UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-KSB

(Mark One)

|X|   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF
      1934

      For the fiscal year ended December 31, 2006

|_|   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934

 For the transition period from _____________________ to _______________________
 Commission file number ________________________________________________________

                        DEVINE ENTERTAINMENT CORPORATION
                 (Name of small business issuer in its charter)

       Ontario, Canada                                        Not Applicable
  (State or jurisdiction of                                  (I.R.S. Employer
incorporation or organization)                            Identification Number)

                          Suite 504, 2 Berkeley Street,
                        Toronto, Ontario, Canada, M5A 2W3
                                 (416) 364-2282
          (Address and telephone number of principal executive offices
                        and principal place of business)

         Securities registered under Section 12 (b) of the Exchange Act:

        Title of each class            Name of each exchange on which registered
          Not Applicable                             Not Applicable

Securities registered under Section 12 (g) of the Exchange Act:

                                  Common Shares
                                (Title of Class)

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure  will be contained,  to
the  best  of  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. |X|

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|

Issuer's revenues for the year ended December 31, 2006 $423,959

As of March 26,  2007,  the  aggregate  market value of the voting stock held by
non-affiliates,  computed by  reference  to the average of the bid and ask price
shown on the NASD OTCBB was $3,274,068 CDN

As of March 26, 2007,  the issuer had  outstanding  39,313,699  shares of common
stock.


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                                TABLE OF CONTENTS

PART I

   ITEM 1.   BUSINESS
   ITEM 2.   PROPERTY
   ITEM 3.   LEGAL PROCEEDINGS
   ITEM 4    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

PART II

   ITEM 5.   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
   ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
             RESULTS OF OPERATIONS
   ITEM 7.   FINANCIAL STATEMENTS
   ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
             FINANCIAL DISCLOSURE
   ITEM 8A.  CONTROLS AND PROCEDURES

PART III

   ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
             COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
   ITEM 10.  EXECUTIVE COMPENSATION
   ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
   ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
   ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K
   ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

SIGNATURES


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                                EXPLANATORY NOTE

      Unless the  context  otherwise  requires,  all  references  in this Annual
Report on Form 10-KSB to the "Company" or "Devine Entertainment" refer to Devine
Entertainment Corporation. Unless stated otherwise, all dollar amounts set forth
in this report are stated in Canadian  Dollars and all  references to "$" are to
Canadian Dollars.

                     FACTORS THAT MAY AFFECT FUTURE RESULTS

      This Annual  Report on Form  10-KSB  contains  forward-looking  statements
within the  meaning of the  Federal  securities  laws,  about our  business  and
prospects,  including  without  limitation  statements  regarding  our  expected
revenues and revenue growth rate in 2005. The forward-looking  statements do not
include the  potential of any mergers,  acquisitions,  divestitures  or business
combinations that may be completed after the date hereof.  Readers are cautioned
that actual  results may differ  materially  from the results  projected  in any
"forward-looking"  statements  included  in this  report on Form  10-KSB,  which
involve a number  of risks and  uncertainties.  Forward-looking  statements  are
statements that are not historical  facts,  and include (but are not limited to)
statements  regarding the Company's  planned  production  slate and  development
activities, anticipated future profitability,  losses, revenues, expected future
expenditures,  the Company's  intention to raise new  financing,  sufficiency of
working  capital  for  continued  operations,  and  other  statements  regarding
anticipated  future events and the  Company's  anticipated  future  performance.
Forward-looking  statements generally can be identified by the words "expected",
"intends", "anticipates", "feels", "continues", "planned", "plans", "potential",
"with a view to", and similar  expressions or variations thereon, or that events
or conditions  "will",  "could",  or "should" occur,  or comparable  terminology
referring to future events or results.

      The  Company's   actual  results  could  differ   materially   from  those
anticipated in these forward-looking statements as a result of numerous factors,
including  those  described in the section of this report  titled  "Management's
Discussion and Analysis of Financial  Condition and Results of  Operations-Risks
and  Uncertainties",  any of which could cause actual results to vary materially
from current results or the Company's  anticipated  future results.  The Company
assumes no responsibility or obligation to update any forward-looking statements
contained herein after the date of this Annual Report.


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                                     PART I

ITEM 1. BUSINESS

Overview

      The Company is an  award-winning  Canadian-based  developer,  producer and
distributor of high-quality  feature films,  primetime drama, and children's and
family entertainment for the theatrical motion picture,  television and the home
DVD marketplace  worldwide.  The Company's  intention is to produce positive and
meaningful  films that emphasize human values and focus on art,  inspiration and
personal  expression  and  simultaneously  entertain  and educate its  principal
market of children aged six to fourteen  years.  The Company's  productions  are
designed to make viewing  films a compelling  family  activity  that  encourages
intellectual interaction.

      In the past twenty years,  the Company's films have been honored with over
110 international awards, including five Emmy Awards and five Gemini Awards. The
Company's DVDs, videos and CDs are distributed worldwide.

      Devine Entertainment's focus in family entertainment is the production and
distribution  of films based on historical and timeless  stories.  This strategy
began with the success of the Raffi videos (now  certified  multi-platinum)  and
Beethoven  Lives  Upstairs,  winner  of the  1993  Prime  Time  Emmy  Award  for
Outstanding Children's Program.

      In 1996, the Company won the CableACE award for Best Children's Series for
The Composers' Specials (Bizet, Bach, Strauss, Liszt, Rossini and Handel), a new
series of six one-hour  specials.  Broadcast  on Home Box Office  ("HBO") in the
United States and The Family Channel in Canada, the series has received numerous
awards and honors in recognition of the entertaining  and educational  values it
offers to children.

      In 1997 and 1998, Devine  Entertainment  produced The Inventors'  Specials
(Einstein,  Leonardo DaVinci, Galileo, Newton, Marie Curie and Edison), a series
of one-hour  specials that brings  history's great inventors and their creations
to life. In each special,  the true story of a visionary  genius is told through
his relationship with a young protege.  The Inventors' Specials premiered on HBO
and The Family Channel and garnered critical acclaim and  international  awards,
including nine Emmy nominations and three Emmy Awards.

      In 1999 and 2000,  Devine  Entertainment  created  The  Artists'  Specials
(Monet,  Degas,  Cassatt,  Goya,  Winslow Homer and  Rembrandt).  This series is
currently  airing  on HBO and the  Canadian  Broadcast  Corporation  ("CBC")  in
Canada. This series has received several accolades including the Humanitas Prize
for  writing of a  children's  program  that  promotes  human  values,  two Emmy
nominations and one Emmy Award, three American Library Association's Honors, and
two "Top 5 Video of the Year" designations by KidsFirst!


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      Bailey's Billion$, a family comedy about a dog that inherits a fortune and
becomes the CEO of a renowned animal rights  foundation,  is the Company's first
feature film for  theatrical  release.  Bailey's  Billion$  stars Dean Cain, Tim
Curry,  Jennifer  Tilly,  Laurie Holden and Jon Lovitz (as the voice of Bailey).
Bailey's Billion$,  was released theatrically in North America on August 5, 2005
and is currently being distributed in theatres, on television and DVD worldwide

      In 2006,  the Company  continued  expanding  its  proprietary  library and
financed and began production of its first general audience  primetime  one-hour
mystery  series,  entitled  Across the River to Motor City for  broadcast  world
wide.  The initial six  one-hour  episodes  are  scheduled  for  completion  and
delivery to CHUM Television in Canada in the first half of 2007.

      As a leader in providing culture, education and entertainment for children
and families around the world,  the Company remains  committed to broadening its
brand by  continuing  to pursue  international  motion  picture  and  television
projects, DVD and video sales, publishing and Internet opportunities worldwide.

      The Company was incorporated  under the laws of the Province of Ontario on
September  21, 1982 under the name "518104  Ontario  Limited"  and  subsequently
changed its name to "Devine  Videoworks  Corp." in January  1983. In April 1994,
the name of the Company was changed to its current name,  "Devine  Entertainment
Corporation." The Company's registered office and principal place of business is
located at Suite 504, 2 Berkeley Street, Toronto, Ontario M5A 2W3, its telephone
number is  416-364-2282,  its  facsimile  number is  416-364-1440,  its web site
address is www.devine-ent.com and its e-mail address is info@devine-ent.com.

Product Demand and Supply

The Company believes that the increasing demand for  entertainment  programming,
both in general and in the children's and family  market,  presents  significant
opportunities for substantial  growth. The Company's principal markets currently
are:

      (i) the worldwide theatrical motion picture marketplace;

      (ii) the worldwide home DVD and video markets, including the sell-through,
retail, rental, educational and institutional (schools and libraries) markets;

      (iii)  broadcasters  in  the  United  States  and  Canada,  including  the
conventional  television  networks,   specialty  broadcasters,   cable  and  pay
television  stations  and  first  run  syndication   (initial   distribution  to
independent television stations);

      (iv) international broadcasters; and


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      (v) the markets for  products  complementary  to the  Company's  programs,
including  audio   soundtracks,   published  music  and  books  and  educational
interactive, multimedia, internet and new media products.

      As new delivery  systems are introduced,  creating more potential users of
entertainment programming,  the Company believes the market for its productions,
and the value of the rights to them, will increase. The Company's (i) success in
accessing and  exploiting its programs in the broadcast and video markets in the
United States; (ii) existing relationships with foreign producers, distributors,
and  broadcasters,  including  those in  France,  Germany,  the Czech and Slovak
Republics, the United Kingdom,  Hungary, Italy and Ireland; and (iii) ability to
supply programs satisfying  indigenous quota  requirements,  that are popular in
Canada and certain European countries, will enable the Company to supply markets
worldwide.

      Indigenous  quota  requirements  are part of  programs  adopted in certain
countries to support national or indigenous cultural content. Under such support
programs,  quotas have been established limiting, among other things, the number
of foreign motion pictures and television programs that may be exhibited.  These
support  programs  further  provide  government  subsidies and tax incentives to
domestic  producers,  distributors  and  broadcasters  of  motion  pictures  and
television programming.  Canada has into multi-lateral  production treaties with
over 50  foreign  countries.  A  production  covered  by one of  these  treaties
qualifies as a national or  indigenous  production of each country party to such
treaty. Since 1994, all of the Company's productions have been covered by one or
more   Canadian   multi-lateral   production   treaties.   See  "  -  Regulatory
Considerations."

      The  Company's   established   relationships   with  major   distributors,
broadcasters  and funds  including,  TVA, Odeon Films,  Alliance/Atlantis,  CHUM
Television,  TMN (The Movie  Network),  Movie Central,  YTV, The Family Channel,
HBO,  The Disney  Channel and Disney  Channel  International  (U.K.,  France and
Australia),  Carrere  Group DA,  PBS,  CBC,  TPS,  MCA,  NHK  (Japan),  HBO Ole,
Discovery Channel International (Latin America,  Spain and Portugal),  SONY, The
Corus Feature Film Fund, Astral Media The Harold Greenberg Fund, The Independent
Production Fund and Telefilm Canada, are vital in maximizing the exploitation of
the Company's products internationally and financing new proprietary production.

Expansion of the Business

      The Company is committed to building its core library of quality films and
maximizing the  exploitation of its expanding  library by expanding its focus on
family  programming  to include  feature films and  primetime  drama for general
audiences.

      The Company  recently  completed  the $8.1  million  financing  of its new
primetime mystery series for Chum Television, Across the River to Motor City and
completed principal photography on the series on time and on budget in 2006. The
first six hour-


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long  episodes will be delivered for  distribution  and to Canadian  broadcaster
CHUM  Television  in the first six  months  of 2007  when the  episodes  will be
completed and delivered.  The Company is optimistic  about the success of Across
the River to Motor City and the  possibility of new episodes of the series being
ordered  by Chum  Television  for  2007-2008.  The  Company  is also  pleased to
announce that subsequent to the year end, CHUM Television  committed  additional
funding for new scripts for the second season of Across the River to Motor City.

      The Company took a major step in expanding  its business and product lines
when it financed and produced its first  feature film for  worldwide  theatrical
release,  entitled  Bailey's  Billion$  in 2004.  The  film,  budgeted  at $11.4
million, was co-produced with partners in the United Kingdom, equity investments
from  Astral  Media,  The Corus  Feature  Film Fund and  Telefilm  Canada,  with
distribution   in  Canada  in  conjunction   with  Odeon  Film  (a  division  of
Alliance/Atlantis)  and international  sales through Arclight Films. The Company
expects  that this film will  present the  Company  with new  opportunities  for
developing, financing and distributing proprietary films.

      The Company also recognizes that its business offers opportunities for the
integration  of new  activities.  With  The  Composers'  Specials,  the  Company
established  licensing  arrangements  for home  video and  broadcast  rights and
developed  licensing  arrangements  for  publishing  the  soundtracks of the six
programs and a teacher's  guide for school use.  The  Composers'  Specials,  The
Inventors'  Specials and The Artists'  Specials  now all have  companion  print,
audio,  video and DVD products.  The Company has initiated  marketing efforts in
non-traditional  markets.  These  non-traditional  markets consist  primarily of
schools,  boards of education,  parental home school instructors,  and libraries
and other educational and cultural  institutions.  The Company plans to increase
its  profitability  by  expanding  its own  distribution  operations  and taking
additional  steps to expand,  enhance and  complement  its core  business.  Such
additional  steps include  expanding  educational  distribution,  developing new
interactive and other media-based  products,  controlling the manufacture of the
Company's  products,   possibly  acquiring  product  libraries  or  distribution
capacity and further developing direct and cause-related marketing programs. The
Company has from time to time engaged in cause-related  marketing  programs with
schools,  hospitals  and  charity  organizations  whereby a portion of the sales
revenue is contributed to the co-participant.

The Company is continually seeking to expand its business.  The specific actions
taken by the Company in furtherance thereof are varied. The Company completed an
exclusive distribution agreement with SONY BMG Music Entertainment to distribute
SONY BMG's acclaimed  Marsalis on Music series.  The Company will distribute the
series on DVD into the  educational,  institutional  and specialty  retail trade
throughout  the USA,  Canada and Mexico in 2007. In November  2006,  the Company
completed  principal  photography  on its new  mystery  series  licensed by Chum
Television  entitled  Across the River to Motor City. In July 2006,  the Company
announced its new multi-year distribution and co-production financing agreements
with Carrere Group DA. For its new series of six one-hour  Writers' Specials and
its  award-winning  18 film library of


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historical family films, The Artists' Specials,  The Inventors' Specials and the
Composers'  Specials.  During 2006, the Company attended three educational sales
conventions held in Chicago, Orlando and Nashville.

      The  Company   continues  to  develop   relationships   with   prospective
distributors,  co-producers  and sales agents that have expressed an interest in
marketing  and  otherwise  representing  the  Company's  products in markets not
currently accessed by the Company directly.

Development Activities

      The Company's development activities are primarily focused on the creation
of  intelligent  programs for children and their families for the United States,
Canadian  and global  markets.  The  Company's  2007 project  development  slate
includes  new  episodes  of its core  library  based on the  lives  and times of
groundbreaking writers (The Writers' Specials) with co-producer Carrere Group of
France,  as well as new  scripts  for the  second  season of Across the River to
Motor City and a number of feature films,  television movies and series targeted
at  the  international  audience  (The  Miracle  Journey,  Russell  Sprout,  and
Humchucker).

      The  Company's  ability to complete  these  productions  is subject to the
risks  inherent  in the  film  and  television  industry.  These  risks  include
dependence on new products, audience acceptance of new products, dependence upon
licensing and distribution  relationships,  competition,  technological  change,
dependence upon government incentive programs, changes in government regulation,
currency  exchange rate  fluctuations  and  availability of adequate  production
financing.

Distribution Activities

      The distribution  activities of Devine  Entertainment  include selling the
broadcast rights of its films to the global market.  Since 1990, the Company has
sold its programming to  broadcasters  and video licensees in over 50 countries.
Devine Entertainment has established  contractual  relationships with, and sales
have been made to, major international broadcasters,  including HBO Ole in Latin
America, HBO in the United States, Disney Channel in the United Kingdom,  France
and Australia,  TPS in France, the Discovery Channel in Spain, Portugal,  Mexico
and Latin America,  and NHK in Japan.  In addition,  the Company  entered into a
multi-year  distribution  agreement  with  Carrere  Group of Paris in the  third
quarter of 2006 for  territories  outside of North America which it expects will
start to generate revenue from sales of the Company's film library in 2007.

      The Company  participates in major international  television program trade
shows and may attend other trade shows where  opportunities exist for management
to develop  areas of  interest  to the  Company.  Devine  also  distributes  its
programming through direct  communication with video distributors and television
broadcasters,  and through


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selective  advertising in significant  trade journals and strategic  media.  The
Company also sells its  products  directly to its  customers  through its direct
toll  free  telephone  marketing  campaign  in  the  United  States  and  Canada
(1-877-338-4633). The Company expects, by the end of the second quarter of 2007,
to be able to effect  direct sales of its products to customers via its Internet
store at www.devine-ent.com.

      Devine  Entertainment's  distribution  activities  include  exploiting the
merchandising  potential  of its  programming.  The  Company  has  entered  into
licenses  for home  video  and  broadcasting.  The  Company  has also  developed
licensing  arrangements for DVDs,  books,  soundtrack  recordings,  and internet
applications,  based on The Composers' Specials, The Inventors' Specials and The
Artists'  Specials  series.  The  Inventors'  Specials  are also  available  for
distribution  as audio  books.  All three  series  are  close-captioned  and The
Inventors'  Specials  and The  Artists'  Specials  have been  described  for the
visually impaired.

The Company's Film Library

      The following table outlines Devine Entertainment's library of proprietary
productions.

Genre: Family and Children's Television

Title                                       Premiere         Distributor
--------------------------------------------------------------------------------

A Young Children's Concert with Raffi         1985             Rounder
Raffi in Concert with the Sunshine Band       1989             Rounder

Beethoven Lives Upstairs                      1992             Naxos

The Composers' Specials

Bach's Fight for Freedom                      1996     Devine Productions Ltd
Liszt's Rhapsody                              1996     Devine Productions Ltd
Rossini's Ghost                               1996     Devine Productions Ltd
Strauss: The King of 3/4 Time                 1996     Devine Productions Ltd
Bizet's Dream                                 1996     Devine Productions Ltd
Handel's Last Chance                          1996     Devine Productions Ltd

The Inventors' Specials

Einstein: Light to the Power of 2             1997     Devine Productions Ltd
Leonardo: A Dream of Flight                   1997     Devine Productions Ltd
Galileo: On the Shoulders of Giants           1998     Devine Productions Ltd
Newton: A Tale of Two Isaacs                  1998     Devine Productions Ltd
Marie Curie: More than Meets the Eye          1998     Devine Productions Ltd
Edison: The Wizard of Light                   1998     Devine Productions Ltd


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The Artists' Specials

Degas and the Dancer                          1999     Devine Productions Ltd
Mary Cassatt: American Impressionist          1999     Devine Productions Ltd
Monet: Shadow and Light                       2000     Devine Productions Ltd
Rembrandt: Fathers and Sons                   2000     Devine Productions Ltd
Goya: Awakened in a Dream                     2000     Devine Productions Ltd
Winslow Homer: An American Original           2000     Devine Productions Ltd.

Genre: Feature Film

Bailey's Billion$                             2005     AllianceAtlantis/Arclight

      The Company's film library has been actively  distributed in North America
and over the past twelve years, generating in excess of $20 million in revenues.
Since 2000, the Company's  revenue derived from its proprietary  film library of
children's  television  programs and DVD's has averaged  over $800,000 per year.
Bailey's  Billion$,   the  company's  first  feature  film  has  generated  over
$6,000,000 since it was completed and delivered in 2004.

Business Strategy

      The Company's  business strategy is to: (i) focus on the production of its
high-quality  children's  and  family  films,  primetime  television  series and
feature films for general audiences in order to continue building its library of
original  programs;  (ii)  increase  its  production  and  distribution  through
strategic alliances with major  international  broadcasters and distributors and
co-producers,  including HBO, Canal Plus, TPS, France5 (France), Sony Classical,
The Family  Channel,  YTV, CBC, The Disney Channel (United  Kingdom,  France and
Australia),  PBS,  Carrere  Group DA, MCA, NHK (Japan),  HBO Ole (Mexico,  Latin
America),  Discovery Channel International (Latin America,  Spain and Portugal),
Warner  Electra  Atlantic,   Scholastic,   McGraw  Hill,  and  the  Hal  Leonard
Corporation;  (iii)  enhance its  long-term  return on  investment  by retaining
control  over  the  distribution,  merchandising  and  ancillary  rights  to its
proprietary  productions;  and (iv) increase its  profitability by expanding its
own distribution  division and taking  additional  steps to expand,  enhance and
complement  its  core  business.   Such  additional   steps  include   expanding
educational   distribution,   developing  direct  and  cause-related  marketing,
developing new  interactive  and other  media-based  products,  controlling  the
manufacture  of the  Company's  products  and,  potentially,  acquiring  product
libraries and/or distribution capacity.

      The  Company's  films  have to date  been  sold for  broadcast  in over 50
countries and are distributed in video and DVD formats across North America.  As
children  enter the  relevant  age  group,  the films in the  Company's  library
generate "evergreen" sales.


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      The Company has identified  over 100 potential  international  markets for
the  Company's  products,  and  the  Company  believes  that  the  international
television  market is an  important  growth area for its  products.  The Company
plans to continue building its library of quality films with future series based
on great  writers  and world  leaders.  Recent  sales in  Europe,  to the French
specialty cable broadcaster,  TPS, among others in Europe and Asia, have brought
commitments  to  participate  with  Devine  Entertainment  in  co-producing  and
broadcasting new films and series.

      In order to expand  production  output  for the  worldwide  audience,  the
Company has  optioned  several  screenplays  and young adult  novels,  which the
Company will seek to develop as feature films, and television movies, series and
mini-series.   These  options  enable  the  Company  to  determine  whether  the
screenplays and novels are suitable for commercial  exploitation  without having
to pay the full cost to acquire all  development,  production  and  distribution
rights with respect thereto.

Competitive Conditions

      Substantially  all  of  the  Company's   revenues  are  derived  from  the
production and distribution of television and film  programming.  The production
and distribution of television  programs and home videos are highly  competitive
businesses.  The most important  competitive  factors  include  popular  appeal,
artistic excellence and cost effectiveness.  The Company competes with the major
motion  picture  studios,  as well as with  numerous  other  motion  picture and
television production companies, many of which have greater financial, technical
and marketing resources.  The Company believes its principal competitors include
Hallmark Entertainment, The Walt Disney Company and Sullivan Films.

Employees

      The Company  currently  employs six full-time  employees and one part-time
employee.

Key Man Life Insurance

      The Company's  success  depends,  in substantial  part, on the efforts and
abilities of David Devine, the Company's  President and Chief Executive Officer,
and Richard Mozer, the Company's Chief Financial Officer. See "Item 9. Directors
and Executive Officers, Promoters and Control Persons -- Directors and Executive
Officers."  The loss of the  services  of either of these  persons  could have a
material  adverse  effect  upon  the  Company.  The  Company  maintains  key man
insurance on the lives of Messrs.  Devine and Mozer with  coverage in the amount
of  $500,000  each.  The annual  premiums  paid on Mr.  Devine's  policy and Mr.
Mozer's policy are $1,134 and $540, respectively.


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<PAGE>

Regulatory Considerations

      Local cultural policies in many of the international entertainment markets
regulate  broadcast content and provide industry  incentives to local producers.
This  is   particularly   the  case  in  those   countries  where  control  over
communications  systems such as  television  broadcasting  has devolved from the
state  through  privatization.  The  relaxation  of state control over media has
given rise to  regulations  which  protect  indigenous  culture  through (i) the
establishment  of local  content  requirements  as a  pre-condition  to  issuing
broadcasting  licenses and (ii) the subsidization of productions by broadcasters
and  producers  indigenous  to the  particular  market  through  a system of tax
incentives or direct grants and  investments  by national or regional  agencies.
The  Company  believes  that there is an  increasing  desire on the part of many
countries to protect their cultural identities which they feel may be undermined
by the international popularity of American culture,  especially as communicated
through the  television  and motion  picture  media.  Incentives  are  available
through  programs  administered by government  agencies in many major countries,
including  Canada,  France,  Italy,  the United  Kingdom,  Germany and  Ireland.
Management   believes  that,  while  the  shape  and  details  of  the  programs
implemented  in  support of such  policies  may  change  from time to time,  the
economic  commitment of governments to those policies will not be  significantly
reduced in the foreseeable future.

