fund in the earnings of Distribution LP. For the three months ended December 31, 2005 minority interest was $12.3 million, compared to $8.4 million in the prior
year. Minority interest for the year ended December 31, 2005 was $22.5 million, compared to $34.0 million in the prior year. The change from the prior year reflects the change in
net income for Distribution LP in the quarter and year.

Unusual ItemsUnusual items were ($0.8) million for the quarter and year ended December 31,
2005, compared to $36.1 million for the quarter and year ended December 31, 2004. The recovery recorded in the current year pertains to a reversal of an accrual for employee costs
related to the Entertainment restructuring plan undertaken in December 2003. (refer to note 11 of the Company's consolidated financial statements). Unusual items from the prior year
include a $12.1 million write down of deferred financing costs associated with the previous revolving credit facility and senior subordinated notes as the Company refinanced its existing credit
facilities on December 20, 2004, as well as a $24.0 million redemption premium related to the senior subordinated notes.

Income TaxesThe income tax provision for the three months ended December 31, 2005 increased
by $17.1 million to $15.2 million compared to the three months ended December 31, 2004. For the year ended December 31, 2005, income tax provision increased
$48.5 million to $49.1 million compared to $0.6 million in the prior year. This increase for the quarter and year reflects the impact of higher taxable earnings, the mix of
earnings between different tax jurisdictions, not currently tax affecting certain losses, and a reversal of certain valuation allowances in the prior year's quarter relating to losses where benefits
were not previously recognized.

Earnings (Loss) From Operations Before Undernoted And Discontinued Operations (Operating Earnings (Loss))Operating earnings for the three
months ended December 31, 2005 were $40.5 million compared to an operating loss of $10.4 million for the three months ended December 31, 2004. The higher earnings, somewhat
offset by a higher effective tax rate this year resulted in net operating earnings for the three months ended December 31, 2005 of $24.9 million, compared to a net operating loss of
$2.9 million in the three months ended December 31,

24

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2004.
The higher effective tax rate was due to mix of earnings between different tax jurisdictions, not currently tax affecting certain losses and a reversal of certain valuation allowances in the
prior year's quarter relating to losses where benefits were not previously recognized.

On
a per share diluted basis, net operating earnings was $0.56 for the three months ended December 31, 2005 compared to net operating loss per share of $0.07 in the comparable
period in the prior year.

Operating
earnings for the year ended December 31, 2005 was $124.2 million compared to operating earnings of $9.8 million for the year ended December 31,
2004. Higher earnings, somewhat offset by a higher effective tax rate this year resulted in net operating earnings for the year ended December 31, 2005 of $76.4 million, compared to net
operating earnings of $16.8 million in the prior year.

On
a per share diluted basis, net operating earnings was $1.73 for the year ended December 31, 2005 compared to net operating earnings per share of $0.39 in prior year.

Investment Losses (Gains)Investment gain for the quarter ended December 31, 2005 was
$0.5 million compared to $1.8 million in the prior year's quarter. The gain in the current quarter is primarily due to a $0.6 million gain recognized on the sale of one of the
Company's investments and is offset by impairment charges on certain investments carried at cost.

For
the year ended December 31, 2005, investment loss totaled $0.2 million compared to an investment gain in the prior year of $2.4 million. The loss in the year is
due to a gain on sale of the Company's investment in Cineplex Galaxy Income Fund of $0.9 million in addition to the gain previously mentioned, more than offset by pre-tax impairment
charges of $1.7 million on certain investments carried at cost. The prior year gain relates primarily to a mark to market adjustment on one of the Company's investments, partially offset by a
loss recorded as a result of a settlement with respect to warrants the Company held.

(Gain) Loss on Disposal of AssetsGain on disposal of assets for the quarter and year ended
December 31, 2005 was $0.4 million and $4.1 million, respectively, compared to nil and a loss of $0.2 million for the prior year's quarter and year ended
December 31, 2004, respectively. During the current year, Distribution LP and its partner sold two of the cinemas held by the Alliance Atlantis Cinemas partnership. A gain of
$4.1 million was recognized on the sale of two Cinemas, before deducting the share for minority interest. The sales generated cash proceeds of $5.9 million, net of closing costs and
before deducting the share for minority interest, on assets with carrying values of $0.4 million and intangible assets with carrying values of $1.4 million. The prior year amount relates
to small impairment losses on assets.

Foreign Exchange Losses (Gains)Foreign exchange losses for the three months ended
December 31, 2005 were $1.4 million compared to gains of $15.8 million in the prior year's quarter. Foreign exchange losses for the year ended December 31, 2005 were
$8.1 million compared to gains of $22.4 million in the prior year. The losses for the year are primarily unrealized and are related to the long-term investment in foreign
operations held by the Company's Motion Picture Distribution business, and are somewhat offset by unrealized gains as a result of the unhedged portion on the Company's long-term
U.S. dollar denominated debt.

Net EarningsThe net earnings for the three months ended December 31, 2005 was
$24.8 million compared to net earnings of $9.6 million for the three months ended December 31, 2004. On a basic and diluted basis, net earnings per share were $0.57 and $0.56,
respectively for the three months ended December 31, 2005, compared to basic and diluted net earnings per share of $0.22 for the three months ended December 31, 2004.

The
net earnings for the year ended December 31, 2005 was $70.9 million compared to net earnings of $29.7 million for the prior year. On a basic and diluted basis,
net earnings per share were $1.63 and $1.61, respectively, for the year ended December 31, 2005, compared to basic and diluted net earnings per share of $0.69 and $0.68, respectively, for the
prior year.

Liquidity and Capital Resources

Current and Short Term Liquidity

The nature of our business is such that significant expenditures are required to produce, acquire and promote television programs and motion pictures in advance
of revenue generation from these programs and

25

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motion
pictures, which is earned over an extended period of time after their completion or acquisition. As well, launching digital television channels and other initiatives may be capital intensive.
This also results in significant working capital requirements. The Company has historically financed its working capital requirements through a combination of cash flow from operations, the use of
revolving credit facilities, and the issuance of debt.

Working
capital, comprising cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, income taxes payable and deferred revenue, net of the revolving
credit facility and the current portion of term loans, was a deficiency of $218.9 million at December 31, 2005 compared to a deficiency of $209.2 million at December 31,
2004, representing a decline of $9.7 million. The most significant contributor to the decline in the Company's working capital was the increase in Distribution LP's revolving credit
facility.

The
Company's operating cash flow (see note on non-GAAP measures on page 44 for the definition and calculation of operating cash flow) for the three
months ended December 31, 2005 was an inflow of $39.7 million compared to an inflow of $5.9 million for the three months ended December 31, 2004, representing an increase
of $33.8 million. Operating cash flow for the year ended December 31, 2005 was an inflow of $122.1 million compared to an inflow of $36.6 million in the prior year,
representing an increase of $85.5 million. The increases for the three months and year ended December 31, 2005 are due primarily to increases in operating earnings, as well as the
utilization of tax loss carryforwards available to the Company.

The
Company's free cash flow (see note on non-GAAP measures on page 44 for the definition and calculation of free cash flow) for the three months ended
December 31, 2005 was an inflow of $63.6 million compared to an inflow of $32.7 million for the three months ended December 31, 2004, representing an improvement of
$30.9 million. Free cash flow for the year ended December 31, 2005 was an inflow of $120.1 million compared to an outflow of $23.1 million, representing an improvement of
$143.2 million. The quarter and year ended December 31, 2005 were positively affected by the increase in operating earnings and proceeds from the sale of assets and investments held by
the Company. The year was also positively impacted by a decrease in investing activities due to the prior year including the acquisition of Aurum as well as the improvement of non-cash
operating balances, mainly due to increased accounts receivable balances in the prior year, partially offset by lower accounts payable balances in the
current year caused by the repayment of production financing arrangements, program related payables, long term compensation plan payouts, and the exit of certain production business.

As
previously mentioned, the Company's net debt, which comprises the revolving credit facility and term loans, net of cash and cash equivalents, decreased over the prior year by
$96.7 million, from $428.6 million at December 31, 2004 to $331.9 million at December 31, 2005, primarily as a result of improvements to free cash flow, driven by
the strength of operating earnings, interest savings from the refinancing of substantially all of its existing credit facilities in December 2004, as well as the impact of the strength of the
Canadian dollar on the U.S. dollar denominated debt. The Company expects to continue to generate free cash flows from its three principal businesses. Having established target debt levels for
the business, the Company is focused on monitoring and maintaining an appropriate and flexible capital structure and will use free cash flow accordingly.

Net
debt, excluding the non-recourse net debt of Distribution LP, decreased from $417.3 million at December 31, 2004, to $290.6 million at
December 31, 2005, a decrease of $126.7 million.

CommitmentsThe Company has entered into various contracts which result in future cash flow
commitments related to programming purchases, operating leases, certain broadcast intangible assets, production financing and term loans. The following table details the cash flow commitments over the
next five years and thereafter related to these obligations. The Company plans to fund these commitments through cash

26

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flow
from operations; however, any temporary deficiencies in this cash flow will be funded by the Company's revolving credit facility (in millions of Canadian dollars).

|                                              |  | 2006  |  | 2007  |  | 2008  |  | 2009 |  | 2010 |  | Thereafter |  | Total  
|--------------------------------------------- |  | ----- |  | ----- |  | ----- |  | ---- |  | ---- |  | ---------- |  | -------
|Term loans principal*                         |  | 65.9  |  | 14.8  |  | 26.5  |  | 34.3 |  | 2.8  |  | 265.2      |  | 409.5  
|Interest on term loans*                       |  | 24.3  |  | 20.3  |  | 19.1  |  | 17.3 |  | 16.3 |  | 8.1        |  | 105.4  
|Broadcast and distribution rights(1)          |  | 181.4 |  | 123.3 |  | 81.6  |  | 7.7  |  | 8.1  |  |           |  | 402.1  
|Operating leases(2)                           |  | 12.3  |  | 10.0  |  | 9.7   |  | 9.1  |  | 9.2  |  | 69.9       |  | 120.2  
|Production financing arrangements*            |  | 1.4   |  |      |  |      |  |     |  |     |  |           |  | 1.4    
|Broadcast intangibles acquisition liabilities |  | 4.1   |  | 2.7   |  | 2.0   |  | 1.6  |  | 1.6  |  |           |  | 12.0   
|Consulting contracts(3)                       |  | 0.8   |  | 0.8   |  | 0.8   |  |     |  |     |  |           |  | 2.4    
|                                              |  |       |  |       |  |       |  |      |  |      |  |            |  |        
|Total contractual obligations                 |  | 290.2 |  | 171.9 |  | 139.7 |  | 70.0 |  | 38.0 |  | 343.2      |  | 1,053.0
|                                              |  |       |  |       |  |       |  |      |  |      |  |            |  |        

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Capital Resources

In December 2004, the Company completed a refinancing of substantially all of its existing credit facilities. The existing revolving credit facility and
senior subordinated notes were replaced by new secured credit facilities consisting of a five-year $175.0 million revolving credit facility, a five-year
US$108.6 million term loan A credit facility, and a seven-year US$250.0 million term loan B credit facility. On December 21, 2005 the Company amended the existing
credit facility agreement. Term Loan B was replaced by Term Loan C. The amendment allows for greater flexibility regarding the use of the Company's available funds and reduced the interest rate margin
by 25 basis points.

Revolving Credit FacilityAt December 31, 2005 the revolving credit facility provided up to
$175.0 million in available committed credit bearing interest at the Banker's Acceptance or LIBOR rate plus a margin ranging from 75 to 175 basis points and the Canadian prime rate and
the US base rate plus a margin of up to 75 basis points. At December 31, 2005 no amounts were drawn on this facility. As at December 31, 2005 unused credit facilities aggregating
$147.8 million were available under the facility, net of outstanding letters of credit.

The
Distribution LP revolving credit facility provides up to $25.0 million in borrowings bearing interest at either the Canadian prime rate and the U.S. base rate
plus a margin of 100 to 200 basis points or the Bankers' Acceptance rate and the LIBOR rate plus a margin of 200 to 300 basis points. The facility is a 364-day facility that
can be extended for a further 364 days upon request and upon consent of lenders holding at least two-thirds of the revolving credit facility commitment. During 2005, the facility
was extended for a further 364 days with a maturity date of October 9, 2006.

The
Distribution LP revolving term credit facility provides up to $50.0 million in borrowings bearing interest at either the Canadian prime rate and the U.S. base
rate plus a margin of 200 to 300 basis points or the Bankers' Acceptance rate and the LIBOR rate plus a margin of 300 to 400 basis points. The revolving term credit facility matures on
October 15, 2006.

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The
Distribution LP revolving term credit facility was established in May 2004 through an amended and restated credit agreement that authorized $25.0 million in new
credit and transferred $25.0 million of the original term loan facility to the new revolving term credit facility. Distribution LP incurred banking fees of $1.0 million as a
result of the restructuring of the facilities, which have been deferred and are being amortized.

At
December 31, 2005, none of Distribution LP's revolving credit facility and $33.0 million of the revolving term credit facility has been drawn and
Distribution LP had unused credit facilities aggregating $42.0 million.

Term LoansTerm loans include the Company's five-year US$63.6 million
(December 31, 2004  US$108.6 million) term loan A credit facility and seven-year US$240.1 million term loan C credit facility
(formerly term loan B (December 31, 2004  US$250.0 million)). Term loans also include various industry loans, obligations under capital lease and a
non-revolving term facility held by Distribution LP.

Advances
under the five-year US$63.6 million term loan A credit facility bear interest at the Banker's Acceptance or LIBOR rate plus a margin ranging from 75 to
175 basis points. Advances under the seven-year US$240.1 million term loan C credit facility bear interest at the Banker's Acceptance or LIBOR rate plus a margin of
150 basis points. The principal amount of all advances under the term loan A and term loan C credit facilities are being repaid in 19 and 27 consecutive quarterly installments,
respectively, which commenced June 30, 2005.

On
April 22, 2005 and July 28, 2005, the Company made voluntary repayments on both the term Loan A and C Credit Facilities totaling US$43.9 million and
US$8.1 million, respectively.

At
December 31, 2005, the entire $50.0 million non-revolving term facility held by Distribution LP was drawn. The Distribution LP term loan bears
interest at either the Canadian prime rate and the U.S. base rate plus a margin of 200 to 300 basis points or the Banker's Acceptance rate and the LIBOR rate plus a margin of 300 to
400 basis points. The term loan matures on October 15, 2006.

Senior Subordinated NotesThe Company had US$300.0 million senior subordinated notes that were
to mature December 15, 2009. At any time after December 15, 2004 the Company could redeem all or a portion of the notes at specific redemption prices plus accrued interest to the date of
the redemption. In December 2004, as part of the Company's comprehensive refinancing, the senior subordinated notes were repaid.

Capital ExpendituresAs at December 31, 2005 the Company had no material firm capital expenditure commitments. The Company's
capital expenditure budget for Fiscal 2006 will be funded primarily from cash flow from operations.

Long Term Liquidity

Since the first quarter of fiscal 2002, the Company reduced its net debt, defined as the Company's revolving credit facility, senior subordinated notes and term
loans, net of cash, from a peak of $729.7 million to $331.9 million on December 31, 2005. In order to establish more cost effective and appropriate financing, the Company
successfully completed a refinancing of substantially all of its existing credit facilities in December 2004 with further modification in December 2005, as outlined above. As a result,
significant interest expense savings were realized in the current year and are expected to continue in the future.

Management
believes that the availability of the current revolving credit facilities, term loans, capital base and earnings from operations will be sufficient to fund the Company's
operations and commitments for the foreseeable future, although there can be no assurance in this regard.

Capital Structure

In an effort to maximize shareholder value, and to determine appropriate uses of free cash flow, during 2005 the Company reviewed its capital structure. Following
the review, the Company has established target debt levels for the business and determined appropriate uses of free cash flow beyond current reinvestment opportunities. The Company will target a Net
Debt to EBITDA (see note on non-GAAP measures on page 44) ratio in the range of 1.5x to 2.5x, excluding its Motion Picture Distribution business. At December 31, 2005,
the Company's Net Debt to EBITDA ratio was 1.98, excluding its Motion Picture Distribution business. The

28

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Company
plans to monitor its capital structure and maintain this range by repurchasing shares under its normal course issuer bid. The Company has been successful in its debt reduction objectives, and
remains keenly focused on free cash flow generation, and has determined these capital structure objectives to be a complementary way to enhance shareholder value.

On
December 16, 2005, the Company renewed its existing normal course issuer bid for a one year period. During the year ended December 31, 2005, the Company repurchased
496,500 Class B Non-Voting Shares at an average price of $34.29 per share.

Subsequent Event

On January 20, 2006, Distribution LP and The Weinstein Company entered into an exclusive 80 picture, multi-year distribution
agreement. Under the deal, Distribution LP will acquire all distribution rights throughout Canada to all upcoming motion pictures released by The Weinstein Company and Dimension Films. The deal
is anticipated to run through to December 31, 2009.

Related Party Transactions

In the normal course of business, the Company acquires broadcast rights from minority interests who exert significant influence over subsidiaries of the Company.
During the year ended December 31, 2005, these purchases totalled $7.8 million. At December 31, 2005, included in accounts payable, are amounts due to these related parties of
$5.5 million.

The
Company has entered into trademark and franchise payment agreements with minority interests who exert significant influence over subsidiaries of the Company. During the year ended
December 31, 2005, the Company paid $1.5 million related to such agreements. At December 31, 2005, the amount due to these related parties and included in long-term
liabilities pertaining to certain broadcast intangible assets was $5.2 million.

During
the year ended December 31, 2005, Distribution LP and its partner sold University 4 Cinema to Empire Co. Ltd., a related party as a major
shareholder of Empire Co. Ltd. sits on the Company's board of directors, for consideration of $1.4 million, net of closing costs. This sale resulted in a gain in the amount of
$0.4 million (before minority interest share) on the sale of assets with carrying values of $1.0 million.

During
the year ended March 31, 2003, the Company provided loans, primarily for the purpose of financing working capital requirements, of $2.3 million to equity accounted
investees. During the nine months ended December 31, 2003 the Company provided further advances of $1.0 million. The loans bear interest at rates ranging from the Canadian prime rate
plus 2.5% to 11.0%. Included in accounts receivable at December 31, 2005 is $1.9 million due from these related parties. During the year ended December 31, 2005 the Company
recognized interest income of $0.5 million in connection with these loans.

Loans,
primarily for the purpose of share purchase, of $2.2 million are due from a senior officer. The amounts are included in accounts receivable and are repayable on demand,
bearing interest of 5%.

In
2003, the Company entered into an arrangement with two former senior officers to provide consulting services for a five-year period ended December 31, 2008. This
arrangement has fixed annual fees of $0.8 million plus certain contingent bonuses based upon achievement of certain cash flow targets related to certain television series. The total of the fees
and bonuses for the five-year period will be in the range of $4.0 million to $15.5 million, depending upon achievement of targets. During 2005, $2.3 million was paid
to the two former senior officers under this arrangement.

During
2004, Distribution LP incurred $1.0 million of costs related to the issuance of Fund Units. Upon the creation of the Fund in October 2003,
$13.1 million of costs related to the issuance of Fund Units were borne by Distribution LP. These issue costs were deducted from the partners' capital of Distribution LP at the
date of formation and subsequent issue of additional Fund units.

