UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q

|X|    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                  For the quarterly period ended June 30, 2008

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

 For the transition period from ______________________ to ______________________
                        Commission file number 000-51168

                        DEVINE ENTERTAINMENT CORPORATION
             (Exact name of registrant as specified 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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes |X| No |_|

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated filer, a non-accelerated  filer, or a smaller reporting company. See
the   definitions   of   "large   accelerated   filer",   "accelerated   filer",
"non-accelerated  filer",  and "smaller  reporting company" in Rule 12b-2 of the
Exchange Act. (Check one):

--------------------------------------------------------------------------------
Large accelerated filer                        Accelerated filer
--------------------------------------------------------------------------------
Non-accelerated filer                          Smaller reporting company |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|

As of August 14, 2008 the registrant had 45,980,549  shares of common stock,  no
par value, issued and outstanding.

<PAGE>

TABLE OF CONTENTS

PART I   FINANCIAL INFORMATION

Item 1.  Financial Statements                                                  8

Item 2.  Management's Discussion and Analysis or Plan of Operation            39

Item 3.  Quantitative and Qualitative Disclosures About Market Risk           65

Item 4T. Controls and Procedures                                              65

PART II  OTHER INFORMATION

Item 1.  Legal Proceedings                                                    67

Item 1A. Risk Factors                                                         67

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds          67

Item 3.  Defaults Upon Senior Securities                                      67

Item 4.  Submission of Matters to a Vote of Security Holders                  67

Item 5.  Other Information                                                    67

Item 6.  Exhibits and Reports on Form 8-K                                     67

Signatures                                                                    69


                                      -2-
<PAGE>

Item 1.

                        DEVINE ENTERTAINMENT CORPORATION

                    INTERIM CONSOLIDATED FINANCIAL STATEMENTS

                                  June 30, 2008

                                    CONTENTS

                                                                          PAGE

Balance Sheet                                                               4

Statement of Shareholders' Equity                                           5

Statement of Operations                                                     6

Statement of Cash Flows                                                     7

Notes to Financial Statements                                             8 - 38


                                      -3-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION
                                 Ontario, Canada
                       INTERIM CONSOLIDATED BALANCE SHEET
                                   (Unaudited)
                         (expressed in Canadian dollars)

                                  JUNE 30, 2008

                                     ASSETS

                                                    June 30         December 31
                                                      2008             2007
                                                  ------------     ------------
Cash and cash equivalents                         $    130,017     $    245,872
Accounts receivable                                    142,116        1,028,705
Film tax credits receivable (Note 4)                   212,361        1,112,207
Inventory                                               52,363           54,871
Prepaid expenses and sundry assets                     140,498          185,360
Advances receivable (Note 5)                           494,550          494,550
Investment in film, television
  programs and recordings (Note 6)                   2,062,009        5,355,327
Equipment (Note 7)                                      13,318           15,345
                                                  ------------     ------------

                                                  $  3,247,232     $  8,492,237
                                                  ============     ============

                                  LIABILITIES

Accounts payable and accrued liabilities          $  1,684,481     $  1,569,974
Film production loan (Note 8)                               --        1,840,604
Loans payable (Note 9)                               1,700,800        1,700,800
Preferred shares (Note 10)                             494,550          494,550
                                                  ------------     ------------

                                                     3,879,831        5,605,928
                                                  ============     ============

                       SHAREHOLDERS' EQUITY (DEFICIENCY)

Capital stock (Note 11)                             12,661,908       12,652,998
Contributed surplus (Note 12)                        1,068,369          902,449
Warrants (Note 11(d)                                   772,283          708,456
Deficit                                            (15,135,159)     (11,377,594)
                                                  ------------     ------------

                                                      (632,599)       2,886,309
                                                  ------------     ------------

                                                  $  3,247,232     $  8,492,237
                                                  ============     ============

See accompanying notes to interim consolidated financial statements.


                                      -4-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

             INTERIM CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                                   (Unaudited)

    FOR THE SIX MONTHS ENDED JUNE 30TH, 2008 AND YEAR ENDED DECEMBER 31, 2007

<TABLE>
<CAPTION>
                                                                                                Stock      Contributed
                                             Common Shares                 Warrants            Options       Surplus      Deficit
                                       -------------------------    ----------------------    ---------    -----------  -----------
                                            #              $            #             $           #             $             $
                                                                                                            (Note 12)
                                       --------------------------------------------------------------------------------------------
<S>                                    <C>            <C>           <C>            <C>        <C>            <C>        <C>
BALANCE, as restated (note 2)
December 31, 2006                      39,313,699     12,268,006    6,069,166      335,544    4,245,000      707,165    (10,805,510)

- expired options                                                                              (905,000)

- settlement for services rendered         68,850         10,328

- settlement of accrued liabilities        63,600          9,540

- issuance of private placement         6,475,000        365,124    6,475,000      227,276

- grant of stock options                                                                      1,315,000      119,450

- modification of warrants                                                          16,256                   (16,256)

- grant of warrants                                                 1,930,000      129,380

- proceeds from financings                                                                                   131,316

- subscription receivable, net                                                                               (39,226)

NET LOSS                                                                                                                   (572,084)
                                       --------------------------------------------------------------------------------------------
BALANCE,                               45,921,149     12,652,998   14,474,166      708,456    4,655,000      902,449    (11,377,594)
December 31, 2007

- subscription received                                                                                      229,747

- settlement of accrued liabilities        59,400          8,910

- modification of warrants                                                          63,827                   (63,827)

NET LOSS                                                                                                                 (3,757,565)
                                       --------------------------------------------------------------------------------------------
BALANCE, June 30, 2008                 45,980,549     12,661,908   14,474,166      772,283    4,655,000    1,068,369    (15,135,159)
                                       --------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to interim consolidated financial statements.


                                      -5-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

                  INTERIM CONSOLIDATED STATEMENT OF OPERATIONS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                     Three months ended June 30,         Six months ended June 30,
                                                                       2008              2007             2008              2007
                                                                   ------------      ------------     ------------      ------------
                                                                                      As Restated                        As Restated
                                                                                       (note 2)                            (note 2)
<S>                                                                <C>               <C>              <C>               <C>
REVENUE                                                            $    149,587      $  1,935,408     $    254,141      $  3,964,483
                                                                   ------------      ------------     ------------      ------------

EXPENSES
Selling, general and administrative                                     212,650           285,586          409,063           387,820
Amortization
- film, television programs and recordings                               75,076         1,354,414           99,450         2,731,119
- equipment                                                                 977             1,308            2,027             2,715
Write-down of Investment in film, television programs                 3,477,698                          3,477,698
and recordings (Note 6)
Interest (Note 13)                                                       23,403             8,846           23,468            44,895
                                                                   ------------      ------------     ------------      ------------
                                                                      3,789,804         1,650,154        4,011,706         3,166,549
                                                                   ------------      ------------     ------------      ------------

NET INCOME (LOSS) AND COMPREHENSIVE
INCOME (LOSS)                                                      $ (3,640,217)     $    285,254     $ (3,757,565)     $    797,934

EARNINGS (LOSS) PER SHARE (Note 14)

Basic and diluted                                                  $      (0.08)     $       0.01     $      (0.08)     $       0.02
                                                                   ============      ============     ============      ============

WEIGHTED AVERAGE NUMBER OF SHARES
Basic and diluted                                                    45,930,287        39,370,444       45,925,718        39,342,228
                                                                   ============      ============     ============      ============
</TABLE>

See accompanying notes to interim consolidated financial statements.


                                      -6-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

                  INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                      Three months ended June 30,        Six months ended June 30,
                                                                         2008            2007             2008             2007
                                                                                      As Restated                       As Restated
                                                                                        (note 2)                          (note 2)
<S>                                                                  <C>              <C>              <C>              <C>
OPERATING ACTIVITIES

Net income (loss) for the period                                     $(3,640,217)     $   285,254      $(3,757,565)     $   797,934
Stock based compensation                                                      --          146,500               --          146,500
Amortization - film, television programs
               and recordings                                             75,076        1,354,414           99,450        2,731,119
             - equipment                                                     977            1,308            2,027            2,715
Write-down of investment in film, television programs                  3,477,698                         3,477,698
and recordings
Change in non-cash components of
 working capital (Note 19)                                             1,401,912       (1,055,295)       1,957,222       (1,365,992)
                                                                     -----------      -----------      -----------      -----------
                                                                       1,315,446          732,181        1,778,832        2,312,276
                                                                     -----------      -----------      -----------      -----------
FINANCING ACTIVITIES
Increase (decrease) of film production loans                          (1,272,570)         (21,667)      (1,840,604)        (677,014)
Proceeds from financing and
subscription receivable                                                       --                           229,747               --
                                                                     -----------      -----------      -----------      -----------
                                                                      (1,272,570)         (21,667)      (1,610,857)        (677,014)
                                                                     -----------      -----------      -----------      -----------

INVESTING ACTIVITIES
Investment in film, television programs and recordings                  (158,993)        (873,444)        (283,830)      (1,749,271)
                                                                     -----------      -----------      -----------      -----------
                                                                        (158,993)        (873,444)        (283,830)      (1,749,271)
                                                                     -----------      -----------      -----------      -----------

CHANGE IN CASH AND CASH EQUIVALENTS                                     (116,117)        (162,830)        (115,855)        (114,009)

CASH AND CASH EQUIVALENTS, Beginning of period                           246,134          316,822          245,872          268,001
                                                                     -----------      -----------      -----------      -----------

CASH AND CASH EQUIVALENTS, End of period                             $   130,017      $   153,992      $   130,017      $   153,992
                                                                     ===========      ===========      ===========      ===========


SUPPLEMENTARY CASH FLOW INFORMATION
  Interest paid                                                      $     2,349      $        --      $    31,591      $        --
  Income taxes paid                                                  $        --      $        --      $        --      $        --
</TABLE>

See accompanying notes to interim consolidated financial statements.


                                      -7-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                                  JUNE 30, 2008

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.  Furthermore,  the industry
      has long operating  cycles that require cash  injections into new projects
      significantly  ahead  of  the  delivery  and  exploitation  of  the  final
      production.

      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.

      While the Company  continues to maintain  its  day-to-day  activities  and
      produce  and  distribute  films  and  television  programming,  it  has  a
      significant  working  capital  deficiency  and its continued  existence is
      dependent upon its ability to restore and maintain  profitable  operations
      and to successfully extinguish loans payable (Note 9), which are currently
      in default.  Management is in constant communication with the loan holders
      and  expects  that the  Company  will be able to  settle  the loans in the
      normal course of operations.  Nonetheless,  the Company  remains unable to
      service this loan and the Company will require  additional working capital
      from its production activities or corporate financing in 2008.

      The Company is pursuing various financing  initiatives;  however, there is
      no assurance that the Company will be successful in its financing  efforts
      and in achieving sufficient cash flows from operating  activities.  If the
      Company is  unsuccessful,  the Company  may be  required to  significantly
      reduce or limit operations.  The application of the going concern basis is
      dependent  upon the Company  obtaining  additional  financing  to fund its
      continuing operations and meet its obligations as they come due.

      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.    RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

      The Company is restating its previously  reported  consolidated  financial
      statements  for the 3 and 6 months  ended June 30,  2007. A summary of the
      impact  of  the  restatement   adjustments  on  the  previously   reported
      consolidated balance sheet, statement of operations and cash flows amounts
      is as follows:


                                      -8-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                                  JUNE 30, 2008

2.    RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (continued)

      Summary of Restatement Adjustments

      a)    The Company  has  determined  that the  previously  filed  financial
            statements  for  the  3 and 6  month  period  ended  June  30,  2007
            contained errors resulting from the incorrect  accounting related to
            interest for the Company's  Investment in film,  television programs
            and recordings.  The interest  income was incorrectly  accounted for
            and should not have been  included  in the  results for the 6 period
            ended June 30, 2007. In addition,  the transaction  should have been
            accounted for and was  addressed in the December 31, 2007  financial
            statements.

            The Company has restated the interest  income from interest  expense
            (income).  The restatement  amounts to $30,312.  As a result accrued
            liabilities increased by $30,312 and net income decreased by $30,312
            for the 6 months  ended June 30,  2007.  The  deficit  increased  by
            $30,312.

      b)    The company  restated its preferred  shares from an equity component
            to a liability  as it was  determined  that under the CICA  Handbook
            Section  3861,  and  following  the  guidance  under  EIC-149.   The
            preferred   shares   are   redeemable,   retractable,   and  have  a
            preferential  priority  participation  in the residual equity of the
            Company;  accordingly  preferred  shares  have  been  restated  as a
            liability.   The   effect   of  the   restatement   resulted   in  a
            reclassification  from preferred shares in the equity section of the
            balance  sheet in the amount of $494,550 to preferred  shares in the
            liability  section  in the  amount  of  $494,550.  This  change  was
            reflected in the Company's  December 31, 2007 financial  statements.
            Accordingly  dividends  amounting  to $11,220  would be  restated as
            interest  expense  for the 3 month  period  ending June 30, 2007 and
            dividends amounting to $22,440 would be restated as interest expense
            for the 6 month period ending June 30, 2007.

      c)    The Company  has  determined  that the  previously  filed  financial
            statements  contained errors resulting from the incorrect volatility
            calculation used to determine the fair value of warrants and options
            issued  for the 3 and 6 month  periods  ended  June 30,  2007.  As a
            result,  contributed  surplus  increased  by  $94,500  and  warrants
            increased by $22,740.  This was offset by an increase to the deficit
            of $117,240 resulting in a reduction to net income and comprehensive
            income of $117,240.

            The  following  table  summarizes  the  impact  of  the  restatement
            adjustment on the previously  reported  statements of operations and
            cash flows for the 3 and 6 months ended June 30, 2007.

            Statement of Operations
                                                   3 months          6 months
                                                 June 30, 2007    June 30, 2007

Net income and comprehensive income
  As previously reported                           $ 413,714        $ 967,926
Interest expense (Note 2 a)                               --          (30,312)
Interest income (Note 2 b)                           (11,220)         (22,440)
Selling, general and administrative                 (117,240)        (117,240)
                                                   ---------        ---------
Net income and comprehensive income
  As restated                                      $ 285,254        $ 797,934


                                      -9-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                                  JUNE 30, 2008

2.    RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (continued)

Statement of Cash Flows
                                                     3 months        6 months
                                                  June 30, 2007    June 30, 2007

Cash flows provided by operating activities
  As previously reported                           $   732,181     $ 2,312,276
Net loss for the period                               (128,460)       (169,992)
Stock based compensation (Note 2 (c)                   117,240         117,240
Accrued liabilities (Note 2 a and b)                    11,220          52,752
                                                   -----------     -----------
Cash flows provided by operating activities
  As restated                                      $   732,181     $ 2,312,276
                                                   -----------     -----------

Cash flows used in financing activities
  As previously reported                           $   (21,667)    $  (677,014)
Cash flows used in financing activities
  As restated                                      $   (21,667)    $  (677,014)
                                                   -----------     -----------

Cash flows used in investing activities            $  (873,444)    $(1,749,271)
                                                   -----------     -----------
Cash flows used in investing activities
  As restated                                      $  (873,444)    $(1,749,271)
                                                   -----------     -----------

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      These  financial  statements  have been  prepared in  accordance  with the
      Canadian  Institute  of  Chartered   Accountants   standards  for  interim
      financial   statements.   These  financial   statements  follow  the  same
      accounting  polices  and methods of their  application  as the most recent
      annual  financial  statements;  however,  they do not  include  all of the
      disclosure  requirements  for annual  financial  statements.  Accordingly,
      these interim financial  statements should be read in conjunction with the
      Company's  audited  financial  statements  for the year ended December 31,
      2007.  Note  21  describes  and  reconciles  the  significant  measurement
      differences  between  Canadian GAAP and  accounting  principles  generally
      accepted  in the United  States  ("US GAAP")  affecting  the  accompanying
      interim  consolidated  financial  statements.  A  summary  of  significant
      accounting principles is set below:

      (a)   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  00-2  of  the  American   Institute  of  Certified  Public
            Accountants  ("SOP  00-2").  Revenue  from  the  sale  of  film  and
            television programming rights and license arrangements is recognized
            only  when  persuasive  evidence  of a sale  or  arrangement  with a
            customer exists,  the film is complete and the contractual  delivery
            arrangements have been satisfied,  the license period has commenced,
            the  arrangement  fee is fixed or  determinable,  collection  of the
            arrangement  fee is  reasonably  assured,  and other  conditions  as
            specified in the respective agreements have been met.

            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.


                                      -10-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                                  JUNE 30, 2008

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

      (a)   Revenue recognition (continued)

            Revenue from  royalties is recognized  when reported by the licensee
            and collection is reasonably assured.

            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 the collectability of proceeds.

            Revenue from the sale of home videos and DVD's are recognized at the
            time of shipment and collection is reasonably assured.

            Amounts  received in advance are recorded as deferred  revenue until
            the revenue recognition criteria are met.

      (b)   Basis of consolidation

            These  consolidated  financial  statements  include the  accounts of
            Devine  Entertainment  Corporation,  its wholly-owned  subsidiaries,
            Across the River  Productions and across the River II Productions as
            well as  Variable  Interest  Entities  ("VIEs").  All  inter-company
            transactions have been eliminated.

            The  Company   adheres  to  the  Canadian   Institute  of  Chartered
            Accountants'    ("CICA")    Accounting    Guideline   15   (AcG-15),
            "Consolidation   of   Variable   Interest   Entities".   AcG-15   is
            substantially  similar to the Financial  Accounting  Standards Board
            interpretation   No.46R  ("FIN  46R")   "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 it controlled the entity
            through a controlling  voting interest.  AcG-15 requires a VIE to be
            consolidated by a company if that company is the primary beneficiary
            of that entity.

            Accordingly,  the Company has included the results of  operations of
            certain limited partnerships.

      (c)   Inventory

            The Company's  inventory consists of finished goods and is stated at
            the  lower of cost and net  realizable  value.  Finished  goods  are
            comprised  mainly  of  DVD's,   videos,   and  teachers'  guides  of
            previously   released   productions   for  resale  through   various
            distribution channels.


                                      -11-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                                  JUNE 30, 2008

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

      (d)   Investment in film, television programs and recordings

      In accordance with SOP 00-2,  investment in film,  television programs and
      recordings  represent  projects in progress and the  unamortized  costs of
      film,  television  programs and recordings,  net of 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.  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.