ITEM 2. DESCRIPTION OF PROPERTY

      The Company leases its office and production facilities.  These facilities
consist of approximately 2,100 square feet and are located at 2 Berkeley Street,
Toronto,  Ontario,  Canada.  The lease in respect of these facilities expires on
May 31, 2008 and provides for annual rent of approximately  $56,000 during 2006.
The Company  believes that its  facilities  are sufficient to meet its operating
requirements for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

      Neither the Company nor any of its property is the subject of any material
pending legal proceeding.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      During the fourth quarter of the fiscal year covered by this Annual Report
on Form 10-KSB, no matters were submitted to a vote of security holders.


12
<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

      The Common Shares were delisted from the Toronto Stock Exchange (the "TSX"
in March 2004 as a result of the Company's  failure to meet the minimum  listing
requirements of the TSX. Currently,  the Common Shares are quoted for trading in
Canada on the Canadian Unlisted Board (the "CUB") under the symbol "DVNN" and in
the United States in the Pink Sheets(R)  under the symbol "DVNNF." The following
table sets forth for the periods  indicated the per share market price ranges of
the Common Shares. All over-the-counter market quotations contained in the table
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not represent actual transactions.

          Date                                      High($)      Low($)
          -------------------------------------------------------------

          2004
          ----
          First Quarter                              0.08         0.08
          Second Quarter                             0.08         0.08
          Third Quarter                              0.26         0.01
          Fourth Quarter                             0.28         0.10

          2005
          ----
          First Quarter                              0.29         0.15
          Second Quarter                             0.25         0.15
          Third Quarter                              0.32         0.07
          Fourth Quarter                             0.15         0.10

          2006
          ----
          First Quarter                              0.18         0.11
          Second Quarter                             0.20         0.12
          Third Quarter                              0.23         0.11
          Fourth Quarter                             0.15         0.09

On March 26, 2006 the closing per share market price was 0.12.


13
<PAGE>

Common Shares Subject to Options, Warrants and Convertible Securities

      As at March 26,  2007,  there  were  3,465,000  Common  Shares  subject to
outstanding options, 6,069,166 Common Shares subject to outstanding warrants and
3,301,600  Common Shares  issuable upon  conversion of  outstanding  convertible
securities.

Holders

      As at March 26,  2007,  there  were 69  holders  of  record of the  Common
Shares.

Dividends

      The Company has not made any  dividend  payment with respect to the Common
Shares. The Company has no current intention to pay cash dividends on the Common
Shares in the foreseeable future. In lieu thereof, the Company intends to retain
any future  earnings for  reinvestment in the Company's  business.  The Series 1
Preferred  Shares restrict the Company's  ability to pay dividends on the Common
Shares. See "Description of Securities"

Penny Stock Considerations

      The  United  States   Securities  and  Exchange   Commission  has  adopted
regulations applicable to broker/dealers who sell "penny stock." A "penny stock"
is  generally  defined to be any  equity  security  that has a market  price (as
defined)  of less than $5.00  (U.S.) per share,  subject to certain  exceptions.
These   regulations   impose   additional   sales   practice   requirements   on
broker/dealers  who  sell  "penny  stock"  to  persons  other  than  established
customers and accredited investors. These additional sales practice requirements
may have the effect of reducing the level of trading  activity in the  secondary
market for "penny stock."

      Following  the  declaration  of the  effectiveness  of  this  registration
statement by the Securities and Exchange Commission, the Company's Common Shares
trade  on the  OTC  Bulletin  Board  service  of  the  National  Association  of
Securities  Dealers,  Inc. (the "OTC Bulletin Board").  The Common Shares of the
Company fall within the  definition of "penny  stock." There can be no assurance
that the Common Shares will trade for $5.00 (U.S.) or more per share.

Exchange Controls and Other Limitations Affecting Security Holders.

      Canada  has  no  system  of  exchange  controls.  There  are  no  exchange
restrictions on borrowing from citizens or residents of foreign countries nor on
the remittance of dividends, interest, royalties or similar payments, management
fees, loan repayments, settlement of trade debts or the repatriation of capital.


14
<PAGE>

      Under the  Investment  Canada  Act (the "ICA  Act"),  a  Canadian  federal
statute, certain "non-Canadian" individuals,  governments, corporations or other
entities who wish to acquire a "Canadian  business"  (as defined in the ICA Act)
or establish a "new Canadian  business" (as defined in the ICA Act) are required
to file either a notification  or an application  for review with a governmental
agency known as "Investment  Canada".  The ICA Act further requires that certain
acquisitions  of control  of a Canadian  business  by a  "non-Canadian"  must be
reviewed and approved by the Minister  responsible  for the ICA Act on the basis
that he is  satisfied  that the  acquisition  is "likely to be of net benefit to
Canada". Only acquisitions of control are reviewable under the ICA Act; however,
the ICA Act provides detailed rules for the determination of whether control has
been acquired and, pursuant to those rules, the acquisition of one-third or more
of the voting shares of the Company may, in some circumstances, be considered to
constitute  an  acquisition  of  control.  Failure  to  comply  with the  review
provisions of the ICA Act could result in, among other things,  an injunction or
a court order directing disposition of assets or shares.

      There are no  limitations  contained in the Articles of  Incorporation  or
By-Laws on the rights of non-Canadian residents or non-Canadian  shareholders to
hold or vote the Common Shares.

Taxation

      Dividends

      In  general,  dividends  paid  by a  corporation  resident  in  Canada  to
non-residents  of Canada are subject to Canadian  withholding  tax.  The rate of
withholding  tax under the Income Tax Act (Canada)  (the "Tax Act") on dividends
is twenty-five percent (25%). Such rate may be reduced under the provisions of a
relevant  international tax treaty to which Canada is a party. The Canada-United
States Income Tax Convention  (1980) (the "U.S.  Treaty") provides for a general
reduction in the rate of Canadian  withholding  tax to fifteen  percent (15%) on
dividends paid on shares of a corporation resident in Canada to residents of the
United  States,  and  also  provides  that  where  the  beneficial  owner of the
dividends is a corporation resident in the United States which owns at least ten
percent (10%) of the voting shares of the corporation paying the dividends,  the
rate of withholding tax is reduced to ten percent (10%).

      Capital Gains

      A  non-resident  of  Canada  is not  subject  to tax  under the Tax Act in
respect of a capital gain realized upon the  disposition  of a share of a public
corporation  for  purposes  of the Tax Act unless the share  represents  taxable
Canadian property to the holder thereof. A share of a public corporation will be
taxable  Canadian  property  to the holder  thereof  if, at any time  during the
period of five (5) years immediately preceding a disposition,  the non-resident,
persons  with  whom  the  non-resident  did not  deal at  arm's  length,  or the
non-resident  together  with persons with whom he did not deal at


15
<PAGE>

arm's  length,  owned (or had an option in  respect  of or had an  interest  in)
twenty-five percent (25%) or more of the issued shares of any class or series of
the  corporation  or if,  upon  ceasing to be a resident  of Canada,  the holder
elected  that the share be taxable  Canadian  property.  The Company is a public
corporation for purposes of the Tax Act.

      The U.S. Treaty provides that, in general, a resident of the United States
will  not  be  subject  to  tax  on any  capital  gains  realized  by him on the
disposition  of  shares  that are  taxable  Canadian  property  unless  (i) such
resident has or had (within the twelve-month period preceding the disposition) a
permanent  establishment  in Canada and such shares  formed part of the business
property of that  permanent  establishment,  (ii) such shares formed part of the
personal property pertaining to a fixed base which is or was available (within a
twelve-month  period preceding the disposition) to such resident for the purpose
of performing  independent  personal services,  (iii) the value of the shares is
derived   principally  from  real  property  situated  in  Canada  or  (iv)  the
shareholder  is an  individual  who was resident in Canada for 120 months in any
twenty-year period preceding the disposition and at any time during the ten-year
period  immediately  preceding the  disposition  and who owned the shares of the
corporation at the time he or she ceased to be a resident of Canada.

      Estate and Gift Tax

      At present, Canada does not impose any estate or gift tax.

      Description of Securities

Authorized Capital

      The  authorized  share  capital of the Company  consists  of an  unlimited
number  of Common  Shares  and an  unlimited  number of  preferred  shares  (the
"Preferred Shares"),  issuable in series.  39,313,699 Common Shares and a series
of 494,550  Preferred  Shares (the "Series 1 Preferred  Shares") were issued and
outstanding  as at March 26, 2007.  Set forth below is a summary  description of
certain  provisions  relating to the Company's  share  capital  contained in its
Articles of  Incorporation  and  By-Laws,  and under the OBCA.  Such  summary is
qualified  in  its  entirety  by   reference  to  the   Company's   Articles  of
Incorporation and By-Laws, and the OBCA.

Preferred Shares

      The  Preferred  Shares are  issuable in one or more  series.  The board of
directors  of the Company is  permitted  under the  Articles  of  Incorporation,
without the approval of the  stockholders,  but subject to the provisions of its
corporate  legislation  (including  the  issuance of articles  of  amendment  in
prescribed  form), to designate,  fix the number of shares in, and determine the
rights, privileges,  restrictions and conditions attaching to the shares of each
series  of  Preferred  Shares  at or prior to the  date of their  issuance.  The
Preferred  Shares  could  be used  as a  method  of  discouraging,  delaying  or
preventing  a change in  control of the  Company.  In  addition,  the rights and


16
<PAGE>

preferences  of the  Preferred  Shares may be  dilutive  of the  interest of the
holders of the Common Shares and otherwise  have an adverse effect on the rights
of the holders of the Common Shares.

      In December 2004, the Series 1 Preferred  Shares were created.  All of the
Series 1  Preferred  Shares were issued to the  Partnership.  See  "Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operation --
Devine Entertainment Limited Partnership." The holders of the Series 1 Preferred
Shares, in priority to the holders of the Common Shares, are entitled to receive
a cumulative  annual dividend of 9.1 cents per share.  Absent the consent of all
of the holders of the Series 1 Preferred  Shares,  dividends  may not be paid on
the Common  Shares if dividends are then due and owing on the Series 1 Preferred
Shares.

      Except as  otherwise  required  by the OBCA,  the  holders of the Series 1
Preferred  Shares are entitled to vote only in the event the Company proposes to
dissolve or sell,  lease or exchange  all or  substantially  all of its property
other than in the ordinary course of business.

      Commencing on November 16, 2014 and  continuing on each  anniversary  date
thereafter,  the  holders of the  Series 1  Preferred  Shares  have the right to
require  the  Company to redeem on such date all or a portion of their  Series 1
Preferred Shares. The redemption price (the "Redemption  Price") for each Series
1  Preferred  Share  is  equal  to the sum of $1 plus  all  accrued  and  unpaid
dividends thereon.

      In the event the  Company is  liquidated,  dissolved  or  wound-up  or its
assets are  otherwise  distributed  among the Company's  stockholders  by way of
repayment  of capital,  whether  voluntary  or  involuntary,  the holders of the
Series 1 Preferred  Shares are  entitled to receive a per share  amount equal to
the  Redemption  Price before any  distribution  of the Company's  assets to the
holders of the Common Shares.

Common Shares

      All of the issued and outstanding Common Shares are validly issued,  fully
paid and  non-assessable.  Holders of the Common Shares are entitled to one vote
per  share at all  meetings  of  stockholders.  There is no right to  cumulative
voting;  thus,  the holders of a majority of the  outstanding  Common Shares can
elect all of the members of the Company's board of directors. A majority vote is
also sufficient for other actions that require the vote of stockholders,  except
in cases in which more than a majority is required by law. Holders of the Common
Shares are entitled to receive,  on a ratable  basis,  any dividends as and when
declared  by the  board of  directors  out of funds  legally  available  for the
payment of dividends.  Upon the liquidation,  dissolution,  or winding-up of the
Company, subject to the prior rights of the holders of the Preferred Shares, the
holders of Common  Shares are  entitled  to  receive,  on a ratable  basis,  the
remaining  assets  and  property  of the  Company.  The  Common  Shares  have no
preemptive rights or subscription, redemption or conversion privileges.


17
<PAGE>

1995 Issuance of 7.5% Debentures

      In December 1995, the Company issued  $1,125,000  principal amount of 7.5%
redeemable  convertible  subordinated  debentures (the "7.5% Debentures").  Each
7.5%  Debenture  originally  matured on December 31, 2000. On December 19, 2000,
the Company  obtained the approval of the holders of the 7.5% Debentures to: (i)
extend the maturity  date of the 7.5%  Debentures  to December  31,  2002:  (ii)
reduce the conversion rate of the 7.5% Debentures from $1.50 to $0.50 per Common
Share;  (iii) increase the rate of interest on the 7.5%  Debentures to 10.5% per
annum; (iv) issue to the holders of the 7.5% Debentures one warrant  ("Extension
Warrant") for each $1.00  principal  amount of the 7.5%  Debentures held by such
holders; and (v) secure the 7.5% Debentures by way of a floating charge over all
of the Company's  assets,  such floating  charge being  subordinated  to certain
senior indebtedness of the Company.  The Extension Warrants expired unexercised.
The Company is currently  further  renegotiating the terms and conditions of the
7.5% Debentures with the holders thereof.

      In February  2002,  $915,000 of the 7.5%  Debentures  became  covered by a
security  interest  granted by the Company.  See  "Management's  Discussion  and
Analysis of  Financial  Condition  and Results of Operation -- Fiscal Year Ended
December 31, 2004.

1996 Issuance of 7.5% Debenture

      In  February  1996,  the  Company  issued  a 7.5%  redeemable  convertible
subordinated  debenture  (the  "1996  Debenture")  in the  principal  amount  of
$100,000 to Euro American  Mercantile  Corp.  The 1996  Debenture is convertible
into Common Shares at the rate of $1.50 per share. The 1996 Debenture originally
matured on December 31, 2000. On December 19, 2000, the Company renegotiated the
payment  terms of the 1996  Debenture and increased the interest rate thereon to
10% per annum.  As a result,  the principal  was  repayable  during 2001 in four
equal quarterly  payments.  The first installment  payment on the 1996 Debenture
was  made in  April  2001.  The  Company  failed  to make  the  three  remaining
installment payments due on the 1996 Debenture. The Company is currently further
renegotiating  the terms and conditions of the 1996 Debenture with Euro American
Mercantile   Corp.  The  1996  Debenture  is   subordinated  to  certain  senior
indebtedness of the Company.

10.5% Debentures and 10.5% Debenture Warrants

      On December 21, 2000,  the Company  issued  $550,000  principal  amount of
10.5% convertible subordinated debentures (the "10.5% Debentures") which matured
on December  31,  2005.  The  Company is  currently  in default  under the 10.5%
Debentures.  The Company is in the process of  negotiating  an  extension to the
maturity date of the 10.5%  Debentures.  The 10.5% Debentures bear interest at a
rate of 10.5% per annum payable  semi-annually and are convertible at the option
of the holder at any time on the basis of one Common  Share per $0.50  principal
amount of 10.5% Debentures outstanding.  The 10.5% Debentures are secured by way
of a floating  charge


18
<PAGE>

over all of the Company's  assets,  such floating  charge being  subordinated to
certain senior indebtedness of the Company.

      Each purchaser of the 10.5%  Debentures  also received a warrant (a "10.5%
Debenture  Warrant")  for each  $1.00  invested.  Each 10.5%  Debenture  Warrant
entitled  the  holder to  purchase  one Common  Share for $1.75 per share  until
December 31, 2005. All of the 10.5%  Debentures  Warrants  expired without being
exercised.

      Forvest  Trust  S.A.  acted  as  agent  for  the  issuance  of  the  10.5%
Debentures,  and was issued compensation  warrants entitling it to acquire up to
50,000  Common  Shares  at an  exercise  price of $0.50  per  share on or before
December 21, 2007. Forvest Trust S.A. also received a cash commission on closing
of $50,000.

Other Warrants

      Information  concerning  additional  outstanding  warrants  issued  by the
Company  within  the  past  three  years  is  set  forth  in  "Recent  Sales  of
Unregistered Securities."

Capital Reorganization

      In order to  assist in  ensuring  that the  Company  remains  entitled  to
receive certain financial  incentives and assistance or any required licenses or
approvals from Canadian federal or provincial governments and agencies which are
available  only if the  ownership  of the equity  securities  of the  Company by
Canadian  residents  meets  certain  specified  requirements,  a resolution  was
adopted at a meeting of the board of  directors  of the Company  held on May 13,
2004  authorizing  the Company to seek all necessary  approvals to further amend
its Articles of  Incorporation  to effect the following  capital  reorganization
(the "Reorganization"):

      (a)   create two new classes of shares to be  designated as Class A voting
            shares (the  "Voting  Shares")  and Class B  non-voting  shares (the
            "Non-Voting Shares"), each in an unlimited number;

      (b)   exchange the issued and outstanding Common Shares into Voting Shares
            and  Non-Voting  Shares on the basis of one-half of one Voting Share
            and a one-half of one  Non-Voting  Share for each Common Share held;
            and

      (c)   cancel all the authorized Common Shares.

      The stockholders of the Company initially  approved the  Reorganization on
June 25, 2004 at a stockholders  meeting.  The  reorganization was reapproved by
the Company's  stockholders at a stockholders meeting held on June 16, 2005. The
Company  expects  that the  Reorganization  will be effected at such time in the
future  as may be  required  in order to allow the  Company  to  continue  to be
eligible  to  receive  the  aforesaid  incentives,   assistance,   licenses  and
approvals.  As a general matter, in order for the


19
<PAGE>

Company to remain  eligible,  at least a majority  of the equity  ownership  and
voting  control of the  Company  must be held by  Canadian  residents.  Canadian
residents  currently  hold in excess of 85% of the equity  ownership  and voting
control of the Company.  The OBCA does not impose any time  limitation per se on
when the Reorganization must be effected following its approval by the Company's
stockholders.  However,  until such time as the Reorganization is effected,  the
Company  will,  on  an  annual  basis,   continue  to  seek  reapproval  of  the
Reorganization at the Company's annual meeting of stockholders.

      Pursuant to the terms of the Reorganization,  holders of Voting Shares and
Non-Voting  Shares will have the  following  rights and  privileges  and will be
subject to the following restrictions and conditions:

      (a)   subject to any  preference  as to  dividends  provided to any shares
            ranking in priority to the Voting Shares and the Non-Voting  Shares,
            to participate equally, share for share, in any dividend, whether in
            cash, in shares of the Company or  otherwise,  which may be declared
            or paid on either class of such shares;

      (b)   in the  event  of  liquidation,  dissolution  or  winding-up  of the
            Company or other  distribution  of assets for the purpose of winding
            up its  affairs,  to  receive  equally,  share  for  share,  all the
            remaining  property of the Company  after  payment of the  Company's
            liabilities and any amounts payable to holders of any shares ranking
            in priority to the Voting Shares and the Non-Voting Shares,  without
            preference or distinction;

      (c)   receive  notice  of,  attend (in person or by proxy) and be heard at
            all meetings of the stockholders of the Company; and

      (d)   in the event that an independent committee of the board of directors
            of the Company  reasonably  determines  that it is necessary for the
            Company to be Canadian  controlled or that there be  limitations  on
            the number of shares held by non-residents of Canada for the purpose
            of  determining   the  eligibility  of  the  Company  for  financial
            incentives  or assistance  or licenses or other  approvals  from any
            Canadian federal or provincial government or agency or for any other
            regulatory  purpose,  the Company  shall have the right,  upon prior
            written  notice to the  holders  of  Voting  Shares  and  Non-Voting
            Shares, to (i) refuse to allot or issue any shares of the Company to
            any non-resident of Canada;  (ii) direct that the voting rights,  if
            any,  attached to shares held by  non-residents of Canada may not be
            exercised for such period or periods of time as is specified in such
            notice;  (iii)  authorize and direct its transfer agent to refuse to
            register any transfer of Voting Shares or  Non-Voting  Shares to any
            non-resident  of  Canada;   and  (iv)   automatically   convert  all
            Non-Voting Shares into Voting Shares.


20
<PAGE>

      In  addition  to  the  rights,  privileges,  restrictions  and  conditions
described above, holders of Voting Shares shall be entitled to:

      (a)   vote at all meetings of the  stockholders of the Company (other than
            at meetings of the  holders of another  class or series  entitled to
            vote  separately  as a class or series in  respect  of a  particular
            matter); and

      (b)   convert,  at any  time,  each  Voting  Share  held by them  into one
            Non-Voting Share.

      Furthermore,  if an offer is made to purchase  Voting Shares which,  under
applicable  securities  legislation or the  requirements  of a stock exchange on
which the Voting Shares or the Non-Voting Shares are listed, must be made to all
or  substantially  all holders of Voting Shares in a province of Canada to which
the requirement  applies and an unconditional  offer is not concurrently made to
purchase  Non-Voting  Shares that is identical  with respect to price per share,
percentage  of  outstanding  shares for which the offer is made and in all other
material respects, each Non-Voting Share will become convertible,  at the option
of the holder,  within a specified  time  following  the offer,  into one Voting
Share.  The conversion right may only be exercised for the purpose of depositing
the resulting  Voting Share in response to the offer and the transfer  agent and
registrar of the Company will deposit the  resulting  Voting Shares on behalf of
the  stockholders.  If the  Voting  Shares  resulting  from the  conversion  are
subsequently  withdrawn from the bid by the  stockholders or not taken up by the
offeror or if the offer is abandoned  and  withdrawn by the offeror,  the Voting
Shares thus converted will be reconverted  into Non-Voting  Shares.  In no other
circumstances will the Non-Voting Shares be convertible into Voting Shares.

      In instances where the  Reorganization  would result in a holder of Common
Shares  receiving a fractional  Voting Share or a  fractional  Non-Voting  Share
(after  aggregating all Voting Shares or all Non-Voting  Shares, as the case may
be), such fractional shares will be rounded up to the next whole Voting Share or
Non-Voting Share (as the case may be).

      The  Reorganization  will affect all  stockholders  uniformly and will not
affect any  stockholder's  percentage  interest  in the  Company,  except to the
extent the  Reorganization  would  otherwise  result in a  stockholder  owning a
fractional  share.  In  addition,   the  Reorganization   will  not  affect  any
stockholder's   proportionate  voting  rights,   subject  to  the  treatment  of
fractional shares as described above.


21
<PAGE>

      Recent Sales of Unregistered Securities

      Set forth below is certain  information  regarding all securities that the
Company has sold within the two most recently  completed  calendar years without
registering  such  securities  under the Securities Act of 1933, as amended (the
"Securities Act").

      In January 2005, the Company issued 40,000 Common Shares to David Karas in
consideration  for  financial  advisory  services  provided to the Company.  The
aforesaid  Common Shares were offered and sold in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act.

      In January 2005, the Company issued 40,000 Common Shares to Anthony Golden
in consideration for investor  relation  services  provided to the Company.  The
aforesaid  Common Shares were offered and sold in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act.

      In May 2005,  the Company issued 350,000 Common Shares to the Canadian law
firm,  Wildeboer  Dellecle  LLP,  in partial  consideration  for legal  services
rendered to the Company from March 27, 2001 through May 31, 2005.  The aforesaid
Common  Shares  were  offered  and  sold  in  reliance  on the  exemptions  from
registration afforded by Section 4(2) and Regulation S of the Securities Act.

      Effective  May 31, 2006 the  Company  sold  3,383,331  units at a price of
$0.15 per unit for  aggregate  gross  proceeds of $507,500 to a group of private
investors.  Substantially  all of these  investors are residents of Canada.  The
remaining  investors are residents of the United States.  Each unit consisted of
(i) one Common Share and (ii)  one-half  Common  Share  purchase  warrant.  Each
warrant is exercisable,  at any time on or prior to May 31, 2007, to acquire one
Common Share at an exercise price of $0.30 per Common Share.

      The aforesaid Common Shares and warrants were offered and sold in reliance
on the exemptions from registration afforded by Section 4(2) and Regulation S of
the Securities Act.

      In June 2006, the Company issued 150,000 Common Shares to Cameron  Thomson
Group Ltd. in  consideration  for financial  advisory  services  provided to the
Company.  The  aforesaid  Common Shares were offered and sold in reliance on the
exemption from registration afforded by Section 4(2) of the Securities Act.

      In June  2006,  the  Company  issued  114,560  Common  Shares to Mr.  Paul
Crossett  in  consideration  for  financial  advisory  services  provided to the
Company.  The  aforesaid  Common Shares were offered and sold in reliance on the
exemption from registration afforded by Section 4(2) of the Securities Act.

      In June 2006,  the Company  issued  40,000  Common Shares to Mr. Thomas F.
Weisz in consideration for financial  advisory services provided to the Company.
The


22
<PAGE>

aforesaid  Common Shares were offered and sold in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act.