At
the time of the transfer of the net assets into Distribution LP, the Company agreed to discharge $24.3 million of liabilities included in the net assets transferred to
Distribution LP. This amount was paid during the year ended December 31, 2004.

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On
October 15, 2003, the Fund, and its wholly-owned trust, Holding Trust, the General Partner and Distribution LP entered into a Support Agreement. Under the terms of the
Support Agreement, the General Partner will provide certain management, administrative and support services to the Fund and Holding Trust for the next 8 years and will be reimbursed by
Distribution LP for all direct and indirect costs and expenses it incurs in the provision of services pursuant to the Support Agreement. For the year ended December 31, 2005,
Distribution LP incurred expenses of $0.6 million in connection with the Support Agreement.

During
the year ended December 31, 2005, the Company recognized revenue of $26.0 million on the sale of films to Cineplex Entertainment Limited Partnership, a related party
as the Chief Executive Officer of the Partnership sits on the Company's board of directors. Included in accounts receivable at December 31, 2005 is $2.9 million due from this related
party. The transactions were measured at the exchange amount.

The
Company has established a Consideration Pool Plan, an Equity Bonus Pool Plan and a Capital Pool Plan for the benefit of certain qualifying employees of Distribution LP. The
Company will fund 100% of these compensation plans, not Distribution LP. Distribution LP will account for the payments made and the stock options granted under these plans as capital
contributions. The expense for these plans is recorded in Distribution LP.

Consideration Pool PlanUnder the Consideration Pool Plan, participating Distribution LP employees will be entitled to
cash retention payments from a pool of up to $6.0 million to be paid over four annual installments, commencing in February 2005 and terminating January 2008. Payments to be made
under this Plan will be recognized as compensation expense as earned by the participating employees throughout the term of this plan. For the year ended December 31, 2005,
Distribution LP recognized $3.5 million of compensation expense under the Consideration Pool Plan (December 31, 2004  nil).

Equity Bonus Pool PlanUnder the Equity Bonus Pool Plan, participating employees will be entitled to cash awards of up to
$10.0 million upon conversion or sale of Subordinated LP Units of Distribution LP owned by the Company. Payments to be made under this plan will be recognized as a compensation
expense as earned by the participating employees over the expected life of the plan, which is based on management's estimate of the Conversion Date (as defined in the Limited Partnership
Agreement). For the year ended December 31, 2005, Distribution LP recognized $2.5 million of compensation expense under the Equity Bonus Pool Plan (December 31,
2004  nil).

Capital Pool PlanUnder the Capital Pool Plan, participating employees will be granted up to 600,000 options to
purchase preferred shares of an indirect subsidiary of the Company at an exercise price of $0.01 per share.

Provided
that Distribution LP meets certain cash distribution targets, the options will vest at the rate of 25% per calendar year on December 31 of each year commencing in
2005. If vesting does not occur on December 31 of any calendar year because the distribution targets were not satisfied, the options that were to have vested will be carried forward and will
vest on the date when the missed cash distribution payments are subsequently made. If the missed cash distribution payments are not made prior to the conversion date (as defined in the Limited
Partnership Agreement), the options will terminate.

After
an option has been exercised, participants will have the right to exchange the preferred shares received for Subordinated LP Units from the Company's existing holdings
(or if the exercise occurs on or after the conversion date, Ordinary LP units) on a one-for-one basis. If this right is exercised, the Company will have the right
to substitute the Subordinated LP Units to be delivered with (i) Fund units (ii) cash or (iii) any combination of Subordinated LP Units, Fund units and cash.

In
addition to the options granted to participating employees, on a quarterly basis effective October 1, 2004, the General Partner will pay to each participant, as additional
employment income, an amount equal to the quarterly distributions that the Company would be paid on the 600,000 Subordinated LP Units set aside under this Plan ("Employment Distribution
Amount"). The Company will have no further rights to receive distributions on the 600,000 Subordinated LP Units governed by this Plan.

For
the year ended December 31, 2005, Distribution LP recognized $2.9 million of compensation expense under the Capital Pool Plan (December 31,
2004  $0.2 million).

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Outstanding Shares

The Company is authorized to issue an unlimited number of Class A Voting Shares and Class B Non-Voting Shares. At March 2, 2006
the Company had 1,005,447 Class A Voting Shares and 42,284,837 Class B Non-Voting Shares outstanding compared to 1,005,447 Class A Voting Shares
and 42,284,837 Class B Non-Voting Shares outstanding as at December 31, 2005. The Class A Voting Shares and the Class B Non-Voting Shares
have identical attributes except that the Class B Non-Voting Shares are non-voting and each of the Class A Voting Shares is convertible at any time at the
holder's option into one fully paid and non-assessable Class B Non-Voting Share. The Class B Non-Voting Shares may be converted into Class A
Voting Shares only in certain circumstances.

Off Balance Sheet Arrangements

Standby Letters of CreditThe Company, including certain of its subsidiaries, has granted irrevocable
standby letters of credit, issued by financial institutions, to third parties to indemnify them in the event the Company does not perform its contractual obligations. As at December 31, 2005,
the maximum potential liability under these guarantees was $27.2 million of which $15.6 million was for tax assessments which are currently under appeal and $11.6 million was for
payments to be made under various distribution and licencing agreements.
As at December 31, 2005, the Company does not expect to make any additional payments associated with these guarantees.

Sale leaseback arrangementsBetween 1999 and 2004 the Company entered into various production
financing arrangements with 13 U.K. limited partnerships whereby all rights, title and interests to certain film and television programs were sold to the limited partnerships that leased
back to the Company the exclusive rights to distribute such programs for periods up to 15 years. The Company has placed cash on deposit with superior rated banks to fund these future lease
payments. The Company's maximum exposure to loss is limited to the cash on deposit which is $131.2 million. The Company believes that the possibility of it being required to make payments under
these arrangements is remote.

Print & advertising tax sheltersBetween 1993 and 2000 a subsidiary of the Company packaged
theatrical distribution activities into limited partnerships and earned fees from the sale of these limited partnerships to investors. These partnerships were appointed by producers to develop and
execute marketing campaigns for films. In exchange for these services the limited partnerships received distribution fees which were reinvested in a legal subsidiary of the Company. That legal
subsidiary has an obligation to repay the partnerships and has placed the cash received on deposit with various international banks that have superior ratings. The Company is not required to absorb
any of the variability associated with the deposits held by the legal subsidiary and is therefore not the primary beneficiary of the entity. At December 31, 2005 the entity had received cash
from seven limited partnerships and had placed funds on deposit of $221.8 million. The Company's maximum exposure to loss under the arrangement is limited to its nominal equity investment in
the legal subsidiary.

Production services tax sheltersBetween 1996 and 2000 the Company packaged production services into
limited partnerships and earned fees from the sale of these partnerships to investors. The investors financed their purchase of units in the limited partnerships with bank loans. Under an Investor
Loan Put Agreement the banks have the right, but not the obligation, to require a legal subsidiary of the Company to acquire the investor loans. The rights under the Investor Loan Put Agreements are
exercisable between 2005 and 2009. The third party producers that benefited from production services provided by the limited partnerships will fund the acquisition price under the Investor Loan Put
Agreement and have secured these obligations by placing funds on deposits with the banks to settle the acquisition price. Management has assessed its interests and obligations in the legal subsidiary
that has entered into the Investor Loan Put Agreements and has concluded that they are nominal. In 2005 the banks exercised their right to require this legal subsidiary to acquire $98.5 million
in investor loans and as a result the legal subsidiary had total assets of approximately $98.5 million at December 31, 2005 and a corresponding obligation to third party producers. The
Company is no longer involved in arranging these types of structures. This is not expected to have an impact on the Company's current and future operations.

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Market Risk

The Company is exposed to market risk related to interest rates and foreign exchange rates. The Company is authorized to enter into currency conversion and
interest rate conversion agreements to modify the exposure to these risks, however, the Company does not engage in any speculative trading program.

Foreign Exchange RiskA significant portion of the Company's revenue and expenses are in currencies
other than Canadian dollars and, therefore, are subject to fluctuations in exchange rates. Approximately 42% of our revenues for the year ended December 31, 2005 were derived from our foreign
customers, a significant portion of which was denominated in U.S. dollars. Exchange rates may vary substantially and have an adverse impact on our results of operations, prospects or financial
condition. The exposure to this foreign exchange risk has been mitigated by the Company's U.S. dollar denominated term loans and expenditures on certain film and television programs. The
Company believes its future U.S. dollar cash inflows generated on certain film and television programs will be sufficient to fund the repayment of U.S. dollar indebtedness. As at
December 31, 2005, there were no foreign exchange forward contracts outstanding.

Interest Rate RiskThe Company is exposed to interest rate risk arising from fluctuations in interest
rates on its drawings under its revolving credit facility and term loans. As at December 31, 2005, there were no interest rate conversion agreements outstanding.

Credit RiskCredit risk on the Company's accounts receivable is controlled as a result of there being
a wide variety of customers, markets and geographic areas to which the Company sells.

Critical Accounting Policies and Estimates

The preparation of the financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting
period. Management of the Company regularly reviews its estimates and assumptions based on historical experience and various other assumptions that it believes would result in reasonable estimates
given the circumstances. Actual results could differ from those estimates under different assumptions. The following is a discussion of accounting policies that require significant management
judgments and estimates. For a discussion of all of the Company's accounting policies, including the items outlined below, refer to note 1 of the consolidated financial statements.

Film and television programsThe Company accounts for its production and distribution of film and
television programs in accordance with SoP 00-2. SoP 00-2 requires that film and television costs of production and acquisition are amortized using the individual film
forecast method under which such costs are amortized for each film or television program in the ratio of revenue earned in the current period for such title to management's estimate of the total
revenue to be realized from all media and markets for that title. Management regularly reviews and revises when necessary, its total revenue estimates
on a title-by-title basis, which may result in a change in the rate of amortization and/or a write down of the film and television asset to the estimated fair value amount.
Results of operations in future years are dependent upon the amortization of film and television costs and may be significantly affected by periodic adjustments in amortization rates. As a result, the
Company's financial results fluctuate from period to period. If estimates of ultimate revenues change with respect to a film or television program, causing reductions in fair values, we may be
required to write down all or a portion of the related unamortized costs. The fair value of the film or television program is determined using management's estimates of future revenues and costs under
a discounted cash flow approach and a write down equivalent to the amount by which the unamortized costs exceed the estimated fair value of the film or television program is recorded in direct
operating costs.

During
the nine-months ended December 31, 2003, the Company conducted an extensive review of its Entertainment operations and concluded that it would significantly and
permanently reduce the size and scope of its production business. As a result, management's estimates of total revenue from all media and markets for certain titles held by Entertainment were revised,
resulting in the recognition of a $158.9 million write down to investment in film and television programs. This write down was included in direct operating costs for the nine

32

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months-ended
December 31, 2003. The restructuring is complete and management does not expect to incur further costs related to the restructuring.

Although
the Company has diversified its product mix with respect to the production and distribution of film and television programs, we cannot be certain that a write down will not have
a significant impact on its results of operations, prospects or financial condition.

InvestmentsThe valuation of cost and equity accounted investments is regularly reviewed by
management to ensure that any decline in market value that is considered other than temporary has been reflected in the related carrying value of the investment. In making that assessment, several
factors are considered, including the amount by which the market value exceeds carrying value, the duration of the market value decline and the investees' expected future cash flows and
earnings. The Company recorded in the investment losses (gains) line on the statement of earnings (loss) non-cash impairment charges of $1.7 million for the year ended
December 31, 2005, $5.0 million for the year ended December 31, 2004 and $5.8 million for the nine months ended December 31, 2003.

Goodwill and Broadcast LicencesOn April 1, 2001, the Company adopted the recommendations of
the new Canadian Institute of Chartered Accountants ("CICA") Handbook Section 3062, "Goodwill and Other Intangible Assets". Previously, the Company amortized goodwill on a
straight-line basis over periods of up to 40 years and broadcast licences on a straight-line basis over a period of 40 years. Based on the new standard, goodwill
and broadcast licences of the Company are no longer amortized but are tested for impairment annually at September 30 (formerly December 31), or more frequently if impairment indicators
arise, to determine if an impairment loss should be recognized. Impairment indicators include the existence of significant restructuring plans, the existence of significant adverse changes in the
business climate and the existence of significant write-downs of assets. Fair value is based on discounted estimated future cash flows from operations. Based on the valuation testing
performed for the year ended December 31, 2005, the Company determined that one of its broadcast licences
was impaired. The impairment resulted from minor revisions to the business plan of one of the Company's channels resulting in a pre-tax impairment charge of $2.7 million. Also
during the year ended December 31, 2005, the Company recorded an impairment charge of $2.3 million related to its broadcast intangible assets. A significant downward revision in the
estimated future cash flows could result in a material impairment of the Company's goodwill and broadcast licences under CICA Handbook Section 3062.

ProvisionsBalance sheet provisions for accounts receivable, loans receivable, future income taxes,
restructuring costs, returns of product (video/DVD) and legal issues all require estimates and assumptions by management that could be significant.

In
certain instances, the provision for accounts receivable is based on specifically identified accounts where management believes that collection is doubtful. These accounts are
identified based on customer knowledge and past experience. In other instances, the provision for accounts receivable is based on a general allowance for accounts receivable outstanding for a specific
amount of time, excluding accounts that have been specifically provided for. Historically, management's estimate of the required provision has been adequate.

The
provision for loans receivable is based on specifically identified loans when management believes that collection is doubtful.

In
recording future tax assets, the Company has established a valuation allowance against a portion of these based on a current assessment of the recoverability of these future tax
assets. Management's assessment of the Company's ability to realize future income tax assets is performed on a legal entity basis and is based on existing tax laws and estimates of future taxable
income. Where, in the opinion of management, the value of future income tax assets exceeds the estimate of amounts expected to be realized, a valuation allowance is recorded to reduce the future
income tax asset. If the Company's assessment changes in the future, the valuation allowance will increase or decrease accordingly, resulting in corresponding decreases or increases in income,
respectively, in that period. The valuation allowance is in no way indicative of the availability of income tax losses or other timing differences to offset future profits earned. Rather, the
valuation allowance reduces the future income tax asset to management's estimate of the future tax asset that will be realized as a reduction of cash income taxes paid in the future.

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The
provision for returns of product is based on historical return patterns. Product returns are generally linked to the theatrical success of individual titles. Management tracks sales
performance on a regular basis to establish adequate returns provisions on a title-by-title basis.

Provisions
for legal issues are based on management's best estimate of the probable outcome and resolution of legal matters.

The
above estimates are revised accordingly as new or different circumstances arise. While management believes that the balance sheet provisions are adequate, using different assumptions
or estimates could have a significant impact on the Company's results of operations, prospects or financial condition.

Income tax reassessmentsThe Company is subject to periodic government audits in respect of prior
years' income tax returns. Management sets a provision for expected losses in relation to the possibility of any challenges of previous filing positions and believes these provisions to be adequate at
December 31, 2005.

In
December 2002, and in November 2003, a subsidiary of the Company received federal and provincial income tax reassessments for $22.5 million in total, including
interest and penalties. Subsequent to December 31, 2005, these reassessments were resolved in favour of the Company.

Accounting Changes and Recent Accounting Pronouncements

Variable Interest EntitiesEffective January 1, 2005, the Company adopted Accounting Guideline 15
("AcG 15")  Consolidation of Variable Interest Entities issued by the Canadian Institute of Chartered Accountants ("CICA"). AcG 15 provides
criteria for the identification of VIEs and further criteria for determining what entity, if any, should consolidate them. AcG 15 defines a VIE as an entity that either does not have sufficient
equity at risk to finance its activities without subordinated financial support or wherein the equity investors lack the characteristic of a controlling financial interest. VIEs are subject to
consolidation by a company if that company is deemed the primary beneficiary of the VIE. The primary beneficiary is the party that is either exposed to a majority of the expected losses from the VIE's
activities or is entitled to receive a majority of the VIE's residual returns or both.

Prior
to AcG 15, the Company consolidated all entities that it controlled through ownership of a majority of voting interests. Effective January 1, 2005, the Company implemented
AcG 15, retroactively without the restatement of prior periods, and as a result the Company has consolidated entities in which it has control through ownership of a majority of the voting interests as
well as all VIEs for which it is the primary beneficiary.

Upon
implementation of AcG 15, the Company concluded that it was not required to deconsolidate any of the entities previously consolidated. However the Company is the primary beneficiary
of the following entities which had not previously been included in its consolidation.

Production financing tax sheltersIn 1995 the Company entered into various tax shelter arrangements
that provided investors with certain tax benefits and also provided financing for the Company's production activities. Under these arrangements the Company sold the rights, title and interest to
certain film and television programs to limited partnerships that would in turn grant the Company the exclusive rights to distribute the production for an extended period. The Company has provided
loans to either directly or indirectly finance the equity of these partnerships. These loans bear interest at rates ranging from 6% to 10.9% and mature between 2010 and 2011. Additionally, the Company
has agreed to repurchase the rights sold to the partnerships. As a result, the proceeds received from the sale of the film and television programs have been classified as an obligation on the balance
sheet to satisfy these future obligations which are payable between 2010 and 2011. The obligation to make these future payments equals the amounts the Company has recorded in respect of the loans
provided to finance the partnerships' equity and are essentially secured by these financing loans. The Company has historically reported these amounts on a net basis. However, as a result of the AcG
15 review, the Company determined that the assets and obligations of these tax shelters should have been reported on a gross basis in prior years. Accordingly, the Company has increased
reported assets (loans receivable from tax shelters) and liabilities (tax shelter participation liabilities) by $90.9 million at December 31, 2004. Under the terms of the
arrangements among the parties, the loans receivable from the investors are to be settled with the proceeds received from the partnerships; accordingly, the arrangements are not expected to have any
impact on the Company's cash flows.

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The
Company has determined that the limited partnerships qualify as variable interest entities for the purposes of AcG 15 and has concluded that the Company is the primary beneficiary of
these partnerships. As required by AcG 15, the Company has consolidated 18 limited partnerships into the financial statements. These partnerships hold only the rights, title and interest to
film properties and do not have active operations.

Production arrangementIn December 2003, the entertainment business materially reduced the
size and scope of its production business. As a result, the Company entered into production arrangements with a third party production company to complete production on a television series. This
production company is a VIE as it does not have sufficient equity financing. Under the arrangement, the Company has entered into a distribution deal with the production company and has agreed to give
the entity a non-refundable minimum revenue guarantee which the Company is entitled to recover from future distribution revenues. The Company has a variable interest in this entity through
its participation in future distribution revenues of the entity; this right exposes the Company to a majority of the expected losses of the entity. As required by AcG 15, the Company has consolidated
this third party entity. The entity's only activity is the production of the Company's television series. At December 31, 2005, production on the series was still in progress, and the entity
has commenced recognizing revenues and costs. The Company's maximum exposure to loss under the arrangement is limited to its minimum revenue guarantee payment of $2.4 million.

