PEACE ARCH ENTERTAINMENT GROUP INC, 424B4, 1999-07-30

PEACE ARCH ENTERTAINMENT GROUP INC
424B4, 1999-07-30
MOTION PICTURE & VIDEO TAPE DISTRIBUTION

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<PAGE>

FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION NO. 333-10354

[LOGO OF PEACE ARCH ENTERTAINMENT GROUP INC.]

750,000 Class B Shares

Peace Arch Entertainment Group Inc. is offering 750,000 Class B shares for
sale in the U.S.

Our Class B shares are currently listed on The Toronto Stock Exchange under
the symbol "PAE.B." Effective July 14, 1999, every five of our common shares
was reclassified and converted into one Class A share and one Class B share.
Except for voting rights, and other rights with respect to conversion,
dividends and issuer bids, the Class B shares and Class A shares are identical
in all material respects. The Class A shares are entitled to ten votes per
share and the Class B shares to one vote per share.

The Class B shares have been approved for listing on the American Stock
Exchange under the symbol "PAE", subject to official notice of issuance. There
has been no trading market for the Class B shares in the U.S. prior to this
offering.

Before investing in the Class B shares, you should carefully consider the
risks described in the "Risk Factors" section beginning on page 7.

<TABLE>
<CAPTION>
Per Share Total
<S> <C> <C>
Public offering price.......................... $5.00 $3,750,000
Underwriting discount.......................... $ .39 $ 292,500
Proceeds, before expenses, to Peace Arch....... $4.61 $3,457,500
</TABLE>

Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

We have granted the underwriter the right to purchase up to an additional
112,500 Class B shares at the initial public offering price, less the
underwriting discount, to cover over-allotments.

The Seidler Companies Incorporated

The date of this prospectus is July 28, 1999.
<PAGE>

DESCRIPTION OF PROSPECTUS INSIDE FRONT COVER

The inside front cover of the prospectus consists of a photo montage
(which covers approximately two-thirds of the page) of images from our
television programming (in some cases, accompanied by the names of the program).
Program materials include photos of talent and scenes from "First Wave", "So
Weird", "Dead Man's Gun", "Electric Playground" and six of our other past
productions.

<PAGE>

PROSPECTUS SUMMARY

This summary highlights important information about our business and this
offering. Because it is a summary, it does not contain all the information you
should consider before investing in the Class B shares. You should read the
entire prospectus carefully. All references in this prospectus to "$" or
"dollars" are to United States dollars unless otherwise indicated.

Peace Arch Entertainment Group Inc.

We develop, produce and distribute high-quality, proprietary television
programming for markets worldwide. We take ideas, storylines and other creative
concepts developed by us or acquired from independent sources and convert those
concepts into television programming. Our proprietary programming consists of a
variety of episodic series, movies and documentaries, including "First Wave," a
popular one-hour science fiction drama series produced in association with
Pearson Television International Ltd., Francis Ford Coppola and Chris Brancato.

Our revenues in fiscal 1996 were Cdn$5.7 million. Beginning in 1996, we began
shifting our focus to production and distribution of proprietary programming.
Our fiscal 1997 revenues were Cdn$23.6 million due to growth of this new
business, and in fiscal 1998 revenues increased to Cdn$32.5 million over fiscal
1997 as a result of a 60% increase in revenues from proprietary programming
over fiscal 1997. The production and distribution of proprietary programming
represented approximately 86% of our revenues during fiscal 1998 and is
anticipated to make the greatest contribution to our future growth. In fiscal
1998 we reported net earnings of Cdn$1.8 million, up from a net loss of Cdn$1.2
million for fiscal 1997. Our 1997 loss was made up of Cdn$1.4 of operating
income and Cdn$2.6 million of one-time charges.

Historically, we have distributed our programming outside North America
through distributors such as Walt Disney Company, directly and through its
Buena Vista Television subsidiary, Hallmark Entertainment Network, Metro-
Goldwyn-Mayer and Pearson Television International Ltd. In North America, we
sell our programming directly to major U.S. and Canadian broadcasters,
including USA Networks, Showtime Networks, CHUM-City, CTV, CanWest Global and
WIC Television.

The proceeds of this offering will be used primarily to accelerate the
expansion of our business through increased funding of the development,
production and distribution of additional proprietary programming. Our aim is
to create a brand image for each program or series we produce. Successful
branding will allow us to generate greater revenues from television
distribution and ancillary markets, such as clothing, toys, novelties, books,
CDs, soundtracks and other audio products, electronic games, Internet
applications and other merchandise. By retaining ownership rights to our
programming, we add to our program library, which we believe has the potential
to generate future revenues.