      In June 2006,  the Company  issued 35,100 Common Shares equally to Flehr &
Associates Ltd. and Messrs F. Bryson Farrill and Kenneth Taylor in consideration
for Board of Director  services  provided to the Company.  The aforesaid  Common
Shares were  offered and sold in reliance  on the  exemption  from  registration
afforded by Section 4(2) of the Securities Act.

      In September  2006,  the Company  issued  25,000 Common Shares to Boigon &
Hutchison Productions Inc. in consideration for stock options issued in 2004 for
post production  services  provided to the Company.  The aforesaid Common Shares
were offered and sold in reliance on the exemption from registration afforded by
Section 4(2) of the Securities Act.

      In October 2006,  the Company issued 67,200 Common Shares equally to Flehr
&  Associates   Ltd.  and  Messrs  F.  Bryson  Farrill  and  Kenneth  Taylor  in
consideration  for Board of  Director  services  provided  to the  Company.  The
aforesaid  Common Shares were offered and sold in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act.

      In October 2006, the Company issued 38,250 Common Shares to Baxter Capital
Advisors Inc. in consideration  for financial  advisory services provided to the
Company.  The  aforesaid  Common Shares were offered and sold in reliance on the
exemption from registration afforded by Section 4(2) of the Securities Act.

      In October  2006,  the  Company  issued  6,750  Common  Shares to Midsouth
Capital Inc. in consideration  for financial  advisory  services provided to the
Company.  The  aforesaid  Common Shares were offered and sold in reliance on the
exemption from registration afforded by Section 4(2) of the Securities Act.

      In November  2006,  the Company  issued 100,000 Common Shares to Friedland
Capital Advisors Inc. in consideration for financial  advisory services provided
to the Company. The aforesaid Common Shares were offered and sold in reliance on
the exemption from registration afforded by Section 4(2) of the Securities Act.

      Each  exemption  claimed  above  from  compliance  with  the  registration
provisions of the Securities Act by reason of Section 4(2) of the Securities Act
is based on the  grounds  that each  offer and sale did not  involve  any public
offering,   each  purchaser  was  sophisticated  with  access  to  the  kind  of
information  registration  would  provide and that such  purchaser  acquired the
securities at issue without a view towards distribution thereof.

      Each  exemption  claimed  above  from  compliance  with  the  registration
provisions of the  Securities Act by reason of Regulation S under the Securities
Act is based on the grounds that each offer and sale was effected by means of an
offshore transaction  involving one or more non-U.S.  persons in accordance with
all applicable  conditions and restrictions of Regulation S under the Securities
Act.


23

<PAGE>


ITEM 6. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
        OPERATIONS

The following management's discussion and analysis has been prepared as of March
26,  2007 to  provide a review of current  activities  and a  comparison  of the
performance and financial  position of Devine  Entertainment  for the year ended
December  31, 2006 and 2005.  Additional  information  related to the Company is
available on SEDAR at  www.sedar.com.  The financial  data in this document have
been prepared in accordance with  accounting  principles  generally  accepted in
Canada  that  conforms,  in all  material  respects,  with U.S.  GAAP  except as
described  in  Note  21 to the  financial  statements.  References  to  Canadian
dollars,  Cdn$ or $ are to the currency of Canada and references to U.S. dollars
or US$ are to the currency of the United States.

FISCAL 2006 HIGHLIGHTS

2006 was a very  active  development  year for the  Company,  focused on project
financing,  the  production  of a new  primetime  series  and  establishing  new
international  distribution  and  co-production   relationships,   the  positive
financial  impact of which will be reflected in its financial  statements in the
next six to twelve months and beyond.

      o     The  Company  completed  the  $8.1  million  financing  of  its  new
            primetime  mystery series for Chum  Television,  Across the River to
            Motor City and completed principal photography on the series on time
            and on  budget.  Canadian  broadcast  license  agreements  currently
            agreed to will generate initial revenues from the series of at least
            $4 million in the first six months of 2007 when the episodes will be
            completed and delivered. The Company is optimistic about the success
            of  Across  the  River to  Motor  City  and the  possibility  of new
            episodes  of  the  series  being  ordered  by  Chum  Television  for
            2007-2008.  The Company is also pleased to announce that  subsequent
            to the year end, Chum Television  committed  additional  funding for
            new scripts for the second season of Across the River to Motor City.

      o     The Company  delivered  master  duplication  and sales  materials to
            Carrere Group of France  (Paris Stock  Exchange EPA: CAR) in August.
            The multi-year  agreement announced July 11, 2006 with Carrere Group
            will start to  generate  revenue  from sales of the  Company's  film
            library in 2007.  In addition,  the Company is working  closely with
            co-producer  Carrere  Group to bring its new six episode  series The
            Writers'  Specials,  budgeted at  approximately  $7.5 million,  into
            production in 2007.


                                                                              24
<PAGE>

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2006

Revenues

In 2006,  the Company's  revenues  decreased by $3,595,786 or 90% to $423,959 as
compared to $4,019,745 in 2005.

The  Company's  proprietary  film library of completed  television  programs and
recordings  generated  all of the Company's  revenues of $423,959,  reflecting a
decrease of 60% as compared with  $1,067,389 in 2005. The Company's  proprietary
library of completed television programs and recordings generated lower revenues
in  2006  than  in  2005  in  part  because  of a  delay  in  results  from  the
establishment of new  international  distribution  agreements with Carrere Group
which took  effect  late in 2006 and in part  because  of  reduced  sales in the
United States.  The Company believes that this drop in revenues in temporary and
expects revenues from the library to return to historically higher levels as the
international distribution agreement with Carrere Group and new product launches
in the United States  contribute  to the Company's  results in 2007 and into the
future.

As expected,  the Company's  feature film,  Bailey's  Billion$,  which generated
revenues  around the world of  $2,952,356  in 2005  reflecting a sale of foreign
distribution  rights to a UK based distributor that generated an initial payment
of approximately $2,659,000 in the second quarter of 2005, did not contribute to
the Company's revenues in 2006.

The  Company's  revenues  by  geographic  location,  based  on the  location  of
customers were as follows:

                                                    2006                 2005
                                                 ----------           ----------
Canada                                           $   28,000           $  446,000
United States                                       274,000              591,000
France                                               69,000               99,000
United Kingdom                                            0            2,659,000
Europe - Other                                       38,000                    0
Other foreign                                        15,000              225,000
                                                 ----------           ----------
                                                    424,000            4,020,000

Earnings (loss) per Common Share (EPS)

Net loss in year ended December 31, 2006, was  ($2,514,151)  or (0.07) per share
reflecting the Company's  amortization and write-down of its proprietary library
and works in progress  which  totaled  $2,010,385  in 2006.  While the Company's
library  continues to be a key asset and was recently  valued  independently  as
having a fair market value of over  $7,000,000,  under  SOP-002 all of the costs
related to a proprietary  program or series must be expensed within ten years of
it  original  delivery  and  exploitation.  2006  was the  tenth  year  that the
Inventors'  Specials  and  the 8th  year  the  Artists'  Specials have


25
<PAGE>

been  in  distribution  and   accordingly,   the  Company  has  accelerated  the
amortization of these series.

EBITDA

EBITDA, defined as earnings before interest, taxes,  depreciation,  amortization
and  write-down  was  ($460,329)  or ($0.01)  per share in 2006,  a decrease  of
$2,689,998 as compared with 2005.

EBITDA is a  non-GAAP  financial  measure.  Management  believes  EBITDA to be a
meaningful   indicator  of  the  Company's   performance  that  provides  useful
information to investors regarding the Company's financial condition and results
of  operations.  EBITDA is a non-GAAP  financial  measure  commonly  used in the
entertainment  industry  and by  financial  analysts  and  others who follow the
industry to measure operating performance.  While management considers EBITDA to
be an  important  measure of  comparative  operating  performance,  it should be
considered  in addition  to, but not as a  substitute  for, net income and other
measures of financial  performance reported in accordance with GAAP. EBITDA does
not  reflect  cash  available  to fund  cash  requirements.  Not  all  companies
calculate  EBITDA in the same  manner and the  measure as  presented  may not be
comparable to similarly-titled measures presented by other companies.  EBITDA is
not  used by the  Company  as a  performance  indicator  for the  evaluation  of
management or employee performance and any related remuneration or bonuses.

Shareholders' Equity

Shareholders' equity was $3,458,346 at December 31, 2006,  reflecting a decrease
of $1,713,678 from $5,172,024 at December 31, 2005.

SUMMARY OF QUARTERLY RESULTS:

<TABLE>
<CAPTION>
                              Dec. 31,      Sept. 30,    June 30,     Mar. 31,     Dec. 31,      Sept. 30,   June 30,       Mar. 31,
                                2006          2006         2006         2006         2005          2005         2005          2005
                             ----------     --------     --------     --------     --------      --------    ---------      -------
<S>                              <C>          <C>         <C>          <C>          <C>           <C>        <C>            <C>
Revenues                         60,430       84,255      115,414      163,860      468,348       180,899    2,892,261      478,236

Operating Expenses              181,507      287,420      156,200      232,377      268,418       192,765      214,791      175,044

Earnings (loss) before       (2,514,151)    (231,398)    (147,639)    (150,577)    (865,770)     (323,166)     933,050       22,477
income taxes
                                                                                                                            (12,189)
Income taxes                         --           --           --           --       12,189            --           --

Net earnings (loss)          (2,514,151)    (231,398)    (147,639)    (150,577)    (853,581)     (323,166)     920,861       22,477

Basic  earnings (loss) per        (0.07)       (0.01)       (0.00)       (0.00)       (0.02)        (0.01)        0.03         0.00
common share
</TABLE>


                                                                              26
<PAGE>

Operating expenses

The Company's  operating expenses for the year ended December 31, 2006 increased
by $6,486 or approximately 1% to $857,504, as compared to $851,018 in 2005.

Production and Development Activity

The Company  continues to develop new projects in order to secure new production
activity.  The  Company  has  acquired  the  rights and is  actively  developing
additional  films and series projects  targeted to the worldwide family audience
including Russell Spout, StarDucks,  Quarterback,  Fat Camp and Humchucker.  The
Company has also  entered  into an initial  agreement  to  co-develop,  with the
intent of co-producing in the future,  a new series of Writers'  Specials with a
co-producer in France.  Subsequent to the year end, the Company commissioned new
scripts for a second season of it new primetime mystery series, Across the River
to Motor City,  with the  participation  and support of CHUM Television and from
the Cable Television Fund.

Investment in Film and Television Programs and Recordings

The  Company  reviews  and  revises  the  estimated  fair  market  value  of its
investment in film,  television programs and recordings as required on a regular
basis.  Capitalized  film costs are stated at the lower of  unamortized  cost or
estimated fair value on an individual  film basis.  For the  proprietary  films,
television  programs and recordings produced by the company, a maximum period of
ten years after the delivery of the  production is used in  accordance  with SOP
00-2 to estimate  fair  value.  Development  costs that are  expected to benefit
future periods are also  capitalized.  If the property under development has not
been  set for  production  within  three  years,  or if upon  review  management
determines that certain costs are unrecoverable,  the costs associated with such
property  are  written  off to income.  As a result of the  review,  the Company
expensed  $883,148  of  its  capitalized   project  development  costs  in  2006
(2005-nil).

Amortization  and  write-down  expenses  in 2006 for the  Company's  library  of
completed   television  programs  and  recordings  and  motion  picture  totaled
$2,010,385. As at December 31, 2006, the Company's investment in its proprietary
film library of completed  television  programs and  recordings was estimated as
$930,318 after accumulated amortization.  The Company's investment in its motion
picture  Bailey's   Billion$  was  estimated  as  $2,891,078  after  accumulated
amortization   and  the  Company's   investment  in  projects  in  progress  was
$5,669,105,  which  includes  $4,202,665  for Across the River to Motor City and
$1,466,440 for projects in development as per the following table:


27
<PAGE>

<TABLE>
<CAPTION>
                                                                                    Dec. 31, 2006            Dec. 31, 2005
                                                                                    -------------            -------------
                                                                                     Accumulated
                                                                       Cost         Amortization           Net                Net
                                                                       ----         ------------           ---                ---
<S>                                                                <C>               <C>               <C>               <C>
Completed television programs and recordings                       $15,996,453       $15,066,135       $   930,318       $ 1,723,043
Completed Motion picture - Bailey's Billion$                         6,972,580         4,081,502         2,891,078         3,241,219
Projects in progress                                                 5,669,105                --         5,669,105         1,883,846
                                                                   -----------       -----------       -----------       -----------
                                                                   $28,638,138       $19,147,637       $ 9,490,501       $ 6,848,108
                                                                   ===========       ===========       ===========       ===========
</TABLE>

Annually,  management  reviews the estimate of total remaining  ultimate revenue
and the fair value of the capitalized film costs. As a result of the review, the
Company reduced the carrying value of its completed film and television programs
and recordings by $575,340 (2005 - $1,373,356) and reduced the carrying value of
its completed motion picture costs by $300,254 in 2006 (2005 - $1,979,997).  The
company  expects to amortize  approximately  $415,000 for  completed  television
programs and  recordings  costs and $355,000 for completed  motion picture costs
during the next fiscal year.

As at year end 2005 94% of completed  television programs and recordings and 59%
of completed motion picture costs have been amortized.

The Company expects 100% of completed television programs and recordings and 70%
of completed motion picture costs will be amortized by December 31, 2008.

As at December  2010,  over 80% of the  completed  motion  picture costs will be
amortized.

The remaining period of amortization for the completed  projects ranges from two
to seven years at December 31, 2006.

Capital stock

At December 31, 2005 the Company had 35,353,508 common shares and 494,550 Series
1 Class A preferred shares outstanding.

The Company  issued  3,960,191  common  shares in 2006 as part of the  following
transactions:

      (i)   In May 2006, the Company issued 3,383,331 units,  each consisting of
            one common share and one-half purchase warrant at $0.15 per unit.

      (ii)  Each  warrant  is  exercisable,  at any  time on or prior to May 31,
            2007, to acquire one common share at an exercise  price of $0.30 per
            share.


                                                                              28
<PAGE>

      (iii) In June 2006,  the Company issued 339,660 common shares for services
            rendered, valued at $43,074.

      (iv)  In September 2006, the Company issued 25,000 common shares for stock
            options exercised, for cash consideration of $2,500.

      (v)   In October  2006,  the  Company  issued  112,200  common  shares for
            services rendered, valued at $16,830.

      (vi)  In November  2006,  the Company  issued  100,000  common  shares for
            services rendered, valued at $15,000.

At December 31, 2006 the Company had 39,313,699 common shares and 494,550 Series
1 Class A preferred shares outstanding.

Related Party Transactions

During the year ended  December 31, 2006 $299,280 (2005 - $337,417) of fees were
paid or accrued to corporations  controlled by two of the directors for writing,
directing  and  producing  services.  Included in  accounts  payable and accrued
liabilities at December 31, 2006 was $73,750 (2005 - $32,477).

Limited Partnerships

During  2004  the  Company  entered  into  a  services   agreement  with  Devine
Entertainment  Limited  Partnership  ("Partnership").  Under  the  terms  of the
agreement,  the  Partnership  assumed  certain  expenses of the Company  through
December 31, 2004, relating to the following:

      o     Labour, employment and all other "direct" services;

      o     Marketing  services,  including  production  and  placement  of  all
            required advertising;

      o     The incurring of other operating  expenses,  excluding  payments for
            the purchase of real property,

      o     Administrative services

      o     Certain  development   services  required  in  connection  with  new
            projects of the business

In return,  the Partnership was paid a royalty based on the gross revenue of the
Company.  The Company paid such  royalty by issuing  380,450  Common  Shares and
494,550 Series 1 Preferred Shares of the Company.

During the first quarter of 2005, the Company entered into a services  agreement
with the QCF 2005 Limited Partnership ("QCF"). Under the terms of the agreement,
QCF


29
<PAGE>

assumed certain  expenses,  of the Company up through December 31, 2005 relating
to the following:

      o     Labour, employment and all other "direct" services;

      o     Marketing  services,  including  production  and  placement  of  all
            required advertising;

      o     The incurring of other operating  expenses,  excluding  payments for
            the purchase of real property,

      o     Administrative services

      o     Certain  development   services  required  in  connection  with  new
            projects of the business

In return,  QCF is entitled to receive royalty payments equal to a percentage of
gross revenue of the Company for the calendar years 2005 through 2015.

In December  2005, The Devine  Entertainment  Film Library  Limited  Partnership
("DEFL  LP"),  a limited  partnership  formed and  registered  under the Limited
Partnerships  Act  (Ontario)  on March 8, 2004,  acquired  Devine  Entertainment
Corporation's  interest  in a defined  part of the  Company's  proprietary  film
library  for $7.0  million,  as valued by an outside  valuator.  The Company has
provided  financing  for the  transaction,  and  has  entered  into a  financing
agreement  and will enter into a management  agreement  with DEFL LP in order to
manage the  exploitation  and expand the  distribution of the properties.  Under
these agreements,  the Company will receive management fees and interest revenue
and the  Company  will  maintain a call right for between a minimum of 70% and a
maximum 100% interest in the library assets. On December 29, 2006  subscriptions
for 80 units of the DEFL LP were  finalized  providing an investment of $470,817
of which  $175,000 is  receivable  in 2008 - 2009.  Subsequent to payment of all
closing  expenses the DEFL LP overall net proceeds for general  working  capital
were $249,098.  The accounts of this variable interest entity have been included
in the consolidated financial statements of the Company.

Liquidity and Capital Resources

The  Company's  cash on hand as at December 31, 2006 was $268,001 as compared to
$239,990 as at December 31, 2005, an increase in cash position of  approximately
12% or $28,011.

A Demand loan bearing  interest at prime plus 1%,  repayable in full by June 30,
2008 was  arranged  for the  financing of 6 episodes of a new one hour TV series
entitled  Across the River to Motor City,  which was  produced by the  Company's
wholly owned  subsidiary,  Across the River Productions Ltd. The loan is secured
by all receipts  including all  commercialization  or exploitation of the series
worldwide including pre-sale and funding agreements and various tax credits. The
loan is not secured by the parent company's assets and is non-recourse to parent
company. As at December 31, 2006 the production loan totalled $2,121,527 (2005 -
$Nil). Interest on the above demand loan totalled $30,312 in 2006 (2005 - $NIL)


                                                                              30
<PAGE>

The Company expects to maintain  renewed growth from operations and expects that
proceeds  from sales of Across the River to Motor City and its film library will
generate additional revenues and positive cash flow through 2007.

The Company's working capital deficiency,  although reduced, remains significant
but is  mitigated by the fact that the Company is working  towards  successfully
converting  its  $1,519,290 of outstanding  convertible  debentures  into common
shares in 2007.

Nonetheless,  the Company remains unable to service its convertible debt and the
Company will require additional  working capital from its production  activities
or corporate  financing in 2007. The Company intends to actively seek additional
funding in calendar 2007.

OUTLOOK

As 2007  begins,  the  Company is  optimistic  about the  successful  commercial
exploitation  of its new one hour  primetime  mystery  Across the River to Motor
City and its library of motion pictures and television  programs and recordings.
With  approximately $4 million of contracted  pre-sale  broadcast  licenses with
CHUM Television in place for Across the River to Motor City and results from the
new international  distribution agreement for the Company's library with Carrere
Group  expected  to begin in 2007,  this  next  year  promises  to be among  the
Company's strongest ever.

Although there can be no assurance the Company  expects that 2007 will bring new
opportunities for additional corporate and production financings and the Company
is actively pursuing  financing to produce new films,  develop its marketing and
distribution  activities in North America and abroad and for its general working
capital requirements.

While many business risks remain and the success of these  strategies  cannot be
guaranteed, the Company expects that the successful completion of all or some of
these  strategic  objectives  will  assist  with the  continued  renewal  of the
Company's growth through 2006 and into the future.

CONTROLS AND PROCEDURES

The Company's Chief Executive Officer and Chief Financial Officer (collectively,
the  "Certifying  Officers") are responsible  for  establishing  and maintaining
disclosure controls and procedures for the Company. Such officers have concluded
(based upon their  evaluation  of these  controls  and  procedures  as of a date
within 90 days of filing of this report) that the Company's  disclosure controls
and procedures are effective to ensure that information required to be disclosed
by the Company in this report is accumulated  and  communicated to the Company's
management,  including its Certifying  Officers as appropriate,  to allow timely
decisions  regarding  required  disclosure.  The  Certifying


31
<PAGE>

Officers  also have  indicated  that  there were no  significant  changes in the
Company's  internal  controls or other factors that could  significantly  affect
such  controls  subsequent  to the date of their  evaluation,  and there were no
corrective  actions  with  regard  to  significant   deficiencies  and  material
weaknesses.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These  consolidated  financial  statements have been prepared in accordance with
accounting  principles  generally  accepted  in  Canada  that  conforms,  in all
material  respects,  with U.S.  GAAP,  except as described in the Note 21 to the
financial statements.

Basis of Consolidation

In October  2005 the Company  amalgamated  its  operation  with its wholly owned
subsidiaries.

The December 31, 2006 consolidated  financial statements include the accounts of
Devine  Entertainment  Corporation,  its wholly-owned  subsidiaries and Variable
Interest  Entities  ("VIE").  The  December  31,  2005  consolidated   financial
statements  include  the  accounts  of  Devine  Entertainment  Corporation  with
Variable Interest Entities ("VIE").

Inventory

Inventory  consists of finished  products and is stated at the lower of cost and
net realizable value

Revenue Recognition

Revenue is derived from broadcast licensing agreements,  royalties, distribution
fees, the sale of distribution  rights, sale of copyright interests and the sale
of  home  videos.  All  revenue  is  recognized  upon  meeting  all  recognition
requirements of SOP 00-2. Revenue from broadcast licensing agreements,  together
with  related  costs,  and  revenue  from the sale of  copyright  interests  are
recognized once the licensing periods have commenced, the programs are delivered
and collection is reasonably  assured.  Revenue from royalties and  distribution
fees is recognized when received.  Revenue from the sale of distribution  rights
is recognized when the film or television  programs are substantially  complete,
the investors  have  irrevocably  committed to acquire  distribution  rights and
there is reasonable  assurance of collectibility  of proceeds.  Revenue from the
sale of home videos and DVDs are  recognized  at the time of  shipment.  Amounts
received and not recognized as revenue are recorded as deferred revenue.

Investment in Film, Television Programs and Recordings

Investment in film,  television  programs and recordings  represent  projects in
progress and the unamortized costs of film,  television programs and recordings,
net of anticipated  federal and provincial  film  production tax credits,  which
have been  produced  by the  Company  or for which the  Company  has  acquired a
copyright  interest  or  the  rights  to  future  revenue.  Such  costs  include
development  and  production  expenditures,  capitalized  overhead and financing
costs and other costs,  which are expected to benefit future


                                                                              32
<PAGE>

periods.  Under SOP 00-2 exploitation costs, including advertising and marketing
costs,  are being  expensed as  incurred.  The  Company  also has an interest in
programs,  which have been fully  amortized  in prior years and have no carrying
value in these financial statements.

Projects in  progress  include  the costs of  acquiring  film rights to original
screenplays and costs to adapt such projects.  Such costs are  capitalized  and,
upon  commencement  of production,  are added to investment in film,  television
programs, and recordings.  Advances or contributions received from third parties
to assist in development are deducted from these costs. Projects in progress are
written off at the earlier of the date  determined not to be recoverable or when
projects in progress are abandoned, and three years from the date of the initial
investment.

Amortization  is determined  based on the ratio that current gross film revenues
bear to management's  estimate of total remaining ultimate gross film revenue as
of the  beginning of the current  fiscal year on a program by program basis (the
"individual  film  forecast  method").  Revenue  and film costs are  continually
reviewed by management and revised when warranted by changing  conditions.  When
estimates of total revenues and costs indicate that a feature film or television
program will result in an ultimate  loss,  a reduction in the carrying  value of
the  investment is recognized to the extent that  capitalized  film costs exceed
estimated  fair  value.  Such  adjustments  could have a material  effect on the
results of operations in future periods.  Production financing provided by third
parties that acquire substantive equity participation is recorded as a reduction
of costs of the production.

Capitalized  film costs are stated at the lower of unamortized cost or estimated
fair  value on an  individual  film  basis.  Fair  market  value is based on the
discounted projected net cash flows. The determination of the projected net cash
flows and discount rates are subjective in nature and involve  uncertainties and
matters of significant judgement by management.

Property and Equipment

Property and equipment are recorded at cost less accumulated amortization.

Amortization  is  being  provided  for on the  declining  balance  basis  at the
following annual rates.