Long-Term Incentive PlanOn May 12, 2005, Distribution LP created a trust,
administered by a third party, to act as trustee for Distribution LP's Long-Term Incentive Plan ("LTIP") (see note 13 of the consolidated financial statements). On
May 13, 2005, Distribution LP transferred $4.4 million in cash to the trust for exceeding certain 2004 defined distributable cash threshold amounts, subsequent to which the
trustee acquired 412,925 units of the Fund on the open market. One third of these units vested prior to December 31, 2005 and were distributed to the plan members. The remaining units
are recorded at their carrying value of $2.9 million and are held in the trust to be distributed under the terms of the LTIP.
The trust is considered a VIE as the total capital invested in the trust at risk is not sufficient to permit the trust to finance its activities without additional support. Distribution LP
holds a variable interest in the trust and has determined that it is the primary beneficiary of the trust and, therefore, consolidated the trust. Distribution LP has not guaranteed the value of
the units held by the trust should the market value of the Fund's units decrease from the value at which the trust acquired the units.

Details
of the amounts recorded on the consolidated balance sheet at December 31, 2005 in respect of the above VIEs are summarized below and include the impact of the tax shelter
limited partnerships, the production company and the LTIP trust.

|                                           |  | Impact of
the adjustments |  
|------------------------------------------ |  | ------------------------- | -
|Cash                                       |  | (0.2                      | )
|Accounts receivable                        |  | 1.8                       |  
|Investments                                |  | 2.9                       |  
|Other assets                               |  | (0.5                      | )
|Investment in film and television programs |  | 2.6                       |  
|Loans receivable from tax shelters         |  | 97.2                      |  
|                                           |  |                           |  
|Total assets                               |  | 103.8                     |  
|                                           |  |                           |  
|Accounts payable and accrued liabilities   |  | 2.4                       |  
|Deferred revenue                           |  | 0.1                       |  
|Term loans                                 |  | 4.1                       |  
|Tax shelter participation liabilities      |  | 97.2                      |  
|                                           |  |                           |  
|Total liabilities                          |  | 103.8                     |  
|                                           |  |                           |  
|Revenue                                    |  | 0.6                       |  
|                                           |  |                           |  
|Direct operating expenses                  |  | 0.6                       |  
|                                           |  |                           |  

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The
consolidation of the LTIP trust decreased the Company's other assets by $0.5 million, increased investments by $2.9 million and accounts payable and accrued liabilities
by $2.4 million.

The
consolidation of the production financing tax shelters increased the Company's loans receivable from tax shelters by $97.2 million and resulted in a corresponding increase in
tax shelter participation liabilities. These obligations are non-recourse to the Company and its other subsidiaries. The only impact on the consolidated statements of earnings is interest
income earned on the loans receivable which was offset by interest expense on the participation liabilities.

The
consolidation of the production company decreased cash by $0.2 million and increased investment in film and television programs by $2.6 million, accounts receivable by
$1.8 million, term loans by $4.1 million, deferred revenue by $0.1 million as well as increasing revenue by $0.6 million and direct costs by $0.6 million, now that
the production is 65% delivered. The increase in term loans is in respect of a $4.4 million credit facility held by the production company that bears interest at a rate of prime plus 0.75% and
is secured by the entity's production asset. The credit facility matures on December 31, 2006 and is non-recourse to the Company and its subsidiaries.

The
Company also identified the following significant VIEs, however it has determined that it is not the primary beneficiary of these entities and therefore these entities have not been
consolidated.

Interests held in a specialty television channelIn 2000 the Company acquired a 49% equity interest
in a corporation operating a specialty television channel. The channel is operated by the Company's partner in the business. In addition, the Company has made loans to the entity. The Company's
maximum exposure to loss at December 31, 2005 is limited to the carrying amount of its loans receivable balance of $0.9 million as the carrying amount of the investment in the entity was
written off in prior periods. The Company is required to fund 49% of the entity's future financing requirements. At December 31, 2005 the entity had assets of $3.2 million.

Sale leaseback arrangementsBetween 1999 and 2004 the Company entered into various production
financing arrangements with 13 U.K. limited partnerships whereby all rights, title and interests to certain film and television programs were sold to the limited partnerships that leased
back to the Company the exclusive rights to distribute such programs for periods up to 15 years. The Company has placed cash on deposit with superior rated banks to fund these future lease
payments. The Company's maximum exposure to loss is limited to the cash on deposit which is $131.2 million. The Company believes that the possibility of it being required to make payments under
these arrangements is remote.

Print & advertising tax sheltersBetween 1993 and 2000 a subsidiary of the Company packaged
theatrical distribution activities into limited partnerships and earned fees from the sale of these limited partnerships to investors. These partnerships were appointed by producers to develop and
execute marketing campaigns for films. In exchange for these services the limited partnerships received distribution fees which were reinvested in a legal subsidiary of the Company. That legal
subsidiary has an obligation to repay the partnerships and has placed the cash received on deposit with various international banks that have superior ratings. The Company is not required to absorb
any of the variability associated with the deposits held by the legal
subsidiary and is therefore not the primary beneficiary of the entity. At December 31, 2005 the entity had received cash from seven limited partnerships and had placed funds on deposit of
$221.8 million. The Company's maximum exposure to loss under the arrangement is limited to its nominal equity investment in the legal subsidiary.

Production services tax sheltersBetween 1996 and 2000 the Company packaged production services into
limited partnerships and earned fees from the sale of these partnerships to investors. The investors financed their purchase of units in the limited partnerships with bank loans. Under an Investor
Loan Put Agreement the banks have the right, but not the obligation, to require a legal subsidiary of the Company to acquire the investor loans. The rights under the Investor Loan Put Agreements are
exercisable between 2005 and 2009. The third party producers that benefited from production services provided by the limited partnerships will fund the acquisition price under the Investor Loan Put
Agreement and have secured these obligations by placing funds on deposits with the banks to settle the acquisition price. Management has assessed its interests and obligations in the legal subsidiary
that has entered into the Investor Loan Put Agreements and has concluded that they are nominal. In 2005 the banks exercised their right to require this legal subsidiary to acquire $98.5 million
in

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investor
loans and as a result the legal subsidiary had total assets of approximately $98.5 million at December 31, 2005 and a corresponding obligation to third party producers. The
Company is no longer involved in arranging these types of structures. This is not expected to have an impact on the Company's current and future operations.

Distribution dealsAs part of distribution activities principally in the Entertainment group, the
Company has acquired the distribution rights for certain film and television programs developed and owned by independent production entities which are VIEs as they do not have sufficient equity
financing. The Company is entitled to retain a specified percentage of the future distribution revenues for a contractually agreed period of time. In certain instances the Company may provide an
initial non-refundable minimum revenue guarantee to the VIE during the production phase which is expected to be recovered through future distribution revenues. These minimum revenue
guarantees are reflected in the financial statements of the Company as an investment in film and television asset when they become payable. This amount represents the Company's maximum exposure to
loss. The Company has a variable interest in these VIEs through its participation in future distribution revenues of the entity but these rights do not expose the Company to a majority of the expected
losses or the expected residual returns of the VIEs. Due to the number of independent production entities involved in these arrangements and also because these entities are under the control of the
independent producers, the Company has not been able to establish the aggregate size of these entities.

Goodwill and indefinite life intangible asset impairment testingDuring the year ended December 31, 2005, the Company
changed the date on which it performs its annual impairment testing for broadcast licenses and goodwill from December 31 to September 30 (Distribution LP continues to perform its
annual impairment testing on June 30). As a result of this change, the Company performs its annual impairment testing for broadcast licenses and goodwill at the end of its third quarter,
consistent with the timing of the testing prior to the Company's change in year end (see note 1 of the consolidated financial statements). This change in accounting policy had no impact
on the Company's results of operations and financial position for the year ended December 31, 2005.

During
September 2004, the Securities and Exchange Commission ("SEC") staff issued EITF D-108, "Use of the Residual Method to Value Acquired Assets Other than
Goodwill", which, among other things, required that a "direct" method be used to determine the fair value of intangible assets other than goodwill in connection with impairment testing under Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." The Company has applied this guidance for purposes of Canadian GAAP. Accordingly, effective
January 1, 2005, the Company changed the valuation method used for its annual impairment testing of its broadcast licenses from the residual value method to a direct value method.

Financial InstrumentsThe CICA issued revisions to Handbook Section 3860, "Financial
Instruments  Disclosure and Presentation". This standard was amended to require that certain obligations that may be settled at the issuer's option in cash or
the equivalent value by a variable number of the issuer's own equity instruments be presented as a liability. The revisions to this standard were effective January 1, 2005. The adoption of this
standard did not have an impact on the Company's results of operations or financial position.

In
January 2005, the CICA issued Handbook Section 3855, "Financial Instruments  Recognition and Measurement". The section prescribes
when a financial instrument is to be recognized on the balance sheet and at what amount. It also specifies how financial instrument gains and losses are to be presented. This new standard will be
effective for interim and annual financial statements relating to fiscal years commencing on or after October 1, 2006. The Company is assessing the impact of this new standard on its
consolidated financial statements.

HedgingIn January 2005, the CICA issued Handbook Section 3865, "Hedges". The Section provides alternative
treatments to Section 3855 for entities which choose to designate qualifying transactions as hedges for accounting purposes. It replaces and expands on Accounting Guideline "Hedging
Relationships", and the hedging guidance in Section 1650 "Foreign Currency Translation" by specifying how hedge accounting is applied and what disclosures are necessary when it is applied. This
new standard will be effective for interim and annual financial statements relating to fiscal years commencing on or after October 1, 2006. The Company is assessing the impact of this new
standard on its consolidated financial statements.

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Comprehensive IncomeIn January 2005, the CICA issued Handbook Section 1530, "Comprehensive
Income". The
section introduces a new requirement to temporarily present certain gains and losses from changes in fair value outside net income, but in a transparent manner. This new standard will be effective for
interim and annual financial statements relating to fiscal years commencing on or after October 1, 2006. The Company is assessing the impact of this new standard on its consolidated financial
statements.

Non-monetary TransactionsIn June 2005, the CICA issued Handbook Section 3831,
"Non-monetary Transactions". This standard supersedes CICA Handbook Section 3830, "Non-monetary Transactions" and requires all non-monetary transactions to
be measured at the fair value of the asset given up or asset received, whichever is more reliable, unless the transaction lacks commercial substance, among other exceptions. The commercial substance
approach differs from the prior approach related to the culmination of the earnings process as a test for fair value measurement. The commercial substance requirement is met when an entity's future
cash flows are expected to change significantly as a result of the transaction. This standard will be effective for transactions initiated in fiscal periods beginning on or after January 1,
2006. The Company is assessing the impact of this new standard on its consolidated financial statements.

Financial Instruments

The estimated fair values of financial instruments as at December 31, 2005 are based on relevant market prices and information available at the time. The
carrying values of cash and cash equivalents, loans receivable, revolving credit facilities, accounts payable and accrued liabilities and term loans approximate the fair values of these financial
instruments.

Accounts
receivable are recognized at fair value, based on discounting future cash flows using rates currently available for similar instruments. At December 31, 2005, included in
accounts receivable are amounts due beyond December 31, 2006 totalling $39.3 million (December 31, 2004  $28.4 million). Also
included in accounts receivable is a long-term receivable of $38.8 million related to one of the Company's productions. The amount will be collected in monthly installments of
$2.2 million until July 2007. The receivable is carried at its fair value, being the sum of discounted future cash flows using rates available for similar instruments.

Investments
have a carrying value of $6.8 million as at December 31, 2005 (December 31, 2004  $16.4 million). The fair
value of investments is based on the trading value of publicly
traded investees at December 31, 2005 amounting to $19.2 million (December 31, 2004  $22.9 million).

Industry Risk and Uncertainties

The Company's business is subject to a number of risks and uncertainties discussed below. Additional risks and uncertainties not presently known to the Company or
that the Company does not currently anticipate will be material, may impair the Company's business operations and its operating results and as a result could materially impact its business, results of
operations, prospects and financial condition.

Audience AcceptanceThe specialty broadcasting, television production and motion picture industries
each involve a substantial degree of risk. There can be no assurance of the economic success of any specialty television channel, television program, or motion picture as revenue derived depends on
audience acceptance, which cannot be accurately predicted. Audience acceptance is a factor of the response to the specialty channel content's, television program's, or motion picture's artistic
components or entertainment value. Also contributing to audience acceptance are, the reviews of critics, promotions, the quality and acceptance of competing specialty television channels, television
programs, or motion pictures, the availability of alternative forms of entertainment and leisure time activities, general economic conditions, public tastes generally and other intangible factors. All
of the aforementioned factors could change rapidly and many are beyond the Company's control. A lack of audience acceptance for any of the Company's specialty television channels, the series
comprising theCSIfranchise, or any of the motion pictures distributed by Distribution LP could have an adverse effect on the Company's
business, results of operations, prospects and financial condition.

Ability to Attract AdvertisingThe Company's inability to generate advertising revenue could
adversely affect its operating results, prospects or financial condition. A substantial portion of the Company's broadcasting revenue is from advertising sales. Advertising revenues are subject to
fluctuation as a result of changes in the

38

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economic
environment, the marketplace, new technologies and viewership levels. The Company competes for advertising sales with other television channels and with other media, including radio and print
media. In addition, personal video recorders ("PVRs") and similar embedded digital technologies enable consumers to program shows to be watched at a later date and to bypass the commercials. If the
use of such devices to bypass commercials should become widespread, there could be a negative impact on the Company's advertising revenue. Conversely, PVRs could increase demand for digital
set-top boxes and as a result could increase demand for the Company's specialty networks. In addition, the convenience PVRs provide may increase viewership by the existing subscribers to
the Company's specialty television channels.

CompetitionThe businesses of operating specialty channels, producing and distributing television
programs and distributing motion pictures is highly competitive. The Company faces intense competition from other Canadian and international broadcasters, producers and distributors, many of which are
substantially larger and have greater financial resources than the Company.

The
Company competes with other television production companies for ideas and storylines created by third parties as well as for actors, directors and other personnel required for a
production. In addition, the CRTC and foreign regulatory authorities continue to licence additional television channels, thereby further increasing the competition in the specialty television
broadcasting industry and fragmenting the television audience, which puts upward pressure on program licence fees. The Company cannot be certain that it will be able to successfully compete in these
areas in the future or that it will continue to acquire rights to additional successful programming or enter into agreements for the financing, distribution or licencing of programming on terms
favourable to it. The Company's failure to do so could have an adverse impact on its businesses, results of operations, prospects or financial condition.

Competition
by other broadcasters is ever-present and may be increased if the CRTC issues any new broadcast licences in an area where the Company currently holds a specialty
television broadcast licence. In each of the Company's current markets, there are a number of competing television channels. Recent regulatory and public policy trends favour the emergence of a more
competitive environment. Added competition in the market could result in reduced sales or an increase in costs to acquire programming and, consequently, have a negative impact on the Company's
revenues. In particular, the specialty television industry in Canada is highly competitive. The number of specialty services licenced by the CRTC has substantially increased since 2000. This will have
the effect of further fragmenting the television viewing audience and increasing competition for carriage, viewers, programming and advertising revenue.

The
emergence of new technologies: video on mobile phones, video streaming over the Internet, and downloads of video content to portable devices may increase the competition the Company
faces and provide opportunities as well. The emergence of VOD services by cable companies and certain channels will present additional competition to the Company's specialty channels. VOD services
will allow users to select video which is then downloaded to a digital set-top box for viewing. Should these content experiences include the content available on the Company's specialty
channels, it would diminish the value of the Company's programming investment and potentially the viewing audience. The increased popularity of VOD may also stimulate the further roll-out
of digital set-top boxes, which in turn could also increase demand for the Company's specialty television networks. In addition, the emergence of VOD may provide an opportunity to the
Company to offer its content through VOD.

The
Company's specialty television services also face competition from the illegal "grey market" and "black market" satellite services that broadcast unauthorized programming.

Changes in TechnologyTechnological advances and the conversion of content into digital formats have
made it easier to create, transmit and "share" high quality unauthorized copies of television programs and motion pictures. As a result, users may be able to download and distribute unauthorized or
"pirated" copies of copyrighted television programs and motion pictures over the Internet. As long as pirated content is available on the Internet, some consumers may choose to download pirated
television programs or motion pictures rather than watch programs on television or attend theatres to watch motion pictures. Some consumers may also purchase pirated DVD's of television series or
motion pictures rather than purchase them from authorized

39

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vendors.
Although the Company has benefited from the rapid growth of the DVD market, there can be no assurance that such growth and penetration rates will continue.

There
has been an increase in the popularity of HDTV technology, which provides a higher resolution, HD format picture. A continued increase in the consumer acceptance of HDTVs and
potential regulatory requirements may require the Company's networks to increasingly offer programming in HD format to satisfy the needs of its audiences. This could cause the Company's costs for
entertainment content to increase. In addition, the CRTC has not yet confirmed whether genre protection will extend to HD format, meaning that it is possible that the Company's genre protected
channels could face competition from a competitor offering similar content, but in HD format.

The
motion picture independent studios' need for distributors is based in part on the fact that the studios would incur substantial film print costs if they attempted to directly
distribute their motion pictures on a worldwide basis. Partly because of these significant print costs, certain independent studios choose to retain distributors in national markets, thereby sharing
the cost and risks associated with worldwide distribution among a number of different strategic partners. Technological developments permitting the digital distribution of motion pictures as an
economic basis and its general adoption within the industry could reduce film print costs significantly, thereby making it more attractive for producers to distribute their own motion pictures.
Although this technology has yet to be widely adopted by exhibitors (due in part to the significant capital costs that would be associated with the widespread adoption of this technology),
expansion of this technology could adversely affect Distribution LP's business.

Regulatory EnvironmentThe Company's specialty television channels are regulated by the CRTC, which
grants and renews licences. The Company's CRTC broadcast licences must be renewed from time to time, typically every seven years, and cannot be transferred without regulatory approval. The Company's
inability to renew any of its licences on as favourable terms would have an adverse impact on its results of operations, prospects or financial condition. Changes in the regulations governing the
Company's specialty television channels, including decisions by regulators affecting its broadcast operations, such as the granting or renewal of licences or the granting of additional broadcast
licences to the Company's competitors, or the introduction of new regulations by regulators, could adversely impact the Company's operating results, prospects or financial condition.

Changes
in public policy related to Canadian ownership of broadcasting or other fundamental principles of the broadcasting system could adversely affect the Company's relationships with
foreign partners in broadcasting or its position in the advertising market. As the federal and provincial governments review and modify their funding programs for television production the Company's
broadcasting business could be
impacted by fewer resources to fill the gap between licence fees and the independent producers' ability to finance their productions. Since the Company's broadcast conditions of licence determine its
original production needs, these reviews and modifications could be a risk to some of the Company's specialty television channels.

Production FinancingThe production, completion and distribution of television programs requires a
significant amount of capital. Actual television program costs may exceed their budgets. Factors such as labour disputes, death or disability of a star performer, technology changes relating to
special effects or other aspects of production, shortages of necessary equipment, damage to film negatives, master tapes and recordings or adverse weather conditions may cause cost overruns and delay
or hamper completion of a television production. Although the Company generally completes television productions within budget, the Company cannot be certain that it will continue to do so. In the
event of substantial budget overruns the Company may have to seek additional financing from outside sources in order to complete production of a television project. The Company cannot be certain of
the availability of such financing or that such financing will be available on terms acceptable to the Company. In addition, in the event of substantial budget overruns, the Company cannot be certain
that it will be able to recoup such costs. Failure to recoup any of these costs could have an adverse impact on the Company's businesses, results of operations, prospects and financial condition.
Notwithstanding the foregoing, as theCSIfranchise programs are the main focus of the Company's television production activities, many of the risks
associated with new production activity are minimized.