We are based in Vancouver, British Columbia, the third largest film and
television production center in North America after Los Angeles and New York.
As a British Columbia-based producer, we currently benefit from a number of
competitive advantages over producers outside of Canada, including favorable
Canadian tax and other business incentives. Following this offering, we believe
we will continue to qualify for these tax and business incentives.

We are a vertically integrated company, with the in-house capacity to handle
concept creation, script writing, production, post-production and almost all of
the other aspects of the production and distribution process. We own our
primary production and post-production facilities located in downtown
Vancouver, which helps ensure that necessary facilities are available during
periods of high demand such as Vancouver is currently experiencing.

1
<PAGE>

In addition to these proprietary activities, we provide production services
for third parties on a contract basis. This programming includes television
series, movies and commercials, music videos, training and industrial
presentations. Our production services business acts as a training ground for
our creative staff, fosters our relationships with key industry participants,
provides us with an incubator for new skills and industry practices and keeps
our facilities utilized during the hiatus periods in the production of our
television series programming.

Recent Highlights

First Wave. We recently made an advance sale to the USA Networks' SciFi
Channel of 66 episodes of "First Wave," representing three years of regular
programming. This will allow us to substantially increase our library and
reflects a significant business opportunity for us. "First Wave" is broadcast
in Canada on CHUM's Space: The Imagination Station, a Canadian cable network.
In December 1998, CHUM's Space: The Imagination Station announced that "First
Wave" was their highest rated series, ranking ahead of "The X-Files."

Projects in Development. We currently are in an early stage of development of
our proprietary one-hour drama, "Yaletown," and a half-hour situation comedy
entitled "Acme Agency." Also, we recently purchased an option for the rights to
the screenplay "Jetlag," on which Dave Thomas, known for his appearances in
"Grace Under Fire," "SCTV" and "Strange Brew," will be executive producer. The
project, a made-for-television movie, is designed as a pilot for a television
series.

So Weird. In April 1999, we began production services for the Disney Channel
on a further 26-episode season of the half-hour children's series "So Weird."
Henry Winkler ("Happy Days" and "MacGyver") serves as executive producer.

Name Change. Effective July 14, 1999, we changed our name from Vidatron
Entertainment Group Inc. to Peace Arch Entertainment Group Inc.

2
<PAGE>

The Offering

<TABLE>
<C> <S>
Shares outstanding .............. 1,517,971 Class A shares
1,517,971 Class B shares
Shares offered................... 750,000 Class B shares
Shares to be outstanding after
this offering .................. 1,517,971 Class A shares
2,267,971 Class B shares

3,785,942 total shares
Use of proceeds.................. We intend to use the net proceeds of this
offering primarily for working capital and
other general corporate purposes relating
to the expansion of our business, including
possible future acquisitions. A portion of
the proceeds will be used to repay
approximately Cdn$1.4 million of
indebtedness, including approximately
Cdn$0.2 million owed to our directors and
officers. For further discussion of how we
intend to use the proceeds of this
offering, see "Use of Proceeds."
</TABLE>

3
<PAGE>

Information Concerning Certain Financial Matters

We prepare our financial statements in accordance with Canadian generally
accepted accounting principles ("Canadian GAAP"). These principles conform in
all important respects with accounting principles generally accepted in the
U.S. ("U.S. GAAP"), except as described in Note 19 of the Notes to Consolidated
Financial Statements contained in this prospectus. We believe that our
accounting policies are in accord with U.S. industry practices as set out in
Financial Accounting Standards Board Statement No. 53.

Unless otherwise indicated, all information in this prospectus assumes that
the underwriter will not exercise its option to acquire up to 112,500 Class B
shares to cover over-allotments and that the underwriter will not exercise its
warrant to acquire 75,000 Class B shares. In addition, unless otherwise
indicated, all information in this prospectus assumes no exercise of
outstanding options or warrants. Giving effect to the share reclassification,
we had options outstanding, as of April 30, 1999, to purchase 196,850 Class A
shares and 196,850 Class B shares at a weighted average exercise price of
Cdn$10.10 per share, and warrants outstanding, as of May 10, 1999, to purchase
50,000 Class A shares and 50,000 Class B shares at an exercise price of
Cdn$6.25 per share. Finally, all information in this prospectus assumes no
conversion of the Class A shares into Class B shares and that no fractional
shares resulted from the conversion of our common shares into Class A shares
and Class B shares.