      Computer and editing equipment - 30%
      Furniture and fixtures         - 20%

Foreign Currency Translation

Monetary  assets and liabilities  denominated in currencies  other than Canadian
dollars are translated at year-end  exchange rates.  Revenue,  expenses and film
production  costs are  translated  at the rates  prevailing  at the times of the
transactions.  The  gains  or  losses  resulting  from  these  translations  are
reflected in the statements of operations.


33
<PAGE>

Government and Other Assistance

The  Company has access to various  government  programs,  including  refundable
investment tax credits,  that are designed to assist film,  television  programs
and recordings production and distribution in Canada.  Refundable investment tax
credits are  recorded as a reduction of the cost of related  films.  Tax credits
are recognized  when there is reasonable  assurance that the amount claimed will
be received.

Stock-Based Compensation

The Company  accounts for all  stock-based  payments  using the fair value based
method.  The  Company  grants  stock  options  for a fixed  number  of shares to
employees and consultants  with an exercise price equal to the fair value of the
shares at the date of grant. The Company recognizes compensation expense for the
stock-based  compensation  plan  when  stock  or stock  options  are  issued  to
employees.  Any consideration  paid by employees on exercise of stock options or
purchase of stock is credited to share capital.

If stock or stock options are  repurchased  from employees or  consultants,  the
excess of the consideration  paid over the carrying amount of the stock or stock
option cancelled is charged to retained earnings.

Stock options without attached stock  appreciation  rights granted after January
1, 2002 are  accounted  for under the fair  value  method.  Under  this  method,
compensation  expense  is  measured  at fair  value at the grant  date using the
Black-Scholes option pricing model and recognized over the vesting period with a
corresponding increase to contributed surplus. When stock options are exercised,
the proceeds,  together with the amount  recorded in  contributed  surplus,  are
recorded  in share  capital.  Stock  options  granted  prior to  January 1, 2002
continue to be  accounted  for using the  intrinsic  value method which does not
give rise to compensation expense.

Future Income Taxes

The Company uses the asset and liability method to account for income taxes. The
asset and  liability  method  requires  that income  taxes  reflect the expected
future tax consequences of temporary differences between the carrying amounts of
assets  or  liabilities  and their tax  bases.  Future  income  tax  assets  and
liabilities  for each  temporary  difference  based on the tax  rates  which are
expected to be in effect when the  underlying  items of income and  expenses are
expected to be realized.  The effect of future income tax assets and liabilities
of a change in the tax rates is  included  in income in the period that the rate
changes.

Earnings Per Share

Basic  earnings per share is computed by dividing  earnings  available to common
shareholders by the weighted average number of common shares  outstanding during
the year.  The treasury stock method is used to calculate  diluted  earnings per
share. Diluted earnings per share is similar to basic earnings per share, except
that the  denominator  is increased to include the number of  additional  common
shares that would have been outstanding  assuming that options and warrants with
an average  market  price for the year  greater  than their  exercise  price are
exercised and the proceeds used to repurchase common shares.


                                                                              34
<PAGE>

Measurement Uncertainty

The preparation of financial  statements in conformity  with Canadian  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions that affect the reported amounts on assets and liabilities, revenues
and expenses and disclosures of contingent  assets and liabilities.  Significant
areas  requiring the use of  significant  judgment  include the  measurement  of
deferred  revenue related to future sales,  amortization  of Long-Lived  Assets,
valuation of stock compensation, recoverability of tax credits and estimation of
future income tax assets and valuation  allowances.  Actual results could differ
from these estimates.

These estimates are reviewed  periodically and, as adjustments become necessary,
they are reported in earnings in the period in which they become known.

Impairment of Long-Lived Assets

Long-Lived  Assets,  Including  property and  equipment,  Investments  in Films,
Television  programs  and  recording  and  deferred  charges  are  reviewed  for
impairment when significant  events or circumstances  indicate that the carrying
amount of an asset may not be  recoverable.  Impairment  exist when the carrying
value of the assets is greater than the future  undiscounted cash flows expected
to be provided by the asset.  The amount of impairment loss, if any, which is in
excess of net  carrying  value  over fair  value,  is  charged to income for the
period.  Fair  value  is  generally  measured  equal  to  the  estimated  future
discounted net cash from the asset.

Deferred Revenue

Sales of rights and  licences  related to projects in progress  are  recorded as
deferred revenue until revenue recognition parameters have been met.

Deferred Charges

Deferred charges costs are being amortized using the straight-line method over a
five year period.

Recent Accounting Pronouncements

i)    Effective December 1, 2004, the Company was required to adopt the Canadian
      Institute   of  Chartered   accountants'   (CICA)   Accounting   Guideline
      15(AcG-15),  "Consolidation of Variable Interest Entities" ("VIE"). AcG-15
      is  substantially  similar to the  Financial  Accounting  Standards  Board
      interpretation  No.46  ("FIN  46")  "consolidation  of  Variable  Interest
      Entities".  AcG-15 provides  guidance that addresses when a company should
      consolidate  in its  financial  statements  the  assets,  liabilities  and
      operating results of another entity.  Under previous  guidance,  a company
      generally included another entity in its consolidated financial statements
      only if  controlled  the entity  through a  controlling  voting  interest.
      AcG-15 requires a VIE to be consolidated by the company if that company is
      the  primary  beneficiary  of that  entity.  Accordingly,  the Company has
      included the results of  operations  of the Devine  Entertainment  Limited
      Partnership and the Devine  Entertainment Film Library Limited Partnership
      in its consolidated operations.


35
<PAGE>

ii)   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.

iii)  In 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 AcG-13 "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.

iv)   In 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.

v)    In  September   2005,,  the  CICA  released  new  Handbook  Section  1506,
      "Accounting  Changes"  (Section  1506),  effective  for annual and interim
      periods  beginning on or after January 1, 2007. This section  replaces the
      former  section 1506 which  establishes  criteria for changing  accounting
      policies, together with the accounting treatment and disclosure of changes
      in  accounting  policies and  estimates,  and  correction  of errors.  The
      Company has  determined  that Section 1506 will not have any impact to the
      consolidated results of operations or financial position.

vi)   In  September   2006,  the  Emerging  Issues   Committee   issued  EIC-163
      "Determining  the  Variability  to  be  Considered  in  Applying  AcG-15",
      effective for the first interim or annual reporting period beginning on or
      after  January  1,  2007.  EIC-163  defines  that  the  variability  to be
      considered in applying  AcG-15 is to be based on analysis of the design of
      the entity and  prescribes the steps to be undertaken in such an analysis.
      The Company has not yet determined  the impact of adopting  EIC-163 on its
      consolidated results of operations or financial position.


                                                                              36
<PAGE>

RECONCILIATION TO UNITED STATES GAAP

Canada and United States Accounting Policy Differences

The  consolidated  financial  statements  of the Company  have been  prepared in
accordance with Canadian GAAP. The significant  differences between Canadian and
U.S.  GAAP,  and their effect on the  consolidated  financial  statements of the
Company, are described below.

Consolidated statements of operations:

The  following  table  reconciles  net  loss  as  reported  in the  accompanying
consolidated  statements  of loss to net loss that would have been  reported had
the financial statements been prepared in accordance with U.S. GAAP:

FOR THE YEARS ENDED DECEMBER 31,                         2006           2005
                                                     -----------    -----------

Net loss in accordance with Canadian GAAP            $(2,514,151)   $  (233,409)
Interest (Dividends) on Preferred Shares (Note c)        (45,004)       (45,004)
                                                     -----------    -----------

Net Loss in accordance with U.S. GAAP                $(2,559,155)   $  (278,413)
                                                     -----------    -----------

Loss per share                                       $     (0.07)   $     (0.01)
                                                     ===========    ===========

The  cumulative  effect  of these  adjustments  on  shareholders'  equity  is as
follows:

FOR THE YEARS ENDED DECEMBER 31,                         2006           2005
                                                     -----------    -----------
Shareholders' Equity in accordance with Canadian
GAAP                                                 $ 3,458,346    $ 5,172,024

Conversion feature on Convertible Debentures
(Note a)                                                (181,510)      (181,510)


37
<PAGE>

Gain on settlement of New Convertible Debentures
Effect on Contributed Surplus (Note b)                  (284,803)      (284,803)

Gain on settlement of New Convertible Debentures
Effect on Deficit (Note b)                               284,803        284,803

Cumulative dividends (Note c)                            (90,131)       (45,127)

Preferred Shares (Note c)                               (494,550)      (494,550)
                                                     -----------    -----------

Shareholders' Equity in accordance with U.S. GAAP    $ 2,692,155    $ 4,450,837
                                                     ===========    ===========

The effect of these adjustments on the consolidated Balance Sheet is as follows:

FOR THE YEARS ENDED DECEMBER 31,                         2006          2005
                                                      -----------   -----------

Assets in accordance with Canadian GAAP               $12,934,759   $ 7,950,553

Differences for U.S. GAAP                                      --            --
                                                      -----------   -----------

Assets in accordance with U.S. GAAP                   $12,934,759   $ 7,950,553
                                                      ===========   ===========

Liabilities in accordance with Canadian GAAP          $ 9,476,413   $ 2,778,529

Conversion feature on Convertible
Debentures (Note a)                                       181,510       181,510

Cumulative dividends (Note c)                              90,131        45,127

Preferred Shares (Note c)                                 494,550       494,550
                                                      -----------   -----------

Liabilities in accordance with U.S. GAAP              $10,242,604   $ 3,499,716
                                                      ===========   ===========


                                                                              38
<PAGE>

The effect of these adjustments on the consolidated statement of
cash flo flows is as follows:

FOR THE YEARS ENDED DECEMBER 31,                         2006           2005
                                                     -----------    -----------

Cash flows provided by Operating Activities

Cash flows provided by operating activities in
accordance with Canadian
GAAP                                                 $ 1,963,775    $ 1,656,918

Interest (Dividends) on Preferred Shares
Effect on Net Loss (Note c)                              (45,004)       (45,004)

Interest (Dividends) on Preferred Shares (Note c)
Effect on Other Liabilities                               45,004         45,004
                                                     -----------    -----------

Cash flows provided by Operating Activities          $ 1,963,775    $ 1,656,918
                                                     ===========    ===========

The  consolidated  financial  statements  of the Company  have been  prepared in
accordance with Canadian GAAP. The material  differences  between the accounting
policies  used by the Company  under  Canadian  GAAP and U.S. GAAP are disclosed
below.

(a)   Under Canadian GAAP, the conversion feature on the convertible  debentures
      (Note 8), is valued at $181,510  and had been  classified  as  contributed
      surplus.   Under  U.S.  GAAP  the  conversion  feature  is  not  accounted
      separately  and thus  would not flow  through  contributed  surplus.  This
      transaction occurred in 2000.

(b)   Under  Canadian  GAAP,  the  exchange of  convertible  debentures  for new
      convertible  debentures  and  subsequent  gain  on  settlement  of the new
      convertible debentures were valued at $284,803 and have been classified as
      contributed  surplus.  Under  U.S.  GAAP  the  conversion  and  subsequent
      settlement is not accounted for through  contributed  surplus and would be
      recorded  through the statement of  operations  thus reducing the deficit.
      This transaction occurred in 2000.

(c)   Under Canadian GAAP, the Company's  preferred shares have been included in
      shareholders'   equity  as  the  Company   considered  the  likelihood  of
      redemption  by


39
<PAGE>

      the holders to be remote.  Under U.S. GAAP, the preferred  shares would be
      classified as a liability.  In addition,  cumulative dividends are part of
      the liability for the shares.

(d)   Financial  Accounting  Standards Board  Statement of Financial  Accounting
      Standards No. 130 "Reporting Comprehensive Income" (SFAS 130) requires the
      disclosure of comprehensive  income,  which includes reported net earnings
      adjusted for other comprehensive  income.  Other  comprehensive  income is
      defined as the change in equity of a business  enterprise  during a period
      from  transactions  and other  events  and  circumstances  from  non-owner
      sources. During 2005 and 2004, there were no other comprehensive income.

Impact of Newly Issued United States Accounting Standards

i)    Effective  January  1,  2006,  the  Company  adopted  a recent  accounting
      pronouncement of the Financial Accounting  Standards Board ("FASB"),  SFAS
      No. 123R,  "Share-Based  Payments" ("SFAS 123R"), which requires companies
      to  measure  and  recognize  compensation  expenses  for all  share  based
      payments at a fair value. The Company does not expect the adoption of SFAS
      123R to have a material impact on its consolidated financial statements.

ii)   In May 2005, the FASB issued SFAS No. 154,  "Accounting  Changes and Error
      Corrections"   ("SFAS  No.  154),  which  is  providing  guidance  on  the
      accounting   for,  and   reporting  of,   accounting   changes  and  error
      corrections.  This  Statement  replaces  APB  Opinion  No. 20,  Accounting
      Changes, and FASB Statement No. 3, Reporting

iii)  In February  2006,  the FASB issued SFAS No.155,  "Accounting  for Certain
      Hybrid Financial  Instruments." Which amends SFAS No. 133 and SFAS No.140.
      SFAS No. 155 permits hybrid financial instruments that contain an embedded
      derivative  that would  otherwise  require  bifurcation  to irrevocably be
      accounted for at fair value,  with changes in fair value recognized in the
      statement  of  income.  The  fair  value  election  may be  applied  on an
      instrument-by-instrument basis. SFAS No. 155 also eliminates a restriction
      on the passive  derivative  instruments that a qualifying  special purpose
      entity may hold. SFAS No. 155 is effective for those financial instruments
      acquired or issued after  December 1, 2006.  At adoption,  any  difference
      between the total  carrying  amount of the  individual  components  of the
      existing  bifurcated  financial  instrument  and  the  fair  value  of the
      combined   hybrid   financial   instrument   will  be   recognized   as  a
      cumulative-effect  adjustment to beginning retained earnings.  The Company
      does not  expect  the new  standard  to have any  material  impact  on our
      financial position and results of operations.

iv)   In March 2006, the FASB issued SFAS No. 156,  "Accounting for Servicing of
      Financial  Assets,  an amendment of FASB  Statement No. 140." SFAS No. 156
      requires  all  separately   recognized   servicing  assets  and  servicing
      liabilities to be


                                                                              40
<PAGE>

      initially measured at fair value, if practicable.  The standard permits an
      entity to subsequently measure each class of servicing assets or servicing
      liabilities  at  fair  value  and  report  changes  in fair  value  in the
      statement of income in the period in which the changes occur.  The Company
      does not  expect  the new  standard  to have any  material  impact  on our
      financial position and results of operations.

v)    In July 2006, the FASB issued FASB  Interpretation No. 48, "Accounting for
      Uncertainty  in Income Taxes an  interpretation  of FASB Statement No. 109
      (FIN 48), which clarifies the accounting for uncertainty in tax positions.
      This   Interpretation   requires   that  we  recognize  in  our  financial
      statements,  the impact of a tax position, if that position is more likely
      than not of being sustained on audit, based on the technical merits of the
      position.  The  provisions  of FIN 48 are effective as of the beginning of
      our 2007  fiscal  year,  with  the  cumulative  effect  of the  change  in
      accounting  principle  recorded  as  an  adjustment  to  opening  retained
      earnings. The Company is currently evaluating the impact of adopting FIN48
      on our financial statements.

vi)   In September  2006, FASB issued SFAS 157 'Fair Value  Measurements'.  This
      Statement  defines fair value,  establishes a framework for measuring fair
      value in generally  accepted  accounting  principles  (GAAP),  and expands
      disclosures  about fair value  measurements.  This Statement applies under
      other  accounting   pronouncements  that  require  or  permit  fair  value
      measurements,  the Board having  previously  concluded in those accounting
      pronouncements  that fair  value is the  relevant  measurement  attribute.
      Accordingly,   this   Statement  does  not  require  any  new  fair  value
      measurements.   However,  for  some  entities,  the  application  of  this
      Statement  will change current  practice.  This Statement is effective for
      financial  statements issued for fiscal years beginning after November 15,
      2007,  and interim  periods  within  those  fiscal  years.  The Company is
      currently  evaluating  the  effect  of  this  pronouncement  on  financial
      statements.

vii)  In  September  2006,  the SEC  issued  Staff  Accounting  Bulletin  No.108
      "Considering  the  Effects of Prior Year  Misstatements  when  Quantifying
      Misstatements  in Current Year Financial Statements" ("SAB  108"). SAB 108
      provides  guidance on how to evaluate  prior  period  financial  statement
      misstatements  for purposes of assess in their  materiality in the current
      period. If the prior period effect is material to the current period, then
      the prior  period is  required  to be  corrected.  Correcting  prior  year
      financial  statements  would  not  require  an  amendment  to  prior  year
      financial statements,  but such correction would be made the next time the
      company files the prior year financial  statements.  Upon adoption SAB 108
      allows a one-time  transitional  cumulative  effect adjustment to retained
      earnings for correction of prior period  misstatement  required under this
      statement.  SAB108 is effective for fiscal years ending after November 15,
      2006.  The  adoption  of  SAB108  did not have a  material  effect  on the
      Company's financial statements.


41
<PAGE>

viii) In February  2007, the FASB issued FASB Statement NO. 159, "The Fair Value
      Option  for  Financial  Assets  and  Financial  Liabilities  Including  an
      Amendment of FASB  Statement No. 115" ("SFAS 159").  The fair value option
      established by SFAS 159 permits all entities to choose to measure eligible
      items at fair value at specified  election  dates. A business  entity will
      report  unrealized gains or loses on items for which the fair value option
      has been elected in earnings  (or another  performance  indication  if the
      business  entity does not report  earnings) at each  subsequent  reporting
      date. The fair value option:  (a) may be applied instrument by instrument,
      with a few exceptions,  such as investments otherwise accounted for by the
      equity method; (b) is irrevocable (unless a new election date occurs); and
      (c)  is  applied  only  to  entire  instruments  and  not to  portions  of
      instruments.  FASB No. 159 is effective as of the  beginning of the fiscal
      years  beginning  after November 15, 2007. The adoption of SFAS 159 is not
      expected to be material to the Company's financial statements.

ix)   In May 2005,  the FASB issued SFAS No.154.  "Accounting  Changes and Error
      Corrections  ("SFAS  154").  SFAS  154  replaces  APB  No.20,  "Accounting
      Changes"  and  SFAS No.  3, "  Reporting  Accounting  Changes  in  Interim
      Financial  Statements"  and establishes  retrospective  application as the
      required method for reporting a change in accounting  principle.  SFAS 154
      provides guidance for determining whether  retrospective  application of a
      change in accounting principle is impracticable and for reporting a change
      when  retrospective  application  is  impracticable.  The  reporting  of a
      correction of an error by restating previously issued financial statements
      is also  addressed.  SFAS 154 is  effective  for  accounting  changes  and
      corrections  of errors made in fiscal years  beginning  after December 15,
      2005. The Company does not believe that the adoption of SFAS 154 in fiscal
      2007 will have a material  impact on our  consolidated  balance sheets and
      statements of operations, shareholders' equity and cash flows.

x)    In December 2004,  FASB issued SFAS No. 123R which revises SFAS No.123 and
      is effective for small  business  issuers as of the beginning of the first
      interim or annual  reporting  period  after  December  31, 2005 with early
      adoption permitted.  SFAS No. 123R requires public entities to measure the
      cost of  employment  services  received in exchange for an award of equity
      instruments on the grant - date fair value of the award.  The cost will be
      recognized over the period during which an employee is required to provide
      service in exchange for the award - the requisite  service period (usually
      the  vesting  period).  No  compensation  cost is  recognized  for  equity
      instruments  for which  employees  do not  render the  requisite  service.
      Employee   share   purchase  plans  will  not  result  in  recognition  of
      compensation cost if certain conditions are met; those conditions are much
      the same as the related conditions in Statement 123.


                                                                              42
<PAGE>

RISK AND UNCERTAINTIES

In  evaluating  the  Company  and its  business,  shareholders  should  consider
carefully  the  following  risk factors and  uncertainties  in addition to other
information contained herein:

Risks Related to the Nature of the Entertainment Industry

The  entertainment  industry  historically has involved a substantial  degree of
risk. Acceptance of entertainment  programming represents a response not only to
the  programming's  artistic  components,  but also to the  review  of  critics,
promotion by the  distributor,  the quality and  acceptance  of other  competing
programs   released  into  the  marketplace  at  or  near  the  same  time,  the
availability of alternative  forms of entertainment and leisure time activities,
general  economic  conditions,  public  tastes  generally  and other  intangible
factors,  all of which  could  change  rapidly  and  cannot  be  predicted  with
certainty.  There is a risk that some or all of the Company's  programming  will
not be successful,  possibly  resulting in a portion of costs not being recouped
or anticipated profits not being realized. While Devine continually endeavors to
develop new programming, there can be no assurance that revenue from existing or
future  programming will replace a possible loss of revenue  associated with the
cancellation of any particular production.

Fluctuating Results of Operations

Results of operations for any period are  significantly  dependent on the number
and timing of home video programs  delivered or made available to various media.
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.  Results from
operations  fluctuate materially from quarter to quarter and the results for any
one quarter are not necessarily indicative of results for future quarters.

Additional Financing

There is no assurance that additional  financing will be available when required
or if  available  that it could be obtained  on  favorable  terms.  This lack of
additional  financing  will affect the  Company's  ability to continue  with its
contemplated plan of operations.

Competition

Substantially all of the Company's  revenues are derived from the production and
distribution of television and film  programming.  The business of producing and
distributing  film and home video  programs is highly  competitive.  The Company
faces intense  competition from other producers and  distributors,  many of whom
are  substantially  larger and have greater creative,  financial,  technical and
marketing  resources than the Company.  The Company competes with other film and
home  video  production  companies  for ideas and  storylines  created  by third
parties as well as for actors,  directors  and other  personnel  required  for a
production.


43
<PAGE>

Government Incentive Programs

The Company attempts to defray a significant  portion of the production costs of
most of its  programming  by  obtaining,  prior  to  commencement  of  principal
photography, advances and guarantees from distributors and licensees in exchange
for distribution  and broadcasting  rights to the production and, in some cases,
investments from third parties. In addition to fees from broadcasters, financial
contributions  by  co-producers  and presales of distribution  rights,  Canadian
industry  incentive  programs  represent  a financing  source for the  Company's
productions.  There  can be no  assurance  that  individual  incentive  programs
available to the Company will not be reduced, amended or eliminated.

International Operations

The  Company's  international  operations  depend,  in part,  on local  economic
conditions,  currency  fluctuations,  changes in local regulatory  requirements,
compliance with a variety of foreign laws and regulations and cultural barriers.
In addition,  political instability in a foreign nation may adversely affect the
ability of the Company to distribute its product in that country. As a result of
the foregoing international risks, the Company's international operations may be
adversely affected.

Importance of Management Estimates in Reported Revenues and Earnings

The Company makes numerous estimates as to its revenues and matching  production
and direct distribution  expenses on a project-by-project  basis. As a result of
this  accounting  policy,  earnings can widely  fluctuate if management  has not
accurately forecast the revenue potential of a production.

Exchange Rates

The  return  to  the  Company  from  foreign  commercial  exploitations  of  its
properties is customarily  paid in U.S.  currency and as such may be affected by
fluctuations in the exchange rate of the U.S.  dollar.  Currency  exchange rates
are  determined by market factors beyond the control of the Company and may vary
substantially during the course of a production period. In addition, the ability
of the Company to repatriate to Canada funds arising in connection  with foreign
exploitation  of its properties  may also be adversely  affected by currency and
exchange control  regulations  imposed by the country in which the production is
exploited.  At  present,  the Company is not aware of any  existing  currency or
exchange  control  regulations  in any  country in which the  Company  currently
contemplates  exploiting its  properties,  which would have an adverse effect on
the Company's ability to repatriate such funds.

Canadian Content and Ownership

Canadian conventional,  specialty,  pay and pay-per-view television services are
required to devote a certain amount of their  programming  schedules,  including
prime time, to Canadian  productions.  In addition to  scheduling  requirements,
such  Canadian  television  services  are  typically  required  to invest in, or
acquire,  Canadian  programs based on the nature of the  particular  service and
financial  performance.  Under  regulations  and policies of the CRTC, a program
will qualify as a Canadian production if, among other things, (i)


                                                                              44
<PAGE>

it is produced by  Canadians  with the  involvement  of  Canadians  in principal
functions,  and (ii) a  substantial  portion of the budget is spent on  Canadian
elements.  The  Company  believes  it will  continue  to  qualify  as a Canadian
producer for this purpose so long as, among other  things,  more than 50% of the
combined  voting  power  of its  outstanding  shares  is  beneficially  owned by
Canadian nationals. The Company cannot be certain of the total percentage of the
Company's  stock  currently  held in Canada  because  the  Company has no way of
determining the beneficial ownership of its outstanding Common Shares.