40

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Generally,
television programs are produced under contracts that provide for licence fee revenue that may not cover all anticipated production costs. The "gap" or production deficit
between these fees and production costs can be substantial. The ability to recover the production deficit and the realization of profits, if any, are generally dependent upon the ability to distribute
the programs in multiple geographic regions, including international markets, or through multiple distribution channels. There is a risk that some of the Company's television programs will not be
successful, which could result in a failure to recoup costs or realize profits.

Dependency on Broadcasting Distribution UndertakingsThe Company is, and will, continue to be
dependent on broadcasting distribution undertakings ("BDUs") (which include cable, DTH telecommunications and multi-point distribution system distributors) for distribution of its analog and digital
channels. Due to industry consolidation in recent years, a majority of the subscriber base for the Company's analog and digital channels is reached through a small number of very significant
affiliates, mainly the BDUs. There could be a negative impact on the Company's revenue if distribution affiliation agreements with BDUs were not renewed on terms or conditions similar to those
currently in place or if a BDU defaulted on its obligations under those agreements. Affiliation agreements with BDUs have multi-year terms that expire at various points in time. Due to the
Company's strong relationships with its distributor affiliates and the popularity of the Company's analog and digital channels, the Company is confident it can renew these agreements on mutually
satisfactory terms and conditions, as has been the case historically.

Subscription
revenues are dependent on the number of subscribers and the wholesale rate billed by the Company to BDUs for carriage of the individual networks. The extent to which the
Company's subscriber bases for its channels will grow is uncertain and is partly dependent upon the ability of BDUs to deploy and
expand their digital technologies, their marketing efforts and the packaging of their networks' offerings as well as the willingness of subscribers to adopt and pay for the services.

Digital MigrationDue to the nature of analog cable technology and regulations, analog channels have
historically been offered by cable companies grouped together in tiers and not on an individual basis. Therefore, analog cable subscribers have been required to subscribe to an entire tier in order to
receive particular channels of their choice. Subscribers to analog cable have not had the same packaging flexibility and choice that digital technology can offer. The industry is shifting from analog
to digital transmission ("digital migration"), which provides an HD TV signal through a set-top box.

On
February 28, 2006, the CRTC released its digital migration framework. It has been designed to maximize the benefits and encourage the rollout of digital technology, while
ensuring that individual analog services are not unduly affected during the transition period over the next four to seven years and that they can continue to make significant contributions to the
broadcasting system.

The
digital migration framework evolved from a CRTC process which began in January 2005. Canada's major broadcasters including the Company and Rogers Cable
Communications Inc., Canada's largest BDU, developed a consensus position and memorandum of understanding on the rules that should guide digital migration. The submission by all these parties
encouraged the CRTC to adopt these transition principles so that they may serve as a template for other BDUs. The CRTC stated in its digital migration framework decision that the memorandum of
understanding offered a useful reference point and commended it as a model for negotiations between individual programmers and BDUs.

While
the CRTC has taken a balanced approach to the transition in its digital migration framework, there are risks for operators of analog specialty services because the framework allows
for standalone offerings of analog services by BDUs. There is a risk that current subscribers to one or more of the Company's analog channels who currently receive the channel as part of a cable tier
may not choose to subscribe to the Company's channels once they are available in digital format and as new packaging options become available to them.

Departure of Key Personnel and Effect on Supply ContractsThe Company relies, to a significant degree
on the experience, leadership and skills of senior executives who provide unique and useful services to it and who would be difficult to replace on short notice. The loss of services of any key
personnel could have an adverse impact on the Company's business, results of operations, prospects or financial condition.

41

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Personal
relationships with suppliers and customers play a significant role in the motion picture distribution business. Often, content suppliers will make a decision as to the
initiation or renewal of a distribution agreement based on their assessment of that distributor's key personnel and on whether such key personnel remain employed by Distribution LP.
Distribution LP's output agreement with one of its principal content suppliers may be terminated in certain circumstances if a named officer ceases to be involved in the business.
As a result, Distribution LP is dependent on the continued employment of certain key personnel and the continued goodwill between those individuals and key decision-makers of the relevant
content supplier.

Motion Picture Distribution Output AgreementsDistribution LP obtains distribution rights from
content suppliers to exploit motion pictures in all media. In Canada, Distribution LP has exclusive output agreements with a limited number of U.S. and
Canadian  based independent studios, including New Line Cinema, the Weinstein Company, Focus Features, Dimension Films, Miramax Films, IFC Films and
Remstar and enters into distribution agreements in respect of individual motion pictures less frequently. Conversely, in the United Kingdom and Spain, Distribution LP most often enters
into distribution agreements in respect of individual motion pictures, and as a result of this, it is able to draw on a wider range of content suppliers in those territories. Overall, a relatively
small number of producers represent a substantial proportion of Distribution LP's total revenue. Management believes that Distribution LP's financial performance is, and will continue to
be, substantially dependent on Distribution LP's continued relationship with these content suppliers and the ability of these content suppliers to continue to produce motion pictures that
receive significant audience acceptance.

Results
of operations for any period are significantly dependent on the number, timing and commercial success of motion pictures delivered or made available to various distribution
platforms during that period, none of which can be predicted with certainty. Consequently, the Company's results of operations may fluctuate materially from period to period and the results of any one
period are not necessarily indicative of results for future periods. Cash flows may also fluctuate and are not necessarily closely correlated with revenue recognition. In addition, where the Motion
Picture Distribution business obtains distribution rights under an output agreement or multi-picture agreement, the anticipated exhibition schedule of motion pictures for their theatrical release and
exploitation through successive distribution windows is not consistent from year to year. Consequently, the Company's revenue fluctuates from period to period.

The
Motion Picture Distribution business may also experience variation in its operating results, particularly in respect of theatrical exhibition revenues, as a result of an undersupply
of motion pictures. This may occur due to seasonal variations in the major studios' release schedules or during a period when the business has been unable to, or determined not to, secure distribution
rights to available motion pictures. In this circumstance, Distribution LP's overall revenues would be adversely affected, and although it would not incur the distribution and P&A costs
associated with a theatrical or other release, its distributable cash may nevertheless be adversely affected. Given the consolidation in the motion picture exhibition industry, the potential for
industry changes exists. However, the Company has not experienced and it does not anticipate any changes at this time.

Relationship with UnionsApproximately 100 employees in the Operations area of the Company's
Broadcasting business elected to have the Canadian Media Guild represent them as their bargaining agent for the purpose of collective bargaining with the Company. The Company has not yet been served
with a notice to bargain. The impact on the operations of the Company is difficult to predict. However, it is possible that collective bargaining with employees in the Operations area of the
Broadcasting business in the future will increase labour costs and could result in work stoppages. It is also possible that more of the Company's employees will seek to join a union. Although there
may be risks to the Company, it does not believe such risks will materially affect the Company's businesses, results of operations, prospects or financial condition.

International OperationsThe Company is the distributor of the CSIfranchise for
all territories outside the United States, distributes its library of content in many foreign jurisdictions and
Distribution LP has a growing presence in the United Kingdom and Spain. Therefore, the Company will continue to earn a substantial portion of revenue from outside of Canada. The
Company's ability to maintain or expand its international business, as well as its ability to contract upon favourable terms with international broadcasters, distributors and other licencees, and
conduct foreign production activities depends, in part, on local economic conditions, currency fluctuations, changes in local laws and regulatory requirements, compliance with a variety of foreign
laws and

42

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regulations,
inflation, interest rates and cultural barriers and preferences. As a result, the Company cannot be certain that its international operations will continue to be successful.

Intellectual Property RightsDistribution rights to motion pictures and television programs are
granted legal protection under the copyright laws of Canada, U.S., the United Kingdom, Spain and most other foreign countries, which impose substantial civil and criminal sanctions for
unauthorized duplication and exhibition of motion pictures and television programs. From time to time, various third parties contest or infringe upon the Company's intellectual property rights. There
can be no assurance that the Company's actions to establish and protect trademarks and other proprietary rights will be adequate to prevent imitation by others of motion pictures distributed by the
Company or to prevent third parties from seeking to block the Company's distribution of motion pictures and television programs as a violation of their trademarks and proprietary rights. Moreover,
there can be no assurance that others will not assert rights in, or ownership of, the Company's trademarks and other proprietary rights, or that the Company will be able to successfully resolve these
conflicts. In addition, the laws of certain foreign countries may not protect proprietary rights to the same extent as do the laws of Canada, U.S., the United Kingdom or Spain.

Internal Controls Over Financial ReportingSection 404 of the Sarbanes-Oxley Act of 2002
requires that for the year ended December 31, 2006, the Company will be required to perform an evaluation of its internal controls over financial reporting and have its auditor attest to such
evaluation on an annual basis. Preparing to comply with these requirements has been expensive and time-consuming, and the Company expects that to continue. While the Company believes that
it will be able to meet the required deadlines, no assurance can be given that this will be the case. If the Company fails to complete this evaluation on a timely basis, or fails to remedy any
identified material weaknesses, or if its auditors render an adverse attestation, it may be subject to regulatory scrutiny and a loss of public confidence in its internal controls over financial
reporting.

Constraints on SharesTo ensure that the Company maintains minimum levels of Canadian ownership for
regulatory purposes, it has instituted a voting and non-voting share structure and has placed constraints on the issue, voting and transfer of its non-voting shares. To ensure
that the Company complies with Canadian ownership requirements under the Broadcasting Act and other legislation under which it derives the benefit of tax credits and industry incentives, the board of
directors may refuse to permit the voting of or registration of any transfer of its shares if such voting or transfer were to result in persons other than Canadians owning or controlling more than the
permitted number of its shares or the votes attaching to such shares, under such legislation. The Company's voting structure and the constraints and transfer restrictions on its non-voting
shares may adversely affect the liquidity of its non-voting shares and may have an impact on their trading price. They may also prevent or delay a merger, takeover or other change in the
Company's control and thus discourage attempts to acquire it.

Significant ShareholdersThe Company is indirectly controlled by two individual shareholders who hold
approximately 67% of the votes attached to its voting shares. As a result, the principal shareholders are in a position to significantly influence the Company's operations and strategy and, subject to
applicable law, influence the election of a majority of the directors, influence the appointment of individuals as directors and officers and influence the outcome of matters submitted to a
shareholder vote. The effect of this control may be to limit the price that investors may be willing to pay in the future for the Company's Class B Non-Voting Shares, or to prevent
or delay a merger, takeover or other change in the Company's control and thus discourage attempts to acquire it.

Disclosure Controls and Procedures

The Company's Chief Executive Officer and its Executive Vice-President and Chief Financial Officer are responsible for establishing and maintaining
the Company's disclosure controls and procedures. They are assisted in this responsibility by the Disclosure Committee ("DC"), a management committee comprised of senior executives of the Company. The
DC was formed to assist the Chief Executive Offer and Executive Vice-President and Chief Financial Officer in oversight of the accuracy and timeliness of material disclosures made by the
Company.

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The
Chief Executive Officer and the Executive Vice-President and Chief Financial Officer, after evaluating the effectiveness of the Company's disclosure controls and
procedures as at December 31, 2005, have concluded that the Company's disclosure controls and procedures are adequate and effective to ensure that material information relating to the Company
and its subsidiaries would have been known to them.

Use of Non-GAAP Financial Measures

In addition to the results reported in accordance with Canadian GAAP, the Company uses various non-GAAP financial measures, which are not recognized
under Canadian or United States GAAP as supplemental indicators of our operating performance and financial position. These non-GAAP financial measures are provided to enhance the
user's understanding of our historical and current financial performance and our prospects for the future. Management believes that these measures provide useful information in that they exclude
amounts that are not indicative of our core operating results and ongoing operations and provide a more consistent basis for comparison between years. The following discussion defines the measures
that the Company uses and explains why management believes they are useful measures of performance:

Earnings before undernoted (EBITDA) and direct profitThe Company uses EBITDA and direct profit to
measure operating performance. EBITDA, calculated using figures determined in accordance with Canadian GAAP, is defined as earnings before undernoted, which are earnings before amortization, unusual
items, interest, equity (earnings) losses in affiliates, minority interest, investment gains and losses, gains and losses on disposal of assets, dilution gains, foreign exchange gains and losses,
income taxes and discontinued operations, net of tax. Direct profit is defined as revenue less direct operating expenses, as defined in note 25 to the Company's consolidated financial
statements.

Operating earnings (losses) and net operating earnings (losses)Operating earnings (losses) has been
defined as earnings (loss) from operations before undernoted and discontinued operations, which are earnings before investment gains and losses, gains and losses on disposal of assets, dilution gains,
foreign exchange gains and losses, income taxes and discontinued operations, net of tax. Net operating earnings is defined as operating earnings (losses), net of an applicable portion of income tax.

Adjusted EBITDA, adjusted operating earnings (losses), and adjusted net operating earnings
(losses)Earnings (loss) before undernoted and earnings (loss) from operations before undernoted and discontinued operations include cash and non-cash
items that relate to restructuring activities in Entertainment in Fiscal 2004. Additionally, Calendar 2004 earnings (loss) from operations before undernoted and discontinued operations also includes
$12.1 million related to the write down of deferred financing costs associated with the Company's previous revolving credit facility and senior subordinated notes, as well as a
$24.0 million redemption premium related to the senior subordinated notes. Management does not expect to undertake restructuring activities or refinancing activities of a similar magnitude or
nature in the imminent future and therefore believes that the impact of these activities and their associated charges should be eliminated when evaluating the current operating performance of the
Company. For this reason, management has also used adjusted EBITDA, adjusted operating earnings, and adjusted net operating earnings to evaluate the performance of the business. Adjusted EBITDA has
been defined as EBITDA less cash and non-cash restructuring items included in earnings (loss) before undernoted, adjusted operating earnings (loss) has been defined as operating earnings
(loss) less cash and non-cash restructuring items included in earnings (loss) from operations before undernoted, the write down of deferred financing costs, and the redemption premium on
the senior subordinated notes, and adjusted net operating earnings has been defined as adjusted operating earnings (loss), net of an applicable portion of income tax.

Operating cash flow and free cash flowOperating cash flow is defined as cash and cash equivalents
provided by (used in) operating activities, excluding the net changes in other non-cash balances related to operations, less investments in property and equipment. Free cash flow is
defined as the total of cash and cash equivalents provided by (used in) operating activities and provided by (used in) investing activities. Operating cash flow and free cash flow are measures used by
the Company to measure its operating performance. Management uses operating cash flow and free cash flow to assess the Company's ability to satisfy working capital needs, repay debt and fund capital
expenditures and acquisitions. These non-GAAP financial measures are provided to give

44

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users
and investors a better understanding of the Company's cash flow from normal or operational business activities.

While
many in the financial community consider these non-GAAP financial measures to be important measures of operating performance, they should be considered in addition to,
but not as a substitute for, net earnings (loss) from operations before discontinued operations, net earnings, cash flow and other measures of financial performance prepared in accordance with
Canadian GAAP which are presented in the attached consolidated financial statements. In addition, these and related measures do not have any standardized meaning prescribed by Canadian GAAP and,
therefore, are unlikely to be comparable with the calculation of similar measures used by other companies. EBITDA, direct profit, operating earnings, net operating earnings, have been reconciled to
their related Canadian GAAP measures on pages 45 to 49. Operating cash flow and free cash flow have been reconciled to their related Canadian GAAP measures on page 47
and 49.

The
following table presents a reconciliation of net earnings, as reported under Canadian GAAP, to EBITDA, direct profit, operating earnings, net operating earnings for the three months
and year ended December 31, 2005 and 2004 (in millions of Canadian dollars):

|                                                                                                          |  | For the three months ended December 31, |   | For the year ended December 31, |  
|--------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | - | ------------------------------- | -
|
|Net earnings for the period, as reported under Canadian GAAP                                              |  | 24.8                                    |   | 9.6                             |  
|Add:  Discontinued operations, net of tax                                                                 |  |                                        |   | 0.5                             |  
|Provision for (recovery of) income taxes                                                                  |  | 15.2                                    |   | (1.9                            | )
|Foreign exchange losses (gains)                                                                           |  | 1.4                                     |   | (15.8                           | )
|(Gain) loss on disposal of assets                                                                         |  | (0.4                                    | ) |                                |  
|Investment (gains) losses, net                                                                            |  | (0.5                                    | ) | (1.8                            | )
|                                                                                                          |  |                                         |   |                                 |  
|Earnings (loss) from operations before undernoted and discontinued operations (operating earnings (loss)) |  | 40.5                                    |   | (10.4                           | )
|Add:  Minority interest                                                                                   |  | 12.3                                    |   | 8.4                             |  
|Equity losses in affiliates                                                                               |  | 2.8                                     |   |                                |  
|Interest                                                                                                  |  | 9.3                                     |   | 11.9                            |  
|Unusual items                                                                                             |  | (0.8                                    | ) | 36.1                            |  
|Amortization                                                                                              |  | 8.0                                     |   | 4.8                             |  
|                                                                                                          |  |                                         |   |                                 |  
|EBITDA                                                                                                    |  | 72.1                                    |   | 50.8                            |  
|Add:  Operating expenses                                                                                  |  | 47.4                                    |   | 47.2                            |  
|                                                                                                          |  |                                         |   |                                 |  
|Direct profit                                                                                             |  | 119.5                                   |   | 98.0                            |  
|Operating earnings (loss)                                                                                 |  | 40.5                                    |   | (10.4                           | )
|Less: Provision for (recovery of) income taxes on operating earnings                                      |  | 15.6                                    |   | (7.5                            | )
|                                                                                                          |  |                                         |   |                                 |  
|Net operating earnings (loss)                                                                             |  | 24.9                                    |   | (2.9                            | )
|Operating earnings (loss)                                                                                 |  | 40.5                                    |   | (10.4                           | )
|Add:  Restructuring items in amortization                                                                 |  |                                        |   |                                |  
|Restructuring items and refinancing costs included in unusual items                                       |  | (0.8                                    | ) | 36.1                            |  
|Restructuring items included in operating expenses                                                        |  |                                        |   |                                |  
|Adjusted operating earnings                                                                               |  | 39.7                                    |   | 25.7                            |  
|Adjusted operating earnings                                                                               |  | 39.7                                    |   | 25.7                            |  
|Less: Provision for income taxes on adjusted operating earnings                                           |  | 15.3                                    |   | 5.5                             |  
|                                                                                                          |  |                                         |   |                                 |  
|Adjusted net operating earnings                                                                           |  | 24.4                                    |   | 20.2                            |  
|EBITDA                                                                                                    |  | 72.1                                    |   | 50.8                            |  
|Add:  Restructuring items included in operating expenses                                                  |  |                                        |   |                                |  
|                                                                                                          |  |                                         |   |                                 |  
|Adjusted EBITDA                                                                                           |  | 72.1                                    |   | 50.8                            |  
|                                                                                                          |  |                                         |   |                                 |  