      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 carrying 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.


                                      -12-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                                  JUNE 30, 2008

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

      (e)   Cash and cash equivalents

            Cash and cash equivalents include cash and all investments purchased
            with an  original  maturity  of three  months or less at the date of
            purchase.  Cash  and  Cash  equivalents  are  held  in  three  major
            financial institutions located in Canada.

      (f)   Equipment

            Equipment  are  recorded  at  cost  less  accumulated  amortization.
            Amortization  is provided for on the declining  balance basis at the
            following annual rates:

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

      (g)   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 exchange
            rates in  effect  at the  times of the  transactions.  The  gains or
            losses  resulting  from  these  translations  are  reflected  in the
            consolidated statements of operations.

      (h)   Government and other assistance

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

      (i)   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  with an exercise  price equal to the
            fair  value  of the  shares  at  the  date  of  grant,  and  vesting
            immediately.  The Company  recognizes  compensation  expense for the
            stock-based  compensation  plan  when  stock  or stock  options  are
            issued.  Any  consideration  received from  employees on exercise of
            stock  options or purchase of stock is credited to share capital and
            the fair value of stock  options  is  transferred  from  contributed
            surplus to share capital.


                                      -13-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                                  JUNE 30, 2008

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

            For  stock  based   compensation   issued  to  non  employees,   the
            Corporation  recognizes  an  expense  based on the fair value of the
            equity instrument issued.

      (j)   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 tax assets and liabilities are measured
            using enacted or  substantively  enacted tax rates expected to apply
            when the  asset  is  realized  or the  liability  settled.  When the
            realization  of a  future  tax  asset is  determined  to not be more
            likely than not realized, a valuation allowance is provided.

      (k)   Earnings per share

            Earnings per share are  computed in  accordance  with Section  3500:
            Earnings  per Share of the CICA  Handbook,  which  directs  that the
            treasury stock and if-converted  method be used to calculate diluted
            earnings per share.

            Diluted  earnings per share  considers  the  dilutive  impact of the
            exercise of outstanding stock options,  warrants,  and conversion of
            preferred  shares, as if the events had occurred at the beginning of
            the  period or at a time of  issuance,  if later.  Diluted  loss per
            share is not presented when the effect would be anti dilutive.

      (l)   Use of Estimates

            The preparation of financial  statements in conformity with Canadian
            generally accepted accounting principles and United States Generally
            accepted  accounting  principles ("US GAAP") 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   revenues  from  film   distribution,
            amortization  of  Investment  in  film,   television   programs  and
            recordings,    valuation   of   stock    compensation,    inventory,
            recoverability  of tax credits and  estimation  of future income tax
            assets,


                                      -14-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                                  JUNE 30, 2008

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

            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.

      (m)   Impairment of long-lived assets

            Long-lived  assets  include  equipment  and  investments  in  films,
            television  programs and  recordings.  Equipment is accounted for as
            per  SFAS 144 (see  Note  3(f)).  Investment  in  films,  television
            programs and  recordings  is accounted for as per SOP-00-2 (see Note
            6). Long-lived assets are reviewed for impairment on an annual basis
            at year end 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  Company's
            investment in films,  television  programs and recordings is greater
            than the  undiscounted  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 flows from the asset.

      (n)   Deferred revenue

            Revenue  received  from  sales of rights  and  licences  related  to
            projects in progress is recorded as deferred  revenue  until revenue
            recognition parameters have been met.

      (o)   Basis of presentation

            The  Company is  presenting  its  balance  sheet as an  unclassified
            balance sheet as its normal operating cycle is more than one year.

      (p)   Adoption of new accounting standards

            Effective  January 1, 2007, the Company adopted the  recommendations
            of CICA Handbook sections 1530,  Comprehensive Income; 3251, Equity;
            3855, Financial  Instruments - Recognition and Measurement;  Section
            3861,   Financial   Instruments  -   Measurement,   Disclosure   and
            Presentation;   and  Section  3865,   Hedges.  As  required  by  the
            standards,  these resulting changes in accounting policies have been
            applied retrospectively with no restatement to prior periods.

            i.    Comprehensive  Income:  Section 1530 establishes standards for
                  reporting  and  display of  comprehensive  income.  Unrealized
                  gains or losses  on  available-for-sale  investments,  and the
                  effective portion of gains or losses on derivatives designated
                  as cash  flow  hedges  and  hedges  of the net  investment  in
                  self-sustaining  foreign  operations  are  included  in  other
                  comprehensive    income   ("OCI")   and   accumulated    other
                  comprehensive  income  ("AOCI")  is  included  as  a  separate
                  component  of  equity.  The  Company  had no such  OCI or loss
                  transactions  for the year ended  December  31, 2007 and there
                  were no opening or closing balances for AOCI.


                                      -15-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                                  JUNE 30, 2008

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

            ii.   Financial Instruments:  Under the new standards, all financial
                  instruments  are  classified  into one of the  following  five
                  categories:   held-for-trading   (assets   and   liabilities),
                  available-for-sale  financial  assets,  loans and receivables,
                  held-to-maturity   financial   assets,   and  other  financial
                  liabilities.  Transaction  costs are  included  in the initial
                  carrying   amount  of   financial   instruments   except   for
                  held-for-trading  items in which  case  they are  expensed  as
                  incurred.  All financial instruments are initially measured at
                  fair value.  Measurement in subsequent  periods depends on the
                  classification of the financial instrument.

      Under these standards:

            Held-for-trading (assets or liabilities)

            This category is comprised of certain investments in equity and debt
            instruments, stand-alone derivatives, other than those designated as
            hedging items, and embedded derivatives requiring  separation.  They
            are carried in the balance  sheet at fair value with changes in fair
            value recognized in the statement of operations.

            Loans and receivables

            These assets are non-derivative  financial assets resulting from the
            delivery of cash or other assets by a lender to a borrower in return
            for a promise to repay on a specified  date or dates,  or on demand.
            They arise  principally  through the provision of goods and services
            to customers (accounts receivable), but also incorporate other types
            of contractual  monetary  assets.  They are initially  recognized at
            fair value and  subsequently  carried at amortized  cost,  using the
            effective interest rate method, less any provision for impairment.

            Available-for-sale investments

            Non-derivative financial assets not included in the above categories
            are   classified  as   available-for-sale   and  comprises   certain
            investments in equity instruments, including a company's investments
            in private  companies.  When they have a quoted  market  price in an
            active  market,  they are carried at fair value with changes in fair
            value  recognized  as a separate  component  of other  comprehensive
            income.  When  they do not have a quoted  market  price in an active
            market,  they are carried at cost. Where a decline in the fair value
            is determined to be other than temporary,  the amount of the loss is
            removed  from  other  comprehensive  income  and  recognized  in the
            statement of operations.

            Other financial liabilities

            Other financial liabilities includes all financial liabilities other
            than  those  classified  as  held-for-trading  and  comprises  trade
            payables,  other  short-term  monetary  liabilities,  and  the  debt
            element  of  convertible   debt.  These  liabilities  are  initially
            recognized at fair value and subsequently  carried at amortized cost
            using the effective interest rate method.

            The adoption of these  standards  had no impact on opening  retained
            earnings and therefore did not result in a  transitional  adjustment
            as of January 1, 2007.


                                      -16-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                                  JUNE 30, 2008

3.    SUMMARY OF SIGNIFICANT Measurement ACCOUNTING POLICIES (continued)

      The  Corporation's  financial  assets and  liabilities  are  recorded  and
      measured as follows:

Asset/Liability                    Category                       Measurement
---------------                    --------                       -----------
Accounts receivable                Loans and receivables          Amortized cost

Subscription receivable            Loans and receivables          Amortized cost

Accounts payable and accrued       Other liabilities              Amortized cost
liabilities

Accrued Liabilities                Other liabilities              Amortized cost

Loans payable                      Other liabilities              Amortized cost

      No derivative  financial  instruments  existed for the periods  presented.
      Based on the preceding information, the application of these new standards
      had a limited impact on the financial statements of the Company.

      Other  balance  sheet  accounts,  such as prepaid  expenses,  property and
      equipment, intangible assets, deferred costs, and deferred revenue are not
      within the scope of the new accounting standards as they are not financial
      instruments.

            iii.  On  January  1,  2007,  the  Company   adopted  Section  1506,
                  "Accounting  Changes",  from the CICA  Handbook.  This Section
                  establishes  criteria  related to the accounting  treatment to
                  adopt and disclosure requirements for accounting changes made,
                  revision of accounting estimates and correction of errors. The
                  adoption of these new standards had no material  impact on the
                  Company's financial statements.

      (q)   Recent Accounting Pronouncements

            i)    In 2006 the  CICA  issued  Handbook  Section  3862,  Financial
                  Instruments  -   Disclosures,   and  Handbook   Section  3863,
                  Financial Instruments - Presentation.  These standards enhance
                  existing disclosure requirements and place greater emphasis on
                  disclosures  related to recognized and unrecognized  financial
                  instruments  and how those  risks are  managed.  Section  3863
                  carries  forward the same  presentation  standards  as Section
                  3861. These new standards are effective for interim and annual
                  financial statements relating to fiscal years commencing on or
                  after  October  1, 2007 on a  prospective  basis.

            ii)   In 2006,  the  CICA  issued  Handbook  Section  1535,  Capital
                  Disclosures  ("CICA 1535").  CICA 1535 requires that an entity
                  disclose  information  that  enables  users  of its  financial
                  statements  to evaluate an entity's  objectives,  policies and
                  processes for managing capital,  including  disclosures of any
                  externally  imposed capital  requirements and the consequences
                  for non-compliance.


                                      -17-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                                  JUNE 30, 2008

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

            iii)  In August  of 2006,  the CICA  issued  Handbook  Section  3031
                  ("CICA 3031"). "Inventories", which must be applied for fiscal
                  years  beginning  on or  after  January  1,  2008.  CICA  3031
                  prescribes the measurement of inventories at the lower of cost
                  and net realizable  value,  with guidance on the determination
                  of cost  including  allocation of overheads and other costs to
                  inventory. Reversals of previous write-downs to net realizable
                  value are permitted when there is a subsequent increase on the
                  value of  inventories.

            iv)   In 2008, the CICA issued Handbook  Section 3064,  Goodwill and
                  Intangible  Assets ("CICA  3064").  CICA 3064,  which replaces
                  Section  3062,  Goodwill and  Intangible  Assets,  and Section
                  3450,  Research and Development Costs,  establishes  standards
                  for the  recognition,  measurement  and disclosure of goodwill
                  and intangible  assets.  The new standard is effective for the
                  Company's interim and annual consolidated financial statements
                  for  periods  commencing  January  1,  2009.  The  Company  is
                  assessing  the impact of the new standard on its  consolidated
                  financial statements.

            v)    In May 2007,  the CICA  published  an  updated  version of its
                  "Implementation Plan for Incorporating International Financial
                  Reporting  Standards  ("IFRS") into Canadian GAAP".  This plan
                  includes  an outline of the key  decisions  that the CICA will
                  need to make as it implements  the Strategic Plan for publicly
                  accountable  enterprises that will converge Canadian generally
                  accepted accounting  principles with IFRS. The changeover date
                  from Canadian GAAP to IFRS is for annual and interim financial
                  statements  relating  to fiscal  years  beginning  on or after
                  January 1, 2011.

4.    FILM TAX CREDITS RECEIVABLE

      Film 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 June 30, 2008,  the Company  expects to
      receive  tax  credits  of nil  (December  31,  2007 -  $194,080)  from the
      Canadian  government  and nil  (December  31,  2007 -  $820,766)  from the
      Ontario government for its completed productions.  The Company has accrued
      $115,000  for tax credits  receivable  related to its projects in progress
      (December 31, 2007 - $97,361)

5.    ADVANCES RECEIVABLE

      Advances to an unrelated  company bear  interest at 6.5% per annum and are
      due December 16, 2014.


                                      -18-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                                  JUNE 30, 2008

6.    INVESTMENT IN FILM, TELEVISION PROGRAMS AND RECORDINGS

      In  accordance  with  statement of position of the  American  Institute of
      Certified Public  Accountants  ("SOP 00-2"),  the Company's  Investment in
      Film,  Television  Programs and Recordings  represent projects in progress
      and the unamortized costs of film, television programs and recordings, net
      of 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.

      The  Company  determines  amortization  of  its  investment  in  film  and
      television  programs and recordings  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").  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.
      Revenue and film carrying 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.  Capitalized  film costs are stated at the lower of
      unamortized cost or estimated fair value on an individual film basis.

      Development  costs which are expected to benefit  future  periods are also
      capitalized.  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. 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 net carrying  value for the Company's  Investment in Film,  Television
      Programs and Recordings  totaled  $2,062,008 as at June 30, 2008 (December
      31, 2007 - $5,335,327).

<TABLE>
<CAPTION>
                                                                                     June 30,                           December 31,
                                                                                       2008                                2007
                                                                                   ------------                         ------------
                                                                                                          Net               Net
                                                                                   Accumulated         Carrying           Carrying
                                                                     Cost          Amortization          Value             Value
                                                                  -----------      ------------       -----------       -----------
<S>                                                               <C>               <C>               <C>               <C>
Completed television programs and recordings                      $ 6,862,840       $ 6,774,041       $    88,799       $   265,000
Completed Motion picture - Bailey's Billion$                        6,972,580         6,972,580                --         2,034,919
Completed Television Drama Series                                   5,793,598         4,629,248         1,164,350         1,816,485
Projects in progress                                                  808,860                --           808,860         1,238,327
                                                                  -----------       -----------       -----------       -----------
                                                                  $20,437,878       $18,375,869       $ 2,062,009        $5,335,327
                                                                  ===========       ===========       ===========       ===========
</TABLE>


                                      -19-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                                  JUNE 30, 2008

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

      Amortization  and  write-down  expensed in the three months ended June 30,
      2008  for the  Company's  Investment  in  Film,  Television  Programs  and
      Recordings  totaled  $3,552,773  (2007  -  $1,354,414).  Amortization  and
      write-down  expensed  in the  six  months  ended  June  30,  2008  for the
      Company's  Investment in Film,  Television Programs and Recordings totaled
      $3,577,148 (2007 - $2,731,119).

      The following table summarizes the Company's amortization and write downs:

<TABLE>
<CAPTION>
For the                                                             Three months ended      Six months ended
                                                                         June 30, 2008         June 30, 2008
------------------------------------------------------------------------------------------------------------
                                Completed films,
                                television programs,   Projects In
                                & recordings           Progress               Total                 Total
------------------------------------------------------------------------------------------------------------
<S>                                    <C>                   <C>               <C>                   <C>
Amortization

-Artists Series                        $75,076                 -               $75,076               $99,450
------------------------------------------------------------------------------------------------------------
Write-down

-Artists Series                         64,982                                  64,982                64,982
-Bailey's Billions                   2,034,919                               2,034,919             2,034,919
-Across the River                      760,134                                 760,134               760,134
-Writers Series                              -           428,196               428,196               428,196
-Humchucker                                  -           189,467               189,467               189,467
------------------------------------------------------------------------------------------------------------
Total Write-down                     2,860,035           617,663             3,477,698             3,477,698
------------------------------------------------------------------------------------------------------------
Total Amortization and
Write-down                          $2,935,111          $617,663            $3,552,774            $3,577,148
------------------------------------------------------------------------------------------------------------
</TABLE>

      The following table summarizes Company's amortization expenses:

<TABLE>
<CAPTION>
                                                                         Three months ended                  Six months ended
                                                                              June 30                             June 30
Amortization                                                           2008              2007              2008              2007

<S>                                                                 <C>               <C>               <C>               <C>
Completed television programs and recordings                        $   75,076        $   21,834        $   99,450        $   65,960
Completed Motion picture - Bailey's Billion$                                --                --                --                --
Completed Television Drama Series                                           --         1,332,580                --         2,665,159
                                                                    ----------        ----------        ----------        ----------

                                                                    $   75,076        $1,354,414        $   99,450        $2,731,119
                                                                    ==========        ==========        ==========        ==========
</TABLE>


                                      -20-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                                  JUNE 30, 2008

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

The following table summarizes Company's write-downs:

<TABLE>
<CAPTION>
                                                                   Three months ended             Six months ended
                                                                        June 30                       June 30
Write-downs                                                        2008           2007           2008           2007

<S>                                                             <C>              <C>          <C>              <C>
Completed television programs and recordings                    $   64,982       $   --       $   64,982       $   --
Completed Motion picture - Bailey's Billion$                     2,034,919           --        2,034,919           --
Completed Television Drama Series                                  760,134           --          760,134           --
Projects in progress                                               617,663           --          617,663           --
                                                                ----------       ------       ----------       ------
                                                                $3,477,698       $   --       $3,477,698       $   --
                                                                ==========       ======       ==========       ======
</TABLE>

      Completed Television Programs and Recordings

      Amortization and write-down of the Company's completed television programs
      and  recordings,  which  include The  Composers  Specials,  The  Inventors
      Specials and The Artists Specials for the three months ended June 30, 2008
      totaled $140,058 (2007 - $21,834)  including a write down of $64,982 (2007
      - $nil). Amortization and write-down of the Company's completed television
      programs  and  recordings,  which  include  The  Composers  Specials,  The
      Inventors  Specials and The Artists Specials for the six months ended June
      30,  2008  totaled  $164,432  (2007 - $74,707)  including  a write down of
      $64,982 (2007 - $nil).

      At  June  30,  2008  investment  in  completed   television  programs  and
      recordings totaled $88,799 (December 31, 2007 - $265,000).

      In the nine-year period from 1999 to 2007, The Artists Specials,  the last
      series of films in its completed television programs and recordings with a
      net carrying value remaining,  generated  approximately  $5,850,000 in its
      first  eight  years  after the  original  release,  which is an average of
      $650,000 per annum.  The  Company's  ultimate  revenue  estimates  for The
      Artists' Specials in 2008 is approximately $300,000,  based on its history
      of sales in North  American  DVD  markets  and  estimates  from its recent
      distribution  agreement for the foreign  territories.  While,  the Company
      believes that its proprietary library of completed television programs and
      recordings  are evergreen  and will  continue to generate  revenues in the
      future,  in accordance  with SOP 00-2 all of the Company's  carrying value
      for its completed  television  programs will be expensed by the end of the
      proscribed ten year amortization period of The Artists Specials at the end
      of  2008.  Accordingly,  the  Company  accelerated  the  expensing  of its
      completed  television  programs and  recordings  in the three months ended
      June 30, 2008 and wrote down its carrying value by $106,263.