Proprietary Rights

To the extent  practicable,  the  Company  attempts  to retain and  protect  all
proprietary  and  intellectual   property  rights  to  its  productions  through
international  copyright laws and licensing and distribution  arrangements  with
reputable  international  companies  for  specified  territories  and  media for
limited  durations.  Despite these  precautions,  existing copyright laws afford
only limited  practical  protection in certain  jurisdictions  and, in fact, the
Company  operates  in  other  jurisdictions  in  which  there  is  no  copyright
protection.  As a result,  it may be possible for unauthorized  third parties to
copy  and   distribute  the  Company's   productions  or  certain   portions  or
applications  of  the  Company's  productions.  In  addition,  there  can  be no
assurance  that other  companies  will not  independently  develop  and  produce
programs  that are  similar  to or  imitate  those of the  Company  but  legally
circumvent the Company's intellectual property rights.

OTHER INFORMATION

Additional information relating to Devine Entertainment  Corporation is on SEDAR
at www.sedar.com

Disclosure of outstanding share data

As of March 26, 2007 the Company has the following  voting or equity  securities
or  securities  convertible  or  exercisable  into voting or equity  securities,
issued and outstanding:

Common shares issued & outstanding: 39,313,699
Series 1 preferred shares issued and outstanding: 494,550
Options: 3,465,000 outstanding options to purchase 3,465,000 common shares
Warrants: 6,069,166 outstanding to purchase 6,069,166 common shares
Debentures: 1,519,290 convertible into 3,301,600 common shares


45
<PAGE>

ITEM 7.

                        DEVINE ENTERTAINMENT CORPORATION

                        CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2006

                         (expressed in Canadian dollars)


                                                                              46
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

                        CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2006

                                    CONTENTS

                                                                            PAGE

Report of Independent Registered Public Accounting Firm                        1

Consolidated Balance Sheets                                                    2

Consolidated Statements of Shareholders' Equity                                3

Consolidated Statements of Operations                                          4

Consolidated Statements of Cash Flows                                          5

Notes to Consolidated Financial Statements                                6 - 32


47
<PAGE>

[LOGO Mintz & Partners LLP]

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of
Devine Entertainment Corporation

We  have  audited  the  consolidated  balance  sheets  of  Devine  Entertainment
Corporation  as  at  December  31,  2006  and  the  consolidated  statements  of
shareholders'  equity,  operations  and cash  flows for year then  ended.  These
consolidated  financial  statements  are  the  responsibility  of the  company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audit.

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

In our opinion,  these consolidated  financial statements present fairly, in all
material  respects,  the  consolidated  financial  position of the company as at
December 31, 2006 and the consolidated results of its operations, changes in its
shareholders'  equity and its cash  flows for the year then ended in  conformity
with accounting principles generally accepted in Canada

The consolidated financial statements of Devine Entertainment  Corporation as of
December 31, 2005,  were audited by other  auditors  whose report dated February
24,  2006,  expressed  an  unqualified  opinion  with a comment on U.S. - Canada
reporting difference on those statements.

           COMMENTS BY AUDITORS ON U.S. - CANADA REPORTING DIFFERENCE

In Canada,  reporting  standards  for  auditors do not permit the addition of an
explanatory  paragraph when the financial  statements  account for, disclose and
present in accordance with generally accepted accounting  principles  conditions
and events that cast substantial doubt on the company's ability to continue as a
going concern.  Although our audit was conducted in accordance  with both Public
Company  Accounting  Oversight  Board  (United  States) and  Canadian  generally
accepted auditing standards, our report to the shareholders dated March 26, 2007
is expressed in accordance with Canadian reporting standards which do not permit
a  reference  to  such   uncertainties   in  the  auditor's   report  when  such
uncertainties are adequately disclosed in the financial statements.

                                                        /s/ Mintz & Partners LLP

Toronto, Ontario                                           Chartered Accountants
March 26, 2007
                                                                      [LOGO MRI]


                                                                              48
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

                           CONSOLIDATED BALANCE SHEETS

                                DECEMBER 31, 2006
                         (expressed in Canadian dollars)

                                     ASSETS

                                                      2006             2005
                                                  ------------     ------------
Current
Cash                                              $    268,001     $    239,990
Accounts receivable                                     82,699          229,581
Subscription receivable                                132,296               --
Inventory                                               88,236           88,140
Film tax credits receivable (Note 4)                 2,051,568               --
Prepaid and sundry assets                              131,406           26,312
                                                  ------------     ------------
                                                     2,754,206          584,023

Advances receivable (Note 5 & 18)                      494,550          494,550
Investment in film, television programs
  and recordings (Note 6)                            9,490,501        6,848,108
Long term receivable                                   175,097
Property and equipment (Note 7)                         20,405           23,872
                                                  ------------     ------------
                                                  $(12,934,759)    $ (7,950,553)
                                                  ============     ============

                                  LIABILITIES

Current
Accounts payable and accrued liabilities          $  1,492,953     $  1,259,239
Film production loan (Note 8)                        2,121,527               --
Current portion of convertible
  debentures (Note 9)                                1,519,290        1,519,290
Deferred revenue (Note 3 (m))                        4,342,643               --
                                                  ------------     ------------
                                                    (9,476,413)      (2,778,529)
                                                  ------------     ------------

                              SHAREHOLDERS' EQUITY

Capital stock (Note 14)                             12,330,949       11,745,545
Preferred shares                                       494,550          494,550
Contributed surplus (Note 16)                        1,267,449        1,007,376
Deficit                                            (10,634,602)      (8,075,447)
                                                  ------------     ------------
                                                    (3,458,346)      (5,172,024)
                                                  ------------     ------------
                                                  $ 12,934,759     $  7,950,553
                                                  ============     ============

See accompanying notes to consolidated financial statements.

APPROVED ON BEHALF OF THE BOARD:

______________________________           ______________________________
          [signed]              Director            [signed]            Director
        David Devine                              Richard Mozer


49
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                        FOR THE YEARS ENDED DECEMBER 31,
                         (expressed in Canadian dollars)

<TABLE>
<CAPTION>
                                                                       Stock                               Contributed
                                Common Shares          Warrants       Options         Preferred Shares       Surplus       Deficit
                                -------------          --------       -------         ----------------       -------       -------
                                #            $             #             #             #            $           $             $
                                                                                                            (Note 16)
<S>                        <C>          <C>            <C>           <C>            <C>          <C>        <C>          <C>
BALANCE,
December 31, 2004          32,251,008   11,208,887     5,459,950     3,440,000      494,550      494,550    1,051,886    (7,797,034)

-on conversion of                  --
 Warrants                   2,547,500      433,450    (2,547,500)           --           --           --      (50,950)           --
-on issuance of step
 up warrants                       --      (10,190)    2,547,500            --           --           --       10,190            --
-on exercise of stock
 options                      125,000       16,250            --      (125,000)          --           --       (3,750)           --
-on settlement for
 Services rendered and             --
 accounts payable             430,000       97,148            --            --           --           --           --
-expired options/warrants          --           --      (582,500)     (135,000)          --           --           --            --
-dividend distribution             --           --            --            --           --           --           --       (45,004)

NET LOSS                           --           --            --            --           --           --           --      (233,409)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE,                   35,353,508   11,745,545     4,877,450     3,180,000      494,550      494,550    1,007,376    (8,075,447)
December 31, 2005

-issuance of stock
 options                           --           --            --       340,000           --           --        3,600            --
-on settlement for
 services rendered
 and accounts
 payable                      551,860       74,904            --       750,000           --           --        7,875            --
-issuance of private
 placement                  3,383,331      507,500     1,691,666            --           --           --           --            --
-on exercise of stock
 options                       25,000        3,000            --       (25,000)          --           --         (500)           --
-expired warrants                  --           --      (499,950)           --           --           --           --
-pursuant to closing
 80 units of DEFFLP                                                                                           249,098
-dividend distribution                                                                                                      (45,004)

NET LOSS                           --           --            --            --           --           --           --    (2,514,151)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE,
December 31, 2006          39,313,699   12,330,949     6,069,166     4,245,000      494,550      494,550    1,267,449   (10,634,602)
</TABLE>

See accompanying notes to consolidated financial statements.


                                                                              50
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                        FOR THE YEARS ENDED DECEMBER 31,
                         (expressed in Canadian dollars)

                                                     2006              2005
                                                 ------------      ------------

REVENUE                                          $    423,959      $  4,019,745
                                                 ------------      ------------

EXPENSES
  Operating                                           857,504           851,018
  Stock-based compensation                             26,784            18,400
  Interest (Note 10)                                   36,865            50,832
                                                 ------------      ------------
                                                      921,153           920,250
                                                 ------------      ------------

(LOSS) BEFORE AMORTIZATION
  AND WRITEDOWNS                                     (497,194)        3,099,495

  Amortization & write-down of film,
    television programs and
    recordings (Note 6)                             2,010,385         3,325,049
  Amortization of equipment                             6,572             7,855
                                                 ------------      ------------

(LOSS) BEFORE INCOME TAXES                         (2,514,151)         (233,409)

INCOME TAXES (RECOVERED) (Note 12)                         --                --
                                                 ------------      ------------

NET (LOSS) FOR THE YEAR                          $ (2,514,151)     $   (233,409)
                                                 ============      ============



LOSS PER COMMON SHARE (Note 15)                  $      (0.07)     $      (0.01)
                                                 ============      ============

WEIGHTED AVERAGE SHARES                            37,575,373        34,649,419

See accompanying notes to consolidated financial statements.


51
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                        FOR THE YEARS ENDED DECEMBER 31,
                         (expressed in Canadian dollars)

<TABLE>
<CAPTION>
                                                                                                      2006                 2005
                                                                                                   -----------          -----------
<S>                                                                                                <C>                  <C>
OPERATING ACTIVITIES
  Net income (loss) for the year                                                                   $(2,514,151)         $  (233,409)
  Stock-based compensation                                                                              26,784               18,400
  Issuance of shares for services                                                                       59,595                   --
  Amortization - film, television programs and recordings                                              251,643            3,325,049
               - property and equipment                                                                  6,572                7,855
               - financing charges                                                                          --               36,123
  Write-down of investment in film, television programs and recordings                               1,758,742                   --
                                                                                                   -----------          -----------
                                                                                                      (410,815)           3,154,018
                                                                                                   -----------          -----------

  Change in non-cash operating assets and liabilities (Note 19)                                      2,566,481           (1,497,100)
                                                                                                   -----------          -----------

  Cash flows from operating activities                                                               2,155,666            1,656,918
                                                                                                   -----------          -----------

FINANCING ACTIVITIES
  Increase (decrease) in bank loans                                                                  2,121,527             (919,664)
  Long term receivable                                                                                (175,097)                  --
  Subscription receivable                                                                             (132,296)                  --
  Issuance of shares on exercise of options                                                              2,500               12,500
  Issuance of shares on conversion of warrants                                                              --              382,500
  Preferred share dividends paid                                                                       (45,004)             (45,004)
  Shares issued on private placement                                                                   507,500                   --
  Contributed Surplus                                                                                  249,098                   --
                                                                                                   -----------          -----------

  Cash flows from financing activities                                                               2,528,228             (569,668)
                                                                                                   -----------          -----------

INVESTING ACTIVITIES
  Investment in film, television programs and recordings                                            (4,652,778)            (951,987)
  Purchase of property and equipment                                                                    (3,105)                  --
                                                                                                   -----------          -----------

  Cash flows from investing activities                                                              (4,655,883)            (951,987)
                                                                                                   -----------          -----------

CHANGE IN CASH                                                                                          28,011              135,263

CASH, BEGINNING OF YEAR                                                                                239,990              104,727
                                                                                                   -----------          -----------

CASH, END OF YEAR                                                                                  $   268,001          $   239,990
                                                                                                   ===========          ===========

SUPPLEMENTAL CASH FLOW INFORMATION

Interest paid                                                                                      $    71,519          $    21,171
                                                                                                   ===========          ===========

Income taxes paid                                                                                  $        --          $        --
                                                                                                   ===========          ===========
</TABLE>

See accompanying notes to consolidated financial statements.


                                                                              52
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2006 AND 2005
                         (expressed in Canadian dollars)

1.    NATURE OF BUSINESS AND GOING CONCERN

      Devine   Entertainment   Corporation  ("the  Company")  is  an  integrated
      developer  and producer of  children's  and family  programs for worldwide
      television and film broadcast and home video markets.

      Television and film production and distribution is highly  speculative and
      inherently  risky.  There can be no assurance  of the economic  success of
      such television and film  programming  since the revenues derived from the
      production  and  distribution  (which  do not  necessarily  bear a  direct
      correlation  to the  production or  distribution  costs  incurred)  depend
      primarily upon their acceptance by the public.

      The success of the Company's  television and film  programming also may be
      impacted by, among other factors,  prevailing advertising rates, which are
      subject to fluctuation.  Therefore,  there is a substantial risk that some
      or all of the  Company's  television  projects  will  not be  commercially
      successful,  resulting in costs not being recouped or anticipated  profits
      not being realized.

      These  financial  statements have been prepared on the basis of accounting
      principles  applicable to a going concern,  which presumes the realization
      of assets and settlement of liabilities in the normal course of operations
      in the foreseeable future.

      The Company has a significant working capital deficiency and its continued
      existence is dependent upon its ability to restore and maintain profitable
      operations and to successfully convert convertible  debentures,  which are
      currently in default.  Management  is in constant  communication  with the
      debenture  holders and expects that the Company will be able to settle the
      debentures in the normal course of operations.

      If the going concern  assumption  were not appropriate for these financial
      statements,  then adjustments would be necessary in the carrying values of
      assets and liabilities and the reported net income.

2.    COMPARATIVE FIGURES

      Certain of the comparative  figures have been reclassified to conform with
      the current year's presentation.

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      These consolidated  financial  statements have been prepared in accordance
      with accounting  principles generally accepted in Canada that conforms, in
      all material respects,  with U.S. GAAP, except as described in note 21 the
      financial statements.

      (a)   Basis of Consolidation

            The December 31, 2006 consolidated  financial statements include the
            accounts  of  Devine  Entertainment  Corporation,  its  wholly-owned
            subsidiaries and Variable Interest  Entities  ("VIE").  The December
            31, 2005 consolidated  financial  statements include the accounts of
            Devine  Entertainment  Corporation with Variable  Interest  Entities
            ("VIE").

      (b)   Inventory

            Inventory  consists of finished  goods and is stated at the lower of
            cost and net realizable value.


53
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2006 AND 2005
                         (expressed in Canadian dollars)

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

      (c)   Revenue Recognition

            Revenue is derived from broadcast licensing  agreements,  royalties,
            distribution  fees,  the  sale  of  distribution   rights,  sale  of
            copyright  interests  and the sale of home  videos.  All  revenue is
            recognized upon meeting all recognition requirements of Statement of
            Position of the American  Institute of Certified Public  Accountants
            ("SOP 00-2"). Revenue from broadcast licensing agreements,  together
            with related costs, and revenue from the sale of copyright interests
            are  recognized  once the  licensing  periods  have  commenced,  the
            programs are delivered and collection is reasonably assured. Revenue
            from royalties and  distribution  fees is recognized  when received.
            Revenue from the sale of distribution  rights is recognized when the
            film  or  television  programs  are  substantially   complete,   the
            investors have irrevocably  committed to acquire distribution rights
            and there is  reasonable  assurance of  collectibility  of proceeds.
            Revenue from the sale of home videos and DVDs are  recognized at the
            time of shipment. Amounts received and not recognized as revenue are
            recorded as deferred revenue.

      (d)   Investment in Film, Television Programs and Recordings

            Investment in film,  television  programs and  recordings  represent
            projects in progress and the unamortized  costs of film,  television
            programs and recordings,  net of anticipated  federal and provincial
            film production tax credits, which have been produced by the Company
            or for which the  Company has  acquired a copyright  interest or the
            rights  to  future  revenue.  Such  costs  include  development  and
            production  expenditures,  capitalized  overhead and financing costs
            and other  costs,  which are  expected  to benefit  future  periods.
            Exploitation costs,  including  advertising and marketing costs, are
            being  expensed as  incurred.  The  Company  also has an interest in
            programs, which have been fully amortized in prior years and have no
            carrying value in these financial statements.

            Projects in progress  include the costs of acquiring  film rights to
            original  screenplays  and costs to adapt such projects.  Such costs
            are capitalized and, upon  commencement of production,  are added to
            investment in film, television programs, and recordings. Advances or
            contributions  received from third parties to assist in  development
            are deducted from these costs.  Projects in progress are written off
            at the earlier of the date  determined not to be recoverable or when
            projects in progress are abandoned, and three years from the date of
            the initial investment.

            Amortization  is  determined  based on the ratio that current  gross
            film  revenues  bear to  management's  estimate  of total  remaining
            ultimate  gross film  revenue  as of the  beginning  of the  current
            fiscal  year on a program by program  basis  (the  "individual  film
            forecast method").  Revenue and film costs are continually  reviewed
            by  management  and revised when  warranted by changing  conditions.
            When  estimates of total  revenues and costs indicate that a feature
            film or  television  program  will  result in an  ultimate  loss,  a
            reduction in the carrying  value of the  investment is recognized to
            the extent that  capitalized film costs exceed estimated fair value.
            Such  adjustments  could  have a material  effect on the  results of
            operations in future periods.

            Production   financing   provided  by  third  parties  that  acquire
            substantive equity participation is recorded as a reduction of costs
            of the production.

            Capitalized  film costs are stated at the lower of unamortized  cost
            or estimated  fair value on an  individual  film basis.  Fair market
            value is based  on the  discounted  projected  net cash  flows.  The
            determination of the projected net cash flows and discount rates are
            subjective  in nature  and  involve  uncertainties  and  matters  of
            significant judgement by management.


                                                                              54
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2006 AND 2005
                         (expressed in Canadian dollars)

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

      (e)   Property and Equipment

            Property  and  equipment  are  recorded  at  cost  less  accumulated
            amortization.  Amortization  is being  provided for on the declining
            balance basis at the following annual rates.

                      Computer and editing equipment       - 30%

                      Furniture and fixtures               - 20%

      (f)   Foreign Currency Translation

            Monetary assets and liabilities denominated in currencies other than
            Canadian dollars are translated at year-end exchange rates. Revenue,
            expenses  and film  production  costs  are  translated  at the rates
            prevailing  at the  times of the  transactions.  The gains or losses
            resulting from these translations are reflected in the statements of
            operations.

      (g)   Government and Other Assistance

            The Company  has access to various  government  programs,  including
            refundable  investment tax credits that are designed to assist film,
            television  programs and recordings  production and  distribution in
            Canada.  Refundable  investment  tax  credits  a  re  recorded  as a
            reduction of the cost of related  films.  Tax credits are recognized
            when there is reasonable  assurance  that the amount claimed will be
            received.

      (h)   Stock-Based Compensation

            The Company  accounts for all  stock-based  payments  using the fair
            value based  method.  The Company  grants stock  options for a fixed
            number of shares to employees and consultants with an exercise price
            equal to the fair  value of the  shares  at the date of  grant.  The
            Company   recognizes   compensation   expense  for  the  stock-based
            compensation  plan  when  stock  or  stock  options  are  issued  to
            employees.  Any consideration paid by employees on exercise of stock
            options or purchase of stock is credited to share capital.

            If  stock  or  stock  options  are  repurchased  from  employees  or
            consultants,  the excess of the consideration paid over the carrying
            amount of the stock or stock option cancelled is charged to retained
            earnings.

            Stock options  without  attached stock  appreciation  rights granted
            after January 1, 2002 are accounted for under the fair value method.
            Under this method, compensation expense is measured at fair value at
            the grant  date using the  Black-Scholes  option  pricing  model and
            recognized over the vesting period with a corresponding  increase to
            contributed surplus. When stock options are exercised, the proceeds,
            together  with the  amount  recorded  in  contributed  surplus,  are
            recorded in share capital. Stock options granted prior to January 1,
            2002 continue to be accounted  for using the intrinsic  value method
            which does not give rise to compensation expense.


55
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2006 AND 2005
                         (expressed in Canadian dollars)

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

      (i)   Future Income Taxes

            The  Company  uses the asset and  liability  method to  account  for
            income taxes.  The asset and liability  method  requires that income
            taxes  reflect the  expected  future tax  consequences  of temporary
            differences  between the carrying  amounts of assets or  liabilities
            and their tax bases.  Future income tax assets and  liabilities  for
            each temporary  difference based on the tax rates which are expected
            to be in effect when the underlying items of income and expenses are
            expected to be realized.  The effect of future income tax assets and
            liabilities  of a change in the tax rates is  included  in income in
            the period that the rate changes.

      (j)   Earnings Per Share

            Basic earnings per share are computed by dividing earnings available
            to common  shareholders  by the  weighted  average  number of common
            shares  outstanding  during the year.  The treasury  stock method is
            used to calculate  diluted earnings per share.  Diluted earnings per
            share is  similar  to basic  earnings  per  share,  except  that the
            denominator is increased to include the number of additional  common
            shares that would have been  outstanding  assuming  that options and
            warrants  with an average  market  price for the year  greater  than
            their  exercise  price  are  exercised  and  the  proceeds  used  to
            repurchase  common  shares.  Diluted loss per share is not presented
            when the effect would be anti-dilutive.

      (k)   Measurement Uncertainty

            The preparation of financial  statements in conformity with Canadian
            generally accepted accounting principles requires management to make
            estimates and assumptions that affect the reported amounts on assets
            and liabilities, revenues and expenses and disclosures of contingent
            assets  and  liabilities.  Significant  areas  requiring  the use of
            significant  judgment  include the  measurement of ultimate  revenue
            related  to  future  sales,   amortization  of  Long-Lived   Assets,
            valuation of stock  compensation,  recoverability of tax credits and
            estimation of future  income tax assets,  valuation  allowances  and
            other project  related  accruals.  Actual  results could differ from
            these estimates.

            These estimates are reviewed periodically and, as adjustments become
            necessary, they are reported in earnings in the period in which they
            become known.

      (l)   Impairment of Long-Lived Assets

            Long-Lived Assets, Including property and equipment,  Investments in
            Films,   Television   programs  and   recordings  are  reviewed  for
            impairment  on  an  annual  basis  or  when  significant  events  or
            circumstances  indicate that the carrying amount of an asset may not
            be  recoverable.  Impairment  exists when the carrying  value of the
            assets is greater than the discounted  future cash flows expected to
            be provided by the asset.  The amount of  impairment  loss,  if any,
            which is in excess of net carrying value over fair value, is charged
            to income for the period.  Fair value is generally measured equal to
            the estimated future discounted net cash from the asset.


                                                                              56
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2006 AND 2005
                         (expressed in Canadian dollars)

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      (m)   Deferred revenue

            Sales of rights and  licences  related to projects  in progress  are
            recorded as deferred  revenue until revenue  recognition  parameters
            have been met.

      (n)   Recent Accounting Pronouncements

      i)    Effective  December 1, 2004,  the Company was  required to adopt the
            Canadian  Institute  of  Chartered  accountants'  (CICA)  Accounting
            Guideline 15(AcG-15),  "Consolidation of Variable Interest Entities"
            ("VIE"). AcG-15 is substantially similar to the Financial Accounting
            Standards Board  interpretation  No.46 ("FIN 46")  "Consolidation of
            Variable Interest Entities". AcG-15 provides guidance that addresses
            when a company should  consolidate  in its financial  statements the
            assets,  liabilities and operating results of another entity.  Under
            previous  guidance,  a company generally  included another entity in
            its consolidated  financial statements only if controlled the entity
            through a controlling  voting interest.  AcG-15 requires a VIE to be
            consolidated   by  the  company  if  that  company  is  the  primary
            beneficiary  of that entity.  Accordingly,  the Company has included
            the  results  of  operations  of the  Devine  Entertainment  Limited
            Partnership  and  the  Devine  Entertainment  Film  Library  Limited
            Partnership in its consolidated operations.

      ii)   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.

      iii)  In 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 AcG-13 "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.

      iv)   In  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.


57
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2006 AND 2005
                         (expressed in Canadian dollars)

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      v)    In September  2005,  the CICA  released new Handbook  Section  1506,
            "Accounting  Changes"  (Section  1506),  effective  for  annual  and
            interim periods  beginning on or after January 1, 2007. This section
            replaces  the former  section  1506 which  establishes  criteria for
            changing accounting policies, together with the accounting treatment
            and disclosure of changes in accounting policies and estimates,  and
            correction of errors.  The Company has determined  that Section 1506
            will not have any impact to the  consolidated  results of operations
            or financial position.

      vi)   In September  2006,  the Emerging  Issues  Committee  issued EIC-163
            "Determining  the Variability to be Considered in Applying  AcG-15",
            effective for the first interim or annual reporting period beginning
            on or after January 1, 2007. EIC-163 defines that the variability to
            be considered  in applying  AcG-15 is to be based on analysis of the
            design of the entity and  prescribes  the steps to be  undertaken in
            such an analysis.  The Company has not yet  determined the impact of
            adopting  EIC-163  on its  consolidated  results  of  operations  or
            financial position.