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The
following table presents a reconciliation of diluted net earnings per common share, as reported under Canadian GAAP, to diluted net earnings from operations before undernoted per
common share, net of applicable taxes (net operating earnings) per common share) for the three months and year ended December 31, 2005 and 2004:

|                                                                                                                                             |  | For the three months ended December 31, |  
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | -
|
|Net earnings per common share, as reported under Canadian GAAP                                                                               |  | 0.56                                    |  
|Discontinued operations, net of income taxes of nil (December 31, 2004  $1.4 million)                                                       |  |                                        |  
|                                                                                                                                             |  |                                         |  
|Net earnings per common share before discontinued operations, as reported under Canadian GAAP                                                |  | 0.56                                    |  
|Foreign exchange losses (gains), net of income taxes of $0.6 million (December 31, 2004  $4.0 million)                                      |  | 0.02                                    |  
|Gain on disposal of assets, net of income taxes of $0.2 million (December 31, 2004  nil)                                                    |  |                                        |  
|Investment gains, net of income taxes of $0.1 million (December 31, 2004  $1.5 million)                                                     |  | (0.02                                   | )
|                                                                                                                                             |  |                                         |  
|Net operating earnings (loss) per common share                                                                                               |  | 0.56                                    |  
|Net operating earnings (loss) per common share                                                                                               |  | 0.56                                    |  
|Restructuring items and refinancing costs included in unusual items, net of income taxes of $0.3 million (December 31, 2004  $13.0 million) |  | (0.01                                   | )
|                                                                                                                                             |  |                                         |  
|Adjusted net operating earnings per common share                                                                                             |  | 0.55                                    |  
|                                                                                                                                             |  |                                         |  

|
|

|                                                                                                                                             |  | For the year ended December 31, |  
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | -
|
|Net earnings per common share, as reported under Canadian GAAP                                                                               |  | 1.61                            |  
|Discontinued operations, net of income taxes of nil (December 31, 2004  $1.4 million)                                                       |  |                                |  
|                                                                                                                                             |  |                                 |  
|Net earnings per common share before discontinued operations, as reported under Canadian GAAP                                                |  | 1.61                            |  
|Foreign exchange losses (gains), net of income taxes of $0.2 million (December 31, 2004  $5.8 million)                                      |  | 0.19                            |  
|Gain on disposal of assets, net of income taxes of $1.5 million (December 31, 2004  $0.1 million)                                           |  | (0.06                           | )
|Investment gains, net of income taxes of $0.3 million (December 31, 2004  $1.6 million)                                                     |  | (0.01                           | )
|                                                                                                                                             |  |                                 |  
|Net operating earnings per common share                                                                                                      |  | 1.73                            |  
|Net operating earnings per common share                                                                                                      |  | 1.73                            |  
|Restructuring items in amortization, net of income taxes of nil (December 31, 2004  $0.7 million)                                           |  |                                |  
|Restructuring items and refinancing costs included in unusual items, net of income taxes of $0.3 million (December 31, 2004  $13.0 million) |  | (0.01                           | )
|Restructuring items included in operating expenses, net of income taxes of nil (December 31, 2004  $0.5 million)                            |  |                                |  
|                                                                                                                                             |  |                                 |  
|Adjusted net operating earnings per common share                                                                                             |  | 1.72                            |  
|                                                                                                                                             |  |                                 |  

46

---



The
following table presents a reconciliation of cash and cash equivalents provided by (used in) operating activities, as reported under Canadian GAAP, to operating cash flow and free
cash flow for the three months and year ended December 31, 2005 and 2004 (in millions of Canadian dollars):

|                                                                                                      |  | For the three months ended December 31, |   | For the year ended December 31, | 
|----------------------------------------------------------------------------------------------------- |  | --------------------------------------- | - | ------------------------------- | 
|
|Cash and cash equivalents provided by (used in) operating activities, as reported under Canadian GAAP |  | 65.1                                    |   | 27.9                            | 
|Less: Net changes in other non-cash balances related to operations                                    |  | 22.4                                    |   | 21.5                            | 
|Less: Investment in property and equipment                                                            |  | 3.0                                     |   | 0.5                             | 
|                                                                                                      |  |                                         |   |                                 | 
|Operating cash flow                                                                                   |  | 39.7                                    |   | 5.9                             | 
|                                                                                                      |  |                                         |   |                                 | 
|Cash and cash equivalents provided by (used in) operating activities, as reported under Canadian GAAP |  | 65.1                                    |   | 27.9                            | 
|Add: Cash and cash equivalents used in investing activities                                           |  | (1.5                                    | ) | 4.8                             | 
|                                                                                                      |  |                                         |   |                                 | 
|Free cash flow                                                                                        |  | 63.6                                    |   | 32.7                            | 
|                                                                                                      |  |                                         |   |                                 | 

47

---



The following table presents a reconciliation of net earnings (loss), as reported under Canadian GAAP, to EBITDA, direct profit (loss), operating earnings (loss), net operating earnings
(loss), adjusted EBITDA, adjusted operating earnings (loss), and net adjusted operating earnings (loss) for the year ended December 31, 2004 and the nine months ended December 31, 2003
(in millions of Canadian dollars):

|                                                                                                          |  | For the year ended December 31, 2004 |   | For the nine months ended December 31, 2003 |  
|--------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | - | ------------------------------------------- | -
|Net earnings (loss) for the period, as reported under Canadian GAAP                                       |  | 29.7                                 |   | (169.6                                      | )
|Add:  Discontinued operations, net of tax                                                                 |  | (4.1                                 | ) | 15.7                                        |  
|Provision for income taxes                                                                                |  | 0.6                                  |   | 44.1                                        |  
|Foreign exchange gains                                                                                    |  | (22.4                                | ) | (20.6                                       | )
|Dilution gains                                                                                            |  |                                     |   | (145.1                                      | )
|Investment gains, net                                                                                     |  | (2.2                                 | ) | (1.0                                        | )
|                                                                                                          |  |                                      |   |                                             |  
|Earnings (loss) from operations before undernoted and discontinued operations (operating earnings (loss)) |  | 9.8                                  |   | (276.5                                      | )
|Add:  Minority interest                                                                                   |  | 34.0                                 |   | 9.7                                         |  
|Equity losses in affiliates                                                                               |  | 0.1                                  |   | 0.3                                         |  
|Interest                                                                                                  |  | 58.2                                 |   | 62.4                                        |  
|Unusual items                                                                                             |  | 36.1                                 |   | 13.3                                        |  
|Amortization, including development costs charges                                                         |  | 21.3                                 |   | 50.0                                        |  
|                                                                                                          |  |                                      |   |                                             |  
|EBITDA                                                                                                    |  | 159.5                                |   | (140.8                                      | )
|Add:  Operating expenses                                                                                  |  | 152.5                                |   | 124.7                                       |  
|                                                                                                          |  |                                      |   |                                             |  
|Direct profit (loss)                                                                                      |  | 312.0                                |   | (16.1                                       | )
|                                                                                                          |  |                                      |   |                                             |  
|Operating earnings (loss)                                                                                 |  | 9.8                                  |   | (276.5                                      | )
|Less: Provision for (recovery of) income taxes on operating earnings (loss)                               |  | (7.0                                 | ) | 13.7                                        |  
|                                                                                                          |  |                                      |   |                                             |  
|Net operating earnings (loss)                                                                             |  | 16.8                                 |   | (290.2                                      | )
|Operating earnings (loss)                                                                                 |  | 9.8                                  |   | (276.5                                      | )
|Add:  Restructuring items in amortization, including development costs charges                            |  | 1.9                                  |   | 30.8                                        |  
|Restructuring items and refinancing costs included in unusual items                                       |  | 36.1                                 |   | 12.0                                        |  
|Restructuring items included in direct operating costs                                                    |  |                                     |   | 165.3                                       |  
|Restructuring items included in operating expenses                                                        |  | 1.3                                  |   | 0.7                                         |  
|                                                                                                          |  |                                      |   |                                             |  
|Adjusted operating earnings (loss)                                                                        |  | 49.1                                 |   | (67.7                                       | )
|Adjusted operating earnings (loss)                                                                        |  | 49.1                                 |   | (67.7                                       | )
|Less: Provision for income taxes on adjusted operating earnings (loss)                                    |  | 7.2                                  |   | 88.8                                        |  
|                                                                                                          |  |                                      |   |                                             |  
|Adjusted net operating earnings (loss)                                                                    |  | 41.9                                 |   | (156.5                                      | )
|EBITDA                                                                                                    |  | 159.5                                |   | (140.8                                      | )
|Add:  Restructuring items included in operating expenses                                                  |  | 1.3                                  |   | 0.7                                         |  
|Restructuring items included in direct operating expenses                                                 |  |                                     |   | 165.3                                       |  
|                                                                                                          |  |                                      |   |                                             |  
|Adjusted EBITDA                                                                                           |  | 160.8                                |   | 25.2                                        |  
|                                                                                                          |  |                                      |   |                                             |  

48

---



The
following table presents a reconciliation of diluted net earnings (loss) per common share, as reported under Canadian GAAP, to diluted net earnings (loss) from operations before
undernoted per common share, net of applicable taxes (net operating earnings (loss) per common share) and to adjusted net operating earnings (loss) per common share for the year ended
December 31, 2004 and the nine months ended December 31, 2003:

|                                                                                                                                                  |  | For the year ended December 31, 2004 |   | For the nine months ended December 31, 2003 |  
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | - | ------------------------------------------- | -
|Net earnings (loss) per common share, as reported under Canadian GAAP                                                                             |  | 0.68                                 |   | (3.96                                       | )
|Discontinued operations, net of income taxes of $1.4 million (December 31, 2003  $0.8 million)                                                   |  | 0.10                                 |   | 0.36                                        |  
|                                                                                                                                                  |  |                                      |   |                                             |  
|Net earnings (loss) per common share before discontinued operations, as reported under Canadian GAAP                                              |  | 0.78                                 |   | (3.60                                       | )
|Foreign exchange gains, net of income taxes of $5.8 million (December 31, 2003  $3.0 million)                                                    |  | (0.38                                | ) | (0.41                                       | )
|Investment gains, net of income taxes of $1.7 million (December 31, 2003  $1.2 million)                                                          |  | (0.01                                | ) |                                            |  
|Dilution gains, net of income taxes of nil (December 31, 2003  $26.2 million)                                                                    |  |                                     |   | (2.77                                       | )
|                                                                                                                                                  |  |                                      |   |                                             |  
|Net operating earnings (loss) per common share                                                                                                    |  | 0.39                                 |   | (6.78                                       | )
|                                                                                                                                                  |  |                                      |   |                                             |  
|Net operating earnings (loss) per share                                                                                                           |  | 0.39                                 |   | (6.78                                       | )
|Restructuring items in amortization, including development costs charges, net of income taxes of $0.7 million (December 31, 2003  $11.1 million) |  | 0.02                                 |   | 0.46                                        |  
|Restructuring items and refinancing costs included in unusual items, net of income taxes of $13.0 million (December 31, 2003  $4.4 million)      |  | 0.53                                 |   | 0.18                                        |  
|Restructuring items included in direct operating expenses, net of income taxes of nil (December 31, 2003  $59.4 million)                         |  |                                     |   | 2.47                                        |  
|Restructuring items included in operating expenses, net of income taxes of $0.5 million (December 31, 2003  $0.3 million)                        |  | 0.02                                 |   | 0.01                                        |  
|                                                                                                                                                  |  |                                      |   |                                             |  
|Adjusted net operating earnings (loss) per common share                                                                                           |  | 0.96                                 |   | (3.66                                       | )
|                                                                                                                                                  |  |                                      |   |                                             |  

The
following table presents a reconciliation of cash and cash equivalents provided by (used in) operating activities, as reported under Canadian GAAP, to operating cash flow and free
cash flow for the year ended December 31, 2004 and the nine months ended December 31, 2003 (in millions of Canadian dollars):

|                                                                                                      |  | For the year ended December 31, 2004 |   | For the nine months ended December 31, 2003 |  
|----------------------------------------------------------------------------------------------------- |  | ------------------------------------ | - | ------------------------------------------- | -
|Cash and cash equivalents provided by (used in) operating activities, as reported under Canadian GAAP |  | 9.2                                  |   | (49.1                                       | )
|Less: Net changes in other non-cash balances related to operations                                    |  | (31.9                                | ) | (10.6                                       | )
|Less: Investment in property and equipment                                                            |  | 4.5                                  |   | 2.7                                         |  
|                                                                                                      |  |                                      |   |                                             |  
|Operating cash flow                                                                                   |  | 36.6                                 |   | (41.2                                       | )
|                                                                                                      |  |                                      |   |                                             |  
|Cash and cash equivalents provided by (used in) operating activities, as reported under Canadian GAAP |  | 9.2                                  |   | (49.1                                       | )
|Add: Cash and cash equivalents used in investing activities                                           |  | (32.3                                | ) | 164.5                                       |  
|                                                                                                      |  |                                      |   |                                             |  
|Free cash flow                                                                                        |  | (23.1                                | ) | 115.4                                       |  
|                                                                                                      |  |                                      |   |                                             |  

Additional
information relating to the Company can be found on SEDAR at www.sedar.com.

49

---



GRAPHIC

Consolidated Financial Statements

For the Years Ended December 31, 2005
and December 31, 2004, and the
Nine Months Ended December 31, 2003

---



MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING

The accompanying consolidated financial statements, Management's Discussion and Analysis ("MD&A") and all other information contained in this corporate report of
Alliance Atlantis Communications Inc. ("the Company") are the responsibility of management and have been approved by the Board of Directors.

The
consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles. When alternative methods of accounting exist,
management has chosen those it deems most appropriate in the circumstances. The consolidated financial statements and information in the MD&A necessarily include amounts based on informed judgments
and estimates of the expected effects of current events and transactions with appropriate consideration to materiality. In addition,
in preparing the financial information management must make determinations as to the relevancy of information to be included, and make estimates and assumptions that affect reported information. The
MD&A also includes information regarding the impact of current transactions and events, sources of liquidity and capital resources, operating trends, risks and uncertainties. Actual results in the
future may differ materially from our present assessment of this information because future events and circumstances may not occur as expected. Management has prepared the information elsewhere in
this corporate report and has ensured that it is consistent with the consolidated financial statements.

The
Company maintains a system of internal accounting and administrative controls. Such systems are designed to provide reasonable assurance that the financial information is relevant,
reliable and accurate and the Company's assets are appropriately accounted for and adequately safeguarded.

The
Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial reporting, and is ultimately responsible for reviewing and approving the
consolidated financial statements and MD&A. The Board carries out this responsibility through its Audit Committee.

The
Audit Committee is appointed by the Board, and all of its members are independent directors. The Committee meets periodically with management, as well as the independent external
auditors, to discuss internal controls over the financial reporting process, auditing matters and financial reporting issues. The Committee reviews the consolidated financial statements and the
external auditors' report thereon and the MD&A and reports its findings to the Board for consideration when the Board approves the consolidated financial statements and the MD&A for issuance to the
shareholders. The Committee also considers, for review by the Board and approval by the shareholders, the engagement or re-appointment of the external auditors. The external auditors have
full and free access to the Audit Committee.

On
behalf of the shareholders, the consolidated financial statements have been audited by PricewaterhouseCoopers LLP, the external auditors, in accordance with Canadian generally
accepted auditing standards. Their opinion is presented hereafter.

|LOGO                    |  | LOGO                                                
|----------------------- |  | ----------------------------------------------------
|PHYLLIS YAFFE           |  | DAVID LAZZARATO                                     
|Chief Executive Officer |  | Executive Vice President and
Chief Financial Officer

F-2

---





AUDITORS' REPORT

To
the Shareholders of

Alliance
Atlantis Communications Inc.

We
have audited the consolidated balance sheets of Alliance Atlantis Communications Inc. as at December 31, 2005 and 2004 and the consolidated statements of earnings
(loss), deficit and cash flows for the years ended December 31, 2005 and December 31, 2004, and the nine-month period ended December 31, 2003. These financial
statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with Canadian 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 December 31, 2005 and 2004 and the
results of its operations and its cash flows for the years ended December 31, 2005 and December 31, 2004, and the nine-month period ended December 31, 2003 in
accordance with Canadian generally accepted accounting principles.

|March 20, 2006
Toronto, Canada |  | GRAPHICChartered Accountants
|------------------------------ |  | ----------------------------

F-3

---





ALLIANCE ATLANTIS COMMUNICATIONS INC.    CONSOLIDATED BALANCE SHEETS    (in millions of Canadian dollars)

|                                                          |  | December 31,
2005 |   | December 31,
2004 |  
|--------------------------------------------------------- |  | ----------------- | - | ----------------- | -
|Assets                                                    |  |                   |   |                   |  
|Cash and cash equivalents                                 |  | 110.6             |   | 55.0              |  
|Accounts and other receivables(note 26 and 27)            |  | 343.4             |   | 372.2             |  
|Investment in film and television programs(note 3 and 23) |  | 578.9             |   | 567.3             |  
|Property and equipment(note 4)                            |  | 39.7              |   | 43.7              |  
|Investments(note 5 and 26)                                |  | 6.8               |   | 16.4              |  
|Future income taxes(note 18)                              |  | 87.1              |   | 128.4             |  
|Other assets(note 6)                                      |  | 14.4              |   | 25.1              |  
|Loans receivable from tax shelters(note 2)                |  | 97.2              |   | 90.9              |  
|Broadcast licences(note 30)                               |  | 106.0             |   | 108.7             |  
|Goodwill(note 10 and 25)                                  |  | 202.8             |   | 213.2             |  
|                                                          |  |                   |   |                   |  
|                                                          |  | 1,586.9           |   | 1,620.9           |  
|                                                          |  |                   |   |                   |  
|Liabilities                                               |  |                   |   |                   |  
|Revolving credit facilities(note 7)                       |  | 33.0              |   |                  |  
|Accounts payable and accrued liabilities(note 22)         |  | 504.1             |   | 538.0             |  
|Income taxes payable                                      |  | 38.5              |   | 57.2              |  
|Deferred revenue                                          |  | 31.4              |   | 31.1              |  
|Term loans(note 8)                                        |  | 409.5             |   | 483.6             |  
|Tax shelter participation liabilities(note 2)             |  | 97.2              |   | 90.9              |  
|Minority interest                                         |  | 59.9              |   | 67.4              |  
|                                                          |  |                   |   |                   |  
|                                                          |  | 1,173.6           |   | 1,268.2           |  
|                                                          |  |                   |   |                   |  
|Shareholders' Equity                                      |  |                   |   |                   |  
|Share capital and other(note 12)                          |  | 732.7             |   | 725.7             |  
|Deficit                                                   |  | (310.3            | ) | (372.5            | )
|Cumulative translation adjustments(note 14)               |  | (9.1              | ) | (0.5              | )
|                                                          |  |                   |   |                   |  
|                                                          |  | 413.3             |   | 352.7             |  
|                                                          |  |                   |   |                   |  
|                                                          |  | 1,586.9           |   | 1,620.9           |  
|                                                          |  |                   |   |                   |  
|Commitments and contingencies(note 24)                    |  |                   |   |                   |  

Approved
by the Board of Directors

|GRAPHIC ANTHONY F. GRIFFITHS |  | GRAPHIC ELLIS JACOB
|---------------------------- |  | -------------------

The accompanying notes form an integral part of these consolidated financial statements.