      Completed Motion Picture - Bailey's Billion$

      In the three and six months  ended June 30, 2008,  the Company  wrote down
      the balance of it's  investment  in  completed  motion  picture,  Bailey's
      Billion$,  totaling  $2,034,919  (2007 -  $nil).  At June  30,  2008,  the
      Company's  investment  in completed  motion  picture,  Bailey's  Billion$,
      totaled $nil (December 31, 2007 - $2,034,919),


                                      -21-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                                  JUNE 30, 2008

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

      Ultimate revenue estimates for the Company's completed motion picture were
      based on in-depth  discussions with and estimates  provided by experienced
      third-party  distributors  and  sales  agents,  including  the  contracted
      foreign  sales  agent  and  United  States  distributor.   Each  of  these
      distributors has well over 20 years of experience in its area of sales and
      distribution. The third party sales estimates and the agreements have been
      reviewed  and  approved  the  motion  picture's  co-producers,   copyright
      purchasers and production  lending bank and then discounted by the Company
      in an effort to  provide  conservative  and  realizable  ultimate  revenue
      estimates.

      In the United States,  Management  has used the Company's  twenty years of
      experience  with  broadcasters  in  conjunction  with  the  United  States
      distributor's  estimates  for three  windows over ten years as a basis for
      its television sales estimates.  With regard to DVD/video sales estimates,
      the Company has reviewed distributors'  estimates and compared them to the
      Company's  historical sales. P&L models based on these sales estimates and
      incorporating  the distribution fees and expenses defined in the Company's
      distribution  agreements  assuming between 500,000 to 1,000,000 unit sales
      over ten years with  average  net  revenue  of $4.26  (U.S.) per unit were
      discounted and support what management believes are conservative  ultimate
      revenue  estimates.  The estimates  were based on an initial  release at a
      retail  pricing  of $24.98  (U.S.) for rental  and  initial  sell  through
      release and subsequent drops in pricing to $14.98 (U.S.) and $12.98 (U.S.)
      as the DVD release  migrates to distribution  in mass market  sell-through
      and discount  markets over the ten-year  period.  The Company compared and
      supported this figure with industry standards and published unit sales for
      comparative  family feature films and then discounted them  conservatively
      and modeled the estimates to incorporate the distribution fees and expense
      limitations in its various  distribution  agreements.  The models provided
      net  revenue  estimates  of  approximately  $5 million  (U.S.),  which the
      Company then discounted to less than fifty percent (50%),  which in effect
      reflects 750,000 unit sales over ten years at the lowest price and margin.

      For  estimates in the foreign  territories,  the Company has relied on its
      sales  agents'  estimates  on an  all  rights  basis  per  territory.  The
      Company's ultimate revenue estimates were based on bank approved estimates
      of initial  advance  payments per territory which do not take into account
      any second  window  television  license  values and longer term  DVD/video
      royalty  payments.  These  estimates  were  then  discounted  to match the
      discounted  United  States  ultimate  revenue  estimates,   conservatively
      assuming  that all of the other  territories  around  the world  would not
      exceed the revenues from the United States market.

      While actual  revenues of $6,140,000 from the Company's  Completed  Motion
      Picture in the first two years were above the Company's  original ultimate
      revenue  estimates and a drop-off was expected while certain  non-fundable
      advances in foreign territories were recouped by distributors, the Company
      revised its remaining  ultimate  revenues to approximately $27 million for
      the  next  six  years  in light  of  changing  market  conditions  and the
      declining  performance of its distributors and accordingly  wrote down the
      net carrying value of Bailey's  Billion$ by $856,159 in the fourth quarter
      of 2007.

      Although,  revenues exceeded the Company's  estimates in 2004 and 2005 and
      the motion  picture  performed well in the  marketplace,  sales dropped of
      dramatically  in 2006 and  there  were no sales  reported  in 2007,  which
      reflected  a lack of  reporting  and a  dispute  between  the  U.K.  based
      co-producer and the master  distributor  which the co-producer,  through a
      related party, has a significant  ownership stake.  Although,  the Company
      has continued to pursue  resolution of the  distribution  of the completed
      motion picture and made effort to repatriate its exploitation  rights,  no
      new sales have been  reported,  although the Company  believes  sales have
      been made and revenues have been generated in the period,  and the Company
      no longer has any confidence in the  determinability  of revenues from its
      completed  motion  picture.  Accordingly  the Company is writing  down the
      balance of its carrying value in the second quarter of 2008.


                                      -22-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                                  JUNE 30, 2008

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

      Completed Television Drama Series

      In the three  months  ended  June 30,  2008,  the  Company  wrote down its
      investment in completed television drama series by $760,134 (2007 - $nil).
      In the three months ended June 30, 2008 there was no amortization  (2007 -
      $1,332,180) of the Company's its investment in completed  television drama
      series.  In the six months ended June 30, 2008, the Company wrote down its
      investment in completed television drama series by $760,134 (2007 - $nil).
      In the six months  ended June 30, 2008 there was no  amortization  (2007 -
      $2,665,159) of the Company's its investment in completed  television drama
      series.

      As at June 30, 2008 The Company's investment in completed television drama
      series totaled $1,164,350 (December 31, 2007 - $1,816,485).

      Ultimate  revenue  estimates  for the Company's  television  drama series,
      Across the River to Motor City, are based on the Company's 25 year history
      in the  television  industry  and the  distribution  in the  international
      broadcast and DVD marketplace and discussions  regarding  estimated values
      of broadcast licenses provided by experienced third-party distributors and
      ales agents.  Each of these distributors and sales agents has well over 20
      years of experience in its area of sales and distribution.  Management has
      discounted  these  estimates  in an effort  to  provide  conservative  and
      realizable ultimate revenue estimates backed up by a conservative schedule
      of territory by territory broadcast sales estimates.

      In Canada,  management's  estimates reflect contracted sales of $5,612,500
      receivable  on delivery of the series  (covering  67% of overall  Ultimate
      revenues for the ten year  proscribed  period in compliance with FASB 53).
      The balance of Canadian  revenues  total $360,000 over the ten year period
      covering three broadcast windows in French Canada,  one window after seven
      years in  English  Canada,  and all  revenues  from VOD,  DVD and  digital
      distribution marketplaces.

      In the United States,  management  has used the Company's  twenty years of
      experience with  broadcasters in conjunction with its sales agent's review
      of broadcast license values for three windows over ten years as a basis of
      its television sales estimates and then discounted these estimates.  As an
      example,  the Company's first window (averaging 36 months) cable broadcast
      license for 18 of its programs  have  averaged  just over CDN $325,000 and
      overall  Management's  estimates reflect a conservative  value of $160,000
      over three windows over ten years.

      For estimates in the foreign territories,  the Company has relied on sales
      agents' estimates for a first window sale in France of between $50,000 and
      $150,000 per episode and reviewed  broadcast values for first window sales
      in  the 7  major  territories  as  well  as  estimates  in  25  of 75  key
      international territories and discounted its estimates to $300,000 for all
      territories outside of North America for multiple windows over ten years.

      With regard to DVD/VOD and digital media sales estimates,  the Company has
      reviewed and compared them to the Company's  historical sales. The Company
      compared  and  supported  these  estimates  with  industry  standards  and
      published  unit  sales  for  comparative   television  programs  and  then
      discounted  them  conservatively  and modeled the estimates to incorporate
      its  experience  with  distributor's  fees and expense  limitations in its
      various  distribution  agreements.  Management notes that its estimate for
      all DVD, VOD and digital  distribution  of the series  world-wide  for ten
      years is a conservative $20,000 per episode.


                                      -23-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                                  JUNE 30, 2008

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

      Management believes that market changes, which have resulted from a series
      of related  broadcaster and investor  consolidations in Canada that became
      evident in the second  quarter of 2008  have,  in the  Company's  opinion,
      negatively impacted future revenue estimates for Across the River to Motor
      City. The broadcaster  (CHUM Television) who commissioned the mini-series,
      licensed  Canadian  broadcast  rights  and holds an equity  investment  in
      Across the River to Motor  City,  was bought and sold twice in 2007.  This
      dramatic and un-forecasted change in the rights ownership and promotion of
      the series has,  in the  opinion of  management,  impaired  the  potential
      future revenues for the mini series.  This event, in combination  with the
      effect of the changes in the US currency exchange and the general downturn
      in the public markets,  the economy and the investment  environment,  have
      negatively   impacted   the  future   revenues  and  of  the  program  and
      accordingly,  in compliance with SOP 00-2, the Company is writing down the
      net carrying  value of its  investment in its completed  television  drama
      series by $726,340 in the three months ended June 30, 2008.

      The Company believes that current  ultimate  revenue  estimates for Across
      the River to Motor City are conservative  and realizable,  notwithstanding
      the fact that management  reviews the estimates on a regular basis and may
      adjust them down  depending on changing  results and market  conditions in
      the future

      Projects in Progress

      Development  costs for  properties  that are  expected  to benefit  future
      periods are  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. In the three and six months ended
      June 30, 2008,  $617,662  (2007 - nil) of projects in progress was written
      off to income. .

      At June 30, 2008, the Company's investment in projects in progress totaled
      $808,860 (December 31, 2007 - $1,238,327).

      Participation  expenses and exploitation  costs,  including  manufacturing
      costs and third party  distribution  fees and expenses related to sales of
      Company's  library  of films,  television,  programs  and  motion  picture
      totaled  $46,488 for the three  months ended June 30, 2008  decreasing  by
      $5,172 or  approximately  11% as compared to $51,660 in the same period in
      2007.  For the six month ended June 30, 2008,  participation  expenses and
      exploitation  costs,   including   manufacturing  costs  and  third  party
      distribution  fees and expenses  related to sales of Company's  library of
      films, television,  programs and motion picture totaled $88,881 decreasing
      by $39,569 or approximately 31% as compared to $128,450 in the same period
      in 2007.

      There  were  no  participation  and  exploitation  costs  related  to  the
      Company's  completed  motion picture - Bailey's  Billion$ or its completed
      television drama series and the Company does not expect any  participation
      and  exploitation  expenses  related to these  films in 2008.  The Company
      estimates  approximately  $190,000 in participation and exploitation costs
      related to it library of completed  television  programs and recordings in
      2008,  of which  approximately  $50,000  or 26% are costs  related  to the
      Artists  Specials  series,  the only  series  of the  Company's  completed
      television programs and recordings with a net carry cost remaining.

      The following table summarizes  Company's  participation  and exploitation
      expenses:  related to its library of  completed  television  programs  and
      recordings:


                                      -24-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                                  JUNE 30, 2008

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

<TABLE>
<CAPTION>
                                                                      Three months ended                     Six months ended
                                                                            June 30                                June 30
Participation and Exploitation costs                                 2008               2007               2008               2007

<S>                                                                <C>                <C>                <C>                <C>
Participation Costs                                                $  5,257           $    711           $  7,525           $  6,216
Manufacturing Costs                                                   6,480             39,986             32,048             68,234
Distribution fees and expenses                                       34,751             10,963             49,308             54,000
                                                                   --------           --------           --------           --------

                                                                   $ 46,488           $ 51,660           $ 88,881           $128,450
                                                                   ========           ========           ========           ========
</TABLE>

      Interest   incurred  on  funds  borrowed  during   productions  of  films,
      television  programs  and  recordings  is  capitalized  as a  cost  of the
      production.   In  the  three  months  ended  June  30,  2008  the  Company
      capitalized  $2,349  (2007 - $28,642) of interest in  connection  with the
      film production for its completed  television  series. In the three months
      ended June 30, 2008 the Company  capitalized  interest in connection  with
      various productions amounting to $4,325 (2007 - $8,586). In the six months
      ended June 30, 2008, the Company  capitalized  $31,591 (2007 - $37,731) of
      interest  in  connection  with  the  film  production  for  its  completed
      television  series.  In the six months  ended June 30,  2008,  the Company
      capitalized  interest in connection with various productions  amounting to
      $42,435 (2007 - $14,460).

      At June 30, 2008,  99% (December  31, 2007 - 96%) of completed  television
      programs  and  recordings,  100%  (December  31, 2007 - 71%) of  completed
      motion  picture  costs  and 80%  (December  31,  2007 - 68%) of  completed
      television drama series costs have been amortized. The remaining period of
      amortization  for the completed  projects ranges from one to nine years at
      December 31, 2007.  100% of completed  television  programs and recordings
      will be  amortized  in 2008.  The Company  expects to amortize  69% of the
      remaining completed  television drama series costs in the next three years
      and expects 88% will have been amortized by 2012.

7.    EQUIPMENT

                                             June 30                December 31,
                                               2008                    2007
                                               ----                    ----
                                            Accumulated
                                  Cost     Amortization      Net        Net
                                --------   ------------   --------   --------
Computer and editing equipment  $181,028     $171,336     $  9,692   $ 11,327
Furniture and fixtures            58,193       54,567        3,626      4,018
                                --------     --------     --------   --------

                                $239,221     $225,903     $ 13,318   $ 15,345
                                ========     ========     ========   ========


                                      -25-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                                  JUNE 30, 2008

8.    FILM PRODUCTION LOAN                                    2008       2007
                                                              ----    ----------

      A demand loan  bearing  interest at prime plus 1%
      per annum, repayable in full by June 30, 2008 was
      arranged  for  the  financing  of 6  episodes  of
      ATRTMC,  which  was  produced  by  the  Company's
      wholly-owned   subsidiary    Across   the   River
      Productions  Ltd.  The  loan was  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 was not  secured by the parent
      company's  assets and is  non-recourse  to parent
      company.                                                $nil    $1,444,513
                                                              ====    ==========

      Interest on the above demand loan totalled $2,349
      for the three  month  period  ended June 30, 2008
      (three  months ended Dec. 31, 2007 - $32,899) and
      has been capitalized to projects in progress.

9.    LOANS PAYABLE

      Loans payable  consist of the Company's  1995,  1996 and 2000  convertible
      debentures,  which bear interest at 10.5 % per annum,  have matured,  have
      not been  extended  and carry no fixed  term,  accordingly  the Company is
      carrying the  outstanding  amount of $1,700,800  (2007 - $1,700,800)  as a
      loan payable.  The  creditors  have a general  security  assignment on the
      assets of the Company.  Accrued  interest as at June 30, 2008 was $935,610
      (December  31,  2007 - $846,505)  and is included in accounts  payable and
      accrued liabilities.

10.   PREFERRED SHARES

      The Series 1 preferred  shares (no par value) 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  accruing  and  cumulative  from the date of
      issue. As at June 30, 2008 dividends in arrears amounted to $22,440.

      Under CICA Handbook Section 3861 and following the guidance under EIC-149,
      the Company has classified this series of preferred  shares as a liability
      and such dividends as interest.

      Issued - Series 1 preferred shares (no par value)

                                                               Number    Amount

            Balance, June 30, 2008 and 2007                   494,550   $494,550
                                                              =======   ========


                                      -26-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                                  JUNE 30, 2008

11.   CAPITAL STOCK

      (a)   Authorized
            Unlimited number of common shares and class "A" shares.

      (b)   Issued - common shares (no par value)

                                                         Number         Amount
                                                         ------         ------
            Balance, June 30, 2008                     45,980,549    $12,661,908
            Balance, December 31, 2007                 45,921,149    $12,652,998
                                                       ==========    ===========

      (c)   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.

            The outstanding and exercisable stock options are as follows:

                                                                        Weighted
                                                                         Average
                                                           Number       Exercise
            Outstanding and Exercisable                of Options          Price
            --------------------------------------------------------------------
            Balance, June 30, 2008 and
            December 31, 2007                           4,655,000          $0.16
                                                        =========          =====

            The Company has granted stock options as follows:

<TABLE>
<CAPTION>
                                                                                Weighted
                                                                Outstanding      Average
                                       Number       Exercise        and         Remaining
Expiry Date         Grant Date       of Options       Price     Exercisable       Life
-----------------------------------------------------------------------------------------
<S>               <C>                <C>              <C>        <C>              <C>
June 25, 2009     June 25, 2004      3,000,000        0.10       3,000,000        0.99
May 11, 2009      May 11, 2007         200,000        0.15         200,000        0.86
May 11, 2012      May 11, 2007       1,100,000        0.15       1,100,000        3.86
July 29, 2012     July 30, 2007         15,000        0.15          15,000        3.08
April 24, 2010    April 25, 2006       100,000        0.10         100,000        1.82
Dec.29, 2009      Dec.29, 2006         240,000        1.00         240,000        1.50

                                     4,655,000                   4,655,000        1.72
                                     =========                   =========        ====
</TABLE>


                                      -27-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                                  JUNE 30, 2008

11.   CAPITAL STOCK

      (c)   Stock Option Plan (continued)

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

Issue date                           May 11, 2007   May 11, 2007   July 30, 2007
--------------------------------------------------------------------------------
Number of options                         200,000      1,100,000          15,000
Expected life                           1.5 years        5 years         5 years
Price volatility                             118%           260%            290%
Dividend yield                                 --             --              --
Risk-free interest rate of return           4.56%          4.54%           4.64%
Fair value                                 $9,000       $110,000            $450

      (d)   Warrants

      Balance, at December 31, 2007                                     $708,456
      Modification of Warrants                                            63,827
                                                                        --------
      Balance, at June 30, 2008                                         $772,283
                                                                        ========

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


                                                                        Weighted
                                                                         Average
                                                                        Exercise
            Outstanding and Exercisable               # of Warrants        Price
            --------------------------------------------------------------------
            Balance, June 30, 2008
            and December 31, 2007                      14,474,166        $0.18
                                                       ==========        =====

The Company has granted warrants as follows:

<TABLE>
<CAPTION>
                                                                                   Weighted
                                                                   Outstanding      Average
                                          Number       Exercise        and         Remaining
Expiry Date            Grant Date      of Warrants       Price     Exercisable       Life
--------------------------------------------------------------------------------------------
<S>                  <C>                <C>              <C>        <C>              <C>
December 31, 2009    June 30, 2004      1,830,000        0.25       1,830,000        1.50
April 7, 2009        April 7, 2004      2,547,500        0.30       2,547,500        0.85
May 31, 2009         May 31, 2006       1,691,666        0.30       1,691,666        0.75
December 31, 2009    May 11, 2007         550,000        0.25         550,000        1.50
August 14, 2010      August 14, 2007    1,200,000        0.10       1,200,000        2.12
April 11, 2009       October 11, 2007   6,475,000        0.10       6,475,000        0.78
October 1, 2008      October 1, 2007      180,000        0.10         180,000        0.25
                                       ----------                  ----------        ----
                                       14,474,166                  14,474,166        1.01
                                       ==========                  ==========        ====
</TABLE>


                                      -28-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                                  JUNE 30, 2008

11.   CAPITAL STOCK (continued)

      (d)   Warrants

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

<TABLE>
<CAPTION>
<S>                                 <C>             <C>                <C>
Grant date                          May 11, 2007    August 14, 2007    October 1, 2007
Number of warrants                       550,000          1,200,000            180,000
Expected life                          2.5 years            3 years          1.7 years
Price volatility                            118%               256%               125%
Dividend yield                                --                 --                 --
Risk-free interest rate of return          4.56%              4.28%              4.22%
Fair value                               $27,500            $93,600             $8,280

Grant date                      October 11, 2007
Number of warrants                     6,475,000
Expected life                          1.5 years
Price volatility                            113%
Dividend yield                                --
Risk-free interest rate of return          4.22%
Fair value                              $604,566
</TABLE>

During the second  quarter of 2008 the board of directors  approved an extension
of 2,547,500  warrants to April 7, 2009 that were  originally to expire in April
2008 and  1,691,666  warrants to May 31, 2009 that were  originally to expire in
May 2008.  As a result of the  modification,  Warrants  increased by $63,827 and
Contributed Surplus decreased by $63,827.