4.    FILM TAX CREDITS RECEIVABLE

      Tax credits  receivable are federal and provincial  refundable tax credits
      related to specific film and  television  productions  in Canada.  Amounts
      recorded represent  management's best estimate of the amounts recoverable;
      however all amounts are subject to final determination by the relevant tax
      authorities.  As at December 31, 2006, the Company  expects to receive tax
      credits of $543,389 (2005 -nil) from the federal government and $1,508,179
      (2005 - nil) from the provincial government.

5.    ADVANCES RECEIVABLE

      Advances to an unrelated  company is unsecured and bears  interest at 6.5%
      per annum and are due December 16, 2014 (Note 18).

6.    INVESTMENT IN FILM, TELEVISION PROGRAMS AND RECORDINGS

<TABLE>
<CAPTION>
                                                                                         2006                               2005
                                                                                         ----                               ----
                                                                                      Accumulated
                                                                       Cost          Amortization          Net               Net
                                                                       ----          ------------          ---               ---
<S>                                                                <C>               <C>               <C>               <C>
Completed television programs and recordings                       $15,996,453       $15,066,135       $   930,318       $ 1,723,043
Completed Motion picture - Bailey's Billions                         6,972,580         4,081,502         2,891,078         3,241,219
Projects in progress                                                 5,669,105                --         5,669,105         1,883,846
                                                                   -----------       -----------       -----------       -----------
                                                                   $28,638,138       $19,147,637       $ 9,490,501       $ 6,848,108
                                                                   ===========       ===========       ===========       ===========
</TABLE>

      Amortization and write-down  expenses in 2006 for the Company's library of
      completed  television  programs and recordings and motion picture totalled
      $2,010,385.


                                                                              58
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2006 AND 2005
                         (expressed in Canadian dollars)

6.    INVESTMENT IN FILM, TELEVISION PROGRAMS AND RECORDINGS (continued)

      Annually,  management  reviews the  estimate of total  remaining  ultimate
      revenue and the fair value of the  capitalized  film costs. As a result of
      the review,  the Company  reduced the carrying value of its completed film
      and television programs as summarized below.

      Development  costs for  properties  that are  expected  to benefit  future
      periods are also  capitalized.  If the property under  development has not
      been set for production  within three years, or if upon review  management
      determines that certain costs are unrecoverable, the costs associated with
      such property are written off to income.  The Company decided to write-off
      $883,148 of its investment costs in 2006 (2005 - nil).

                                 Completed
                                television
                                programs &   Bailey's    Projects In
                                recordings   Billions     Progress      Total

      Regular amortization       $198,740    $ 52,903                 $  251,643
      Write-down                  575,340     300,254      883,148     1,758,742
                                 --------    --------     --------    ----------
      Total Amortization and
      Write-down                 $774,080    $353,157     $883,148    $2,010,385
                                 ========    ========     ========    ==========

      The  Company's  investment  in projects in progress was  $5,669,105  which
      includes  $4,202,665 for Across the River to Motor City and $1,466,440 for
      projects in development.

      The remaining  period of  amortization  for the completed  projects ranges
      from two to seven years at December 31, 2006.

7.    PROPERTY AND EQUIPMENT

                                                   2006                   2005
                                                   ----                   ----
                                               Accumulated
                                       Cost    Amortization     Net        Net
                                       ----    ------------     ---        ---
      Computer and editing
        equipment                    $181,028   $165,556     $ 15,472   $ 17,810
      Furniture and fixtures           58,193     53,260        4,933      6,062
                                     --------   --------     --------   --------

                                     $239,221   $218,816     $ 20,405   $ 23,872
                                     ========   ========     ========   ========


59
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2006 AND 2005
                         (expressed in Canadian dollars)

8.    FILM PRODUCTION LOAN

                                                           2006          2005
                                                           ----          ----
      A Demand loan bearing interest at prime plus 1%,
      repayable in full by June 30, 2008 was arranged
      for the financing of 6 episodes of a one hour TV
      series entitled Across the River to Motor City,
      which was produced by the Company's wholly owned
      subsidiary Across the River Productions Ltd. The
      loan is secured by all receipts including all
      commercialization or exploitation of the series
      worldwide including pre-sale and funding
      agreements and various tax credits. The loan is
      not secured by the parent company's assets and
      is non-recourse to parent company.                $2,121,527   $       --
                                                        ==========   ==========

      Interest on the above demand loan totalled
      $30,312 (2005 - $NIL)

9.    CONVERTIBLE DEBENTURES

                                                            2006        2005
            Principal                                       ----        ----
            Issued
            - February 1996 (i)                         $   75,000   $   75,000
            - December 2000 (ii)                           550,000      550,000
            - December 2000 (iii)                          835,800      835,800
            - Capitalized interest (iv)                    240,000      240,000
                                                        ----------   ----------
                                                         1,700,800    1,700,800

            Less - equity component                       (181,510)    (181,510)
                                                        ----------   ----------

                                                        $1,519,290   $1,519,290
                                                        ==========   ==========

      (i)   The  Company   issued  a  7.5%   $100,000   redeemable   convertible
            subordinated  debenture  in February  1996.  This  debenture  was to
            mature on December 31, 2000.  The debenture was  convertible  at the
            holder's  option into common shares at any time prior to maturity at
            a conversion rate of $1.50 per share.

            Management  renegotiated  repayment  terms of this  debenture  at an
            increased interest rate of 10%. The principal was re-payable in four
            quarterly  payments during 2001 of $25,000 plus interest.  The first
            installment was made in April 2001.  The Company is still in default
            on the second,  third and fourth  installments. As at  December  31,
            2006,  there remains an outstanding  balance of $75,000 plus $45,000
            (December 31, 2005 - $37,500) in accrued interest on this debenture.
            As a result of the default, the debenture is classified as a current
            liability  on  the  balance   sheet.   Management   is  in  constant
            communication  with  the  debenture  holders  and  expects  that the
            Company will be able to settle the  debentures  in the normal course
            of operations.


                                                                              60
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2006 AND 2005
                         (expressed in Canadian dollars)

9.    CONVERTIBLE DEBENTURES (continued)

      (ii)  The Company  issued  550,000  units of  debentures  and  warrants in
            December 2000 for $550,000 less costs of $85,000 for net proceeds to
            the Company of $465,000. Each unit consists of a $1.00 debenture and
            1  immediately   separable  warrant.   The  redeemable   convertible
            subordinated  debentures matured on December 31, 2005, bear interest
            at 10.5% per annum,  and are payable  semi-annually.  The debentures
            are  convertible  at the holders'  option into common  shares at any
            time prior to  maturity  on the basis of one common  share per $0.50
            principal  amount of debenture.  The debentures are  subordinated to
            certain senior  indebtedness of the Company. As at December 31, 2006
            the  Company  is in default of an  outstanding  balance of  $223,211
            (December  31,  2005  -  $165,463)  in  accrued  interest  on  these
            debentures.  As a result of the default, the debenture is classified
            as current liability on the balance sheet. Management is in constant
            communication  with  the  debenture  holders  and  expects  that the
            Company will be able to settle the  debentures  in the normal course
            of operations.

      (iii) On December  19,  2000,  the Company  obtained  the  approval of the
            holders of the 7.5% debentures issued December,  1995 to: (i) extend
            the maturity date to December 31, 2002;  (ii) reduce the  conversion
            rate to $0.50 per common share;  (iii) increase the rate of interest
            applicable  to 10.5% per  annum;  (iv)  issue to the  holders of the
            debentures one warrant for each $1.00 principal  amount held by such
            holder;  and (v) to secure the 7.5%  debentures by way of a floating
            charge over all of the Company's assets,  such floating charge to be
            subordinated  to all existing and future "Senior  Indebtedness"  and
            "Permitted  Encumbrances"  and to rank  pari  passu  with  identical
            security  to be granted to  holders  of up to  $1,000,000  principal
            amount of convertible  debentures  issued by the Company on December
            21,  2000.  The  Company  is in  default  on  the  repayment  of the
            debentures.  As at December 31, 2006,  there remains an  outstanding
            balance  of  $337,088  (December  31,  2005 -  $249,328)  in accrued
            interest  on these  debentures.  As a  result  of the  default,  the
            debenture is classified as a current liability on the balance sheet.
            Management is in constant  communication  with the debenture holders
            and expects that the Company  will be able to settle the  debentures
            in the normal course of operations.

      (iv)  As part of the  settlement  of the  long-term  debt the  Company has
            granted the same  conversion  privileges to $240,000  portion of the
            interest  accrued on the  debentures  described  in notes  9(ii) and
            9(iii) and as on the related  debentures.  As at  December  31, 2006
            there is an  outstanding  amount of  $63,000  (December  31,  2005 -
            $37,800)  in  accrued  interest.  As a result  of the  default,  the
            debenture is classified as current  liability on the balance  sheet.
            Management is in constant  communication  with the debenture holders
            and expects that the Company  will be able to settle the  debentures
            in the normal course of operations.


61
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2006 AND 2005
                         (expressed in Canadian dollars)

10.   INTEREST EXPENSE (RECOVERED)                       2006            2005
                                                         ----            ----

      Interest on convertible debentures              $ 178,209       $ 214,332
      Bank film production loan                          30,312          18,629
      Other interest expense                              2,549              --
                                                      ---------       ---------
                                                        211,070         232,961

      Interest income                                   (34,654)        (39,208)
                                                      ---------       ---------
                                                        176,416         193,753
      Less: amounts capitalized to projects            (139,551)       (142,921)
                                                      ---------       ---------

                                                      $  36,865       $  50,832
                                                      =========       =========

11.   INCOME TAXES

      (a)   The following table sets forth reconciliation between prescribed tax
            rates and the  effective  tax rate for the  Company's  total  income
            expense in each of the years presented in the consolidated financial
            statements.

                                                             2006        2005
                                                             ----        ----

      Income tax (recovery) based on combined
      Statutory income tax rates                         $ (908,111)  $ (85,000)
      Expenses renounced to Variable Interest
        Entities                                            607,598     491,000
      Recognition of tax benefits as a result
        of utilization of tax loss carryforward                  --    (406,000)
      Effect of benefits of losses not currently
        recognized                                          300,513
                                                          ---------   ---------
                                                          $      --   $      --
                                                          =========   =========

(b) Future tax assets
                                                          2006          2005
                                                          ----          ----

      Net operating loss carryforward                 $ 3,450,000   $ 2,805,000
      Investment in film, television programs
        and recordings                                    (60,000)      295,000
                                                      -----------   -----------
                                                        3,390,000     3,100,000

      Valuation allowance                              (3,390,000)   (3,100,000)
                                                      -----------   -----------

      Net Future Tax Assets                           $        --   $        --
                                                      ===========   ===========


                                                                              62
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2006 AND 2005
                         (expressed in Canadian dollars)

11.   INCOME TAXES (continued)

            In  assessing  the   realizability  of  future  assets,   management
            considers  whether it is more likely  than not that some  portion or
            all of the future  tax assets  will not be  realized.  The  ultimate
            realization of future tax assets is dependent upon the generation of
            future  taxable  income during the periods in which those  temporary
            differences become deductible.

            The  valuation  allowance  was  provided  against the net future tax
            assets at  December  31,  2006 and 2005 due to  uncertainties  as to
            their ultimate realization.

      (c)   Tax Loss Carryforwards

                2007                                                 $  421,000
                2008                                                  3,105,000
                2009                                                  1,390,000
                2010                                                    950,000
                2014                                                  1,898,000
                2016                                                  1,800,000
                                                                     ----------
                                                                     $9,564,000
                                                                     ==========

12.   FINANCIAL INSTRUMENTS

            Fair values approximate amounts at which financial instruments could
            be exchanged  between willing parties,  based on current markets for
            instruments  of the same risk,  principal and remaining  maturities.
            Fair values are based on estimates using valuation techniques, which
            are  significantly  affected by the assumptions  used concerning the
            amount and timing of  estimated  future  cash flows,  which  reflect
            varying degrees of risk.

            Therefore, due to the use of subjective judgement and uncertainties,
            the aggregate  fair value amount should not be  interpreted as being
            realizable in an immediate settlement of the instruments.

      (i)   Fair Value

            The carrying values of cash, accounts  receivable,  film tax credits
            receivable,  bank loans,  convertible  debenture  issued in February
            1996  (Note  9(i)) and  accounts  payable  and  accrued  liabilities
            approximate fair value due to their  short-term  maturity and normal
            credit terms.

            The carrying value of advances  receivable  approximates  their fair
            value because the interest rate is at market rate.

            The fair value of the convertible debentures issued in December 2000
            has been  estimated by first  calculating  the present  value of the
            liability  component  using a discount  factor and then assigning to
            the equity  component  the  difference  between the  proceeds of the
            debenture  and  the  fair  value  of the  liability  component.  The
            estimated  discount  factor used  approximated  the market  interest
            rates at  December  31,  2006 and 2005.  Accordingly,  the  carrying
            amounts of the convertible debentures approximate fair value.


63
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2006 AND 2005
                         (expressed in Canadian dollars)

12.   FINANCIAL INSTRUMENTS (continued)

      (ii)  Credit Risk

            The Company's  accounts  receivable  are subject to credit risk. The
            Company  continually  monitors its positions with and credit quality
            of  the  organizations,   which  are  counterpart  to  its  accounts
            receivable and does not anticipate non-performance.  The majority of
            the  accounts  receivable  are  amounts  due from  sales of  foreign
            distribution   rights  and  a  limited   number  of   licenses   and
            distributors of video cassettes and DVDs.

      (iii) Currency Risk

            The Company is subject to currency  risk through its  activities  in
            the United States and other countries.  Unfavourable  changes in the
            exchange rate may affect the operating results of the Company.

            The Company does not actively use  derivative  instruments to reduce
            its exposure to foreign  currency  risk.  However,  dependent on the
            nature, amount and timing of foreign currency receipts and payments,
            the Company may enter into  forward  exchange  contracts to mitigate
            the  associated  risks.  There  were no forward  exchange  contracts
            outstanding at December 31, 2006 and 2005.

13.   COMMITMENTS AND CONTINGENCIES

      (a)   In February  2004,  the Company  renewed the lease for its premises.
            The agreement expires May 31, 2009.  Minimum annual rent commitments
            excluding occupancy costs are as follows:

                 2007                                                    $28,000
                 2008                                                     29,000
                 2009                                                     13,000
                                                                         -------
                                                                         $70,000
                                                                         =======

      (b)   The  Company  has  employment   agreements  with  various  principal
            officers and employees.  The  agreements  provide for minimum salary
            levels.

      (c)   The Company has entered  into  contractual  agreements  for creative
            talent related to future film production.

      (d)   The purchasers of the copyright  interest are entitled to a priority
            distribution  of the future  revenue  earned from the motion picture
            "Bailey's  Billion$" up to the original amount of the purchase price
            of  $2,477,500 up to 42%.  Subsequent to the priority  distribution,
            all the amounts would be distributed  pari passu in accordance  with
            the percentage ownership acquired.

      (e)   The distributors of the film are entitled to a priority distribution
            of the  future  revenue  earned  from the motion  picture  "Bailey's
            Billion$"  up to the original  amount of the  purchase  price in the
            amount of $2,908,971.  Subsequent to the priority distribution,  all
            the amounts would be distributed in accordance  with the contractual
            agreements.


                                                                              64
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2006 AND 2005
                         (expressed in Canadian dollars)

13.   COMMITMENTS AND CONTINGENCIES (continued)

      (f)   In the  normal  course of  operations  the  Company is  involved  in
            negotiations,  grievances  and  arbitrations  with guilds and unions
            related to the film production  industry.  Management estimates that
            the  grievances  will not  result in any future  material  financial
            obligation.   No  amount  has  been  recorded  in  the  consolidated
            financial statements with regard to this matter.

14.   CAPITAL STOCK

      (a)   Authorized

            An unlimited number of common shares and Class "A" shares
            494,550 of Series 1 preferred shares.

      (b)   Issued - common shares                     Number          $ Amount

      Balance, December 31, 2004                     32,251,008       11,208,887
                                                     ----------       ----------

      Common shares issued for services
      rendered                                           80,000           18,400

      Common shares issued on conversion
      of warrants                                     2,547,500          423,260

      Common shares issued for settlement
      of payables                                       350,000           78,748

      Common shares issued on exercise of
      stock options                                     125,000           16,250
                                                     ----------       ----------

      Balance, December 31, 2005                     35,353,508       11,745,545
                                                     ----------       ----------

      Common shares issued for settlement
      of accounts payable and services
      rendered                                          551,860           74,904

      Common shares issued on private
      placement                                       3,383,331          507,500

      Common shares issued on exercise of
      stock options                                      25,000            3,000
                                                     ----------       ----------

      Balance, December 31, 2006                     39,313,699       12,330,949
                                                     ==========       ==========

      (vii) On May 31,  2006  the  Company  completed  a  private  placement  of
            3,383,331  units,  each  consisting of one common share and one-half
            purchase warrant of $0.15 per unit. Each warrant is exercisable,  at
            any time on or prior to May 31, 2007, to acquire one common share at
            an  exercise  price  of  $0.30  per  share.  Net  proceeds  totalled
            $507,500.


65
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2006 AND 2005
                         (expressed in Canadian dollars)

14.   CAPITAL STOCK (continued)

      (viii) In June 2006, the Company issued 339,660 common shares for services
            rendered, valued at $43,074.

      (ix)  In September 2006, the Company issued 25,000 common shares for stock
            options exercised.

      (x)   In October  2006,  the  Company  issued  112,200  common  shares for
            services rendered, valued at $16,830.

      (xi)  In November  2006,  the Company  issued  100,000  common  shares for
            services rendered, valued at $15,000.

      (xii) In  January  2005,  the  Company  issued  80,000  common  shares for
            services rendered, valued at $18,400.

      (xiii) In February  2005,  the Company  issued  125,000  common  shares to
            employees who exercised their stock options,  for cash consideration
            of $16,250.

      (xiv) On or before April 7, 2005,  2,547,500  warrants were exercised at a
            price of $0.15 per unit for cash consideration of $382,125.

      (xv)  In May of 2005,  the Company  issued 350,000 common shares to settle
            accounts payable for professional fees in the amount of $78,748

      (c)   Issued - Series 1 preferred shares              Number     $ Amount

            Balance, December 31, 2006 and 2005             494,550     494,550
                                                            =======     =======

            The  Series  1   preferred   shares  are   non-voting,   cumulative,
            non-participating,  $1  redeemable  and  retractable  The shares pay
            dividends  at  the  rate  of  9.1%  per  annum   payable  in  annual
            installments on the  15th day of  December  in each  year and  shall
            accrue and be cumulative from the date of issue. During the year the
            Company paid dividends totalling $45,004.

      (d)   Stock Option Plan

            Under the terms of a stock option plan approved by the shareholders,
            the Company is authorized to grant  directors,  officers,  employees
            and others options to purchase  common shares at prices based on the
            market price of shares as determined on the date of grant.


                                                                              66
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2006 AND 2005
                         (expressed in Canadian dollars)

14.   CAPITAL STOCK (continued)

      (d)   Stock Option Plan

            The outstanding and exercisable stock options are as follows:

                                                                        Weighted
                                                                         Average
                                                    Number  Allocated   Exercise
      Outstanding and Exercisable               of Options      Value      Price
      --------------------------------------------------------------------------
      Balance, December 31, 2004                 3,440,000     99,850       0.10

        Exercised                                 (125,000)    (3,750)      0.10

        Expired                                   (135,000)        --       0.15
                                                 ---------    -------       ----

      Balance, December 31, 2005                 3,180,000     96,100       0.10

        Issued                                     100,000      3,600       0.10

        Issued                                     750,000      7,875       0.16

        Exercised                                  (25,000)      (500)      0.10

        Issued                                     240,000         --       1.00
                                                 ---------    -------       ----

      Balance, December 31, 2006                 4,245,000    107,075       0.16
                                                 =========    =======       ====

      The Company has granted stock options as follows:

<TABLE>
<CAPTION>
                                        Number     Exercise   Outstanding and   Weighted Average
Expiry Date            Grant Date     of Options    Price       Exercisable      Remaining Life
------------------------------------------------------------------------------------------------
<S>                    <C>               <C>         <C>            <C>               <C>
Feb.17, 2007           June 25,2004      30,000      0.10           30,000            0.13
Sept. 30, 2007        June 25, 2004     125,000      0.10          125,000            0.75
June 25, 2009         June 25, 2004   3,000,000      0.10        3,000,000            2.50
April 24, 2010       April 25, 2006     100,000      0.10          100,000            3.32
Jan.11, 2007          June 11, 2006     375,000      0.15          375,000            0.03
Jan.11, 2007          June 11, 2006     375,000      0.17          375,000            0.03
Dec.29, 2009           Dec.29, 2006     240,000      1.00          240,000            3.00
                                      ---------                  ---------

                                      4,245,000                  4,245,000            2.04
                                      =========                  =========            ====
</TABLE>


67
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2006 AND 2005
                         (expressed in Canadian dollars)

14.   CAPITAL STOCK (continued)

      (d)   Stock Option Plan

            The  Company  has  recorded  the fair  value of  options  using  the
            Black-Scholes options pricing model with the following assumptions.

            Issue date           June 25, 2004  June 25, 2004
            -------------------------------------------------
            Number of options        3,000,000        180,000
            Expected life              5 years        2 years
            Price volatility               50%            50%
            Dividend yield                  --             --
            Risk-free interest
              rate of return                5%             5%
            Amount recorded            $93,750         $6,000

            Issue date          April 25, 2006  June 11, 2006  December 29, 2006
            --------------------------------------------------------------------
            Number of options          100,000        750,000            240,000
            Expected life              5 years      0.5 years             3 year
            Price volatility               30%            30%                30%
            Dividend yield                  --             --                 --
            Risk-free interest
              rate of return                5%             5%                 5%
            Amount recorded             $3,600         $7,875                 --

      (e)   Warrants

            Common  shares have been  reserved  for  warrants  on the  following
            basis:

      Outstanding and Exercisable           # of Warrants   Value      Price
      --------------------------------------------------------------------------
      Balance, December 31, 2004              5,459,950    113,900     $0.37

         Converted to common shares          (2,547,500)   (50,950)     0.15
         Issuance of step up warrants         2,547,500     10,190      0.30
         Expired                               (582,500)        --      0.48
                                              ---------     ------      ----

      Balance, December 31, 2005              4,877,450     73,140     $0.36
                                              ---------     ------

         Issued on Private Placement          1,691,666         --      0.30
         Expired                               (499,950)        --   0.15 - 0.20
                                              ---------     ------   -----------

      Balance, December 31, 2006              6,069,166     73,140      0.36
                                              =========     ======      ====


                                                                              68
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2006 AND 2005
                         (expressed in Canadian dollars)

14.   CAPITAL STOCK (continued)

      (e)   Warrants

The Company has granted warrants as follows:

<TABLE>
<CAPTION>
                                          Number       Exercise   Outstanding and   Weighted Average
Expiry Date             Grant Date     of Warrants       Price      Exercisable      Remaining Life
----------------------------------------------------------------------------------------------------
<S>                     <C>             <C>           <C>                   <C>             <C>
April 7, 2005           April 7, 2004   2,580,000     0.15                  --              --
December 31, 2005   December 31, 2000     550,000     0.50                  --              --
September 26, 2006      June 30, 2004     499,950     0.15 - 0.20           --              --
February 26, 2007       June 30, 2004   1,830,000     0.50           1,830,000            0.16
April 7, 2007           April 7, 2005   2,547,500     0.30           2,547,500            0.27
May 31, 2007             May 31, 2006   1,691,666     0.30           1,691,666            0.41
                                        ---------                    ---------
                                        9,699,116                    6,069,166            0.28
                                        =========                    =========            ====
</TABLE>

            The  Company  has  recorded  the fair  value of  warrants  using the
            Black-Scholes options pricing model with the following assumptions.

            Grant date             April 7, 2004  June 30, 2004    June 30, 2004
            Number of warrants         2,580,000      1,830,000      (i) 866,616
            Expected life                 1 year     2.67 years          2 years
            Price volatility                 40%            60%              50%
            Dividend yield                    --             --               --
            Risk-free interest
              rate of return                  5%             5%               5%

            Amount recorded              $51,600        $18,300          $99,000

      (i)   Of the 866,616  warrants  issued  366,666  have been  converted  and
            499,950 have expired.