F-4

---



ALLIANCE ATLANTIS COMMUNICATIONS INC.    CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)    (in millions of Canadian dollars  except per share amounts)

|                                                                              |                                     | Year ended December 31,
2005 |         | Year ended December 31,
2004 |   | Nine months ended December 31, 2003 |      
|----------------------------------------------------------------------------- | ----------------------------------- | ---------------------------- | ------- | ---------------------------- | - | ----------------------------------- | -----
|Revenue                                                                       |                                     |                              |         |                              |   |                                     |      
|                                                                              | Broadcasting                        |                              |         | 283.4                        |   |                                     | 245.9
|                                                                              | Entertainment                       |                              |         | 341.5                        |   |                                     | 258.7
|                                                                              | Motion Picture Distribution         |                              |         | 418.1                        |   |                                     | 512.1
|                                                                              | Corporate and Other                 |                              |         | 0.4                          |   |                                     | 0.8  
|                                                                              |                                     |                              |         |                              |   |                                     |      
|                                                                              |                                     |                              | 1,043.4 |                              |   | 1,017.5                             |      
|                                                                              |                                     |                              |         |                              |   |                                     |      
|Direct operating expenses                                                     |                                     |                              | 677.2   |                              |   | 705.5                               |      
|                                                                              |                                     |                              |         |                              |   |                                     |      
|Direct profit (loss)                                                          |                                     |                              |         |                              |   |                                     |      
|                                                                              | Broadcasting                        |                              |         | 159.2                        |   |                                     | 132.7
|                                                                              | Entertainment                       |                              |         | 118.2                        |   |                                     | 74.8 
|                                                                              | Motion Picture Distribution         |                              |         | 88.4                         |   |                                     | 103.7
|                                                                              | Corporate and Other                 |                              |         | 0.4                          |   |                                     | 0.8  
|                                                                              |                                     |                              |         |                              |   |                                     |      
|                                                                              |                                     |                              | 366.2   |                              |   | 312.0                               |      
|                                                                              |                                     |                              |         |                              |   |                                     |      
|Operating expenses                                                            |                                     |                              |         |                              |   |                                     |      
|                                                                              | Selling, general and administrative |                              |         | 161.2                        |   |                                     | 135.8
|                                                                              | Stock based compensation(note 12)   |                              |         | 12.1                         |   |                                     | 16.7 
|                                                                              |                                     |                              |         |                              |   |                                     |      
|                                                                              |                                     |                              | 173.3   |                              |   | 152.5                               |      
|                                                                              |                                     |                              |         |                              |   |                                     |      
|Earnings (loss) before undernoted and discontinued operations                 |                                     |                              |         |                              |   |                                     |      
|                                                                              | Broadcasting                        |                              |         | 90.7                         |   |                                     | 73.3 
|                                                                              | Entertainment                       |                              |         | 94.1                         |   |                                     | 50.2 
|                                                                              | Motion Picture Distribution         |                              |         | 46.0                         |   |                                     | 72.9 
|                                                                              | Corporate and Other                 |                              |         | (37.9                        | ) |                                     | (36.9
|                                                                              |                                     |                              |         |                              |   |                                     |      
|                                                                              |                                     |                              | 192.9   |                              |   | 159.5                               |      
|                                                                              |                                     |                              |         |                              |   |                                     |      
|Amortization                                                                  |                                     |                              | 18.0    |                              |   | 21.3                                |      
|Unusual items(note 11)                                                        |                                     |                              | (0.8    | )                            |   | 36.1                                |      
|Interest(note 15)                                                             |                                     |                              | 26.3    |                              |   | 58.2                                |      
|Equity losses in affiliates                                                   |                                     |                              | 2.7     |                              |   | 0.1                                 |      
|Minority interest                                                             |                                     |                              | 22.5    |                              |   | 34.0                                |      
|                                                                              |                                     |                              |         |                              |   |                                     |      
|Earnings (loss) from operations before undernoted and discontinued operations |                                     |                              | 124.2   |                              |   | 9.8                                 |      
|Dilution gains(note 16)                                                       |                                     |                              |        |                              |   |                                    |      
|Investment losses (gains), net (note 16)                                      |                                     |                              | 0.2     |                              |   | (2.4                                | )    
|(Gain) loss on disposal of assets(note 9)                                     |                                     |                              | (4.1    | )                            |   | 0.2                                 |      
|Foreign exchange losses (gains)                                               |                                     |                              | 8.1     |                              |   | (22.4                               | )    
|                                                                              |                                     |                              |         |                              |   |                                     |      
|Earnings (loss) before income taxes and discontinued operations               |                                     |                              | 120.0   |                              |   | 34.4                                |      
|Provision for income taxes(note 18)                                           |                                     |                              | 49.1    |                              |   | 0.6                                 |      
|                                                                              |                                     |                              |         |                              |   |                                     |      
|Net earnings (loss) before discontinued operations                            |                                     |                              | 70.9    |                              |   | 33.8                                |      
|Discontinued operations, net of income taxes(note 17)                         |                                     |                              |        |                              |   | (4.1                                | )    
|                                                                              |                                     |                              |         |                              |   |                                     |      
|Net earnings (loss) for the period                                            |                                     |                              | 70.9    |                              |   | 29.7                                |      
|                                                                              |                                     |                              |         |                              |   |                                     |      
|Earnings (loss) per Common Share before discontinued operations(note 20)      |                                     |                              |         |                              |   |                                     |      
|                                                                              | Basic                               |                              | $       | 1.63                         |   | $                                   | 0.78 
|                                                                              | Diluted                             |                              | $       | 1.61                         |   | $                                   | 0.78 
|                                                                              |                                     |                              |         |                              |   |                                     |      
|Earnings (loss) per Common Share(note 20)                                     |                                     |                              |         |                              |   |                                     |      
|                                                                              | Basic                               |                              | $       | 1.63                         |   | $                                   | 0.69 
|                                                                              | Diluted                             |                              | $       | 1.61                         |   | $                                   | 0.68 
|                                                                              |                                     |                              |         |                              |   |                                     |      

The accompanying notes form an integral part of these consolidated financial statements.

F-5

---





ALLIANCE ATLANTIS COMMUNICATIONS INC.    CONSOLIDATED STATEMENTS OF DEFICIT    (in millions of Canadian dollars)

|                                                            |  | Year ended
December 31,
2005 |   | Year ended
December 31,
2004 |   | Nine months ended
December 31, 2003 |  
|----------------------------------------------------------- |  | ---------------------------- | - | ---------------------------- | - | ----------------------------------- | -
|Deficit  beginning of period                               |  | (372.5                       | ) | (402.2                       | ) | (232.6                              | )
|Net earnings (loss) for the period                          |  | 70.9                         |   | 29.7                         |   | (169.6                              | )
|Shares repurchased and cancelled under issuer bid(note 12g) |  | (8.7                         | ) |                             |   |                                    |  
|                                                            |  |                              |   |                              |   |                                     |  
|Deficit  end of period                                     |  | (310.3                       | ) | (372.5                       | ) | (402.2                              | )
|                                                            |  |                              |   |                              |   |                                     |  

The accompanying notes form an integral part of these consolidated financial statements.

F-6

---



ALLIANCE ATLANTIS COMMUNICATIONS INC.    CONSOLIDATED STATEMENTS OF CASH FLOWS    (In millions of Canadian dollars)

|                                                                      |                                                        | Year ended
December 31, 2005 |       | Year ended
December 31, 2004 |       | Nine months ended
December 31, 2003 |       
|--------------------------------------------------------------------- | ------------------------------------------------------ | ---------------------------- | ----- | ---------------------------- | ----- | ----------------------------------- | ------
|Cash and cash equivalents provided by (used in)                       |                                                        |                              |       |                              |       |                                     |       
|Operating activities                                                  |                                                        |                              |       |                              |       |                                     |       
|Net earnings (loss) for the period                                    |                                                        | 70.9                         |       | 29.7                         |       | (169.6                              | )     
|Items not affecting cash                                              |                                                        |                              |       |                              |       |                                     |       
|                                                                      | Amortization of film and television programs(note 25f) |                              | 343.4 |                              | 290.2 |                                     | 423.3 
|                                                                      | Amortization of development costs                      |                              | 1.2   |                              | 4.4   |                                     | 39.4  
|                                                                      | Amortization of property and equipment                 |                              | 10.1  |                              | 11.3  |                                     | 9.6   
|                                                                      | Amortization of other assets                           |                              | 4.9   |                              | 9.8   |                                     | 7.8   
|                                                                      | Write down of broadcast intangible asset (note 6)      |                              | 2.3   |                              |      |                                     |      
|                                                                      | Write down of broadcast licenses                       |                              | 2.7   |                              | 1.1   |                                     |      
|                                                                      | Loss on redemption of long-term debt                   |                              |      |                              | 36.1  |                                     |      
|                                                                      | Provision on loans receivable                          |                              |      |                              |      |                                     | 6.4   
|                                                                      | Dilution gains                                         |                              |      |                              |      |                                     | (145.1
|                                                                      | Investment losses (gains), net (note 16)               |                              | 0.2   |                              | (2.4  | )                                   | (1.0  
|                                                                      | (Gain) loss on disposal of assets(note 9)              |                              | (4.1  | )                            | 0.2   |                                     |      
|                                                                      | Equity losses in affiliates                            |                              | 2.7   |                              | 0.1   |                                     | 0.3   
|                                                                      | Minority interest                                      |                              | 22.5  |                              | 34.0  |                                     | 9.7   
|                                                                      | Future income taxes                                    |                              | 41.3  |                              | (39.8 | )                                   | 23.3  
|                                                                      | Unrealized net foreign exchange losses (gains)         |                              | 7.9   |                              | (24.7 | )                                   | (30.1 
|                                                                      | Stock based compensation                               |                              | 3.9   |                              | 1.5   |                                     | 1.4   
|Investment in film and television programs(note 25f)                  |                                                        | (380.8                       | )     | (310.8                       | )     | (219.6                              | )     
|Development costs expenditures                                        |                                                        | (0.1                         | )     | (1.7                         | )     | (8.9                                | )     
|Net changes in other non-cash balances related to operations(note 21) |                                                        | (15.3                        | )     | (31.9                        | )     | (10.6                               | )     
|Discontinued operations                                               |                                                        |                             |       | 2.1                          |       | 14.6                                |       
|                                                                      |                                                        |                              |       |                              |       |                                     |       
|                                                                      |                                                        | 113.7                        |       | 9.2                          |       | (49.1                               | )     
|                                                                      |                                                        |                              |       |                              |       |                                     |       
|Investing activities                                                  |                                                        |                              |       |                              |       |                                     |       
|Purchases of property and equipment                                   |                                                        | (6.9                         | )     | (4.5                         | )     | (2.7                                | )     
|Proceeds from sale of assets(note 9)                                  |                                                        | 6.1                          |       |                             |       |                                    |       
|Proceeds from dilution of subsidiary                                  |                                                        |                             |       |                             |       | 162.4                               |       
|Business acquisitions(note 10)                                        |                                                        |                             |       | (35.2                        | )     |                                    |       
|Proceeds from sale of investments (note 16)                           |                                                        | 11.6                         |       | 4.9                          |       | 5.0                                 |       
|Purchases of investments                                              |                                                        | (4.4                         | )     |                             |       |                                    |       
|Discontinued operations                                               |                                                        |                             |       | 1.9                          |       | (3.2                                | )     
|Other                                                                 |                                                        |                             |       | 0.6                          |       | 3.0                                 |       
|                                                                      |                                                        |                              |       |                              |       |                                     |       
|                                                                      |                                                        | 6.4                          |       | (32.3                        | )     | 164.5                               |       
|                                                                      |                                                        |                              |       |                              |       |                                     |       
|Financing activities                                                  |                                                        |                              |       |                              |       |                                     |       
|Proceeds from revolving credit facility                               |                                                        | 33.0                         |       |                             |       |                                    |       
|Repayment of term loans                                               |                                                        | (63.6                        | )     | (448.1                       | )     | (92.8                               | )     
|Proceeds on term loans                                                |                                                        |                             |       | 440.9                        |       | 72.9                                |       
|Deferred financing costs                                              |                                                        |                             |       | (8.5                         | )     |                                    |       
|Issue of equity by subsidiary to minority interest                    |                                                        |                             |       | 15.0                         |       |                                    |       
|Distributions paid to minority interest                               |                                                        | (26.1                        | )     | (22.7                        | )     | (2.7                                | )     
|Issue of share capital                                                |                                                        | 11.5                         |       | 6.8                          |       | 1.9                                 |       
|Shares purchased and cancelled under issuer bid                       |                                                        | (17.1                        | )     |                             |       |                                    |       
|Discontinued operations                                               |                                                        |                             |       | (0.7                         | )     | (1.2                                | )     
|                                                                      |                                                        |                              |       |                              |       |                                     |       
|                                                                      |                                                        | (62.3                        | )     | (17.3                        | )     | (21.9                               | )     
|                                                                      |                                                        |                              |       |                              |       |                                     |       
|Effect of exchange rate changes on cash and cash equivalents          |                                                        | (2.2                         | )     |                             |       |                                    |       
|                                                                      |                                                        |                              |       |                              |       |                                     |       
|Change in cash and cash equivalents                                   |                                                        | 55.6                         |       | (40.4                        | )     | 93.5                                |       
|Cash and cash equivalents  beginning of period                       |                                                        | 55.0                         |       | 95.4                         |       | 1.9                                 |       
|                                                                      |                                                        |                              |       |                              |       |                                     |       
|Cash and cash equivalents  end of period                             |                                                        | 110.6                        |       | 55.0                         |       | 95.4                                |       
|                                                                      |                                                        |                              |       |                              |       |                                     |       

The accompanying notes form an integral part of these consolidated financial statements.

F-7

---



ALLIANCE ATLANTIS COMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In millions of Canadian dollars  except share and per share amounts)

1.     NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES





F-8

---





F-9

---





Buildings

5% by declining balanceFurniture and other equipment

20%  30% by declining balanceComputer equipment and software

30% by declining balanceLeasehold improvements

straight-line over the remaining term of the leaseBroadcasting equipment

straight-line over five years




F-10

---





F-11

---





2.     ACCOUNTING CHANGES





F-12

---





Impact of
the adjustmentsCash

(0.2
)Accounts receivable

1.8Investments

2.9Other assets

(0.5
)Investment in film and television programs

2.6Loans receivable from tax shelters

97.2Total assets

103.8Accounts payable and accrued liabilities

2.4Deferred revenue

0.1Term loans

4.1Tax shelter participation liabilities

97.2Total liabilities

103.8Revenue

0.6Direct operating expenses

0.6




F-13

---





F-14

---









F-15

---





3.     INVESTMENT IN FILM AND TELEVISION PROGRAMS

Broadcasting

Entertainment

Motion Picture Distribution

TotalDecember 31, 2005Theatrical ReleaseReleased, net of accumulated amortization



9.7

102.0

111.7Not released





17.1

17.1Advances on unreleased films





13.3

13.3Acquired library, net of accumulated amortization





17.6

17.6Non-Theatrical Film and Television ProgramsReleased, net of accumulated amortization



174.3

31.3

205.6Acquired library, net of accumulated amortization



12.9



12.9Programs in progress



5.2



5.2Broadcasting rights, net of accumulated amortization

195.5





195.5195.5

202.1

181.3

578.9


|
|

Broadcasting

Entertainment

Motion Picture Distribution

TotalDecember 31, 2004Theatrical ReleaseReleased, net of accumulated amortization



11.0

110.0

121.0Not released





15.8

15.8Advances on unreleased films





21.3

21.3Acquired library, net of accumulated amortization





18.2

18.2Non-Theatrical Film and Television ProgramsReleased, net of accumulated amortization



161.3

21.5

182.8Acquired library, net of accumulated amortization



19.4



19.4Programs in progress



3.6



3.6Broadcasting rights, net of accumulated amortization

185.2





185.2185.2

195.3

186.8

567.3




F-16

---





4.     PROPERTY AND EQUIPMENT

December 31, 2005

December 31, 2004Cost

Accumulated amortization

Cost

Accumulated amortizationBuildings





0.3

Furniture and other equipment

18.6

13.2

20.1

13.7Computer equipment and software

38.0

28.0

34.7

25.3Leasehold improvements

36.4

18.2

37.4

16.6Broadcasting equipment

24.6

18.5

22.8

16.0117.6

77.9

115.3

71.6Net book value



39.7



43.7




5.     INVESTMENTS

December 31,
2005

December 31,
2004At cost

6.2

16.1On equity basis

0.6

0.36.8

16.4








F-17

---





6.     OTHER ASSETS

December 31,
2005

December 31,
2004Deferred financing costs (net of accumulated amortization of $3.7
(December 31, 2004  $1.1))

8.0

11.1Broadcasting intangible assets (net of accumulated amortization of $11.6
(December 31, 2004  $8.0))



3.6Other intangible assets (net of accumulated amortization of $4.6
(December 31, 2004  $4.2))

2.4

4.7Development costs

0.1

1.2Prepaid expenses and other

3.9

4.514.4

25.1




F-18

---





7.     REVOLVING CREDIT FACILITIES

December 31,
2005

December 31,
2004Revolving credit facility  authorized

175.0

175.0Revolving credit facility  drawn



Revolving credit facility  available

147.8

148.2Distribution LP revolving credit facility  authorized

25.0

25.0Distribution LP revolving credit facility  drawn



Distribution LP revolving credit facility  available

25.0

25.0Distribution LP revolving term credit facility  authorized

50.0

50.0Distribution LP revolving term credit facility  drawn

33.0

Distribution LP revolving term credit facility  available

17.0

50.0








F-19

---





8.     TERM LOANS

December 31,
2005

December 31,
2004Term Loan A Credit Facility bearing interest at the Banker's Acceptance rate or LIBOR rate plus a margin ranging from 75 to 175 basis points and the Canadian prime rate and the US base rate plus up to 75 basis
points, maturing December 20, 2009 (US$63.6)
(December 31, 2004  US$108.6)

74.0

130.6Term Loan B Credit Facility bearing interest at the Banker's Acceptance rate or LIBOR rate plus a margin of 175 basis points, maturing December 20, 2011(US nil)
(December 31, 2004  US$250.0)



300.5Term Loan C Credit Facility bearing interest at the Banker's Acceptance rate or LIBOR rate plus a margin of 150 basis points, maturing December 20, 2011(US$240.1)
(December 31, 2004  nil)

279.2

Distribution LP non-revolving term facility bearing interest at rates ranging from the Canadian prime rate and the US base rate plus a margin of 200 to 300 basis points and the Banker's Acceptance rate and LIBOR
plus a margin of 300 to 400 basis points, maturing October 15, 2006

50.0

50.0Industry and other term loans which are unsecured and have no fixed terms of repayment, bearing interest at various rates

5.1

1.0Obligations under capital lease

1.2

1.5409.5

483.6




F-20

---





2006

65.92007

14.82008

26.52009

34.32010

2.8Thereafter

265.2409.5


9.     (GAIN) LOSS ON DISPOSAL OF ASSETS



10.   BUSINESS ACQUISITIONS



F-21

---





Net assets
acquiredCash

20.5Accounts receivable

25.2Investment in film and television programsReleased, net of accumulated amortization