12.   CONTRIBUTED SURPLUS

           Balance, December 31, 2007                             $  902,449
           Subscription receivable                                   229,747
           Modification of Warrants                                  (63,827)
                                                                  ----------
           Balance, June 30, 2008                                 $1,068,369
                                                                  ==========

The Company has entered into financing  arrangements  with limited  partnerships
(see Note 18 Limited  Partnership  Financings)  As a part of this  financing the
Company has a subscriptions  receivable balance of $116,872 (December 31, 2007 -
346,619) which is receivable over a period of two years.


                                      -29-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                                  JUNE 30, 2008

13.   INTEREST EXPENSE (INCOME)

<TABLE>
<CAPTION>
                                                                  Three months ended June 30             Six months ended June 30
                                                                                    Restated                               Restated
                                                                   2008               2007               2008                2007
                                                                 ---------          ---------          ---------          ---------
<S>                                                              <C>                <C>                <C>                <C>
Interest on convertible debentures                               $  44,552          $  44,553          $  89,104          $  89,106
Bank film production loan                                            2,349             28,642             31,591             65,769
Interest on preferred shares                                        11,220             11,220             22,440             22,440
                                                                 ---------          ---------          ---------          ---------
                                                                    58,121             84,415            143,135            177,315
Interest income                                                    (28,044)            (8,585)           (45,641)           (16,733)
                                                                 ---------          ---------          ---------          ---------
                                                                    30,077             45,518             97,494            130,270
Less: amounts capitalized to projects                               (6,674)           (37,228)           (74,026)           (52,191)
                                                                 ---------          ---------          ---------          ---------
                                                                 $  23,403          $   8,846          $  23,468          $  44,895
                                                                 =========          =========          =========          =========
</TABLE>

      Interest  expense  of $2,349  for the film  production  bank loan has been
      capitalized to projects in progress. (See note 8)

14.   EARNINGS (LOSS) PER SHARE

      For the 3 and 6 months  ended June 30, 2008 and 2007,  options to purchase
      14,474,166 and 6,619,166 common shares and warrants to purchase  4,655,000
      and  4,765,000  common  shares,  respectively  were  not  included  in the
      computation of diluted  earnings  (loss) because the exercise  prices were
      greater  than the average  market  price of the common  shares and in 2008
      because of the loss position.

      The  following  table sets  forth the  weighted  average  number of common
      shares outstanding for each of those periods.

            Period                                             Outstanding
            ------                                             -----------
            June 30, 2008                                       45,980,549
            June 30, 2007                                       38,342,228


                                      -30-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                                  JUNE 30, 2008

14.   EARNINGS (LOSS) PER SHARE (Continued)

<TABLE>
<CAPTION>
                                                            Three months ended                 Six months ended
                                                                 June 30,                           June 30,

Numerator:                                                              As Restated                          As Restated
<S>                                                   <C>               <C>              <C>                <C>
Net income (loss) and comprehensive income
   (loss) for the period, basic and diluted           $ (3,640,217)     $   285,254      $ (3,757,565)      $    797,934

Denominator:
Weighted average number of shares - basic               45,930,287       39,370,444        45,925,718         39,342,228
                                                      ============      ===========      ============       ============
Effect of dilutive securities:
Stock options and Warrants                                      --               --                --                 --
Weighted average number of shares - diluted             45,930,287       39,370,444        45,925,718         39,342,228
                                                      ============      ===========      ============       ============

Net income (loss) per share

   Basic and diluted                                  $      (0.08)     $      0.01      $      (0.08)      $       0.02
                                                      ============      ===========      ============       ============
</TABLE>

15.   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  and  cash   equivalents,   accounts
            receivable,  film tax credits  receivable for which  application has
            been filed,  subscription  receivables due within one year, accounts
            payable and accrued liabilities  approximate fair value due to their
            short-term maturity and normal credit terms.

            The fair value of subscription receivables due in over one year, and
            accrued film tax credits  receivable  are recorded at the fair value
            using an appropriate discount rate.

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


                                      -31-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                                  JUNE 30, 2008

15.   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 DVD's.

      (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 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 consider  entering  into forward  exchange  contracts to
            mitigate any associated  risks. The Company did not have any forward
            exchange contracts outstanding at June 30, 2008.

            The Company is exposed to foreign  currency  exchange rate risk as a
            result of sales of its  products in various  foreign  countries  and
            production  operations  conducted  in other  countries.  In order to
            minimize the risks  associated with foreign  currency  fluctuations,
            most sales contracts are issued in either  Canadian,  U.S.  dollars.
            The Company  constantly  monitors the exchange rate between the U.S.
            dollar and the Canadian dollar to determine if any adverse  exposure
            exists  relative to its costs of production.  The Company  maintains
            funds in both U.S. and Canadian currency.

16.   COMMITMENTS AND CONTINGENCIES

      (a)   Minimum annual rent  commitments for premises,  excluding  occupancy
            costs, are as follows:

               For the six months ending December 31, 2008              $14,500
               For the year ending December 31, 2009                     13,000
                                                                        -------
                                                                        $27,500
                                                                        =======

      (b)   The Company has entered  into  contractual  agreements  for creative
            talent related to future film production. The agreements provide for
            a minimum fee to be paid for the  creative  work with an  additional
            fee to be paid if the work goes into production.  The additional fee
            would be based on a percentage of revenues.

      (c)   The purchasers of the copyright  interest are entitled to a priority
            distribution  of  the  future  revenue  earned  from  BB$  up to the
            original  amount of the purchase price of $2,477,500.  Subsequent to
            the priority distribution, all the amounts would be distributed pari
            passu in accordance with the percentage ownership acquired.


                                      -32-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                                  JUNE 30, 2008

16.   COMMITMENTS AND CONTINGENCIES

      (d)   The  distributors of BB$ are entitled to a priority  distribution of
            the future revenue earned from the film up to the original amount of
            the  purchase  price  in the  amount  of  approximately  $2,900,000.
            Subsequent  to the priority  distribution,  all the amounts would be
            distributed in accordance with the contractual agreements.

      (e)   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.

      (f)   In connection with certain limited  partnership  financings (Note18)
            the Company may be obligated to issue up to 408,000 common shares to
            the partners of such partnerships.

      (g)   The Company is eligible for various grants and government  incentive
            programs that are designed to assist film and television  production
            and  distribution  in Canada.  The Company has received  $240,661 in
            forgivable  development  funding and grants which have been recorded
            as a reduction of  development  costs in projects in  progress.  The
            Company  could be required  to repay up to $200,000 of this  funding
            and grants in case the  projects  are fully  funded and  produced or
            sold by the  Company to a third party in the  future.  The  ultimate
            liability   related  to  the   repayment   of  these  funds  is  not
            determinable.  The Company will record the  liability or repay these
            funds once the actual liability is known or determinable.

17.   RELATED PARTY TRANSACTIONS

      During the 3 month  period  ended June 30, 2008  $73,750  (June 30, 2007 -
      $73,750) and 6 month period ended June 30, 2008 $147,500  (June 30, 2007 -
      $225,194) of fees were paid or accrued to  corporations  controlled by two
      of the  directors for writing,  directing  and  producing  services on the
      Company's film and television  productions.  These transactions are in the
      normal course of business and have been measured at exchange amount, which
      is the amount of  consideration  established  and agreed to by the related
      parties and which management believes reflect prevailing market rates.

18.   LIMITED PARTNERSHIP FINANCING

      The Company has entered into tax  preferred  financing  arrangements  with
      limited  partnerships.  These limited partnerships are VIEs. In connection
      with  these  financings  the  Company  received  proceeds  net of costs of
      $380,414  to  date  recorded  as  contributed  surplus  and  subscriptions
      receivable  (net) of $116,872 at June 30,  2008.  In  connection  with the
      limited partnership financings the Company may be obligated to issue up to
      408,000  common shares to the partners of such  partnerships  who have the
      right to convert their interest in the partnership's revenue stream into a
      fixed number of the Company's common shares.


                                      -33-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                                  JUNE 30, 2008

19.   CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                                     Three months ended                    Six months ended
                                                                          June 30,                              June 30,

                                                                   2008               2007               2008               2007
                                                               -----------        -----------        -----------        -----------
<S>                                                            <C>                <C>                <C>                <C>
Change in non-cash working capital
Accounts receivable                                            $   902,112        $    70,958        $   886,589        $   151,650
Tax credits receivable                                             395,132            550,310            899,846          1,837,284
Advances receivable                                                                                           --            (59,529)
Inventory                                                             (468)             4,306              2,508             13,919
Prepaid expenses and sundry receivable                              (5,545)            47,396             44,862             46,002
Accounts payable and accrued liabilities                           110,681            121,096            123,417             39,720
Deferred revenue                                                        --         (1,849,361)                --         (3,395,038)
                                                               -----------        -----------        -----------        -----------

                                                                 1,401,912         (1,055,295)         1,957,222         (1,365,992)
                                                               -----------        -----------        -----------        -----------
Non-cash transactions

Shares issued on settlement of
   Accrued director's fees                                           8,910                 --              8,910                 --
</TABLE>

20.   GEOGRAPHIC SALES INFORMATION

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

<TABLE>
<CAPTION>
                                           Three months                                 Six months
                                           ended June 30                               ended June 30
Revenue                         2008         %       2007         %         2008         %        2007        %
<S>                          <C>             <C>  <C>            <C>    <C>              <C>   <C>            <C>
Canada                       $    7,624      5    $1,887,619     98     $   12,344       5     $3,762,151     95
United States                    46,981     31        47,789      2        116,939      46        102,740    2.6
France                           23,868     16            --                23,868       9             --
Russia                               --                   --                    --                 83,442      2
Other foreign                    71,114     48            --               100,990      40         16,150    0.4
                             ----------           ----------            ----------             ----------
                             $  149,587           $1,935,408            $  254,141             $3,964,483
                             ==========           ==========            ==========             ==========
</TABLE>


                                      -34-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                                  JUNE 30, 2008

21.   CANADIAN GAAP AND US GAAP RECONCILIATION

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 and US GAAP, and their effect on the
interim consolidated financial statements of the Company, are disclosed below.

a.    Under US GAAP,  FIN 48  requires  the  Company to  evaluate  whether a tax
      position  taken by the company  will "more  likely than not" be  sustained
      upon  examination  by the  appropriate  tax  authority.  It also  provides
      guidance on how a company  should  measure the amount of benefit  that the
      Company is to recognize in its financial statements. There was no material
      impact on the Company's  financial  statements as a result of implementing
      FIN 48.

b.    Under US GAAP,  FASB 150, if the  preferred  shares are  redeemable at the
      option of the holders,  they should be presented as mezzanine equity.  The
      preferred  shares are  retractable  by the holder but are not  mandatoraly
      redeemable.  Under US GAAP,  the preferred  shares may not be presented as
      permanent  equity  and/or  within the  shareholders'  equity  (deficiency)
      section of the balance sheet. Preferred shares are presented as a separate
      line item between  liabilities and  shareholders'  equity  (deficiency) as
      required by EITF D-98.

c.    Under US GAAP preferred  shares are classified as mezzanine equity and the
      interest  on  preferred  shares  would be  classified  as a  dividend  and
      recorded as a reduction to the deficit under shareholders'  equity.  Under
      Canadian  GAAP the  preferred  shares are  classified  as a liability  and
      interest is expensed accordingly.

d.    Under  US GAAP  cumulative  dividends  are part of the  liability  for the
      shares and declared/or  cumulative  dividends which have not been declared
      should  reduce  net  income to arrive  at a figure  representing  earnings
      (loss) per share.

Consolidated statements of operations:

The net income  (loss) as  reported  in the  accompanying  interim  consolidated
statements of operations would have been different had the financial  statements
been prepared in accordance with US GAAP:

<TABLE>
<CAPTION>
                                                                        Three months ended                  Six months ended
                                                                                      Restated                            Restated
                                                                                    -----------                         -----------
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,                           2008              2007             2008               2007
                                                                  -----------       -----------       -----------       -----------
<S>                                                               <C>               <C>                <C>              <C>
Net income (loss) in accordance with Canadian GAAP                $(3,640,217)      $   285,254        (3,757,565)      $   797,934

Interest (dividends) on preferred shares (Note c)                      11,220            11,220            22,440            22,440
                                                                  -----------       -----------       -----------       -----------

Net income (loss) in accordance with US GAAP                      $(3,628,997)      $   296,474        (3,735,125)      $   820,374
                                                                  -----------       -----------       -----------       -----------

Preferred share dividends (Note d)                                    (11,220)          (11,220)          (22,440)          (22,440)

Net income (loss) in accordance with US GAAP
for earnings per share                                             (3,640,217)          285,254        (3,757,565)          797,934

Net income
(loss) per share - Basic and Diluted                              $     (0.08)      $      0.01       $     (0.08)      $      0.02
                                                                  ===========       ===========       ===========       ===========
</TABLE>


                                      -35-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                                  JUNE 30, 2008

21.   CANADIAN GAAP AND US GAAP RECONCILIATION (continued)

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

<TABLE>
<CAPTION>
                                                                                   June 30,          December 31,
AS AT JUNE 30, 2008 AND DECEMBER 31, 2007                                            2008                2007
                                                                                 -----------         -----------
<S>                                                                              <C>                 <C>
ASSETS
Assets in accordance with Canadian GAAP                                          $ 3,247,232         $ 8,492,237

Assets in accordance with U.S. GAAP                                              $ 3,247,232         $ 8,492,237
                                                                                 ===========         ===========

LIABILITIES

Liabilities in accordance with Canadian GAAP                                     $ 3,879,831         $ 5,605,928

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

Liabilities in accordance with U.S. GAAP                                         $ 3,385,281         $ 5,605,928
                                                                                 ===========         ===========

Preferred Shares (Note b)                                                        $   494,550             494,550
                                                                                 -----------         -----------
</TABLE>

<TABLE>
<CAPTION>
SHAREHOLDERS'  EQUITY (DEFICIENCY)                                                 June 30,          December 31,
                                                                                     2008                2007
                                                                                 -----------         -----------
<S>                                                                              <C>                 <C>
Shareholders' Equity in accordance with
Canadian GAAP                                                                    $  (632,599)        $ 2,886,309

Effect on deficit of treatment of dividends on Preferred
Shares (Note c)                                                                           --                  --

Shareholders' equity (deficiency) in accordance with US GAAP                     $  (632,599)        $ 2,886,309
                                                                                 ===========         ===========
</TABLE>


                                      -36-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                                  JUNE 30, 2008

21.   CANADIAN GAAP AND US GAAP RECONCILIATION (continued)

      Impact of Newly Issued United States Accounting Standards

i)    In June 2006,  the FASB  issued FIN 48,  "Accounting  for  Uncertainty  in
      Income Taxes - an  interpretation  of FASB  Statement No. 109" ("FIN 48").
      FIN 48 clarifies the accounting for uncertainty in income taxes recognized
      in an  entity's  financial  statements  in  accordance  with SFAS No. 109,
      "Accounting for Income Taxes" ("SFAS 109"). The interpretation  prescribes
      a  recognition  threshold  and  measurement  attribute  for the  financial
      statement  recognition and measurement of a tax position taken or expected
      to be taken in a tax return. FIN 48 also provides  accounting  guidance on
      de-recognition,  classification,  interest and  penalties,  accounting  in
      interim  periods,   disclosure  and  transition.  The  evaluation  of  tax
      positions  under FIN 48 is a two-step  process,  whereby  (1) The  Company
      determines  whether it is more likely than not that the tax positions will
      be  sustained  based on the  technical  merits of the position and (2) for
      those  tax  positions  that  meet  the  more-likely-than-not   recognition
      threshold.  There was no  material  impact on the  Company's  consolidated
      financial statements as a result of implementing FIN 48.

ii)   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 prior year  misstatements  should be  considered
      when quantifying  misstatements in the current year financial  statements.
      The SAB  requires  registrants  to  quantify  misstatements  using  both a
      balance sheet and an income statement approach and evaluate whether either
      approach  results in  quantifying a misstatement  that,  when all relevant
      quantitative and qualitative factors are considered,  is material. SAB 108
      does not change the guidance in SAB 99, "Materiality", when evaluating the
      materiality of misstatements. SAB 108 is effective for fiscal years ending
      after  November 15,  2006.  Upon  initial  application,  SAB 108 permits a
      one-time  cumulative  effect  adjustment to beginning  retained  earnings.
      There was no  material  impact  on the  Company's  consolidated  financial
      statements as a result of the adoption of SAB 108.

iii)  In  September  2006,  the FASB issued SFAS No. 157 "Fair Value  Measures."
      (SFAS No. 157),  SFAS No. 157 defines fair value,  establishes a framework
      for  measuring  fair  value and  enhances  disclosures  about  fair  value
      measures  required  under other  accounting  pronouncements,  but does not
      change existing  guidance as to whether or not an instrument is carried at
      fair value.  SFAS No. 157 is effective  for fiscal years  beginning  after
      November 15, 2007. The Company is currently evaluating the impact that the
      adoption  of SFAS No.  157 will have on our future  financial  statements.
      There was no  material  impact  on the  Company's  consolidated  financial
      statements as a result of the adoption of SFAS No. 157.

iv)   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 did not
      have a material effect on the Company's financial statements.