            Grant date             April 7, 2005   May 31, 2006
            Number of warrants         2,547,500      1,691,666
            Expected life                 1 year         1 year
            Price volatility                 30%            30%
            Dividend yield                    --             --
            Risk-free interest
              rate of return                  5%            5%

            Amount recorded              $10,190             --


69
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2006 AND 2005
                         (expressed in Canadian dollars)

15.   LOSS PER COMMON SHARE

      (a)   Basic:  Loss per  share is  calculated  using the  weighted  average
            number of shares  outstanding  during each of the years presented in
            the  consolidated  financial  statements.  The following  table sets
            forth the weighted  average number of common shares  outstanding for
            each of those years.

            Year                                                    Outstanding
            ----                                                    -----------

            2005                                                     35,353,508
            2006                                                     39,313,699

                                                        2006            2005
                                                   ------------    ------------
            Numerator:
            Net income (loss) as reported
              for basic EPS                        $ (2,514,151)   $   (233,409)

            Less: Preferred share
              dividends paid                            (45,004)        (45,004)
                                                   ------------    ------------

            Net Income (Loss)                      $ (2,559,155)   $   (278,413)
                                                   ------------    ------------

            Denominator:
            Weighted average shares
              for basic EPS                          37,575,373      34,649,419
                                                   ============    ============

            Loss per share                         $      (0.07)   $      (0.01)
                                                   ============    ============

      (b)   Fully  Diluted:  The Company  follows CICA  Handbook  Section  3500,
            "Earnings  per Share",  effective  January 31, 2003.  The  statement
            requires the  presentation of both basic and diluted earnings (loss)
            per  share  ("EPS")  in  the  statement  of  operations,  using  the
            "treasury  stock"  method to compute  the  dilutive  effect of stock
            options and warrants and the "if converted"  method for the dilutive
            effect of convertible instruments.

      (c)   Anti-dilutive:  For the  years  ended  December  31,  2006 and 2005,
            options  to  purchase  4,245,000  and  3,180,000  common  shares and
            warrants of 6,069,166 and 2,329,950,  respectively were not included
            in the  computation  of fully  diluted  earnings  (loss)  per  share
            because of the loss results.


                                                                              70
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2006 AND 2005
                         (expressed in Canadian dollars)

16.   CONTRIBUTED SURPLUS

      Balance, December 31, 2005                       $1,007,376
      Add:  Issuance of stock options                       3,600
      Add:  Settlement of services rendered and
            accounts payable                                7,875
      Less: Stock options exercised                          (500)
      Add:  Pursuant to closing of limited
            partnership (Note 18)                          49,098
                                                       ----------
                                                       $1,267,449
                                                       ==========

                                                          2006           2005

      Settlement of debt instruments                   $  664,501    $  656,626
      Equity portion of long-term debt                    181,510       181,510
      Stock Options (Note 14)                              99,200        96,100
      Warrants (Note 14)                                   73,140        73,140
      Pursuant to closing of limited
        partnership (Note 18)                             249,098            --
                                                       ----------    ----------

                                                       $1,267,449    $1,007,376
                                                       ==========    ==========

17.   RELATED PARTY TRANSACTIONS

      During the year ended December 31, 2006 $299,280 (2005 - $337,417) of fees
      were paid or accrued to  corporations  controlled  by two of the directors
      for  writing,  directing  and  producing  services.  Included  in accounts
      payable and accrued  liabilities  at December 31, 2006 was $73,750 (2005 -
      $32,477).

18.   VARIABLE INTEREST ENTITIES

      a) During the year ended  December  31, 2004,  the Company  entered into a
      services agreement with Devine Entertainment Limited Partnership ("DELP").

      Under the terms of the services agreement, the 2004 DELP advanced $846,350
      to the Company for the 2004 services,  which was originally  accounted for
      as royalty interest  payable.  Included in the $846,350 was $494,550 which
      was  initially  loaned from the Company to an unrelated  company (Note 5),
      which subsequently loaned these funds to the limited partners.


71
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2006 AND 2005
                         (expressed in Canadian dollars)

18.   VARIABLE INTEREST ENTITIES (continued)

      DELP was also  granted  the  right  and  option  to  exchange  its  rights
      (including the 2004 royalties)  under the services  agreement,  at anytime
      until December 31, 2004,  for 380,450 common shares and 494,550  preferred
      shares of the Company.

      On  December  22,  2004,  DELP  exercised  its right  under  the  services
      agreement and the royalty  interest  payable was  reclassified  to capital
      stock.

      b) During 2005, the Company entered into a services agreement with the QCF
      2005 Limited Partnership ("QCF")., which to date has not been finalized.

      The accounts of these  variable  interest  entities  have been included in
      these consolidated financial statements of the Company.

      c) In  December  2005,  The  Devine  Entertainment  Film  Library  Limited
      Partnership ("DEFL LP"), a limited partnership formed and registered under
      the Limited  Partnerships Act (Ontario) on March 8, 2004,  acquired Devine
      Entertainment  Corporation's  interest in a defined part of the  Company's
      proprietary  film  library  for $7.0  million,  as  valued  by an  outside
      valuator. The Company has provided financing for the transaction,  and has
      entered into a financing agreement and a management agreement with DEFL LP
      in order to manage the  exploitation  and expand the  distribution  of the
      properties.  Under these agreements the Company will maintain a call right
      for  between a minimum of 70% and a maximum  100%  interest in the library
      assets.  On December  29, 2006  subscriptions  for 80 units of the DEFL LP
      were  finalized.  $175,097 is receivable  in 2008 and 2009.  Subsequent to
      payment of all  closing  expenses  the DEFL LP overall net  proceeds  were
      $249,098. The accounts of this variable interest entity have been included
      in the consolidated financial statements of the Company.

19.   CHANGE IN  NON-CASH  OPERATING  ASSETS AND  LIABILITIES  AND  SUPPLEMENTAL
      INFORMATION

                                                      2006             2005
                                                   -----------      -----------
      Accounts receivable                          $   146,882      $   612,307
      Film tax credits receivable                   (2,051,568)         299,097
      Inventory                                            (96)         (62,127)
      Prepaid and sundry assets                       (105,094)          15,754
      Accounts payable and accrued liabilities         233,714          296,840
      Deferred revenue                               4,342,643       (2,658,971)
                                                   -----------      -----------

                                                   $ 2,566,481      $(1,497,100)
                                                   ===========      ===========

      The supplemental cash flow information
      are as follows:                                    2006             2005
                                                         ----             ----
      Non-cash transactions
      Settlement of accounts payable by
      share issuance                                    59,595           78,748


                                                                              72
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2006 AND 2005
                         (expressed in Canadian dollars)

20.   SEGMENTED INFORMATION

      The Company is considered by its Chief Operating Decision Maker to operate
      in one industry  segment,  and generates revenue from film productions and
      film  library.  Revenue by geographic  location,  based on the location of
      customers, is as follows:

                                                      2006               2005
                                                     -------           ---------
                                                        $                  $
      Revenue
        Canada                                        28,000             446,000
        United States                                274,000             591,000
        United Kingdom                                    --           2,659,000
        France                                        69,000              99,000
        Europe - Other                                38,000                  --
        Other foreign                                 15,000             225,000
                                                     -------           ---------

                                                     424,000           4,020,000
                                                     =======           =========

21.   RECONCILIATION TO UNITED STATES GAAP

      Canada and United States Accounting Policy Differences

      The consolidated financial statements of the Company have been prepared in
      accordance  with  Canadian  GAAP.  The  significant   differences  between
      Canadian and U.S.  GAAP,  and their effect on the  consolidated  financial
      statements of the Company, are described below.

      Consolidated statements of operations:

      The following  table  reconciles net loss as reported in the  accompanying
      consolidated  statements of loss to net loss that would have been reported
      had the financial statements been prepared in accordance with U.S. GAAP:

FOR THE YEARS ENDED DECEMBER 31,                           2006         2005
                                                       -----------    ---------

Net loss in accordance with Canadian GAAP              $(2,514,151)   $(233,409)
Interest (Dividends) on Preferred Shares (Note c)          (45,004)     (45,004)
                                                       -----------    ---------

Net Loss in accordance with U.S. GAAP                  $(2,559,155)   $(278,413)
                                                       ===========    =========

Loss per share                                         $     (0.07)   $   (0.01)


73
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2006 AND 2005
                         (expressed in Canadian dollars)

21.   RECONCILIATION TO UNITED STATES GAAP (continued)

      The cumulative effect of these  adjustments on shareholders'  equity is as
      follows:

      FOR THE YEARS ENDED DECEMBER 31,               2006              2005
                                                 ------------      ------------

      Shareholders' Equity in accordance with
      Canadian GAAP                              $  3,458,346      $  5,172,024

      Conversion feature on Convertible
      Debentures (Note a)                            (181,510)         (181,510)

      Gain on settlement of New Convertible
      Debentures Effect on Contributed
      Surplus (Note b)                               (284,803)         (284,803)

      Gain on settlement of New Convertible
      Debentures Effect on Deficit (Note b)           284,803           284,803
      Cumulative dividends (Note c)                   (90,131)          (45,127)
      Preferred Shares (Note c)                      (494,550)         (494,550)
                                                 ------------      ------------

      Shareholders' Equity in accordance
      with U.S. GAAP                             $  2,692,155      $  4,450,837
                                                 ============      ============

      Effects of these  adjustments  on the  consolidated  Balance  Sheet are as
      follows:

      FOR THE YEARS ENDED DECEMBER 31,               2006              2005
                                                 ------------      ------------

      Assets in accordance with Canadian GAAP    $ 12,934,759      $  7,950,553

      Differences for U.S. GAAP                            --                --
                                                 ------------      ------------
      Assets in accordance with U.S. GAAP        $ 12,934,759      $  7,950,553
                                                 ============      ============


                                                                              74
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2006 AND 2005
                         (expressed in Canadian dollars)

21.   RECONCILIATION TO UNITED STATES GAAP (continued)

      Liabilities in accordance with
      Canadian GAAP                              $  9,476,413      $  2,778,529

      Conversion feature on Convertible
      Debentures (Note a)                             181,510           181,510

      Cumulative dividends (Note c)                    90,131            45,127

      Preferred Shares (Note c)                       494,550           494,550
                                                 ------------      ------------

      Liabilities in accordance with
      U.S. GAAP                                  $ 10,242,604      $  3,499,716
                                                 ============      ============

      Effects of these  adjustments on the consolidated  statement of cash flows
      are as follows:

      FOR THE YEARS ENDED DECEMBER 31,                2006              2005
                                                 ------------      ------------

      Cash flows provided by Operating
      Activities

      Cash flows provided by operating
      activities in accordance with
      Canadian GAAP                              $  1,963,775      $  1,656,918

      Interest (Dividends) on Preferred
      Shares Effect on Net Loss (Note c)              (45,004)          (45,004)

      Interest (Dividends) on Preferred
      Shares (Note c) Effect on Other
      Liabilities                                      45,004            45,004
                                                 ------------      ------------

      Cash flows provided by Operating
      Activities                                 $  1,963,775      $  1,656,918
                                                 ============      ============


75
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2006 AND 2005
                         (expressed in Canadian dollars)

21.   RECONCILIATION TO UNITED STATES GAAP (continued)

      The consolidated financial statements of the Company have been prepared in
      accordance  with  Canadian  GAAP.  The  material  differences  between the
      accounting  policies used by the Company under Canadian GAAP and U.S. GAAP
      are disclosed below.

      (a)   Under  Canadian  GAAP,  the  conversion  feature on the  convertible
            debentures  (Note 9), is valued at $181,510 and had been  classified
            as contributed  surplus.  Under U.S. GAAP the conversion  feature is
            not accounted separately and thus would not flow through contributed
            surplus. This transaction occurred in 2000.

      (b)   Under Canadian GAAP, the exchange of convertible  debentures for new
            convertible  debentures and subsequent gain on settlement of the new
            convertible  debentures  were  valued  at  $284,803  and  have  been
            classified as  contributed  surplus.  Under U.S. GAAP the conversion
            and subsequent  settlement is not accounted for through  contributed
            surplus and would be recorded  through the  statement of  operations
            thus reducing the deficit. This transaction occurred in 2000.

      (c)   Under  Canadian  GAAP,  the  Company's  preferred  shares  have been
            included  in  shareholders'  equity as the  Company  considered  the
            likelihood  of  redemption  by the holders to be remote.  Under U.S.
            GAAP,  the preferred  shares would be classified as a liability.  In
            addition,  cumulative  dividends  are part of the  liability for the
            shares.

      (d)   Financial   Accounting   Standards   Board  Statement  of  Financial
            Accounting Standards No. 130 "Reporting  Comprehensive Income" (SFAS
            130) requires the disclosure of comprehensive income, which includes
            reported net earnings adjusted for other comprehensive income. Other
            comprehensive  income  is  defined  as the  change  in  equity  of a
            business  enterprise  during a period  from  transactions  and other
            events and  circumstances  from non-owner  sources.  During 2005 and
            2004, there were no other comprehensive income.

      Impact of Newly Issued United States Accounting Standards

      i)    Effective  January 1, 2006, the Company adopted a recent  accounting
            pronouncement of the Financial  Accounting Standards Board ("FASB"),
            SFAS No. 123R,  "Share-Based Payments" ("SFAS 123R"), which requires
            companies  to measure and  recognize  compensation  expenses for all
            share based  payments at a fair value.  The Company  does not expect
            the  adoption  of  SFAS  123R  to  have  a  material  impact  on its
            consolidated financial statements.

      ii)   In May 2005, the FASB issued SFAS No. 154,  "Accounting  Changes and
            Error  Corrections  - a  replacement  of APB Opinion No. 20 and FASB
            Statement  No.  3."  Under  SFAS  No.  154,  changes  in  accounting
            principles will generally be made by the  retrospective  application
            of the new accounting principle to the financial statements of


                                                                              76
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2006 AND 2005
                         (expressed in Canadian dollars)

21.   RECONCILIATION TO UNITED STATES GAAP (continued)

      Impact of Newly Issued United States Accounting Standards

      prior  periods  unless it is  impractical  to determine  the effect of the
      change on prior periods. The reporting of a change in accounting principle
      as a cumulative  adjustment to net income in the period of the change,  as
      was  previously  permitted  under APB  Opinion  No. 20,  will no longer be
      permitted  unless it is  impractical to determine the effect of the change
      on prior periods.  Correction of an error in the application of accounting
      principles  will  continue to be reported by  retroactively  restating the
      affected  financial  statements.  The  provisions of SFAS No. 154 will not
      apply  to  new  accounting  standards  that  contain  specific  transition
      provisions.  SFAS No. 154 is  applicable  to  accounting  changes  made in
      fiscal years beginning on or after December 15, 2005. The Company does not
      expect SFAS No. 154 to have a material effect, if any, on its consolidated
      financial statements.

      iii)  In  February  2006,  the FASB issued SFAS  No.155,  "Accounting  for
            Certain Hybrid Financial Instruments." Which amends SFAS No. 133 and
            SFAS No.140. SFAS No. 155 permits hybrid financial  instruments that
            contain  an  embedded   derivative  that  would  otherwise   require
            bifurcation  to  irrevocably  be accounted  for at fair value,  with
            changes in fair value  recognized  in the  statement of income.  The
            fair value  election  may be applied on an  instrument-by-instrument
            basis.  SFAS No. 155 also  eliminates a  restriction  on the passive
            derivative  instruments that a qualifying special purpose entity may
            hold.  SFAS No. 155 is  effective  for those  financial  instruments
            acquired  or  issued  after  December  1,  2006.  At  adoption,  any
            difference  between  the total  carrying  amount  of the  individual
            components of the existing bifurcated  financial  instrument and the
            fair  value of the  combined  hybrid  financial  instrument  will be
            recognized as a  cumulative-effect  adjustment to beginning retained
            earnings.  The Company  does not expect the new standard to have any
            material impact on our financial position and results of operations.

      iv)   In  March  2006,  the FASB  issued  SFAS No.  156,  "Accounting  for
            Servicing of Financial  Assets,  an amendment of FASB  Statement No.
            140." SFAS No. 156  requires  all  separately  recognized  servicing
            assets and servicing  liabilities  to be initially  measured at fair
            value,   if   practicable.   The  standard   permits  an  entity  to
            subsequently  measure  each class of  servicing  assets or servicing
            liabilities  at fair value and  report  changes in fair value in the
            statement  of income in the period in which the changes  occur.  The
            Company does not expect the new standard to have any material impact
            on our financial position and results of operations.

      v)    In  July  2006,  the  FASB  issued  FASB   Interpretation   No.  48,
            "Accounting  for  Uncertainty in Income Taxes an  interpretation  of
            FASB Statement No. 109 (FIN 48), which  clarifies the accounting for
            uncertainty in tax positions.  This Interpretation  requires that we
            recognize in our financial statements, the impact of a tax position,
            if that  position  is more  likely  than not of being  sustained  on
            audit, based on the technical merits of the position. The provisions
            of FIN 48 are effective as of the beginning of our 2007 fiscal year,
            with the  cumulative  effect of the change in  accounting  principle
            recorded as an adjustment to opening retained earnings.  The Company
            is  currently  evaluating  the  impact  of  adopting  FIN48  on  our
            financial statements.


77
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2006 AND 2005
                         (expressed in Canadian dollars)

21.   RECONCILIATION TO UNITED STATES GAAP (continued)

      Impact of Newly Issued United States Accounting Standards

      vi)   In September 2006,  FASB issued SFAS 157 'Fair Value  Measurements'.
            This  Statement  defines  fair value,  establishes  a framework  for
            measuring  fair value in generally  accepted  accounting  principles
            (GAAP), and expands disclosures about fair value measurements.  This
            Statement applies under other accounting pronouncements that require
            or permit  fair  value  measurements,  the Board  having  previously
            concluded in those accounting  pronouncements that fair value is the
            relevant measurement attribute. Accordingly, this Statement does not
            require any new fair value measurements. However, for some entities,
            the application of this Statement will change current practice. This
            Statement is effective  for financial  statements  issued for fiscal
            years  beginning after November 15, 2007, and interim periods within
            those fiscal years.  The Company is currently  evaluating the effect
            of this pronouncement on financial statements.

      vii)  In September 2006, the SEC issued Staff  Accounting  Bulletin No.108
            "Considering   the   Effects  of  Prior  Year   Misstatements   when
            Quantifying Misstatements in Current Year Financial Statements"("SAB
            108").  SAB 108  provides  guidance on how to evaluate  prior period
            financial  statement  misstatements  for purposes of assess in their
            materiality  in the current  period.  If the prior period  effect is
            material to the current period, then the prior period is required to
            be corrected.  Correcting prior year financial  statements would not
            require an amendment to prior year  financial  statements,  but such
            correction  would be made the next time the company  files the prior
            year financial  statements.  Upon adoption SAB 108 allows a one-time
            transitional  cumulative  effect adjustment to retained earnings for
            correction  of  prior  period   misstatement   required  under  this
            statement.  SAB108  is  effective  for  fiscal  years  ending  after
            November  15,  2006.  The adoption of SAB108 did not have a material
            effect on the Company's financial statements.

      viii) In February  2007, the FASB issued FASB Statement NO. 159, "The Fair
            Value  Option  for  Financial   Assets  and  Financial   Liabilities
            Including an Amendment of FASB Statement No. 115" ("SFAS 159").  The
            fair value  option  established  by SFAS 159 permits all entities to
            choose to measure eligible items at fair value at specified election
            dates. A business  entity will report  unrealized  gains or loses on
            items for which the fair value  option has been  elected in earnings
            (or another  performance  indication if the business entity does not
            report  earnings) at each subsequent  reporting date. The fair value
            option:  (a) may be applied  instrument  by  instrument,  with a few
            exceptions,  such  as  investments  otherwise  accounted  for by the
            equity  method;  (b) is  irrevocable  (unless  a new  election  date
            occurs);  and (c) is applied only to entire  instruments  and not to
            portions  of  instruments.  FASB  No.  159  is  effective  as of the
            beginning of the fiscal years beginning after November 15, 2007. The
            adoption of SFAS 159 is not expected to be material to the Company's
            financial statements.

      ix)   In May 2005,  the FASB issued SFAS No.154.  "Accounting  Changes and
            Error  Corrections  ("SFAS  154").  SFAS  154  replaces  APB  No.20,
            "Accounting  Changes" and SFAS No. 3, " Reporting Accounting Changes
            in  Interim  Financial  Statements"  and  establishes  retrospective
            application  as the  required  method  for  reporting  a  change  in
            accounting principle. SFAS 154 provides guidance for


                                                                              78
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2006 AND 2005
                         (expressed in Canadian dollars)

21.   RECONCILIATION TO UNITED STATES GAAP (continued)

      Impact of Newly Issued United States Accounting Standards

            determining  whether  retrospective   application  of  a  change  in
            accounting  principle is  impracticable  and for  reporting a change
            when retrospective application is impracticable.  The reporting of a
            correction  of an error by  restating  previously  issued  financial
            statements is also  addressed.  SFAS 154 is effective for accounting
            changes and  corrections  of errors made in fiscal  years  beginning
            after  December  15,  2005.  The Company  does not believe  that the
            adoption of SFAS 154 in fiscal  2007 will have a material  impact on
            our  consolidated  balance  sheets  and  statements  of  operations,
            shareholders' equity and cash flows.

      x)    In December  2004,  FASB issued  SFAS No.  123R which  revises  SFAS
            No.123  and  is  effective  for  small  business  issuers  as of the
            beginning  of the first  interim or annual  reporting  period  after
            December  31,  2005 with early  adoption  permitted.  SFAS No.  123R
            requires public entities to measure the cost of employment  services
            received in exchange for an award of equity instruments on the grant
            - date fair value of the award. The cost will be recognized over the
            period  during  which an employee is required to provide  service in
            exchange for the award - the requisite  service period  (usually the
            vesting  period).  No  compensation  cost is  recognized  for equity
            instruments for which employees do not render the requisite service.
            Employee  share  purchase  plans will not result in  recognition  of
            compensation  cost if certain  conditions are met; those  conditions
            are much the same as the related conditions in Statement 123.


79
<PAGE>

ITEM  8.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
          FINANCIAL DISCLOSURE

Before  March  26,  2006 the  Company  announced  that the  Board  approved  the
appointment of Mintz & Partners LLP as the company's new independent auditor.

The decision to change the Company's independent accounting firm was approved by
the companies  Board of Directors.  Termination  of Accountants  Kraft,  Berger,
Grill,  Schwartz,  Cohen & March LLP is in no way indicative of any disagreement
on any  matter  of  accounting  principles  or  practices,  financial  statement
disclosure,  or auditing scope or procedure with respect to the company.  If not
resolved to the satisfaction of Kraft, Berger,  Grill,  Schwartz,  Cohen & March
LLP,  disagreements would have caused it to make reference to the subject matter
of the  disagreements in connection with its reports on the Company's  financial
statements.

ITEM 8A. CONTROLS AND PROCEDURES

      The  Company's  Chief  Executive   Officer  and  Chief  Financial  Officer
(collectively,  the "Certifying  Officers") are responsible for establishing and
maintaining  disclosure  controls and procedures for the Company.  Such officers
have concluded  (based upon their evaluation of these controls and procedures as
of a date within 90 days of filing of this report) that the Company's disclosure
controls and procedures are effective to ensure that information  required to be
disclosed by the Company in this report is accumulated  and  communicated to the
Company's management, including its Certifying Officers as appropriate, to allow
timely decisions  regarding required  disclosure.  The Certifying  Officers also
have indicated that there were no significant  changes in the Company's internal
controls  or  other  factors  that  could  significantly  affect  such  controls
subsequent to the date of their evaluation, and there were no corrective actions
with regard to significant deficiencies and material weaknesses.

ITEM 8B. OTHER INFORMATION

      None.


                                                                              80
<PAGE>

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE
        WITH SECTION 16(a) OF THE EXCHANGE ACT

The following table sets forth the names and ages of the members of the Board of
Directors  and our executive  officers,  and sets forth the position with Devine
held by each:

Directors and Executive Officers

         Name                  Age                 Positions
------------------------------------------------------------------------
David Devine                   54       Director, Chairman of the Board,
                                        President and Chief Executive
                                        Officer

Richard Mozer (1)              48       Director, Vice-Chairman of the
                                        Board, Chief Financial Officer,
                                        Treasurer and Secretary

Kenneth D. Taylor (2)          71       Director

Bryson Farrill (1) (2)         77       Director

Ron Feddersen (1) (2)          62       Director

(1)   Member of the Audit Committee.