39.1Not released, Film advances

6.8Property and equipment

0.5Goodwill

62.5Customer relationships

2.9Future income taxes

3.8Prepaid expenses and other assets

0.5Total assets acquired

161.8Less: liabilities assumedAccounts payable and accrued liabilities

16.7Distribution and participation liabilities

55.8Deferred revenue

6.6Revolving credit facility

27.5Net assets acquired

55.2




11.   UNUSUAL ITEMS



F-22

---





12.   SHARE CAPITAL AND OTHER



Class A Voting Shares



unlimitedClass B Non-Voting Shares



unlimited




Number of shares

Value of sharesClass A Voting Shares

Class B Non-Voting Shares

Class A Voting Shares

Class B Non-Voting Shares

Contributed Surplus

TotalBalance, March 31, 2003

3,775,752

38,923,288

52.7

661.3

0.1

714.1Conversion of Class A Voting Shares to Class B Non-Voting Shares

(561,741
)
561,741

(7.8
)
7.8



Shares issued from exercise of stock options and other employee programs

6,260

132,189

0.1

1.8

0.3

2.2Stock option expense









0.8

0.8Deferred share units expense









0.3

0.3Balance, December 31, 2003

3,220,271

39,617,218

45.0

670.9

1.5

717.4Conversion of Class A Voting Shares to Class B Non-Voting Shares

(377,700
)
377,700

(5.2
)
5.2



Shares issued from exercise of stock options and other employee programs

2,500

392,246



6.7



6.7Transfer of contributed surplus for exercised stock options







0.2

(0.2
)
Stock option expense









1.1

1.1Deferred share units expense









0.5

0.5Balance, December 31, 2004

2,845,071

40,387,164

39.8

683.0

2.9

725.7Conversion of Class A Voting Shares to Class B Non-Voting Shares

(1,845,884
)
1,845,884

(25.7
)
25.7



Shares issued from exercise of stock options and other employee programs

6,260

548,289



10.7

0.8

11.5Transfer of contributed surplus for exercised stock options







1.1

(1.1
)
Stock option expense









3.2

3.2Deferred share units expense









0.7

0.7Shares purchased and cancelled under issuer bid



(496,500
)


(8.4
)


(8.4
)Balance December 31, 2005

1,005,447

42,284,837

14.1

712.1

6.5

732.7




F-23

---







Number of OptionsWeighted Average Exercise PriceVoting

Non-Voting

TotalOutstanding at March 31, 2003

17,312

2,639,730

2,657,042

20.75Granted



272,000

272,000

13.57Exercised

(8,552
)
(139,275
)
(147,827
)
14.35Forfeited



(109,400
)
(109,400
)
31.20Expired



(85,750
)
(85,750
)
21.67Outstanding at December 31, 2003

8,760

2,577,305

2,586,065

19.98Granted



223,000

223,000

24.19Exercised

(2,500
)
(400,996
)
(403,496
)
16.05Forfeited



(78,875
)
(78,875
)
18.08Expired







Outstanding at December 31, 2004

6,260

2,320,434

2,326,694

21.01Granted



501,500

501,500

32.56Exercised

(6,260
)
(547,289
)
(553,549
)
19.36Forfeited



(81,250
)
(81,250
)
27.43Expired







Outstanding at December 31, 2005



2,193,395

2,193,395

23.83Exercisable at December 31, 2005



1,450,395

1,450,395

22.03Exercisable at December 31, 2004

6,260

1,630,781

1,637,041

22.63Exercisable at December 31, 2003

8,760

1,710,493

1,719,253

22.46


F-24

---







Range of Exercise Prices

Number of
Options

Weighted Average
Contractual Life

Weighted Average
Exercise Price$12.00 to 18.00

529,895

5.1

13.80$18.01 to 27.00

1,142,000

4.1

24.85$27.01 to 36.00

521,500

8.9

31.77




Range of Exercise Prices

Number of
Exercisable Options

Weighted Average
Exercise Price$12.00 to 18.00

407,145

13.83$18.01 to 27.00

1,001,500

25.06$27.01 to 36.00

41,750

27.62




F-25

---





PSAP
Units

Weighted Average
Exercise PriceOutstanding at March 31, 2003



Granted

620,000

17.50Outstanding at December 31, 2003

620,000

17.50Granted

802,000

19.82Exercised

(24,975
)
17.50Outstanding at December 31, 2004

1,397,025

18.83Granted



Exercised

(358,475
)
18.58Outstanding at December 31, 2005

1,038,550

18.92Exercisable at December 31, 2005

330,502

19.14Exercisable at December 31, 2004

332,001

18.90Exercisable at December 31, 2003










F-26

---







13.   DISTRIBUTION LP COMPENSATION PLANS





F-27

---







Excess Amount Percentage

Incentive Amount PercentageZero to 5%

5% of any excess amount> 5% to 10%

5% of any excess amount to 5%
10% of any excess amount over 5%>10% to 20%

5% of any excess amount to 5%
10% of any excess amount over 5% to 10%
plus 20% of any excess amount over 10% to 20%>20%

5% of any excess amount to 5%
10% of any excess amount over 5% to 10%
plus 20% of any excess amount over 10% to 20%,
plus 30% of any excess amount over 20%




14.   CUMULATIVE TRANSLATION ADJUSTMENTS



December 31, 2005

December 31, 2004Balance  beginning of period

(0.5
)
3.8Effect of exchange rate variation on translation of net assets of self-sustaining foreign operations

(13.5
)
(18.7
)Effect of exchange rate variation on long-term debt designated as a hedge of certain net investments in self-sustaining foreign operations, net of tax of $1.1 (December 31, 2004  $3.2)

4.9

14.4Balance  end of period

(9.1
)
(0.5
)


F-28

---



15.   INTEREST

Year ended December 31, 2005

Year ended December 31, 2004

Nine months
ended December 31,
2003Revolving credit facilities

2.8

4.2

7.0Term loans

29.4

4.8

7.0Senior subordinated notes



50.3

39.5Interest (income) and other

(9.1
)
(4.8
)
(0.7
)Interest capitalized during the year



(1.6
)
(6.4
)Amortization of interest previously capitalized





10.623.1

52.9

57.0Amortization of deferred financing costs

3.2

5.3

5.426.3

58.2

62.4




16.   INVESTMENT LOSSES (GAINS), NET AND DILUTION GAINS





F-29

---





17.   DISCONTINUED OPERATIONS



Year ended
December 31, 2005

Year ended
December 31, 2004

Nine months
ended December 31,
2003Revenue




3.7


11.3Direct profit







3.0Loss on write down of property and equipment







(11.8
)Loss before income taxes




(5.5
)

(14.9
)Provision for (recovery of) income taxes




(1.4
)

0.8Loss from discontinued operations




(4.1
)

(15.7
)Basic loss per common share



$
(0.10
)
$
(0.37
)Diluted loss per common share



$
(0.09
)
$
(0.37
)


F-30

---



18.   INCOME TAXES



Year Ended
December 31, 2005

Year Ended
December 31, 2004

Nine Months
ended December 31,
2003Corporate statutory rate of income tax

36.1%

36.1%

36.6%Provision for (recovery of) income taxes at statutory rate

43.3

10.4

(45.7
)Adjusted for the effect of:Dilution gain





(43.5
)Foreign operations subject to different income tax rates

(0.1
)
(1.6
)
20.7Non-deductible stock based compensation expenses

4.4

0.4

0.3Other expenses not deductible for income tax purposes

3.9

6.3

3.9Change in income tax rate for future income taxes

0.2



(10.5
)Change in valuation allowance

(5.2
)
(22.1
)
46.6Adjustment to prior year estimate



4.3

70.9Other

2.6

2.9

1.449.1

0.6

44.1




December 31, 2005

December 31, 2004Future income tax assets:Property and equipment

7.6

8.0Distribution and participation liabilities

6.8

8.3Loss carryforwards

113.5

132.8Investment in film and television programs

29.5

38.0All other

19.7

33.0177.1

220.1Valuation allowance

(46.4
)
(51.6
)130.7

168.5Future income tax liabilities:Broadcast licences

18.5

18.5All other

25.1

21.643.6

40.1Net future income taxes

87.1

128.4




F-31

---





2006

3.72007

51.62008

14.82009

77.72010

51.02011

2012

2013

2014

51.62015

34.3284.7




Year Ended
December 31, 2005

Year Ended
December 31, 2004

Nine Months
ended December 31,
2003Current income taxes

7.3

42.8

21.0Future income taxes

41.8

(42.2
)
23.149.1

0.6

44.1




19.   JOINT VENTURES



Year Ended
December 31, 2005

Year Ended
December 31, 2004

Nine Months
ended December 31,
2003Assets

123.0

78.9

114.4Liabilities

6.6

12.9

16.9Revenue

129.3

90.0

38.9Direct operating expenses

77.1

53.4

24.2Operating expenses

5.5

5.7

4.3Amortization, interest and income taxes

10.4

7.6

9.7Net earnings (loss)

36.3

23.3

1.9Cash flow from operating activities

5.8

5.5

4.5Cash flow from financing activities

(5.8
)
(5.5
)
(4.4
)


F-32

---



20.   EARNINGS (LOSS) PER COMMON SHARE



Year Ended
December 31, 2005

Year Ended
December 31, 2004

Nine Months
ended December 31,
2003Numerator for basic earnings (loss) per common share:Net earnings (loss) before discontinued operations for the period


70.9


33.8


(153.9
)Denominator for basic earnings (loss) per common share:Weighted average number of common shares (in millions)


43.5


43.1


42.8Basic earnings (loss) per common share before discontinued operations

$
1.63

$
0.78

$
(3.60
)Numerator for diluted earnings (loss) per common share:Net earnings (loss) before discontinued operations for the period


70.9


33.8


(153.9
)Denominator for diluted earnings (loss) per common share:Weighted average number of common shares (in millions)


43.5


43.1


42.8Stock options (in millions)


0.6


0.5


Shares used in computing diluted earnings (loss) per common share (in millions)


44.1


43.6


42.8Diluted earnings (loss) per common share before discontinued operations

$
1.61

$
0.78

($
3.60
)




21.   STATEMENTS OF CASH FLOW SUPPLEMENTAL INFORMATION

Year Ended
December 31, 2005

Year Ended
December 31, 2004

Nine Months
ended December 31,
2003Change in:Accounts receivable

26.6

5.6

12.9Accounts payable and accrued liabilities

(24.7
)
(71.1
)
(27.3
)Deferred revenue

0.3

4.9

(14.7
)Income taxes payable

(18.7
)
26.3

20.9Other

1.2

2.4

(2.4
)Net change in other non-cash balances related to operations

(15.3
)
(31.9
)
(10.6
)


22.   ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

December 31, 2005

December 31, 2004Trade payables

42.2

51.8Program related payables

100.7

102.9Distribution and participation liabilities

200.7

208.2Other accrued liabilities

160.5

175.1504.1

538.0




F-33

---





2006

4.92007

0.72008

2009

2010

Due Subsequent

5.6




Balance, December 31, 2004

4.4Interest accretion

0.3Payments made during year ended December 31, 2005

(2.8
)Balance, December 31, 2005

1.9




23.   GOVERNMENT FINANCING AND ASSISTANCE



24.   COMMITMENTS AND CONTINGENCIES



F-34

---







2006

12.32007

10.02008

9.72009

9.12010

9.2Due Subsequent

69.9120.2




F-35

---





25.   SEGMENTED INFORMATION



F-36

---





Broadcasting

Entertainment

Motion Picture
Distribution

Other

TotalYear ended December 31, 2005Goodwill

42.4

106.3

54.1



202.8Total assets

445.3

533.7

398.1

209.8

1,586.9Additions to property and equipment

2.1

0.1

0.3

4.4

6.9Additions to goodwill









Year ended December 31, 2004Goodwill

42.4

106.3

64.5



213.2Total assets

433.0

639.7

466.0

82.2

1,620.9Additions to property and equipment

1.8



0.4

2.3

4.5Additions to goodwill

0.6



62.5



63.1Nine months ended December 31, 2003Goodwill

41.8

108.7

2.0



152.5Total assets

431.9

666.6

320.3

(2.6
)
1,416.2Additions to property and equipment

0.2



0.5

2.0

2.7Additions to goodwill














F-37

---





Domestic
Distribution

Momentum

Aurum

Cinemas

TotalYear ended December 31, 2005Revenue

271.4

93.7

41.4

11.6

418.1Direct profit

57.0

22.9

7.1

1.4

88.4Earnings before undernoted and discontinued operations

27.4

16.9

1.0

0.7

46.0Goodwill

2.0

10.8

41.3



54.1Total assets

163.9

97.3

132.9

4.0

398.1Additions to property and equipment

0.3







0.3Additions to goodwill









Year ended December 31, 2004Revenue

341.8

92.4

62.9

15.0

512.1Direct profit

79.4

15.5

6.2

2.6

103.7Earnings before undernoted and discontinued operations

58.6

9.8

2.5

2.0

72.9Goodwill

2.0

12.4

50.1



64.5Total assets

209.6

90.0

159.6

6.8

466.0Additions to property and equipment

0.4







0.4Additions to goodwill



12.4

50.1



62.5Nine months ended December 31, 2003Revenue

241.2

56.1



10.5

307.8Direct profit

47.2

12.5



1.3

61.0Earnings before undernoted and discontinued operations

34.4

8.7



0.6

43.7Goodwill

2.0







2.0Total assets

210.1

96.9



13.3

320.3Additions to property and equipment

0.5







0.5Additions to goodwill












F-38

---





Theatrical

Video/DVD

Television

TotalYear ended December 31, 2005Domestic Distribution

56.8

157.2

57.4

271.4Momentum Pictures

9.7

66.7

17.3

93.7Aurum

7.5

18.5

15.4

41.4Alliance Atlantis Cinemas

11.6





11.685.6

242.4

90.1

418.1Year ended December 31, 2004Domestic Distribution

72.1

213.3

56.4

341.8Momentum Pictures

12.8

71.0

8.6

92.4Aurum

7.9

48.1

6.9

62.9Alliance Atlantis Cinemas

15.0





15.0107.8

332.4

71.9

512.1Nine months ended December 31, 2003Domestic Distribution

68.6

141.2

31.4

241.2Momentum Pictures

3.7

45.8

6.6

56.1Aurum







Alliance Atlantis Cinemas

10.5





10.582.8

187.0

38.0

307.8




CSI

Other

TotalYear ended December 31, 2005Revenue

288.4

53.1

341.5Direct profit

112.2

6.0

118.2Year ended December 31, 2004Revenue

205.1

53.6

258.7Direct profit

73.4

1.4

74.8Nine months ended December 31, 2003Revenue

79.1

90.7

169.8Direct profit (loss)

24.0

(193.9
)
(169.9
)




F-39

---





Year ended
December 31, 2005

Year ended
December 31, 2004

Nine months
ended December 31,
2003RevenueCanada

603.6

637.3

481.4United States

141.1

113.5

36.1United Kingdom

124.8

118.8

65.4Spain

44.6

66.5

1.9Other Foreign

129.3

81.4

55.41,043.4

1,017.5

640.2




Year ended
December 31, 2005

Year ended
December 31, 2004

Nine months
ended December 31,
2003Subscriber

123.2

110.9

76.5Advertising

156.2

130.3

80.8Other

4.0

4.7

5.1283.4

245.9

162.4




Amortization of Film and Television Programs

Year ended
December 31, 2005

Year ended
December 31, 2004

Nine months
ended December 31,
2003Broadcasting

110.4

99.2

61.3Entertainment

135.9

98.5

310.1Motion Picture Distribution

97.1

92.5

51.9343.4

290.2

423.3


|
|

Investment in Film and Television Programs

Year ended
December 31, 2005

Year ended
December 31, 2004

Nine months
ended December 31,
2003Broadcasting

(120.7
)
(104.2
)
(69.8
)Entertainment

(153.7
)
(126.6
)
(76.4
)Motion Picture Distribution

(106.4
)
(80.0
)
(73.4
)(380.8
)
(310.8
)
(219.6
)


F-40

---





Broadcasting

Entertainment

Motion Picture
Distribution

Other

TotalAt December 31, 2003

41.8

108.7

2.0



152.5Business acquisitions

0.6



62.5



63.1Adjustments to exit and restructuring accruals



(1.7
)




(1.7
)Sale of discontinued operations



(0.7
)




(0.7
)At December 31, 2004

42.4

106.3

64.5



213.2Impact of currency exchange rates





(10.4
)


(10.4
)At December 31, 2005

42.4

106.3

54.1



202.8


26.   FINANCIAL INSTRUMENTS



27.   RELATED PARTY TRANSACTIONS



F-41

---





28.   REVIEW OF OPERATIONS OF ENTERTAINMENT



F-42

---





Costs Expensed During the Year Ended December 31, 2005

Costs Expensed During the Year Ended December 31, 2004

Costs Expensed During the Nine Months Ended December 31, 2003

Total CostImpairments:Investment in film and television programs





158.9

158.9Development costs





30.8

30.8Investments





2.2

2.2Loans receivable





6.4

6.4Assets held for sale(note 17)





11.8

11.8Employee costs:Continuing operations

(0.8
)


12.0

11.2Discontinued operations



0.7

0.9

1.6Contract terminations



1.9



1.9Other exit costs



1.3

0.7

2.0Total restructuring costs

(0.8
)
3.9

223.7

226.8




F-43

---





Year ended
December 31, 2005

Year ended
December 31, 2004

Nine months
ended
December 31,
2003Direct operating costs:Impairment of investment in film and television programs





158.9Impairment of loans receivable





6.4Operating expenses:Other exit costs



1.3

0.7Amortization, including development cost charges:Impairment of development costs





30.8Contract terminations



1.9

Investment gains and losses:Impairment of investment





2.2Unusual items:Employee costs  continuing operations

(0.8
)


12.0Discontinued operations:Impairment of assets held for sale(note 17)





11.8Employee costs  discontinued operations



0.7

0.9(0.8
)
3.9

223.7




Balance, December 31, 2003

12.1Payments made in the period

(11.0
)Balance, December 31, 2004

1.1Reversal of accrual

(0.8
)Payments made in the period

(0.3
)Balance, December 31, 2005




29.   RECENT ACCOUNTING PRONOUNCEMENTS



F-44

---





30.   BROADCAST LICENCES



31.   SUBSEQUENT EVENT



F-45

---



Reconciliation of Canadian GAAP to United States GAAP

The consolidated financial statements of the Company have been prepared in Canadian dollars in accordance with Canadian GAAP. The following schedule presents the
material adjustments and/or additional disclosures which would be required in order to reconcile net earnings (loss) and shareholders' equity to United States GAAP as required by the
United States Securities and Exchange Commission ("SEC").