                                      -37-
<PAGE>

                        DEVINE ENTERTAINMENT CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                                  JUNE 30, 2008

21.   CANADIAN GAAP AND US GAAP RECONCILIATION

      Impact of Newly Issued United States Accounting Standards (continued)

v)    In December 2007, the FASB issued SFAS No. 160, Non-controlling  Interests
      in  Consolidated  Financial  Statements-an  amendment  of ARB No. 21 ("No.
      160").  This  statement  amends  ARB No. 51 to  establish  accounting  and
      reporting standards for the  non-controlling  interest in a subsidiary and
      for the  deconsolidation  of a subsidiary.  The provisions of SFAS No. 160
      are effective for fiscal years,  and interim  periods  within those fiscal
      years,  beginning on or after  December 15, 2008. As of December 31, 2007,
      management  believes that SFAS No. 160 will not have a material  effect on
      our financial position, results of operations and cash flows.

vi)   In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
      Instruments  and Hedging  Activities--an  amendment of FASB  Statement No.
      133"  ("FAS  161").  FAS  161  changes  the  disclosure  requirements  for
      derivative  instruments and hedging  activities.  Entities are required to
      provide  enhanced  disclosures  about  (a)  how  and  why an  entity  uses
      derivative instruments,  (b) how derivative instruments and related hedged
      items  are   accounted   for   under   Statement   133  and  its   related
      interpretations,  and (c) how  derivative  instruments  and related hedged
      items affect an entity's financial position,  financial  performance,  and
      cash flows. The guidance in FAS 161 is effective for financial  statements
      issued for fiscal years and interim  periods  beginning after November 15,
      2008, with early application  encouraged.  This Statement encourages,  but
      does not require,  comparative  disclosures for earlier periods at initial
      adoption.  The Company is  currently  assessing  the impact of FAS 161 and
      does  not  anticipate  any  material  effect  on the  Company's  financial
      statements.

vii)  In  December  2007,  FASB  issued SFAS No. 141  (revised  2007),  Business
      Combinations ("No. 141R"). This statement establishes requirements for (i)
      recognizing and measuring in an acquiring company's  financial  statements
      the  identifiable  assets  acquired,  the  liabilities  assumed,  and  any
      noncontrolling  interest in the acquiree,  (ii)  recognizing and measuring
      the goodwill acquired in the business combination or a gain from a bargain
      purchase,  and (iii)  determining  what  information to disclose to enable
      users of the  financial  statements  to evaluate the nature and  financial
      effects of the business combination.

      The  provisions of SFAS No. 141R are  effective for business  combinations
      for which the  acquisition  date is on or after the beginning of the first
      annual   reporting  period  beginning  on  or  after  December  15,  2008.
      Management  believes that SFAS No. 141R will not have a material effect on
      the financial position, results of operations and cash flows.


                                      -38-
<PAGE>

Item 2.

                 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

The  following  management's  discussion  and analysis  has been  prepared as of
August 13, 2008 to provide a review of current  activities  and a comparison  of
the performance and financial position of Devine Entertainment for the three and
six month periods ended June 30, 2008 and 2007.  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.

OVERVIEW

Five-time Emmy Award-winning Devine Entertainment Corporation develops, produces
and  distributes   feature  films,   primetime  drama,   children's  and  family
entertainment  for the theatrical  motion picture,  television and the Video/DVD
marketplace worldwide.

The Company's  proprietary library includes 19 award-winning  broadcast programs
based on the  lives of  landmark  international  historical  figures  and  other
classic  family  stories,  which  permit it access to sales in a wide variety of
outlets  encompassing  both  the  entertainment  and  educational  markets.  Its
landmark  Composers',  Inventors'  and Artists'  are  critically  acclaimed  and
broadcast in over 50 countries. The Company completed its first feature film for
theatrical  release,  Bailey's Billion$,  which was released in North America on
August  5,  2005  and is  currently  being  distributed  on  television  and DVD
worldwide.  In 2006 and 2007 the Company  continued  expanding  its  proprietary
library by financing  and producing and  delivering  its first general  audience
primetime  one-hour mystery series,  entitled Across the River to Motor City for
broadcast worldwide.

The  Company's  business  strategy  is to:  (i) focus on the  production  of its
high-quality  children's  and family  films in order to  continue  building  its
broadly based library of original  programs;  (ii) increase its feature film and
primetime drama production and  distribution  through  strategic  alliances with
major international  distributors,  broadcasters and co-producers and (iii) grow
by expanding its library through  acquisitions of third party film libraries and
the integration of third party productions and production companies

FORWARD-LOOKING STATEMENTS

Readers are cautioned that actual results may differ materially from the results
projected in any  "forward-looking"  statements  included in this discussion and
analysis,  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",  "may",  "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 listed under  "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 to update the information
contained herein.


                                      -39-
<PAGE>

RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

As  explained  on pages 49  through  50, and pages 8 through 10 in Note 2 to the
Company's June 30, 2008 Interim Consolidated Financial Statements, of the Annual
Report  on  Form  10-Q,  the  Company  is  restating  its  previously   reported
consolidated financial statements for the 3 and 6 months ended June 30, 2007.

SECOND QUARTER 2008 HIGHLIGHTS

      o     Reflecting the lack of new  productions  being  delivered to date in
            2008,  the  Company's  total  revenues  decreased  by  over  90%  or
            $1,785,821 to $149,587 for the quarter months ended June 30, 2008 as
            compared to $1,935,408 for the same period in 2007.

      o     Revenues  from the  Company's  core library of completed  television
            programs  and  recordings,  which  include the  Company's  Artist's,
            Inventors'  and Composers'  Specials,  as well as Marsalis on Music,
            Shakespeare 4 Kids,  Beethoven  Lives  Upstairs,  its Raffi programs
            continued to perform strongly, increasing by $84,988 or over 230% to
            $149,587  for the  quarter  ended  June 30,  2008 as  compared  with
            $64,599 for the same period in 2007.

      o     Net Loss for the quarter ended June 30, 2008 totaled $3,640,217,  or
            ($0.08)  per share,  an increase  of  $3,925,471  as compared to net
            earnings  of  $285,254,  or $0.01 per  share for the same  period in
            2007,  primarily reflecting non-cash write downs and amortization of
            the Company's investment in film, television programs and recordings
            of $3,552,774.

RESULTS OF OPERATIONS  FOR THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 2008
AND 2007

Revenues

Reflecting  the lack of new  productions  being  delivered to date in 2008,  the
Company's total revenues decreased by over 90% or $1,785,821 to $149,587 for the
three months ended June 30, 2008 as compared to  $1,935,408  for the same period
in 2007.

Total  revenues for the six month  period ended June 30, 2008  decreased by over
90% or $3,710,343  to $254,142 as compared to $3,964,485  for the same period in
2007.

Revenues from the Company's  core library of completed  television  programs and
recordings,  which include the Company's  Artist's,  Inventors'  and  Composers'
Specials,  as well as Marsalis on Music,  Shakespeare  4 Kids,  Beethoven  Lives
Upstairs,  its Raffi  programs  continued  to perform  strongly,  increasing  by
$84,988 or over 230% to  $149,587  for the three  months  ended June 30, 2008 as
compared with $64,599 for the same period in 2007.

For the six month period ended June 30, 2008,  revenues from the Company's  core
library of completed  television programs and recordings increased by $31,275 or
approximately  14% to $254,142 as compared  with $222,867 for the same period in
2007.


                                      -40-
<PAGE>

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

<TABLE>
<CAPTION>
                                        Three months ended                         Six months ended
                                              June 30                                    June 30
Revenue                          2008        %       2007        %          2008       %       2007        %
<S>                           <C>            <C>  <C>           <C>     <C>            <C>  <C>            <C>
Canada                        $    7,624     5    $1,887,619    98      $   12,344     5    $3,762,151     95
United States                     46,981    31        47,789     2         116,939    46       102,740    2.6
France                            23,868    16            --                23,868     9            --
Russia                                --                  --                    --              83,442      2
Other foreign                     71,114    48            --               100,990    40        16,150    0.4
                              ----------          ----------            ----------          ----------
                              $  149,587          $1,935,408            $  254,141          $3,964,483
                              ----------          ----------            ----------          ----------
</TABLE>

Earnings (loss) per Common Share (EPS)

Net Loss for the three months ended June 30, 2008 totaled $3,640,217, or ($0.08)
per share, an increase of $3,925,471 as compared to net earnings of $285,254, or
$0.01 per share for the same period in 2007.

Net Loss for the six months  ended June 30,  2008  increased  by  $4,555,499  to
$3,757,565 or ($0.08) per share as compared to net earnings of $797,934 or $0.02
per share for the same period in 2007, primarily reflecting non-cash write downs
and amortization of the Company's  investment in film,  television  programs and
recordings of $3,577,148.

Shareholders' Deficiency

Shareholders' deficiency was ($632,599) at June 30, 2008, reflecting an decrease
of $3,518,908 as compared to $2,886,309 at December 31, 2007.

SUMMARY OF QUARTERLY RESULTS

<TABLE>
<CAPTION>
                                                                      Restated      Restated     Restated     Restated     Restated
                            June 30,      Mar. 31,      Dec. 31,     Sept. 30,      June 30,     Mar. 31,     Dec. 31,    Sept. 30,
                                2008          2008          2007          2007          2007         2007         2006         2006
                                ----          ----          ----          ----          ----         ----         ----         ----
<S>                      <C>               <C>           <C>         <C>           <C>          <C>             <C>          <C>
Revenues                 $   149,587       104,554       147,941     2,032,153     1,935,408    2,029,075       60,430       84,255
Selling, general
and administrative           212,650       196,413       276,957       392,886       285,586      132,546      216,911      280,670

Amortization:

-Film, television
programs, and
recordings                    75,076        24,374      (106,604)    1,364,572     1,354,414    1,376,705       52,135       28,426

-Equipment                       977         1,050         1,130         1,215         1,308        1,407        1,514        1,687

Write Downs                3,477,698            --     1,600,097            --            --           --    1,758,742           --

Interest                      23,403            65        43,537       (23,678)        8,846        5,737       51,067       (1,880)

Net income (loss)        $(3,640,217)     (117,348)   (1,667,176)      285,254       285,254      512,680   (2,019,939)    (224,648)

Basic  earnings (loss)
per common share         $     (0.08)        (0.00)        (0.04)         0.01          0.01         0.01        (0.06)       (0.00)
</TABLE>


                                      -41-
<PAGE>

Selling, general and administrative expenses

The Company's selling,  general and administrative expenses for the three months
ended June 30, 2008 decreased by $72,936 or  approximately  26% to $212,650,  as
compared to $285,586 in the same period in 2007.

The Company's selling,  general and  administrative  expenses for the six months
ended June 30, 2008  decreased by $9,066 or  approximately  2% to  $409,063,  as
compared to $387,820 in the same period in 2007.

Selling,  general and administrative  expenses include  participation costs, and
exploitation  costs,  which include and manufacturing and distribution costs for
the  Company's  film library.  Participation  expenses and  exploitation  costs,
including  manufacturing  costs and third party  distribution  fees and expenses
related to sales of Company's library of films, television,  programs and motion
picture  totaled  $46,488 for the three months ended June 30, 2008 decreasing by
$5,172 or  approximately  11% as compared to $51,660 in the same period in 2007.
For the six month ended June 30, 2008,  participation  expenses and exploitation
costs,  including  manufacturing  costs and third  party  distribution  fees and
expenses related to sales of Company's  library of films,  television,  programs
and motion picture totaled $88,881 decreasing by $39,569 or approximately 31% as
compared to $128,450 in the same period in 2007.

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, 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.  In addition,  the Company is  preparing  to expand on the  primetime
drama franchise  established by Across the River to Motor City with a new series
set on the US/Mexico border and will be presenting this new series concept to US
broadcasters in the third quarter of 2008.

Investment in Film and Television Programs and Recordings

In accordance with statement of position of the American  Institute of Certified
Public  Accountants ("SOP 00-2"), the Company's  Investment in Film,  Television
Programs and Recordings represent projects in progress and the unamortized costs
of film, television programs and recordings,  net of 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.


                                      -42-
<PAGE>

The Company  determines  amortization  of its  investment in film and television
programs and recordings 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").  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. Revenue and film carrying 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.  Capitalized  film costs are stated at the lower of  unamortized  cost or
estimated fair value on an individual film basis.

Development  costs  which  are  expected  to  benefit  future  periods  are also
capitalized.  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.  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 net carrying value for the Company's Investment in Film, Television Programs
and  Recordings  totaled  $2,062,009  as at June 30, 2008  (December  31, 2007 -
$5,335,327).

<TABLE>
<CAPTION>
                                                                                     June 30,                           December 31,
                                                                                       2008                                 2007
                                                                                       ----                                 ----

                                                                                                           Net               Net
                                                                                    Accumulated         Carrying          Carrying
                                                                       Cost         Amortization          Value             Value
                                                                   -----------      ------------       -----------      -----------
<S>                                                                <C>               <C>               <C>              <C>
Completed television programs and recordings                       $ 6,862,840       $ 6,774,041       $    88,799      $   265,000
Completed Motion picture - Bailey's Billion$                         6,972,580         6,972,580                --        2,034,919
Completed Television Drama Series                                    5,793,598         4,629,248         1,164,350        1,816,485
Projects in progress                                                   808,860                --           808,860        1,238,327
                                                                   -----------       -----------       -----------      -----------
                                                                   $20,437,878       $18,375,869       $ 2,062,009       $5,335,327
                                                                   ===========       ===========       ===========      ===========
</TABLE>

Amortization and write-down expensed in the three months ended June 30, 2008 for
the Company's  Investment in Film,  Television  Programs and Recordings  totaled
$3,552,774 (2007 - $1,354,414).  Amortization and write-down expensed in the six
months  ended June 30, 2008 for the  Company's  Investment  in Film,  Television
Programs and Recordings totaled $3,577,148 (2007 - $2,731,119).


                                      -43-
<PAGE>

The following table summarizes the Company's amortization and write downs:

For the                                     Three Months Ended  Six Months Ended
                                                 June 30, 2008     June 30, 2008

--------------------------------------------------------------------------------
                        Completed films,
                        television
                        programs,      Projects In
                        & recordings   Progress          Total          Total
--------------------------------------------------------------------------------
Amortization

-Artists Series            $75,076            --         $75,076         $99,450
--------------------------------------------------------------------------------
Write-down

-Artists Series             64,982                        64,982          64,982
-Bailey's Billions       2,034,919                     2,034,919       2,034,919
-Across the River          760,134                       760,134         760,134
-Writers Series                 --       428,196         428,196         428,196
-Humchucker                     --       189,467         189,467         189,467
--------------------------------------------------------------------------------
Total Write-down         2,860,035       617,663       3,477,698       3,477,698
--------------------------------------------------------------------------------
Total Amortization and
Write-down              $2,935,111      $617,663      $3,552,774      $3,577,148
                        ----------      --------      ----------      ----------
--------------------------------------------------------------------------------

The following table summarizes Company's amortization expenses:

<TABLE>
<CAPTION>
                                                                         Three months ended                    Six months ended
                                                                              June 30                             June 30
Amortization                                                           2008              2007              2008              2007
<S>                                                                 <C>               <C>               <C>               <C>
Completed television programs and recordings                        $   75,076        $   21,834        $   99,450        $   65,960
Completed Motion picture - Bailey's Billion$                                --                --                --                --
Completed Television Drama Series                                           --         1,332,580                --         2,665,159
                                                                    ----------        ----------        ----------        ----------
                                                                    $   75,076        $1,354,414        $   99,450        $2,731,119
                                                                    ==========        ==========        ==========        ==========
</TABLE>

The following table summarizes Company's write-downs:

<TABLE>
<CAPTION>
                                                                         Three months ended                   Six months ended
                                                                               June 30                            June 30
Write-downs                                                             2008             2007              2008              2007
                                                                     ----------       ----------        ----------        ----------
<S>                                                                  <C>              <C>               <C>               <C>
Completed television programs and recordings                         $   64,982       $       --        $   64,982        $       --
Completed Motion picture - Bailey's Billion$                          2,034,919               --         2,034,919                --
Completed Television Drama Series                                       760,134               --           760,134                --
Projects in progress                                                    617,663               --           617,663                --
                                                                     ----------       ----------        ----------        ----------
                                                                     $3,477,698       $       --        $3,477,698        $       --
                                                                     ==========       ==========        ==========        ==========
</TABLE>


                                      -44-
<PAGE>

Completed Television Programs and Recordings

Amortization and write-down of the Company's  completed  television programs and
recordings, which include The Composers Specials, The Inventors Specials and The
Artists Specials for the three months ended June 30, 2008 totaled $140,058 (2007
- $21,834)  including a write down of $64,982  (2007 - $nil).  Amortization  and
write-down of the Company's completed television programs and recordings,  which
include The Composers Specials,  The Inventors Specials and The Artists Specials
for the six  months  ended  June 30,  2008  totaled  $164,432  (2007 -  $74,707)
including a write down of $64,982 (2007 - $nil).

At June 30, 2008  investment  in completed  television  programs and  recordings
totaled $88,799 (December 31, 2007 - $265,000).

In the nine-year period from 1999 to 2007, The Artists Specials, the last series
of films in its completed television programs and recordings with a net carrying
value  remaining,  generated  approximately  $5,850,000 in its first eight years
after the  original  release,  which is an average of  $650,000  per annum.  The
Company's  ultimate  revenue  estimates  for The  Artists'  Specials  in 2008 is
approximately  $300,000,  based on its  history of sales in North  American  DVD
markets and  estimates  from its recent  distribution  agreement for the foreign
territories.  While,  the  Company  believes  that its  proprietary  library  of
completed  television programs and recordings are evergreen and will continue to
generate  revenues  in the  future,  in  accordance  with  SOP  00-2  all of the
Company's carrying value for its completed  television programs will be expensed
by the  end of the  proscribed  ten  year  amortization  period  of The  Artists
Specials at the end of 2008. Accordingly,  the Company accelerated the expensing
of its completed  television  programs and  recordings in the three months ended
June 30, 2008 and wrote down its carrying value by $106,263.