(2)   Member of the Compensation Committee.

      Set forth  below are brief  biographies  of the  Company's  directors  and
officers.  Except for Mr. Feddersen, all of the directors and executive officers
of the Company have held their  principal  occupations  indicated  below for the
past six years.

      David Devine, Chairman of the Board, President and Chief Executive Officer
of the  Company,  is a film and  television  producer/director  with over twenty
years of experience and a co-founder of the Company.  Mr. Devine  graduated with
an Honours


81
<PAGE>

B.A. from Victoria College at the University of Toronto and received his Masters
of Fine Arts in film production from the University of California at Los Angeles
Film School. He has been a director of the Company since 1982.

      Richard Mozer,  Vice-Chairman  of the Board,  Chief Financial  Officer and
Secretary of the Company,  is a film and television  producer with over 20 years
of  experience  and a co-founder  of the Company.  Mr.  Mozer  attended  Cornell
University  and received his Bachelors  Masters of Fine Arts in film  production
from the University of Southern  California Film School.  He has been a director
of the Company since 1982.

      Kenneth D. Taylor is Chairman  of Taylor and Ryan Inc.,  a public  affairs
consulting  company,  and is currently  Chancellor of Victoria University at the
University  of Toronto.  Mr. Taylor was  appointed  Chancellor in May 1998.  Mr.
Taylor is and has been a director of several private  corporations,  foundations
and other  organizations in Canada and the United States. Mr. Taylor serves as a
director  of the  following  publicly-traded  companies:  Cenuco  Inc.,  Sivault
Systems Inc., Desert Sun Mining Corp.,  Hydro One Inc.,  Rockwater Capital Corp.
and Taylor Gas Liquids Fund. Mr. Taylor was the Canadian Ambassador to Iran from
1977 to 1980. Mr. Taylor is the recipient of a United States  Congressional Gold
Medal and is an Officer of the Order of  Canada.  He has been a director  of the
Company since April 1994.

      Since 1989,  Bryson Farrill has been an independent  financial  consultant
and  businessman,   engaged  in  personal  investing   activities  and  advising
businesses  with  respect to various  manufacturing,  resource  and  commodities
ventures.  Mr. Farrill has had a long career in the securities industry, and was
formerly Chairman of McLeod, Young, Weir International,  an investment dealer in
Toronto,  Ontario,  Canada from 1974 to 1978.  Mr.  Farrill was also Chairman of
Scotia McLeod (USA) Inc.  from 1978 to 1989.  Since 1997,  Mr.  Farrill has also
served as a director of HomeLife, Inc., a publicly-traded company which provides
a broad  range of real  estate  services.  He has been a director of the Company
since April 1994.

      Ron Feddersen has been  Executive  Principal of The Atticus Group Inc., an
interim management  services company,  since 2003. Prior thereto,  Mr. Feddersen
was the President of Flehr Associates Limited, a business consulting company. He
has been a director of the Company since February 2004.

Board of Directors

      The  Company's  Articles of  Incorporation,  as amended (the  "Articles of
Incorporation"),  require that the  Company's  board of directors  consist of no
less than  three and no more than ten  members.  The board of  directors  of the
Company  currently  consists of five members.  Directors  serve for terms of one
year and until their successors are duly elected and have qualified.  Subject to
the Business  Corporations Act (Ontario) (the "OBCA"),  the shareholders may, by
ordinary resolution passed at a meeting of shareholders called for such purpose,
remove any director from office before


                                                                              82
<PAGE>

the expiration of his term of office and the vacancy created by such removal may
be filled at the same  meeting,  failing which it may be filled by the remaining
directors.

      The Company's By-Laws,  as amended (the "By-Laws"),  require that at least
(i) a majority of the directors be Canadian  residents and (ii) one-third of the
directors not serve as officers of, or be employed by, the Company.

Committees of the Board of Directors

      As a public company,  the Company has established an Audit Committee and a
Compensation Committee of the board of directors.

      Audit Committee

      The Audit Committee consists of Messrs. Mozer, Farrill and Feddersen,  and
is responsible for reviewing the Company's financial statements and its internal
controls, reviewing the work of the Company's independent auditors and reporting
thereon to the board of directors.  Neither Mr. Farrill nor Mr.  Fedderson is or
has ever been an officer or employee of the Company or any of its subsidiaries.

      Audit Committee Financial Expect

      The board of directors  does not currently  have any member who is both an
audit committee financial expert as defined by Item 401(h) of Regulations S-K of
the  Securities  Exchange Act of 1934, as amended,  and  independent  within the
meaning of Item 7(d)(3)(iv) of Schedule 14A of such Act.

      Compensation Committee

      The  Compensation  Committee  consists  of  Messrs.  Taylor,  Farrill  and
Feddersen,  and is responsible  for reviewing the level and form of compensation
payable to the  executive  officers of the Company,  and making  recommendations
with respect thereto to the board of directors.  The  Compensation  Committee is
also  responsible  for making  recommendations  to the board of  directors  with
respect to the  granting of stock  options  pursuant to the Option Plan (as such
term is  defined in  "Executive  Compensation").  No member of the  Compensation
Committee  is or has ever been an officer or  employee  of the Company or any of
its subsidiaries.

Compliance with Section 16(a) of the Exchange Act

      Compliance  with  Section  16(a)  ("Section  16(a)") of the  Exchange  Act
requires our executive officers, directors, and persons who own more than 10% of
our  Common  Stock  (collectively,  "Reporting  Persons")  to  file  reports  of
ownership  on Form 3 and  changes  in  ownership  on  Form 4 or Form 5 with  the
Commission.  Such  Reporting  Persons are also  required by the  Securities  and
Exchange  Commission  rules to furnish us with copies of


83
<PAGE>

all Section 16(a) forms that they file. We believe that during fiscal year 2005,
all the Reporting Persons complied with all applicable filing requirements.

ITEM 10. EXECUTIVE COMPENSATION

      The  compensation  payable to the  executive  officers  of the  Company is
established  by the  Compensation  Committee,  no member of which is or has ever
been an officer or  employee  of the  Company  or any of its  subsidiaries.  The
Compensation  Committee  recognizes  that  the  Company's  business  is  largely
dependent    on    attracting    and    retaining    motivated,    skilled   and
achievement-oriented personnel. By compensating the Company's executive officers
at levels which, on an annual basis, are commensurate with established  industry
standards but expending  their salaries to the Company over the entire  duration
of a  particular  production  as  production,  direction,  writing  and  similar
services,  the Company's executive  compensation  program is structured to align
each  executive   officer's  financial  interests  with  the  Company's  overall
objectives of maximizing and sustaining  shareholder  value. The Company is able
to achieve this alignment due to its receipt of Canadian  federal and provincial
labor tax credits for  salaries  paid by the Company to its  executive  officers
when such officers act as a producer or director in connection  with  qualifying
film and television productions. See "Executive Services Agreement."

Summary Compensation Table

      The following table sets forth all compensation  earned during each of the
last three fiscal years ended December 31, 2006 by the Chief  Executive  Officer
and the  Chief  Financial  Officer  of the  Company  (collectively,  the  "Named
Executive Officers"),  such individuals being the only executive officers of the
Company whose total annual salary, bonus and other annual compensation  exceeded
$100,000 (U.S.).

--------------------------------------------------------------------------------
Name and                     Year       Annual Compensation           Long Term
Principal                                                           Compensation
Position
--------------------------------------------------------------------------------
                                                     Other Annual    Securities
                                    Salary   Bonus   Compensation    Underlying
                                      ($)     ($)       ($)(1)       Options (#)
--------------------------------------------------------------------------------
David Devine,                2006     --      --       164,276               --
Chairman, President          2005     --      --       195,150               --
& Chief Executive            2004     --      --       271,610        1,000,000
Officer
--------------------------------------------------------------------------------


                                                                              84
<PAGE>

--------------------------------------------------------------------------------
Name and                     Year       Annual Compensation           Long Term
Principal                                                           Compensation
Position
--------------------------------------------------------------------------------
                                                     Other Annual    Securities
                                    Salary   Bonus   Compensation    Underlying
                                      ($)     ($)       ($)(1)       Options (#)
--------------------------------------------------------------------------------
Richard Mozer                2006     --      --       135,000               --
Vice-Chairman,               2005     --      --       166,170               --
Chief Financial,             2004     --      --       222,226        1,000,000
Officer, Treasurer
& Secretary
--------------------------------------------------------------------------------

(1) In accordance with the executive  services  agreement  described below under
"Executive  Services   Agreement,"  the  Company  pays  fees  to  a  corporation
controlled  jointly by Messrs.  Devine and Mozer as  compensation  for  writing,
directing  and producing  services  provided to the Company. Messrs. Devine  and
Mozer were also issued Common Shares during 2004. See "Certain Relationships and
Material Transactions."

      The Company does not have a long-term  incentive  plan or pension plan and
has never granted stock appreciation rights to any of its directors, officers or
employees.

Executive Services Agreement

      Since April 1994,  the Company has been a party to an  executive  services
agreement with Messrs. Devine and Mozer, and 1078459 Ontario Inc., a corporation
wholly-owned by Messrs.  Devine and Mozer.  Under the current executive services
agreement dated as of January 1, 2005, Messrs.  Devine and Mozer are required to
provide senior  management  services to the Company  through  December 31, 2007.
From time to time,  Messrs.  Devine  and Mozer may  participate  in  production,
direction,  writing  and  similar  activities,  depending  on the  needs  of the
Company.  Under this agreement,  the base fee payable to 1078459 Ontario Inc. is
determined  by the board of directors of the Company from time to time.  1078459
Ontario Inc. is also entitled to additional fees and/or equity-based  incentives
in consideration of the services  performed and provided by it, as determined to
be appropriate by the board of directors of the Company in view of any (i) bonus
paid by the Company to its executive  officers or (ii) film or video development
and production project undertaken by the Company.

      Under the  executive  services  agreement,  Messrs.  Devine  and Mozer are
entitled to participate in any incentive  compensation or other employee benefit
plan or  program  generally  maintained  at the  Company  from  time to time and
offered to the Company's employees generally or executive officers. The services
of these  executives  may be


85
<PAGE>

terminated  by the Company at any time.  If the  services of Messrs.  Devine and
Mozer are  terminated  without  cause (as such term is defined in the  executive
services  agreement),  the  Company is  required  to  continue to pay to 1078459
Ontario Inc. its base fee entitlement until the expiry of the greater of (i) the
remaining term of the agreement or (ii) eighteen months.  The executive services
agreement also includes confidentiality and non-competition provisions.

Option Plan

      The board of  directors  of the Company  adopted a stock  option plan (the
"Option  Plan")  on  May  13,  2004,  which  was  subsequently  ratified  by the
stockholders  of the Company on June 25, 2004. In  connection  with the adoption
and  ratification of the Option Plan, the Company  terminated its  then-existing
stock option plan and cancelled all outstanding options issued thereunder.

      The Option Plan is for the benefit of  employees,  officers and  directors
and certain  consultants of the Company and its subsidiaries and is administered
by the board of directors of the Company.  The board of directors  may from time
to time designate  individuals to whom options to purchase shares of the capital
stock of the  Company  may be granted and the number of shares to be optioned to
each.  The exercise  price of options issued under the Option Plan will be fixed
by the board of  directors  when such  options  are granted  provided  that such
exercise price shall not be less than the market price of the shares at the time
the options are granted.  The period during which an option is  exercisable  may
not exceed  five years from the date the option is granted  and the  options may
not be assigned,  transferred  or pledged,  except in limited  circumstances  as
permitted under applicable securities  legislation.  Subject to any grace period
allowed  under the  policies of any stock  exchange on which the shares are then
listed for trading, the options will expire 60 days following the termination of
the employment or office with the Company or any of its subsidiaries or death of
an individual.

      Pursuant to the terms of the Plan:  the (i) number of shares  reserved for
issuance under options granted to related persons (as such term is defined under
applicable  securities  legislation) under the Option Plan and any similar plans
may not exceed 10% of the aggregate  number of issued and outstanding  shares of
the Company;  (ii) issuance to related  persons,  within a 12 month  period,  of
shares  under the 2004 Plan and any  similar  plans  may not  exceed  10% of the
aggregate number of issued and outstanding  shares of the Company;  (iii) number
of shares  reserved for issuance  under options to acquire shares granted to any
related  person under the Option Plan and any similar plans may not exceed 5% of
the aggregate number of issued and outstanding  shares of the Company;  and (iv)
issuance to any one related person and the related person's associates, within a
12 month  period,  of shares  under the 2004 Plan and any similar  plans may not
exceed  5% of the  aggregate  number  of issued  and  outstanding  shares of the
Company.


                                                                              86
<PAGE>

      In June 2006 the Company's  stock option plan was amended as follows;  The
determination regarding the aggregate number of Voting Shares subject to options
in favour of any  Participant  will take into  consideration  the  Participant's
present and potential  contribution  to the success of the Corporation and shall
be  determined   from  time  to  time  by  the  Board  of  Directors   upon  the
recommendation  of the Compensation  Committee.  The aggregate maximum number of
Voting  Shares  reserved  for  issuance at any time upon the exercise of options
issued pursuant to this Plan and any other Share Compensation Arrangements shall
be equal to fifteen percent (15%) of the aggregate  number of Voting Shares then
issued  and  outstanding  or  such  other  number  as  the  shareholders  of the
Corporation shall approve in accordance with the requirements of any Exchange."

      Any officer or director of the Corporation be and is hereby authorized for
and on behalf of the Corporation to execute, whether under the corporate seal of
the  Corporation or otherwise,  and deliver all such documents and  instruments,
and to do all such acts or things,  as may be  necessary  or  desirable  to give
effect to the foregoing."

      As at March 26, 2007,  5,897,055  Common Shares were reserved for issuance
under the  Option  Plan and  3,465,000  are  subject  to  currently  outstanding
options.

Option Grants in Last Fiscal Year

      The  Company  did not grant  any  options  to  purchase  Common  Shares to
Executive Officers during the fiscal year ended December 31, 2006.

      The following table sets forth  information  regarding options to purchase
Common Shares  granted during the fiscal year ended December 31, 2004 to each of
the Named Executive Officers.

--------------------------------------------------------------------------------
                   Number of
                   Securities       % of Total
                   Underlying    Options Granted     Exercise
                    Options      to Employees in   Price/Common
    Name           Granted (#)   Fiscal Year 2004     Share)     Expiration Date
--------------------------------------------------------------------------------

David Devine       1,000,000          29.1%           $0.10          09.29.09
--------------------------------------------------------------------------------

Richard Mozer      1,000,000          29.1%           $0.10          09.29.09
--------------------------------------------------------------------------------

Aggregated  Option  Exercises  in Last  Fiscal Year and Fiscal  Year-End  Option
Values

      The Executive Officers of the Company did not exercise options to purchase
Common Shares during the fiscal year ended December 31, 2006.


87
<PAGE>

      The following  table sets forth  information  concerning  each exercise of
options to purchase  Common Shares by the Named  Executive  Officers  during the
fiscal year ended December 31, 2006.

--------------------------------------------------------------------------------
    Name      Securities     Value       Unexercised      Value of Unexercised
              Acquired on   Realized     Options at      In-the-Money Options at
              Exercise (#)            December 31, 2006     December 31, 2006
                                             (#)

                                         Exercisable/          Exercisable/
                                        Unexercisable         Unexercisable
--------------------------------------------------------------------------------
David Devine      -0-          $0         1,000,000                 $0
--------------------------------------------------------------------------------

Richard Mozer     -0-          $0         1,000,000                 $0
--------------------------------------------------------------------------------

Compensation of Directors

      As of January 1, 2006, Directors of the Company who are not employees, are
paid $1,500 per quarter,  payable in common shares of the Company or cash. Prior
to January 1, 2007,  Directors  did not receive an annual  retainer or any other
cash compensation for their services as members of the board of directors of the
Company.  Directors  of the  Company,  are  entitled  to  reimbursement  for any
expenses incurred for each meeting of the board of directors or of any committee
of the board of directors that they attend.

      During  2004,  Messrs.  Taylor,  Farrill and  Feddersen  were each granted
options  under the Option Plan to purchase up to 150,000  Common Shares at a per
share exercise price of $0.10 on or before September 29, 2009.

      In April 2005,  Mr.  Feddersen was granted an option under the Option Plan
to purchase up to 100,000  Common Shares at a per share  exercise price of $0.10
on or before April 20, 2010.

      The  Atticus  Group  Inc.,  a company  for which Mr.  Feddersen  serves as
Executive Principal,  is party to an interim management and consultancy services
agreement   with  the   Company.   See  "Certain   Relationships   and  Material
Transactions."

Indemnification of Directors

      The Company has agreed to indemnify  each of its  directors to the fullest
extent permitted by the OBCA for all costs, liabilities and expenses incurred by
each director, including legal fees, in respect of claims to which each director
is made a party by reason of being or having  been a director  of the Company or
any subsidiary thereof,  provided


                                                                              88
<PAGE>

such director acted honestly and in good faith with a view to the best interests
of the  Company  and,  in the case of a criminal  or  administrative  proceeding
enforced by monetary penalty, such director had reasonable grounds for believing
that his conduct was lawful.

Directors' and Officers' Liability Insurance

      The  Company  maintains  insurance  for the benefit of its  directors  and
officers  against  liability in their  respective  capacities  as directors  and
officers. The annual premium payable by the Company in respect of such insurance
is $15,582.  (inclusive of  applicable  taxes) and the total amount of insurance
purchased for the directors and officers as a group is $1,000,000. The directors
and officers  are not  required to pay any premium in respect of the  insurance.
The Company is liable to the extent of $50,000 per claim under the deductibility
provisions of the policy.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The following table sets forth,  as at March 26, 2007 certain  information
as to (i) each person,  who to the knowledge of the Company,  is the  beneficial
owner of more  than  five  percent  (5%) of any  class of the  Company's  voting
securities and (ii) each class of equity securities of the Company or any of its
subsidiaries (other than directors  qualifying shares) beneficially owned by (A)
each director of the Company and the Named  Executive  Officers (as such term is
defined  in  "Executive  Compensation")  and (B)  all  directors  and  executive
officers of the Company as a group.

                         Title of Class - Common Shares

                                            Amount and
Name and Address of                    Nature of Beneficial
 Beneficial Owner(1)                         Ownership          Percent of Class
--------------------                   --------------------     ----------------

Forvest Trust S.A.                         3,570,000(2)                9.1%
6, Place Chevelu
1211 Geneva 1
Switzerland

David Devine                               6,920,545(3)               17.6%

Richard Mozer                              6,433,945(4)               16.4%

Kenneth D. Taylor                            184,100(5)            Less than 1%

Bryson Farrill                               194,100(6)            Less than 1%


89
<PAGE>

Ron Feddersen                                284,100(7)            Less than 1%

All directors and executive               14,016,790                  35.7%
officers (5 individuals)

      The  following  table sets forth certain  information  with respect to the
directors and executive officers of Devine Entertainment.

(1) The  address  for each  beneficial  owner  listed in the  table,  other than
Forvest  Trust  S.A.,  is c/o  Devine  Entertainment  Corporation,  Suite 504, 2
Berkeley Street, Toronto, Ontario, Canada M5A 2W3.

(2) Includes  warrant to purchase  50,000  Common Shares and warrant to purchase
1,830,000 Common Shares.  See "Description of Securities -- 10.5% Debentures and
10.5% Debenture Warrants" and "Recent Sales of Unregistered Securities."

(3) Includes option to purchase  1,000,000 Common Shares and warrant to purchase
250,000 Common  Shares.  See  "Executive  Compensation  -- Option Grants in Last
Fiscal Year" and "Certain Relationships and Material Transactions."

(4) Includes option to purchase  1,000,000 Common Shares and warrant to purchase
250,000 Common  Shares.  See  "Executive  Compensation  -- Option Grants in Last
Fiscal Year" and "Certain Relationships and Material Transactions."

(5)  Includes  option  to  purchase   150,000  Common  Shares.   See  "Executive
Compensation -- Compensation of Directors."

(6)  Includes  option  to  purchase   150,000  Common  Shares.   See  "Executive
Compensation -- Compensation of Directors."

(7)  Includes  option  to  purchase   250,000  Common  Shares.   See  "Executive
Compensation -- Compensation of Directors."

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The Company has entered into an executive  services  agreement dated as of
January 1, 2005 with  Messrs.  Devine and Mozer,  and 1078459  Ontario  Inc.,  a
corporation  wholly-owned  by Messrs.  Devine and Mozer.  Under this  agreement,
Messrs.  Devine and Mozer are required to provide  services to the Company.  See
"Executive Compensation -- Executive Services Agreement."

      Mr. Feddersen, a director of the Company, is the principal interim manager
under an interim  management  and  consultancy  services  agreement  between the
Company and The Atticus  Group Inc. The Atticus Group Inc. is paid a fee of $560
per month for Mr.


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Feddersen's  services under such agreement.  Mr.  Feddersen  serves as Executive
Principal for the Atticus Group Inc.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

Exhibits

--------------------------------------------------------------------------------
                                                                 Sequential Page
  Exhibit No.    Description of Exhibit                               Number
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
  3.1            Articles of Incorporation of the Company,              **
                 as amended
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
  3.2            By-Laws of the Company                                  *
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
  4.1            Specimen Form of Common Share Certificate              **
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
  10.1           Option Plan of the Company                              *
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
  10.2           Executive Services Contract dated as of
                 January 1, 2005 among 1078459 Ontario Inc.,
                 the Company, David B. Devine and Richard Mozer         **
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
  21.1           Subsidiaries of the Company                           ***
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
  99.1           Form F-X of the Company                                 *
--------------------------------------------------------------------------------

*     Incorporated by reference to the exhibit of the same number filed with the
      Registration  Statement  on Form 10-SB of the Company  dated  February 16,
      2005.


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<PAGE>

**    Incorporated  by  reference  to the exhibit of the same number  filed with
      Amendment No. 1 to the Registration Statement on Form 10-SB of the Company
      dated May 26, 2005.

***   filed herewith

b.) Reports on Form 8-K

No reports were filed on Form 8-K during the last quarter of the fiscal year.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Summary of Mintz & Partners LLP for Professional  Services  rendered in 2006 and
Kraft, Berger, Grill,  Schwartz,  Cohen and March LLP, Chartered Accountants for
Professional Services rendered in 2005

                                                        Years Ended December 31,
                                                        ------------------------
                                                        2006               2005

Audit Fees (1)                                        $49,500             80,940
Audit-Related Fees                                         --              2,940
Tax Fees                                                   --                 --
All Other Fees
                                                       49,500             83,880
                                                      =======            =======

1)    Services   relating  to  audit  of  the  annual   consolidated   financial
      statements,  review  of  quarterly  financial  statements,   consents  and
      assistance with the review of documents filed with the SEC.

      All  engagements  for  audit  services,  audit  related  services  and tax
services  are approved in advance by the Audit  Committee  and the full Board of
Directors. The Audit Committee and the Board of Directors has considered whether
the provision of the services described above for the fiscal year ended December
31, 2006 and 2005, is compatible with maintaining the auditor's independence.

      All audit and  non-audit  services  that may be provided by our  principal
accountant to us shall require  pre-approval by the Audit Committee and Board of
Directors.  Further,  our  auditor  shall  not  provide  those  services  to  us
specifically  prohibited by the SEC,  including  bookkeeping  or other  services
related to the accounting  records or financial  statements of the audit client;
financial information systems design and implementation;  appraisal or valuation
services, fairness opinion, or contribution-in-kind reports; actuarial services;
internal audit  outsourcing  services;  management  functions;  human resources;


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broker-dealer,  investment  adviser,  or investment  banking services and expert
services  unrelated  to the audit;  and any other  service  that Public  Company
Oversight Board determines, by regulation, is impermissible.


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                                   SIGNATURES

      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                        DEVINE ENTERTAINMENT CORPORATION

                                        By _____________________________________
                                                        David Devine
                                           Director, Chairman of the Board
                                           President and Chief Executive Officer

Dated: March 26, 2007

      Pursuant to the  requirements of the Securities  Exchange Act, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and on the dates indicated.

Signature               Title                                     Date
--------------------------------------------------------------------------------
/s/ David Devine        Director, Chairman of the Board           March 26, 2007
                        President and Chief Executive Officer

/s/ Richard Mozer       Director, Vice-Chairman of the            March 26, 2007
                        Board, Chief Financial Officer,
                        Treasurer and Secretary

/s/ Kenneth D. Taylor   Director                                  March 26, 2007

/s/ Bryson Farrill      Director                                  March 26, 2007

/s/ Ron Feddersen       Director                                  March 26, 2007


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