Under
United States GAAP, the Canadian GAAP net earnings (loss), earnings (loss) per common share figures and shareholders' equity for the years ended December 31, 2005 and
2004 and the nine months ended December 31, 2003, and the shareholders' equity as at December 31, 2005 and 2004 would be adjusted as follows:

|                                                                                                         |         | Net Earnings (Loss) |       | Shareholders' Equity | 
|-------------------------------------------------------------------------------------------------------- | ------- | ------------------- | ----- | -------------------- | 
|
|Net earnings (loss) before discontinued operations for the period / Shareholders' equity  Canadian GAAP |         |                     | 70.9  |                      | 
|Adjustment to reclassify related party loan to equity (a)                                                |         |                     |      |                      | 
|Adjustment to equity accounting for long-term investments (b)                                            |         |                     |      |                      | 
|Benefit realized on production financing arrangements (d)                                                |         |                     | (0.5  | )                    | 
|Adjustment to accounting for jointly controlled productions (e)                                          |         |                     | (22.5 | )                    | 
|Adjustment to reclassify gains (losses) on warrants (f)                                                  |         |                     |      |                      | 
|Adjustment to accounting for government tax credits (h)                                                  |         |                     | (7.3  | )                    | 
|Adjustment to foreign exchange on hedge of self-sustaining subsidiaries (i)                              |         |                     | 0.9   |                      | 
|Income taxes recorded at enacted rates (c)                                                               |         |                     |      |                      | 
|Income tax impact of adjustment to accounting for government tax credits (h)                             |         |                     | 2.4   |                      | 
|Future tax adjustments on above adjustments                                                              |         |                     | 9.4   |                      | 
|                                                                                                         |         |                     |       |                      | 
|Net earnings (loss) before discontinued operations  United States GAAP                                  |         |                     | 53.3  |                      | 
|Discontinued operations, net of income taxes                                                             |         |                     |      |                      | 
|                                                                                                         |         |                     |       |                      | 
|Net earnings (loss) for the period  United States GAAP                                                  |         |                     | 53.3  |                      | 
|                                                                                                         |         |                     |       |                      | 
|Cumulative other comprehensive earnings adjustment, net of income taxes (p)                              |         |                     |       |                      | 
|                                                                                                         |         |                     |       |                      | 
|Shareholders' equity  United States GAAP                                                                |         |                     |       |                      | 
|                                                                                                         |         |                     |       |                      | 
|Earnings (loss) per common share before discontinued operations  United States GAAP                     |         |                     |       |                      | 
|                                                                                                         | Basic   |                     | $     | 1.23                 | 
|                                                                                                         | Diluted |                     | $     | 1.21                 | 
|                                                                                                         |         |                     |       |                      | 
|Earnings (loss) per common share for discontinued operations  United States GAAP                        |         |                     |       |                      | 
|                                                                                                         | Basic   |                     |       |                     | 
|                                                                                                         | Diluted |                     |       |                     | 
|                                                                                                         |         |                     |       |                      | 
|Earnings (loss) per common share  United States GAAP                                                    |         |                     |       |                      | 
|                                                                                                         | Basic   |                     | $     | 1.23                 | 
|                                                                                                         | Diluted |                     | $     | 1.21                 | 
|                                                                                                         |         |                     |       |                      | 

The
accompanying notes form an integral part of this reconciliation.

1

---









|                                                        |  | Year ended December 31,
2005 |   | Year ended December 31,
2004 |   | Nine months ended December 31,
2003 |  
|------------------------------------------------------- |  | ---------------------------- | - | ---------------------------- | - | ----------------------------------- | -
|Reduction of revenue                                    |  | (113.3                       | ) | (75.5                        | ) | (28.5                               | )
|Reduction in direct operating costs                     |  | (90.8                        | ) | (83.5                        | ) | (23.5                               | )
|Reduction of investment in film and television programs |  | (67.1                        | ) | (35.7                        | ) | (32.7                               | )
|Reduction in liabilities related to participation costs |  | (30.7                        | ) | (20.4                        | ) | (3.2                                | )
|                                                        |  |                              |   |                              |   |                                     |  

2

---





|                                                       |  | Year ended December 31,
2005 |   | Year ended December 31,
2004 |   | Nine months ended December 31,
2003 |  
|------------------------------------------------------ |  | ---------------------------- | - | ---------------------------- | - | ----------------------------------- | -
|Reduction in revenue                                   |  |                             |   |                             |   | (10.4                               | )
|Increase in direct operating expenses                  |  | 7.3                          |   | 9.2                          |   | 1.1                                 |  
|Decrease in provision for income taxes                 |  | (5.0                         | ) | (9.2                         | ) | (10.8                               | )
|                                                       |  |                              |   |                              |   |                                     |  
|Increase of investment in film and television programs |  | 19.9                         |   | 24.8                         |   | 28.1                                |  
|                                                       |  |                              |   |                              |   |                                     |  

3

---





4

---



|                                                        |                                                                                                                                   | Year ended December 31,
2005 |      | Year ended December 31,
2004 |      | Nine months ended December 31,
2003 |     
|------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------- | ---------------------------- | ---- | ---------------------------- | ---- | ----------------------------------- | ----
|Net earnings (loss) for the period  United States GAAP |                                                                                                                                   | 53.3                         |      | 46.8                         |      | (174.8                              | )   
|Other comprehensive earnings (loss):                    |                                                                                                                                   |                              |      |                              |      |                                     |     
|                                                        | Net unrealized gains (losses) on portfolio investments, net of tax of $1.2 (December 31, 2004  $(1.4); December 31, 2003  $2.3) |                              | 5.3  |                              | (6.9 | )                                   | 10.7
|                                                        | (Settlement) unrealized gains on marking warrants to market, net of tax of nil (December 31, 2004  nil; December 31, 2003  nil) |                              |     |                              | (1.5 | )                                   | 0.5 
|                                                        | Foreign currency translation adjustment, net of tax of nil (December 31, 2004  nil; December 31, 2003  $1.4)                    |                              | (9.3 | )                            | (5.7 | )                                   | 19.7
|                                                        |                                                                                                                                   |                              |      |                              |      |                                     |     
|Comprehensive earnings (loss)                           |                                                                                                                                   | 49.3                         |      | 32.7                         |      | (143.9                              | )   
|                                                        |                                                                                                                                   |                              |      |                              |      |                                     |     



|                           |  | Year ended December 31,
2005 |   | Year ended December 31,
2004 |   | Nine months ended December 31,
2003 |  
|-------------------------- |  | ---------------------------- | - | ---------------------------- | - | ----------------------------------- | -
|Balance, beginning of year |  | (0.3                         | ) | 13.8                         |   | (17.1                               | )
|Change for the year        |  | (4.0                         | ) | (14.1                        | ) | 30.9                                |  
|                           |  |                              |   |                              |   |                                     |  
|Balance, end of year       |  | (4.3                         | ) | (0.3                         | ) | 13.8                                |  
|                           |  |                              |   |                              |   |                                     |  



|                                                                                                                     |  | Year ended December 31,
2005 |   | Year ended December 31,
2004 |   | Nine months ended December 31,
2003
|-------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | - | ---------------------------- | - | -----------------------------------
|Unrealized gains on portfolio investments, net of tax of $2.2 (December 31, 2004  $1.0; December 31, 2003  $2.4)   |  | 10.0                         |   | 4.7                          |   | 11.6                               
|Unrealized gains on marking warrants to market, net of tax of nil (December 31, 2004  nil; December 31, 2003  nil) |  |                             |   |                             |   | 1.5                                
|Foreign currency translation adjustment, net of tax of $4.3 (December 31, 2004  $4.3; December 31, 2003  $4.3)     |  | (14.3                        | ) | (5.0                         | ) | 0.7                                
|                                                                                                                     |  |                              |   |                              |   |                                    
|Accumulated other comprehensive earnings (loss)                                                                      |  | (4.3                         | ) | (0.3                         | ) | 13.8                               
|                                                                                                                     |  |                              |   |                              |   |                                    

5

---







|                                                                                                                                                                      |  | Year ended December 31,
2005 |   | Year ended December 31,
2004 |      | Nine months ended December 31,
2003 |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | - | ---------------------------- | ---- | ----------------------------------- | -
|Net earnings (loss) for the period  United States GAAP                                                                                                               |  | 53.3                         |   |                              | 46.8 |                                     |  
|Add: stock option expense included in reported net earnings, net of income taxes of nil (December 31, 2004  nil; December 31, 2003  nil)                            |  | 3.2                          |   |                              | 1.1  |                                     |  
|Less: stock option expense determined under the fair value based method for all awards, net of income taxes of nil (December 31, 2004  nil; December 31, 2003  nil) |  | (4.1                         | ) |                              | (2.8 | )                                   |  
|                                                                                                                                                                      |  |                              |   |                              |      |                                     |  
|Pro forma net earnings (loss)                                                                                                                                         |  | 52.4                         |   |                              | 45.1 |                                     |  
|                                                                                                                                                                      |  |                              |   |                              |      |                                     |  
|Net earnings (loss) per share:                                                                                                                                        |  |                              |   |                              |      |                                     |  
|Basic  as reported                                                                                                                                                   |  | 1.23                         |   | $                            | 1.09 |                                     | $
|Diluted  as reported                                                                                                                                                 |  | 1.21                         |   | $                            | 1.07 |                                     | $
|Basic  pro forma                                                                                                                                                     |  | 1.20                         |   | $                            | 1.05 |                                     | $
|Diluted  pro forma                                                                                                                                                   |  | 1.19                         |   | $                            | 1.03 |                                     | $

6

---







|                           |                                      | Year ended December 31,
2005 |      | Year ended December 31,
2004 |      | Nine months ended December 31,
2003 |     
|-------------------------- | ------------------------------------ | ---------------------------- | ---- | ---------------------------- | ---- | ----------------------------------- | ----
|Balance, beginning of year |                                      | 19.9                         |      | 16.5                         |      | 12.7                                |     
|                           | Charged to costs and expenses        |                              | 3.8  |                              | 5.4  |                                     | 5.6 
|                           | Deductions                           |                              | (6.1 | )                            | (2.2 | )                                   | (0.9
|                           | Balance acquired through acquisition |                              |     |                              | 0.8  |                                     |    
|                           | Foreign exchange                     |                              | (0.2 | )                            | (0.6 | )                                   | (0.9
|                           |                                      |                              |      |                              |      |                                     |     
|Balance, end of year       |                                      | 17.4                         |      | 19.9                         |      | 16.5                                |     
|                           |                                      |                              |      |                              |      |                                     |     



|                           |                               | Year ended December 31,
2005 |   | Year ended December 31,
2004 |   | Nine months ended December 31,
2003
|-------------------------- | ----------------------------- | ---------------------------- | - | ---------------------------- | - | -----------------------------------
|Balance, beginning of year |                               | 7.5                          |   | 7.5                          |   | 1.1                                
|                           | Charged to costs and expenses |                              |  |                              |  |                                    
|                           |                               |                              |   |                              |   |                                    
|Balance, end of year       |                               | 7.5                          |   | 7.5                          |   | 7.5                                
|                           |                               |                              |   |                              |   |                                    



|                           |                                          | Year ended December 31,
2005 |      | Year ended December 31,
2004 |       | Nine months ended December 31,
2003
|-------------------------- | ---------------------------------------- | ---------------------------- | ---- | ---------------------------- | ----- | -----------------------------------
|Balance, beginning of year |                                          | 51.6                         |      | 73.7                         |       | 37.6                               
|                           | Balance acquired through acquisition     |                              |     |                              | 7.9   |                                    
|                           | (Recovery) charged to costs and expenses |                              | (5.2 | )                            | (30.0 | )                                  
|                           |                                          |                              |      |                              |       |                                    
|Balance, end of year       |                                          | 46.4                         |      | 51.6                         |       | 73.7                               
|                           |                                          |                              |      |                              |       |                                    

7

---



|                                    |          | Year ended December 31,
2005 |  | Year ended December 31,
2004 |  | Nine months ended December 31,
2003 |  
|----------------------------------- | -------- | ---------------------------- |  | ---------------------------- |  | ----------------------------------- | -
|Income tax expense  Canadian GAAP: |          |                              |  |                              |  |                                     |  
|                                    | Current  |                              |  |                              |  |                                     |  
|                                    |          | Canada                       |  | 3.1                          |  | 27.6                                |  
|                                    |          | Foreign                      |  | 4.2                          |  | 15.2                                |  
|                                    | Deferred |                              |  |                              |  |                                     |  
|                                    |          | Canada                       |  | 19.0                         |  | (48.0                               | )
|                                    |          | Foreign                      |  | 22.8                         |  | 5.8                                 |  
|                                    |          |                              |  |                              |  |                                     |  
|                                    |          | 49.1                         |  | 0.6                          |  | 44.1                                |  
|                                    |          |                              |  |                              |  |                                     |  



|                                                                                 |         | Year ended December 31,
2005 |       | Year ended December 31,
2004 |       | Nine months ended December 31,
2003 |      
|-------------------------------------------------------------------------------- | ------- | ---------------------------- | ----- | ---------------------------- | ----- | ----------------------------------- | -----
|Earnings (loss) before income taxes and discontinued operations  Canadian GAAP: |         |                              |       |                              |       |                                     |      
|                                                                                 | Canada  |                              | (4.2  | )                            | (24.2 | )                                   | (9.9 
|                                                                                 | Foreign |                              | 124.2 |                              | 58.6  |                                     | (99.9
|                                                                                 |         |                              |       |                              |       |                                     |      
|                                                                                 |         | 120.0                        |       | 34.4                         |       | (109.8                              | )    
|                                                                                 |         |                              |       |                              |       |                                     |      
|Discontinued operations before income taxes  Canadian GAAP:                     |         |                              |       |                              |       |                                     |      
|                                                                                 | Canada  |                              |      |                              | (5.5  | )                                   | (14.9
|                                                                                 |         |                              |       |                              |       |                                     |      
|Earnings (loss) before income taxes  Canadian GAAP:                             |         |                              |       |                              |       |                                     |      
|                                                                                 | Canada  |                              | (4.2  | )                            | (29.7 | )                                   | (24.8
|                                                                                 | Foreign |                              | 124.2 |                              | 58.6  |                                     | (99.9
|                                                                                 |         |                              |       |                              |       |                                     |      
|                                                                                 |         | 120.0                        |       | 28.9                         |       | (124.7                              | )    
|                                                                                 |         |                              |       |                              |       |                                     |      

8

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|                                                        |  | December 31, 2005 |  | December 31, 2004
|------------------------------------------------------- |  | ----------------- |  | -----------------
|Other accrued liabilities                               |  | 103.8             |  | 113.0            
|Compensation accruals including commissions and bonuses |  | 31.5              |  | 22.7             
|Lease termination costs and tenant inducements          |  | 9.3               |  | 9.1              
|Provision for video/DVD returns                         |  | 15.9              |  | 30.3             
|                                                        |  |                   |  |                  
|                                                        |  | 160.5             |  | 175.1            
|                                                        |  |                   |  |                  

|                                     |  | December 31, 2005 |   | December 31, 2004 |  
|------------------------------------ |  | ----------------- | - | ----------------- | -
|Trade accounts receivable            |  | 351.2             |   | 382.9             |  
|Receivables due from related parties |  | 1.9               |   | 4.2               |  
|Other receivables                    |  | 5.5               |   | 2.9               |  
|Accounts receivable reserve          |  | (17.4             | ) | (19.9             | )
|                                     |  |                   |   |                   |  
|                                     |  | 341.2             |   | 370.1             |  
|                                     |  |                   |   |                   |  





9

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10

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ADDITIONAL DISCLOSURE

Certifications and Disclosure Regarding Controls and Procedures.







Notices Pursuant to Regulation BTR.

None

Audit Committee Financial Expert.

The
registrant's board of directors has determined that Ellis Jacob, an independent member of the registrant's audit committee, qualifies as an "audit committee financial expert" (as such term
is defined in Form 40-F) and meets the definition of audit committee member independence of the Nasdaq Stock Market.

Code of Ethics.

The
registrant has adopted a "Code of Business Conduct and Ethics Policy" (the "Code of Ethics"), which is a "code of ethics" (as that term is defined in Form 40-F),
that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions, as well as directors and employees.

The
Code of Ethics is available for viewing on the registrant's website at www.allianceatlantis.com.

40-F3

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Since
the adoption of the Code of Ethics, there have not been any amendments to the Code of Ethics or waivers, including implicit waivers, from any provision of the Code of Ethics.

Principal Accountant Fees and Services.

The
following table provides information about the fees billed to the registrant for professional services rendered by PricewaterhouseCoopers LLP during 2005 and 2004, which amounts include the
audit fees for Motion Picture Distribution LP, a subsidiary of the registrant that is indirectly co-owned by Movie Distribution Income Fund:

|(US$)              |  | 2005 |           | 2004
|------------------ |  | ---- | --------- | ----
|Audit Fees         |  | $    | 3,823,683 |     
|Audit-Related Fees |  | $    | 1,215,393 |     
|Tax Fees           |  | $    | 449,864   |     
|All Other Fees     |  | $    | 62,223    |     
|                   |  |      |           |     
|Total              |  | $    | 5,551,163 |     
|                   |  |      |           |     

Audit
Fees.    Audit fees consist of fees for the audit of the registrant's annual financial statements or services that are normally provided in connection with
statutory and regulatory filings or engagements.

Audit-Related
Fees:    Audit-Related Fees consist of fees related to contract compliance audits, accounting assistance related to the adoption of new CICA
Handbook pronouncements and new business ventures, assistance with the review of correspondence with regulatory authorities and prospectus preparation.

Tax
Fees.    Tax fees consist of fees for tax compliance services, tax advice, tax planning and transfer pricing services. The services provided in this category
included assistance and advice in relation to the preparation of corporate income tax returns and income tax provisions included in the financial statements.

All
Other Fees.    The services provided in this category included those related to research and foreign currency risk management review.

Pre-Approval Policies and Procedures.

The
Registrant's audit committee is responsible for overseeing the work of its independent auditors and has adopted a policy requiring its pre-approval of all audit and permissible
non-audit services provided by its independent auditors. The audit committee's policy is to pre-approve all audit, audit-related, tax and other non-audit services
that may be provided by the Registrant's independent auditors. The policy identifies the principles that must be considered by the audit committee in approving these services to ensure that the
independence of its outside auditors is not impaired; describes the audit and audit-related, tax and other services that may be provided; and sets forth pre-approval requirements for all
permitted services.

Off-Balance Sheet Arrangements.

The
required disclosure is included in the section of this Annual Report on Form 40-F entitled "Off Balance Sheet Arrangements" in the registrant's "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for 2005.

40-F4

---



Tabular Disclosure of Contractual Obligations.

The
required disclosure is included in the section of this Annual Report on Form 40-F entitled "Liquidity and Capital Resources", under the sub-heading "Commitments" in
the registrant's "Management's Discussion and Analysis of Financial Condition and Results of Operations" for 2005.

UNDERTAKING AND CONSENT TO SERVICE OF PROCESS

A.    Undertaking.

The registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Securities and Exchange Commission
(the "Commission") staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to: the securities registered pursuant to Form 40-F;
the securities in relation to which the obligation to file an annual report on Form 40-F arises; or transactions in said securities.

B.    Consent to Service of Process.

The Company has previously filed a Form F-X in connection with the class of securities in relation to which the obligation to file this
report arises.

Any
change to the name or address of the agent for service of process of the registrant shall be communicated promptly to the Securities and Exchange Commission by an amendment to the
Form F-X referencing the file number of the relevant registration statement.

SIGNATURES

Pursuant to the requirements of the Exchange Act, the registrant certifies that it meets all of the requirements for filing on Form 40-F
and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 20, 2006.

| |  | ALLIANCE ATLANTIS COMMUNICATIONS INC.
| |  | -------------------------------------
| |  | By:                                  

40-F5

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EXHIBIT INDEX

|Exhibit |  | Description                                                                                                                                                                                
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|99.1    |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14 of the Securities Exchange Act of 1934                                                                       
|        |  |                                                                                                                                                                                            
|99.2    |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14 of the Securities Exchange Act of 1934                                                                       
|        |  |                                                                                                                                                                                            
|99.3    |  | Section 1350 Certification of Chief Executive Officer                                                                                                                                      
|        |  |                                                                                                                                                                                            
|99.4    |  | Section 1350 Certification of Chief Financial Officer                                                                                                                                      
|        |  |                                                                                                                                                                                            
|99.5    |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                                      
|        |  |                                                                                                                                                                                            
|99.6    |  | Auditors' Report on Schedule of Reconciliation to Generally Accepted Accounting Principles in the United States of America and Comments by Auditors on Canada-U.S.A. Reporting Differences.

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