Completed Motion Picture - Bailey's Billion$

In the three and six months  ended June 30,  2008,  the  Company  wrote down the
balance of it's  investment  in completed  motion  picture,  Bailey's  Billion$,
totaling $2,034,919 (2007 - $nil). At June 30, 2008, the Company's investment in
completed motion picture,  Bailey's Billion$,  totaled $nil (December 31, 2007 -
$2,034,919),

Ultimate revenue estimates for the Company's completed motion picture were based
on in-depth  discussions with and estimates provided by experienced  third-party
distributors and sales agents,  including the contracted foreign sales agent and
United States distributor.  Each of these distributors has well over 20 years of
experience  in its  area of  sales  and  distribution.  The  third  party  sales
estimates  and the  agreements  have  been  reviewed  and  approved  the  motion
picture's  co-producers,  copyright  purchasers and production  lending bank and
then  discounted  by the  Company  in an  effort  to  provide  conservative  and
realizable ultimate revenue estimates.

In the  United  States,  Management  has  used  the  Company's  twenty  years of
experience with broadcasters in conjunction with the United States distributor's
estimates for three windows over ten years as a basis for its  television  sales
estimates.  With regard to DVD/video sales  estimates,  the Company has reviewed
distributors' estimates and compared them to the Company's historical sales. P&L
models based on these sales estimates and  incorporating  the distribution  fees
and expenses defined in the Company's  distribution  agreements assuming between
500,000 to 1,000,000 unit sales over ten years with average net revenue of $4.26
(U.S.)  per unit were  discounted  and  support  what  management  believes  are
conservative ultimate revenue estimates.  The estimates were based on an initial
release at a retail pricing of $24.98 (U.S.) for rental and initial sell through
release and  subsequent  drops in pricing to $14.98  (U.S.) and $12.98 (U.S.) as
the DVD  release  migrates  to  distribution  in mass  market  sell-through  and
discount  markets over the ten-year  period.  The Company compared and supported
this figure with industry  standards and  published  unit sales for  comparative
family feature films and then  discounted  them  conservatively  and modeled the
estimates to incorporate the  distribution  fees and expense  limitations in its
various  distribution  agreements.  The models provided net revenue estimates of
approximately $5 million (U.S.),  which the Company then discounted to less than
fifty percent (50%),  which in effect reflects 750,000 unit sales over ten years
at the lowest price and margin.


                                      -45-
<PAGE>

For  estimates in the foreign  territories,  the Company has relied on its sales
agents' estimates on an all rights basis per territory.  The Company's  ultimate
revenue  estimates  were based on bank  approved  estimates  of initial  advance
payments  per  territory  which do not  take  into  account  any  second  window
television  license values and longer term  DVD/video  royalty  payments.  These
estimates were then  discounted to match the discounted  United States  ultimate
revenue  estimates,  conservatively  assuming that all of the other  territories
around the world would not exceed the revenues from the United States market.

While actual revenues of $6,140,000 from the Company's  Completed Motion Picture
in the first two  years  were  above the  Company's  original  ultimate  revenue
estimates  and a drop-off was expected  while certain  non-fundable  advances in
foreign  territories  were  recouped by  distributors,  the Company  revised its
remaining  ultimate revenues to approximately $27 million for the next six years
in light of changing  market  conditions  and the declining  performance  of its
distributors  and  accordingly  wrote down the net  carrying  value of  Bailey's
Billion$ by $856,159 in the fourth quarter of 2007.

Although,  revenues  exceeded the  Company's  estimates in 2004 and 2005 and the
motion picture performed well in the marketplace,  sales dropped of dramatically
in 2006 and there were no sales  reported  in 2007,  which  reflected  a lack of
reporting  and a dispute  between  the U.K.  based  co-producer  and the  master
distributor  which the  co-producer,  through a related party, has a significant
ownership stake. Although, the Company has continued to pursue resolution of the
distribution  of the completed  motion picture and made effort to repatriate its
exploitation  rights,  no new sales have been  reported,  although  the  Company
believes  sales have been made and revenues  have been  generated in the period,
and the Company no longer has any confidence in the  determinability of revenues
from its completed  motion picture.  Accordingly the Company is writing down the
balance of its carrying value in the second quarter of 2008.

Completed Television Drama Series

In the three months ended June 30, 2008,  the Company wrote down its  investment
in completed  television  drama series by $760,134  (2007 - $nil).  In the three
months ended June 30, 2008 there was no amortization  (2007 - $1,332,180) of the
Company's its investment in completed television drama series. In the six months
ended  June 30,  2008,  the  Company  wrote  down its  investment  in  completed
television  drama series by $760,134 (2007 - $nil). In the six months ended June
30, 2008 there was no  amortization  (2007 -  $2,665,159)  of the  Company's its
investment in completed television drama series.

As at June 30, 2008 The  Company's  investment  in  completed  television  drama
series totaled $1,164,350 (December 31, 2007 - $1,816,485).

Ultimate revenue estimates for the Company's television drama series, Across the
River  to  Motor  City,  are  based  on the  Company's  25 year  history  in the
television industry and the distribution in the international  broadcast and DVD
marketplace and discussions  regarding  estimated  values of broadcast  licenses
provided by experienced third-party  distributors and ales agents. Each of these
distributors  and sales agents has well over 20 years of  experience in its area
of sales and  distribution.  Management  has  discounted  these  estimates in an
effort to provide  conservative and realizable ultimate revenue estimates backed
up  by a  conservative  schedule  of  territory  by  territory  broadcast  sales
estimates.

In  Canada,  management's  estimates  reflect  contracted  sales  of  $5,612,500
receivable on delivery of the series (covering 67% of overall Ultimate  revenues
for the ten year  proscribed  period in compliance with FASB 53). The balance of
Canadian  revenues  total  $360,000  over the ten  year  period  covering  three
broadcast  windows in French  Canada,  one window  after  seven years in English
Canada, and all revenues from VOD, DVD and digital distribution marketplaces.

In the  United  States,  management  has  used  the  Company's  twenty  years of
experience  with  broadcasters  in conjunction  with its sales agent's review of
broadcast  license  values  for three  windows  over ten years as a basis of its
television sales estimates and then discounted  these estimates.  As an example,
the Company's first window  (averaging 36 months) cable broadcast license for 18
of its programs have  averaged  just over


                                      -46-
<PAGE>

CDN $325,000 and overall Management's  estimates reflect a conservative value of
$160,000 over three windows over ten years.

For  estimates  in the  foreign  territories,  the  Company  has relied on sales
agents'  estimates  for a first  window  sale in France of between  $50,000  and
$150,000 per episode and reviewed broadcast values for first window sales in the
7  major  territories  as  well  as  estimates  in 25 of  75  key  international
territories and discounted its estimates to $300,000 for all territories outside
of North America for multiple windows over ten years.

With  regard to DVD/VOD  and  digital  media  sales  estimates,  the Company has
reviewed  and  compared  them to the  Company's  historical  sales.  The Company
compared and supported  these  estimates  with industry  standards and published
unit  sales  for  comparative  television  programs  and  then  discounted  them
conservatively  and modeled the estimates to  incorporate  its  experience  with
distributor's  fees  and  expense   limitations  in  its  various   distribution
agreements.  Management  notes that its  estimate  for all DVD,  VOD and digital
distribution  of the series  world-wide for ten years is a conservative  $20,000
per episode.

Management  believes that market  changes,  which have resulted from a series of
related broadcaster and investor consolidations in Canada that became evident in
the second quarter of 2008 have, in the Company's opinion,  negatively  impacted
future  revenue  estimates for Across the River to Motor City.  The  broadcaster
(CHUM Television) who commissioned the mini-series,  licensed Canadian broadcast
rights and holds an equity  investment  in Across the River to Motor  City,  was
bought and sold twice in 2007.  This  dramatic and  un-forecasted  change in the
rights  ownership and promotion of the series has, in the opinion of management,
impaired the  potential  future  revenues for the mini  series.  This event,  in
combination  with the effect of the changes in the US currency  exchange and the
general  downturn  in  the  public  markets,  the  economy  and  the  investment
environment, have negatively impacted the future revenues and of the program and
accordingly,  in compliance  with SOP 00-2,  the Company is writing down the net
carrying  value of its  investment in its completed  television  drama series by
$726,340 in the three months ended June 30, 2008.

The Company  believes  that current  ultimate  revenue  estimates for Across the
River to Motor City are  conservative and realizable,  notwithstanding  the fact
that  management  reviews the  estimates on a regular  basis and may adjust them
down depending on changing results and market conditions in the future.

Projects in Progress

Development costs for properties that are expected to benefit future periods are
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.  In the three and six months ended June 30, 2008,  $617,662 (2007 - nil)
of projects in progress was written off to income.

At June 30,  2008,  the  Company's  investment  in projects in progress  totaled
$808,860 (December 31, 2007 - $1,238,327).

Participation expenses and exploitation costs, including manufacturing costs and
third party distribution fees and expenses related to sales of Company's library
of films, television,  programs and motion picture totaled $46,488 for the three
months ended June 30, 2008 decreasing by $5,172 or approximately 11% as compared
to $51,660 in the same period in 2007.  For the six month  ended June 30,  2008,
participation expenses and exploitation costs, including manufacturing costs and
third party distribution fees and expenses related to sales of Company's library
of films, television,  programs and motion picture totaled $88,881 decreasing by
$39,569 or approximately 31% as compared to $128,450 in the same period in 2007.

There were no  participation  and  exploitation  costs  related to the Company's
completed motion picture - Bailey's  Billion$ or its completed  television drama
series  and the  Company  does not  expect any  participation  and  exploitation
expenses  related to these films in 2008.  The Company  estimates  approximately
$190,000  in  participation  and  exploitation  costs  related  to it library of
completed television


                                      -47-
<PAGE>

programs and recordings in 2008, of which approximately $50,000 or 26% are costs
related  to the  Artists  Specials  series,  the only  series  of the  Company's
completed television programs and recordings with a net carry cost remaining.

The  following  table  summarizes   Company's   participation  and  exploitation
expenses:   related  to  its  library  of  completed   television  programs  and
recordings:

<TABLE>
<CAPTION>
                                                                       Three months ended                    Six months ended
                                                                             June 30                              June 30
Participation and Exploitation costs                                 2008               2007               2008               2007
<S>                                                                <C>                <C>                <C>                <C>
Participation Costs                                                $  5,257           $    711           $  7,525           $  6,216
Manufacturing Costs                                                   6,480             39,986             32,048             68,234
Distribution fees and expenses                                       34,751             10,963             49,308             54,000
                                                                   --------           --------           --------           --------
                                                                   $ 46,488           $ 51,660           $ 88,881           $128,450
                                                                   ========           ========           ========           ========
</TABLE>

Interest  incurred on funds borrowed  during  productions  of films,  television
programs and recordings is capitalized as a cost of the production. In the three
months  ended June 30, 2008 the Company  capitalized  $2,349 (2007 - $28,642) of
interest in connection  with the film  production  for its completed  television
series. In the three months ended June 30, 2008 the Company capitalized interest
in connection with various  productions  amounting to $4,325 (2007 - $8,586). In
the six months  ended June 30, 2008,  the Company  capitalized  $31,591  (2007 -
$37,731) of interest in connection  with the film  production  for its completed
television  series.  In  the  six  months  ended  June  30,  2008,  the  Company
capitalized interest in connection with various productions amounting to $42,435
(2007 - $14,460).

At June 30, 2008, 99% (December 31, 2007 - 96%) of completed television programs
and recordings, 100% (December 31, 2007 - 71%) of completed motion picture costs
and 80%  (December  31, 2007 - 68%) of completed  television  drama series costs
have been  amortized.  The remaining  period of  amortization  for the completed
projects  ranges from one to nine years at December 31, 2007.  100% of completed
television  programs  and  recordings  will be  amortized  in 2008.  The Company
expects to amortize 69% of the remaining completed television drama series costs
in the next three years and expects 88% will have been amortized by 2012.

Capital stock

At December 31, 2007 the Company had 45,921,149 common shares,  494,550 Series 1
Class A preferred shares outstanding and 14,474,166 warrants outstanding.

On June 16, 2008,  the Company  issued 59,400  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

At June 30, 2008 the Company had  45,980,549  common  shares,  494,550  Series 1
Class A preferred shares outstanding and 14,474,166 warrants outstanding.

Related Party Transactions

During the 3 month period ended June 30, 2008 $73,750  (June 30, 2007 - $73,750)
and 6 month  period ended June 30, 2008  $147,500  (June 30, 2007 - $225,194) of
fees were paid or accrued to corporations controlled by two of the directors for
writing,  directing and producing  services on the Company's film and television
productions.  These  transactions  are in the normal course of business and have
been  measured  at  exchange  amount,  which  is  the  amount  of  consideration
established and agreed to by the related parties and which  management  believes
reflect prevailing market rates.


                                      -48-
<PAGE>

Variable Interest Entities

A Variable  Interest  Entity  ("VIE")  is an entity  that  either  does not have
sufficient  equity  at risk  to  finance  its  activities  without  subordinated
financial  support or wherein the equity investors lack the  characteristic of a
controlling  financial  interest.  Pursuant  to CICA AcG-15 and FIN 46, VIEs are
consolidated  by a company if that company is deemed the primary  beneficiary of
the VIE.  Accordingly,  the Company has  consolidated the VIE's in its financial
statements as discussed herein.

During  2004  the  Company  entered  into  a  services   agreement  with  Devine
Entertainment Limited Partnership ("the Partnership").  On December 22, 2004 the
Company issued  380,450  Common Shares and 494,550 Series 1 preferred  shares of
the Company. The Company recorded the common shares as equity and classified the
preferred shares as a liability.

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. In 2007, the Company received proceeds net of costs of $131,316 (2006 -
$249,098)  recorded as contributed  surplus and  subscriptions  receivable (net)
$39,226 (2006 - $307,393).

Restatement

The  Company  is  restating  its  previously  reported  consolidated   financial
statements  for the 3 and 6 months  ended June 30, 2007. A summary of the impact
of the restatement  adjustments on the previously reported  consolidated balance
sheet, statement of operations and cash flows amounts is as follows:

      Summary of Restatement Adjustments

      a)  The  Company  has  determined  that  the  previously  filed  financial
      statements  for the 3 and 6 month  period  ended June 30,  2007  contained
      errors resulting from the incorrect accounting related to interest for the
      Company's  Investment in film,  television  programs and  recordings.  The
      interest  income was  incorrectly  accounted  for and should not have been
      included in the results for the 6 period ended June 30, 2007. In addition,
      the  transaction  should have been  accounted for and was addressed in the
      December 31, 2007 financial statements.

      The  Company has  restated  the  interest  income  from  interest  expense
      (income).  The  restatement  amounts  to  $30,312.  As  a  result  accrued
      liabilities  increased by $30,312 and net income  decreased by $30,312 for
      the 6 months ended June 30, 2007. The deficit increased by $30,312.

      d) The company restated its preferred shares from an equity component to a
      liability as it was determined that under the CICA Handbook  Section 3861,
      and  following  the  guidance  under  EIC-149.  The  preferred  shares are
      redeemable, retractable, and have a preferential priority participation in
      the residual equity of the Company; accordingly preferred shares have been
      restated  as a  liability.  The effect of the  restatement  resulted  in a
      reclassification  from  preferred  shares  in the  equity  section  of the
      balance  sheet in the  amount  of  $494,550  to  preferred  shares  in the
      liability section in the amount of $494,550.  This change was reflected in
      the  Company's  December  31,  2007  financial   statements.   Accordingly
      dividends  amounting to $11,220 would be restated as interest  expense for
      the 3 month period ending June 30, 2007 and dividends amounting to $22,440
      would be restated as interest  expense for the 6 month period  ending June
      30, 2007.

      e)  The  Company  has  determined  that  the  previously  filed  financial
      statements  contained  errors  resulting  from  the  incorrect  volatility
      calculation  used to  determine  the fair value of  warrants  and  options
      issued for the 3 and 6 month  periods  ended June 30,  2007.  As a result,
      contributed  surplus  increased  by  $94,500  and  warrants  increased  by
      $22,740.  This was  offset  by an  increase  to the  deficit  of  $117,240
      resulting  in a  reduction  to net  income  and  comprehensive  income  of
      $117,240.


                                      -49-
<PAGE>

      The following table summarizes the impact of the restatement adjustment on
      the previously  reported statements of operations and cash flows for the 3
      and 6 months ended June 30, 2007.

Statement of Operations

                                                    3 months         6 months
                                                 June 30, 2007     June 30, 2007

Net income and comprehensive income
    As previously reported                        $   413,714       $   967,926
  Interest expense (Note 2 a)                              --           (30,312)
  Interest income (Note 2 b)                          (11,220)          (22,440)
  Selling, general and administrative                (117,240)         (117,240)
                                                  -----------       -----------
Net income and comprehensive income
    As restated                                   $   285,254       $   797,934

Statement of Cash Flows

                                                    3 months         6 months
                                                 June 30, 2007     June 30, 2007

Cash flows provided by operating activities
  As previously reported                          $   732,181       $ 2,312,276
Net loss for the period                              (128,460)         (169,992)
Stock based compensation (Note 2 (c)                  117,240           117,240
Accrued liabilities (Note 2 a and b)                   11,220            52,752
                                                  -----------       -----------
Cash flows provided by operating activities
  As restated                                     $   732,181       $ 2,312,276

Cash flows used in financing activities
  As previously reported                          $   (21,667)      $  (677,014)
Cash flows used in financing activities
  As restated                                     $   (21,667)      $  (677,014)

Cash flows used in investing activities           $  (873,444)      $(1,749,271)
Cash flows used in investing activities
  As restated                                     $  (873,444)      $(1,749,271)

Loans Payable

Loans  payable  consist  of  the  Company's  1995,  1996  and  2000  convertible
debentures, which bear interest at 10.5 % per annum, have matured, have not been
extended  and carry no fixed  term,  accordingly  the  Company is  carrying  the
outstanding  amount of  $1,700,800  (2007 - $1,700,800)  as a loan payable.  The
creditors  have a general  security  assignment  on the  assets of the  Company.
Accrued interest as at June 30, 2008 was $935,610 (December 31, 2007 - $846,505)
and is included  in accounts  payable  and  accrued  liabilities.  In 2007,  the
Company  deposited  $60,000  in trust  related  to the  loans,  to show that the
Company was  committing  a portion of its cash flow  towards  settlement  of its
liability and included the amount on the balance sheet with prepaid expenses and
sundry assets.

The Company is working  towards  settling  the  outstanding  current loan and no
action has been taken by the debt holders and none is expected. Management is in
constant  communication  with the holders of the majority of this debt, who have
consistently  supported  the Company in the past,  and expects  that the


                                      -50-
<PAGE>

Company will be able to settle the debt in the normal course of operations  from
a combination  of proceeds from equity,  debt and VIE  financing,  the Company's
ongoing operating cash flow and through possible  conversion of a portion of the
debt to equity in the Company.

Nonetheless,  the Company is currently  in default of the loans  payable and the
debt holders have the right to demand on their secured loan. If the shareholders
demand on the  Company's  obligation,  they can force the sale of the  Company's
assets to satisfy the obligation. Although management believes, and is supported
by independent  valuations,  that the value of the Company's  assets surpass the
value of the loan obligation on a going forward basis, a demand by the Company's
secured creditors may negatively affect the market value of the Company's assets
and the Company may be required to significantly reduce or limit operations.

Liquidity and Capital Resources

The  Company's  cash on hand as at June 30,  2008 was  $130,017  as  compared to
$245,872 as at December 31, 2007, a decrease in cash position of $115,855.

The Company has no bank debt. A demand loan  bearing  interest at prime plus 1%,
repayable  in full by June 30, 2008 that 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. was repaid in full in the quarter  ended June 30, 2008 (2007 -
$1,447,513).  Interest on the above  demand loan  totalled  $2,349 for the three
month  period  ended June 30, 2008 (three  months ended Dec. 31, 2007 - $32,899)
and has been capitalized to projects in progress.

The Company's working capital deficiency remains significant but is mitigated by
the fact  that the  Company  is  working  towards  settling  its  $1,700,800  of
outstanding  current  loans payable  related to the matured 1995,  1996 and 2000
convertible  debentures.  Management  is in  constant  communications  with  the
holders  of the  majority  of this debt,  who have  consistently  supported  the
Company in the past,  and expects  that the  Company  will be able to settle the
debt in the normal course of operations.

Nonetheless,  the Company  remains  unable to service  this loan and the Company
will require  additional  working  capital  from its  production  activities  or
corporate financing in 2008. The Company continues to seek additional funding.

The Company expects to renew  profitability and generate positive cash flow from
new  productions  and  operations and expects that proceeds from sales of Across
the River to Motor City and its film library will generate  additional  revenues
through 2008 and beyond.  The Company requires and is actively seeking financing
for working capital and new production;  however, there is no assurance that the
Company will be successful in its financing efforts and in achieving  sufficient
cash flows from operating activities.

The Company's 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.

While the Company  continues to maintain its  day-to-day  activities and produce
and distribute films and television  programming,  it has a significant  working
capital deficiency and its continued  existence is dependent upon its ability to
restore and maintain profitable operations and to successfully  extinguish loans
payable, which are currently in default.

The Company is working  towards  settling  the  outstanding  current loan and no
action has been taken by the debt holders and none is expected. Management is in
constant  communication  with the holders of the majority of this debt, who have
consistently  supported  the Company in the past,  and expects  that the Company
will be able to  settle  the debt in the  normal  course  of  operations  from a
combination  of proceeds  from equity,  debt and VIE  financing,  the  Company's
ongoing operating cash flow and through possible  conversion of a portion of the
debt to equity in the Company.


                                      -51-
<PAGE>

The Company is pursuing  various  financing  initiatives;  however,  there is no
assurance  that the Company will be successful  in its financing  efforts and in
achieving  sufficient  cash flows from operating  activities.  If the Company is
unsuccessful,  the  Company may be  required  to  significantly  reduce or limit
operations.  The  application  of the going concern basis is dependent  upon the
Company  obtaining  additional  financing to fund its continuing  operations and
meet its obligations as they come due.

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.

OUTLOOK

The Company is optimistic  about the successful  commercial  exploitation of its
new six hour primetime mystery miniseries Across the River to Motor City and its
library of motion pictures and television programs and recordings.

Nonetheless, the Company requires additional financing to finance new production
and  to  address  its  working  capital  deficiency.  Although  there  can be no
assurance,  the Company is pursuing 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 2008 and into the future.

SUBSEQUENT EVENTS

On July 11, 2008,  Devine  Entertainment  Corporation (the "Company")  dismissed
Deloitte  & Touche  LLP as its  independent  accounting  firm.  The  reports  of
Deloitte  &  Touche  LLP on the  Company's  financial  statements  for the  year
2007neither  contained  an adverse  opinion or  disclaimer  of opinion  nor were
modified as to uncertainty,  audit scope or accounting principles.  The decision
to  change  the  Company's  independent  accounting  firm  was  approved  by the
Company's board of directors.

To the Company's best knowledge,  during the Company's  engagement of Deloitte &
Touche LLP, there were no disagreements with Deloitte & Touche LLP on any matter
of accounting  principles  or  practices,  financial  statement  disclosure,  or
auditing scope or procedure with respect to the Company, which disagreements, if
not resolved to the  satisfaction of Deloitte & Touche LLP, 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.

On July 11, 2008, the Company provided  Deloitte & Touche LLP with a copy of the
disclosure set forth herein and requested that Deloitte & Touche LLP furnish the
Company with a letter  addressed to the United  States  Securities  and Exchange
Commission stating whether Deloitte & Touche LLP agrees with such disclosure. On
July 29,  2008,  the  Company was advised by Deloitte & Touche LLP that it would
provide details as to any  disagreements of the type required to be disclosed on
Form 8-K under separate cover.

On July 11, 2008,  the Company  engaged  Zeifmans LLP to serve as the  Company's
independent  accounting firm. The engagement of Zeifmans LLP was approved by the
Company's board of directors.


                                      -52-
<PAGE>

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures are designed to provide
reasonable assurance that information required to be disclosed by the Company in
reports  filed with  securities  regulatory  agencies  is  recorded,  processed,
summarized and reported on a timely basis and is accumulated and communicated to
the Company's  management,  including the Company's Chief Executive  Officer and
Chief Financial  Officer,  as appropriate,  to allow timely decisions  regarding
required disclosure.

The Company has carried out an evaluation, in accordance with Exchange Act Rules
13a-15 and 15d-15 and under the  supervision  of and with the  participation  of
management,  including the Company's Chief  Executive  Officer ("CEO") and Chief
Financial Officer ("CFO"),  of the effectiveness of our disclosure  controls and
procedures  at the end of the period  covered by this  report.  The  Company has
determined  that the previously  filed  financial  statements  contained  errors
requiring  restatement  as  reflected  in Note 2 to the June  30,  2008 and 2007
consolidated  financial  statements  and that there are material  weaknesses  in
disclosure controls and the internal control over financial reporting as of June
30, 2007 and that the  Company did not have  sufficient  in-house  expertise  to
ensure compliance with the measurement,  recognition and disclosure requirements
under Canadian and US GAAP for certain transactions.

Management's Plan for Remediation of Material Weaknesses

The  Company  has  undertaken  efforts  to improve  its  internal  control  over
financial reporting and to remediate the material  weaknesses  identified above.
The Company has designed,  implemented  and will  maintain an effective  control
environment  over  financial  reporting.  The Company has taken or will take the
following actions:

The Company is  committed  to enhance its  internal  controls.  When  complex or
unusual transactions surface,  management actively seeks a solution in-house and
then has consulted third party experts for the resolution.

In addition,  the Company has updated its Canadian and United  States  generally
accepted  accounting  principles  knowledge and  established a number of control
procedures  designed to strengthen its capabilities to both identify and address
any potential errors before they are reported in the future.

With the implementation of these corrective  actions,  the Company believes that
the above noted material weaknesses that were identified in its internal control
over financial  reporting as of December 31, 2007 will, over time, be addressed.
However,  the effectiveness of these procedures remains to be tested in 2008 and
several  fiscal  quarters  may be  required  prior to  management  being able to
conclude that the material  weaknesses  have been  remediated.  The Company will
continue to  periodically  review its  disclosure  controls and  procedures  and
internal control over financial  reporting and may make  modifications from time
to time as considered necessary or desirable.

Changes In Internal Control Over Financial Reporting

The Certifying Officers 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,   other  than  the  action  noted  above,  with  regard  to
significant deficiencies and material weaknesses.


                                      -53-
<PAGE>

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

These  financial  statements  have been prepared in accordance with the Canadian
Institute of Chartered  Accountants  standards for interim financial statements.
These financial  statements  follow the same  accounting  polices and methods of
their application as the most recent annual financial statements;  however, they
do  not  include  all  of  the  disclosure  requirements  for  annual  financial
statements.  Accordingly,  these interim financial  statements should be read in
conjunction with the Company's audited  financial  statements for the year ended
December 31, 2007.

Critical accounting policies are those that are, in management's view, important
to the  portrayal  of our  financial  condition  and results of  operations  and
require  management's  judgment.  The Company's  discussion  and analysis of its
financial  statements,  which have been  prepared in  accordance  with  Canadian
generally  accepted  accounting   principles  ("Canadian  GAAP")  describes  and
reconciles the  significant  measurement  differences  between Canada and United
States  generally  accepted  accounting  principles  ("US GAAP")  effecting  the
accompanying consolidated financial statements.

The preparation of these  statements  requires the Company to make estimates and
judgments that affect the reported amounts of assets,  liabilities,  revenue and
expenses.  The  Company  bases  its  estimates  on  experience  and  on  various
assumptions that we believe are reasonable under the circumstances,  the results
of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from those estimates. Our critical accounting policies include:

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 the sale of film and television
programming  rights and licence  arrangements is recognized only when persuasive
evidence of a sale or arrangement with a customer  exists,  the film is complete
and the  contractual  delivery  arrangements  have been  satisfied,  the licence
period has commenced,  the arrangement fee is fixed or determinable,  collection
of the arrangement fee is reasonably assured,  and other conditions as specified
in the respective agreements have been met.

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  is  recognized  when  reported  and  received  or when
collection is reasonably assured.

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 collection is reasonably assured.

Revenue  from the sale of home  videos and DVD's are  recognized  at the time of
shipment and collection is reasonable assured.

Amounts  received in advance are recorded as deferred  revenue until the revenue
recognition criteria are met.

Investment in Film, Television Programs and Recordings

In  accordance  with SOP  00-2,  investment  in film,  television  programs  and
recordings  represent  projects in progress and the  unamortized  costs of film,
television  programs  and  recordings,   net  of  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.  If the property under
development  has not been set for


                                      -54-
<PAGE>

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.

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  carrying  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.

Government and Other Assistance

The Company has access to various government programs, including refundable film
and television tax credits that are designed to assist film, television programs
and recordings production and distribution in Canada. Refundable tax credits are
recorded as a reduction of the cost of related films. Tax credits are recognized
when the Company has  persuasive  evidence to determine that it is probable 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  with an  exercise  price equal to the fair value of the shares at the
date of grant,  and vesting  immediately.  The Company  recognizes  compensation
expense for the  stock-based  compensation  plan when stock or stock options are
issued.  Any consideration  received from employees on exercise of stock options
or purchase  of stock is  credited to share  capital and the fair value of stock
options is transferred from contributed surplus to share capital.

For stock based compensation issued to non employees, the Corporation recognizes
an expense based on the fair value of the equity instrument issued.

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 tax assets and liabilities are
measured using enacted or substantively enacted tax rates expected to apply when
the asset is realized or the  liability is settled.  When the  realization  of a
future  tax asset is  determined  to not be more  likely  than not  realized,  a
valuation allowance is provided.

Use of Estimates

The preparation of financial  statements in conformity  with Canadian  generally
accepted  accounting  principles and United States Generally accepted accounting
principles  ("US GAAP")  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  revenues  from film  distribution,  amortization  of
Investment  in film,  television  programs  and  recordings,  valuation of stock
compensation,  inventory, 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.


                                      -55-
<PAGE>

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  include  equipment  and  investments  in  films,  television
programs and  recordings.  Equipment is accounted  for as per SFAS 144 (see Note
3(f)).  Investment in films, television programs and recordings is accounted for
as per SOP-00-2 (see Note 6).  Long-lived  assets are reviewed for impairment on
an annual basis at year end 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  Company's  investment  in  films,  television
programs  and  recordings  is greater  than the  undiscounted  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 flows from the asset.

Deferred Revenue

Revenue  received  from sales of rights and  licences  related  to  projects  in
progress is recorded as deferred  revenue until revenue  recognition  parameters
have been met.

Adoption of New Accounting Policies

ii)   Effective January 1, 2007, the Corporation  adopted the recommendations of
      the CICA Handbook Sections 1530, Comprehensive Income; 3251, Equity; 3855,
      Financial  Instruments  -  Recognition  and  Measurement;   Section  3861,
      Financial  Instruments -  Measurement,  Disclosure and  Presentation;  and
      Section 3865, Hedges. As required by the standards, the change in policies
      have been applied retrospectively with no restatement to prior periods.

      a.    Comprehensive   Income:   Section  1530  establishes  standards  for
            reporting and display of comprehensive  income.  Unrealized gains or
            losses on available-for-sale  investments, and the effective portion
            of gains or losses on derivatives designated as cash flow hedges and
            hedges of the net investment in  self-sustaining  foreign operations
            are included in other  comprehensive  income ("OCI" and  accumulated
            other  comprehensive  income  ("AOCI")  is  included  as a  separate
            component  of  equity.  The  Corporation  had no  such  OCI or  loss
            transactions  for the year ended December 31, 2007 and there were no
            opening or closing balances for AOCI.

      b.    Financial  Instruments:  Under  the  new  standards,  all  financial
            instruments   are   classified   into  one  of  the  following  five
            categories:     held-for-trading     (assets    and    liabilities),
            available-for-sale   financial   assets,   loans  and   receivables,
            held-to-maturity  financial assets, and other financial liabilities.
            Transaction  costs are  included in the initial  carrying  amount of
            financial  instruments  except for  held-for-trading  items in which
            case they are expensed as incurred.  All financial  instruments  are
            initially measured at fair value.  Measurement in subsequent periods
            depends on the classification of the financial instrument.

      Under the standards:

      Held-for-trading (assets or liabilities)

      This  category  is  comprised  of certain  investments  in equity and debt
      instruments,  stand-alone  derivatives,  other  than those  designated  as
      hedging items, and embedded  derivatives  requiring  separation.  They are
      carried in the  balance  sheet at fair  value  with  changes in fair value
      recognized in the statement of operations.


                                      -56-
<PAGE>

      Loans and receivables

      These  assets  are  non-derivative  financial  assets  resulting  from the
      delivery of cash or other assets by a lender to a borrower in return for a
      promise to repay on a specified  date or dates,  or on demand.  They arise
      principally  through the  provision  of goods and  services  to  customers
      (accounts  receivable),  but also  incorporate  other types of contractual
      monetary  assets.  They  are  initially   recognized  at  fair  value  and
      subsequently  carried at amortized cost, using the effective interest rate
      method, less any provision for impairment.

      Available-for-sale investments

      Non-derivative  financial  assets not included in the above categories are
      classified as  available-for-sale  and comprises  certain  investments  in
      equity   instruments,   including  a  company's   investments  in  private
      companies.  When they have a quoted market price in an active market, they
      are  carried  at fair value with  changes  in fair value  recognized  as a
      separate component of other comprehensive  income. When they do not have a
      quoted market price in an active market, they are carried at cost. Where a
      decline in the fair value is  determined to be other than  temporary,  the
      amount  of the  loss  is  removed  from  other  comprehensive  income  and
      recognized in the statement of operations.

      Other financial liabilities

      Other financial  liabilities includes all financial liabilities other than
      those classified as held-for-trading  and comprises trade payables,  other
      short-term monetary liabilities, and the debt element of convertible debt.
      These liabilities are initially  recognized at fair value and subsequently
      carried at amortized cost using the effective interest rate method.

      The  adoption of these  standards  had no impact on the  opening  retained
      earnings and therefore did not result in a  transitional  adjustment as of
      January 1, 2007.

      The  Corporation's  financial  assets and  liabilities  are  recorded  and
      measured as follows:

Asset/Liability                     Category                      Measurement
---------------                     --------                      -----------
Accounts receivable                 Loans and receivables         Amortized cost

Subscription receivable             Loans and receivables         Amortized cost

Accounts payable and accrued        Other liabilities             Amortized cost
liabilities

Accrued Liabilities                 Other liabilities             Amortized cost

Loans payable                       Other liabilities             Amortized cost

      No derivative  financial  instruments  existed for the periods  presented.
      Based on the preceding information, the application of these new standards
      had a limited impact on the financial statements of the Company.

      Other  balance  sheet  accounts,  such as prepaid  expenses,  property and
      equipment, intangible assets, deferred costs, and deferred revenue are not
      within the scope of the new accounting standards as they are not financial
      instruments.

ii)   On  January  1,  2007,  the  Company  adopted  Section  1506,  "Accounting
      Changes",  from the CICA Handbook.  This Section  establishes  criteria to
      satisfy the accounting treatment to adopt and disclosure  requirements for
      accounting changes made, revision of accounting  estimates and


                                      -57-
<PAGE>

      corrections of errors. The adoption of these new standards had no material
      impact on the financial statements of the Company.

Recent Accounting Pronouncements

      i)    In 2006 the CICA issued Handbook Section 3862, Financial Instruments
            - Disclosures,  and Handbook Section 3863,  Financial  Instruments -
            Presentation.    These   standards   enhance   existing   disclosure
            requirements  and place greater  emphasis on disclosures  related to
            recognized  and  unrecognized  financial  instruments  and how those
            risks  are  managed.   Section   3863   carries   forward  the  same
            presentation  standards as Section  3861.  These new  standards  are
            effective for interim and annual  financial  statements  relating to
            fiscal years commencing on or after October 1, 2007 on a prospective
            basis.

      iii)  In 2006, the CICA issued Handbook Section 1535, Capital  Disclosures
            ("CICA   1535").   CICA  1535  requires  that  an  entity   disclose
            information  that  enables  users  of its  financial  statements  to
            evaluate an entity's objectives, policies and processes for managing
            capital,  including  disclosures of any externally  imposed  capital
            requirements and the consequences  for  non-compliance.

            iv) In August of 2006, the CICA issued Handbook  Section 3031 ("CICA
            3031").  "Inventories",  which  must be  applied  for  fiscal  years
            beginning  on or after  January 1, 2008.  CICA 3031  prescribes  the
            measurement  of  inventories at the lower of cost and net realizable
            value,   with  guidance  on  the  determination  of  cost  including
            allocation of overheads  and other costs to inventory.  Reversals of
            previous  write-downs  to net  realizable  value are permitted  when
            there is a  subsequent  increase  on the value of  inventories.

      iv)   In  2008,  the CICA  issued  Handbook  Section  3064,  Goodwill  and
            Intangible  Assets ("CICA 3064").  CICA 3064, which replaces Section
            3062, Goodwill and Intangible Assets, and Section 3450, Research and
            Development  Costs,   establishes  standards  for  the  recognition,
            measurement  and disclosure of goodwill and intangible  assets.  The
            provisions  relating to the  definition  and initial  recognition of
            intangible assets, including internally generated intangible assets,
            are  equivalent  to the  corresponding  provisions  for IFRS IAS 38,
            Intangible  Assets.  The new standard is effective for the Company's
            interim  and annual  consolidated  financial  statements  commencing
            January 1, 2009.  The  Company  is  assessing  the impact of the new
            standard on its consolidated financial statements.

      v)    International Financial Reporting Standards

            In  May  2007,  the  CICA  published  an  updated   version  of  its
            "Implementation  Plan  for  Incorporating   International  Financial
            Reporting Standards ("IFRS") into Canadian GAAP". This plan includes
            an outline of the key  decisions  that the CICA will need to make as
            it   implements   the  Strategic   Plan  for  publicly   accountable
            enterprises   that  will  converge   Canadian   generally   accepted
            accounting  principles  with IFRS. The changeover date from Canadian
            GAAP to IFRS is for annual and interim financial statements relating
            to fiscal years beginning on or after January 1, 2011.

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 to the
financial statements.


                                      -58-
<PAGE>

There have been no significant changes in the Company's  accounting policies and
estimates since December 31, 2007. Refer to Management's Discussion and Analysis
in the Company's December 31, 2007 Annual Report.

Recent Accounting Pronouncements

iii)  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.

RECONCILIATION TO UNITED STATES GAAP

Canada and United States Accounting Policy Difference

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 and US GAAP, and their effect on the
interim consolidated financial statements of the Company, are disclosed below.

e.    Under US GAAP,  FIN 48  requires  the  Company to  evaluate  whether a tax
      position  taken by the company  will "more  likely than not" be  sustained
      upon  examination  by the  appropriate  tax  authority.  It also  provides
      guidance on how a company  should  measure the amount of benefit  that the
      Company is to recognize in its financial statements. There was no material
      impact on the Company's  financial  statements as a result of implementing
      FIN 48.

f.    Under US GAAP,  FASB 150, if the  preferred  shares are  redeemable at the
      option of the holders,  they should be presented as mezzanine equity.  The
      preferred  shares are  retractable  by the holder but are not  mandatoraly
      redeemable.  Under US GAAP,  the preferred  shares may not be presented as
      permanent  equity  and/or  within the  shareholders'  equity  (deficiency)
      section of the balance sheet. Preferred shares are presented as a separate
      line item between  liabilities and  shareholders'  equity  (deficiency) as
      required by EITF D-98.

g.    Under US GAAP preferred  shares are classified as mezzanine equity and the
      interest  on  preferred  shares  would be  classified  as a  dividend  and
      recorded as a reduction to the deficit under shareholders'  equity.  Under
      Canadian  GAAP the  preferred  shares are  classified  as a liability  and
      interest is expensed accordingly.

h.    Under  US GAAP  cumulative  dividends  are part of the  liability  for the
      shares and declared/or  cumulative  dividends which have not been declared
      should  reduce  net  income to arrive  at a figure  representing  earnings
      (loss) per share.


                                      -59-
<PAGE>

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:

<TABLE>
<CAPTION>
                                                                        Three months ended                   Six months ended
                                                                                     Restated                            Restated
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,                           2008             2007              2008               2007
                                                                  -----------       -----------       -----------       -----------
<S>                                                               <C>               <C>                <C>              <C>
Net income (loss) in accordance with Canadian GAAP                $(3,640,217)      $   285,254       $(3,757,565)      $   797,934

Interest (Dividends) on Preferred Shares (Note c)                      11,220            11,220            22,440            22,440
                                                                  -----------       -----------       -----------       -----------
Net Income (Loss) in accordance with U.S. GAAP                    $(3,628,997)      $   296,474       $(3,735,125)      $   820,374
                                                                  -----------       -----------       -----------       -----------

Preferred share dividends (Note d)                                    (11,220)          (11,220)          (22,440)          (22,440)

Net income (loss) in accordance with US
GAAP for earnings per share                                        (3,640,217)          285,254        (3,757,565)          797,934


Net income (loss) per share - Basic and Diluted                   $     (0.08)      $      0.01       $     (0.08)      $      0.02
                                                                  -----------       -----------       -----------       -----------
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                                 June 30,               December 31,
AS AT JUNE 30, 2008 AND DECEMBER 31, 2007                                                          2008                     2007
                                                                                                -----------             -----------
<S>                                                                                             <C>                     <C>
ASSETS
Assets in accordance with Canadian GAAP                                                         $ 3,247,232             $ 8,492,237

Assets in accordance with U.S. GAAP                                                             $ 3,247,232             $ 8,492,237
                                                                                                ===========             ===========

LIABILITIES

Liabilities in accordance with Canadian GAAP                                                    $ 3,879,831             $ 5,605,928

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

Liabilities in accordance with U.S. GAAP                                                        $ 3,385,281             $ 5,605,928
                                                                                                ===========             ===========

                                                                                                -----------             -----------
Preferred Shares (Note b)                                                                       $   494,550             $   494,550
                                                                                                -----------             -----------
</TABLE>


                                      -60-
<PAGE>

<TABLE>
<CAPTION>
                                                                                                 June 30,               December 31,
SHAREHOLDERS' EQUITY (DEFICIENCY)                                                                  2008                     2007
                                                                                                -----------             -----------
<S>                                                                                             <C>                     <C>
Shareholders' Equity in accordance with
Canadian GAAP                                                                                   $  (632,599)            $ 2,886,309

Effect on deficit of treatment of dividends on Preferred
Shares (Note c)                                                                                          --                      --

Shareholders' equity (deficiency) in accordance with US GAAP                                       (632,599)              2,886,309
                                                                                                -----------             -----------
</TABLE>

Impact of Newly Issued United States Accounting Standards

ii)   In June 2006,  the FASB  issued FIN 48,  "Accounting  for  Uncertainty  in
      Income Taxes - an  interpretation  of FASB  Statement No. 109" ("FIN 48").
      FIN 48 clarifies the accounting for uncertainty in income taxes recognized
      in an  entity's  financial  statements  in  accordance  with SFAS No. 109,
      "Accounting for Income Taxes" ("SFAS 109"). The interpretation  prescribes
      a  recognition  threshold  and  measurement  attribute  for the  financial
      statement  recognition and measurement of a tax position taken or expected
      to be taken in a tax return. FIN 48 also provides  accounting  guidance on
      de-recognition,  classification,  interest and  penalties,  accounting  in
      interim  periods,   disclosure  and  transition.  The  evaluation  of  tax
      positions  under FIN 48 is a two-step  process,  whereby  (1) The  Company
      determines  whether it is more likely than not that the tax positions will
      be  sustained  based on the  technical  merits of the position and (2) for
      those  tax  positions  that  meet  the  more-likely-than-not   recognition
      threshold.  There was no  material  impact on the  Company's  consolidated
      financial statements as a result of implementing FIN 48.

ii)   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 prior year  misstatements  should be  considered
      when quantifying  misstatements in the current year financial  statements.
      The SAB  requires  registrants  to  quantify  misstatements  using  both a
      balance sheet and an income statement approach and evaluate whether either
      approach  results in  quantifying a misstatement  that,  when all relevant
      quantitative and qualitative factors are considered,  is material. SAB 108
      does not change the guidance in SAB 99, "Materiality", when evaluating the
      materiality of misstatements. SAB 108 is effective for fiscal years ending
      after  November 15,  2006.  Upon  initial  application,  SAB 108 permits a
      one-time  cumulative  effect  adjustment to beginning  retained  earnings.
      There was no  material  impact  on the  Company's  consolidated  financial
      statements as a result of the adoption of SAB 108.

viii) In  September  2006,  the FASB issued SFAS No. 157 "Fair Value  Measures."
      (SFAS No. 157),  SFAS No. 157 defines fair value,  establishes a framework
      for  measuring  fair  value and  enhances  disclosures  about  fair  value
      measures  required  under other  accounting  pronouncements,  but does not
      change existing  guidance as to whether or not an instrument is carried at
      fair value.  SFAS No. 157 is effective  for fiscal years  beginning  after
      November 15, 2007. The Company is currently evaluating the impact that the
      adoption  of SFAS No.  157 will have on our future  financial  statements.
      There was no  material  impact  on the  Company's  consolidated  financial
      statements as a result of the adoption of SFAS No. 157.


                                      -61-
<PAGE>

ix)   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 did not
      have a material effect on the Company's financial statements.

x)    In December 2007, the FASB issued SFAS No. 160, Non-controlling  Interests
      in  Consolidated  Financial  Statements-an  amendment  of ARB No. 21 ("No.
      160").  This  statement  amends  ARB No. 51 to  establish  accounting  and
      reporting standards for the  non-controlling  interest in a subsidiary and
      for the  deconsolidation  of a subsidiary.  The provisions of SFAS No. 160
      are effective for fiscal years,  and interim  periods  within those fiscal
      years,  beginning on or after  December 15, 2008. As of December 31, 2007,
      management  believes that SFAS No. 160 will not have a material  effect on
      our financial position, results of operations and cash flows.

xi)   In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
      Instruments  and Hedging  Activities--an  amendment of FASB  Statement No.
      133"  ("FAS  161").  FAS  161  changes  the  disclosure  requirements  for
      derivative  instruments and hedging  activities.  Entities are required to
      provide  enhanced  disclosures  about  (a)  how  and  why an  entity  uses
      derivative instruments,  (b) how derivative instruments and related hedged
      items  are   accounted   for   under   Statement   133  and  its   related
      interpretations,  and (c) how  derivative  instruments  and related hedged
      items affect an entity's financial position,  financial  performance,  and
      cash flows. The guidance in FAS 161 is effective for financial  statements
      issued for fiscal years and interim  periods  beginning after November 15,
      2008, with early application  encouraged.  This Statement encourages,  but
      does not require, comparative disclosures

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.


                                      -62-
<PAGE>

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.

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.

Risks related to US Regulations

Section 404 of the  Sarbanes-Oxley  Act 2002 and related  regulations  presently
requires that the Company  perform an  evaluation  of our internal  control over
financial  reporting  for years  ending  after  December  15,  2007 and have our
auditors  attest to such  evaluations  on an annual basis for years ending after
December 15, 2009. There can be no assurance that we will complete the necessary
work to comply  with all aspects of Section  404 and  related  regulations  in a
timely manner.

As a result of a thorough review of the Company's prior financial disclosures by
management,  the Company has  determined  that the  previously  filed  financial
statements  contained  errors  resulting  from the incorrect  classification  of
liabilities and assets and shareholders'  equity.  This review made apparent the
risk that the Company may not have sufficient  in-house  expertise to be able to
comply in a timely manner with the  requirements  of US  accounting  changes and
disclosure  requirements  in the future  which  would be  considered  a material
weakness.   Accordingly,   management  is  evaluating  the  Company's  need  for
additional  resources to be applied to engage  ingoing advice from experts in US
accounting changes and in order to maintain the Company's  effective  disclosure
control and procedures.

The Company may be unable to comply in a timely manner with the  requirements of
the  Sarbanes-Oxley Act relating to the assessment by us of the effectiveness of
our internal controls over financial reporting,  and our assessment may identify
material  weaknesses  and may result in an attestation  with an adverse  opinion
from our auditors, each of which could adversely affect our reputation and share
price.

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.


                                      -63-
<PAGE>

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) 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 August 13, 2008 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: 45,980,549.
Series 1 preferred shares issued and outstanding: 494,550
Options: 4,655,000 outstanding options to purchase 4,655,000 common shares
Warrants: 14,474,166 outstanding to purchase 14,474,166 common shares


                                      -64-
<PAGE>

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Fair Value

The carrying values of cash and cash equivalents,  accounts receivable, film tax
credits   receivable  for  which   application  has  been  filed,   subscription
receivables  due within  one year,  accounts  payable  and  accrued  liabilities
approximate fair value due to their short-term maturity and normal credit terms.

The fair value of  subscription  receivables  due in over one year,  and accrued
film tax credits  receivable are recorded at the fair value using an appropriate
discount rate.

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

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 DVD's.

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 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 consider entering into
forward exchange contracts to mitigate any associated risks. The Company did not
have any forward exchange contracts outstanding at the end of the period covered
by this report.

The  Company is exposed to foreign  currency  exchange  rate risk as a result of
sales of its products in various  foreign  countries and  production  operations
conducted in other  countries.  In order to minimize the risks  associated  with
foreign  currency  fluctuations,  most  sales  contracts  are  issued  in either
Canadian or U.S.  dollars.  The Company  constantly  monitors the exchange  rate
between the U.S.  dollar and the  Canadian  dollar to  determine  if any adverse
exposure exists relative to its costs of production. The Company maintains funds
in both U.S. and Canadian currency.

Item 4T. Controls and Procedures.

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures are designed to provide
reasonable assurance that information required to be disclosed by the Company in
reports  filed with  securities  regulatory  agencies  is  recorded,  processed,
summarized and reported on a timely basis and is accumulated and communicated to
the Company's  management,  including the Company's Chief Executive  Officer and
Chief Financial  Officer,  as appropriate,  to allow timely decisions  regarding
required disclosure.


                                      -65-
<PAGE>

The Company has carried out an evaluation, in accordance with Exchange Act Rules
13a-15 and 15d-15 and under the  supervision  of and with the  participation  of
management,  including the Company's Chief  Executive  Officer ("CEO") and Chief
Financial Officer ("CFO"),  of the effectiveness of our disclosure  controls and
procedures  at the end of the period  covered by this  report.  The  Company has
determined  that the previously  filed  financial  statements  contained  errors
requiring  restatement  as  reflected  in Note 2 to the June  30,  2008 and 2007
consolidated  financial  statements  and that there are material  weaknesses  in
disclosure controls and the internal control over financial reporting as of June
30, 2007 and that the  Company did not have  sufficient  in-house  expertise  to
ensure compliance with the measurement,  recognition and disclosure requirements
under Canadian and US GAAP for certain transactions.

Management's Plan for Remediation of Material Weaknesses

The  Company  has  undertaken  efforts  to improve  its  internal  control  over
financial reporting and to remediate the material  weaknesses  identified above.
The Company has designed,  implemented  and will  maintain an effective  control
environment  over  financial  reporting.  The Company has taken or will take the
following actions:

The Company is  committed  to enhance its  internal  controls.  When  complex or
unusual transactions surface,  management actively seeks a solution in-house and
then has consulted third party experts for the resolution.

In addition,  the Company has updated its Canadian and United  States  generally
accepted  accounting  principles  knowledge and  established a number of control
procedures  designed to strengthen its capabilities to both identify and address
any potential errors before they are reported in the future.

With the implementation of these corrective  actions,  the Company believes that
the above noted material weaknesses that were identified in its internal control
over financial  reporting as of December 31, 2007 will, over time, be addressed.
However,  the effectiveness of these procedures remains to be tested in 2008 and
several  fiscal  quarters  may be  required  prior to  management  being able to
conclude that the material  weaknesses  have been  remediated.  The Company will
continue to  periodically  review its  disclosure  controls and  procedures  and
internal control over financial  reporting and may make  modifications from time
to time as considered necessary or desirable.

Changes In Internal Control Over Financial Reporting

The Certifying Officers 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,   other  than  the  action  noted  above,  with  regard  to
significant deficiencies and material weaknesses.


                                      -66-
<PAGE>

                           PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors

      There have been no material changes in the Company's risk factors.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

      (a)   On June 16, 2008, the Company issued 59,400 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.

      (b)   Not applicable.

      (c)   Not applicable.

Item 3. Defaults Upon Senior Securities.

      (a)   Note 9 to  the  interim  consolidated  financial  statements  of the
            Company dated June 30, 2006 filed herewith is incorporated herein by
            reference.

      (b)   Not applicable

Item 4. Submission of Matters to a Vote of Security Holders.

      (a)   Not applicable.

      (b)   Not applicable.

      (c)   Not applicable.

      (d)   Not applicable.

Item 5. Other Information.

      (a)   Not applicable.

      (b)   Not applicable.

Item 6. Exhibits and Reports on Form 8-K.

      (a)   Exhibits


                                      -67-
<PAGE>

            i.    31.1  Certification  of Chief  Executive  Officer  pursuant to
                  Section 302 of the Sarbanes-Oxley Act of 2002

            ii.   31.2  Certification  of Chief  Financial  Officer  pursuant to
                  Section 302 of the Sarbanes-Oxley Act of 2002

            iii.  32.1   Certification   pursuant   to   Section   906   of  the
                  Sarbanes-Oxley Act of 2002

      (b)   Reports on Form 8-K

            (i) The Company  filed a current  report on Form 8-K dated August 1,
            2008. Under item 4.01 of that 8-K the Company  announced  changes in
            the registrant's certifying accountant.

            (ii) The Company  filed a current  report on Form 8-K dated June 27,
            2008,  on that 8-K the Company  announced  amendments  to their Form
            10-KSB for the period ended December 31, 2007.


                                      -68-
<PAGE>

                                   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 /s/ David Devine
                                           -------------------------------------
                                                        David Devine
                                           Director, Chairman of the Board
                                           President and Chief Executive Officer

Dated: August 13, 2008

      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          August 13, 2008
                        President and Chief Executive Officer

/s/ Richard Mozer       Director, Vice-Chairman of the           August 13, 2008
                        Board, Chief Financial Officer,
                        Treasurer and Secretary


                                      -69-