The following table sets forth certain exchange rates based on the noon
buying rate in New York City for cable transfers in Canadian dollars as
certified for customs purposes by the Federal Reserve Bank of New York (the
"Noon Buying Rate"). Such rates are set forth as U.S. dollars per Cdn$1.00. On
July 23, 1999, the inverse of the Noon Buying Rate was Cdn$1.00 per US$0.6633.

<TABLE>
<CAPTION>
Period
-----------------------
From To Average High Low
------- ------- ------- ------ ------
<S> <C> <C> <C> <C>
8/31/93 8/31/94 0.7397 0.7740 0.7165
8/31/94 8/31/95 0.7270 0.7471 0.6993
8/31/95 8/31/96 0.7336 0.7517 0.7219
8/31/96 8/31/97 0.7308 0.7525 0.7139
8/31/97 8/31/98 0.6957 0.7293 0.6330
8/31/98 2/28/99 0.6544 0.6728 0.6382
</TABLE>

4
<PAGE>

Summary Financial and Operating Data

The following table summarizes financial data concerning our business
prepared in accordance with Canadian GAAP. You should read the information
below together with all the consolidated financial statements and other
financial information in this prospectus.

The financial data set forth below is reported in Canadian dollars. However
for the convenience of the reader, the annual 1998 and the six-month 1999
statement of operations data also have been translated into U.S. dollars using
the average exchange rate in effect for such periods, and the balance sheet
data have been translated using the rates in effect as of August 31, 1998 and
February 28, 1999. These translations are not necessarily representative of the
amounts that would have been reported if we had historically reported our
financial statements in U.S. dollars. In addition, the rates utilized are not
necessarily indicative of the rates in effect at any other time.

Summary Consolidated Financial and Operating Data
(in thousands, except per share data)

<TABLE>
<CAPTION>
Six Months Ended
Year Ended August 31, February 28,
--------------------------------------------------- -------------------------
Cdn$ Cdn$ Cdn$ Cdn$ Cdn$ US$ Cdn$ Cdn$ US$
1994 1995 1996 1997 1998 1998 1998 1999 1999
------- ------ ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Canadian GAAP
Revenue................. $ 1,519 $4,012 $ 5,723 $23,584 $32,457 $22,580 $16,233 $30,252 $19,797
Expenses
Amortization of
programming........... -- -- -- 14,972 24,124 16,783 12,461 25,406 16,626
Other costs of
production and sales.. 1,003 2,851 3,767 4,261 3,577 2,488 1,866 1,508 987
Selling, general and
administration
expense............... 1,148 1,401 2,404 2,453 2,201 1,531 925 1,330 870
Other.................. 205 376 579 464 500 348 292 354 232
------- ------ ------- ------- ------- ------- ------- ------- -------
Total expenses.......... 2,356 4,628 6,750 22,150 30,402 21,150 15,544 28,598 18,715
------- ------ ------- ------- ------- ------- ------- ------- -------
Net earnings (loss) from
operations............. (837) (616) (1,027) 1,434 2,055 1,430 689 1,654 1,082
Gain (loss) on sale of
capital assets and
other.................. -- -- -- (333) -- -- -- -- --
Provision (against)
limited partnership
revenue interests...... (324) (297) (1,073) (2,313) -- -- -- -- --
Income taxes............ -- -- -- -- (297) (206) -- (645) (422)
------- ------ ------- ------- ------- ------- ------- ------- -------
Net earnings (loss)..... $(1,161) $ (913) $(2,100) $(1,212) $ 1,758 $ 1,224 $ 689 $ 1,009 $ 660
======= ====== ======= ======= ======= ======= ======= ======= =======
Earnings (loss) per
common share:(1)
Basic.................. $ (2.00) $(1.05) $ (1.68) $ (0.65) $ 0.68 $ 0.48 $ 0.28 $ 0.33 $ 0.23
Diluted................ -- -- -- -- $ 0.63 $ 0.43 $ 0.28 $ 0.33 $ 0.23
Weighted average number
of common shares...... 579 892 1,247 1,860 2,603 2,603 2,504 3,026 3,026
Diluted number of
common shares......... -- -- -- -- 3,124 3,124 2,661 3,406 3,406

Other Operating Data:
EBITDA(2)............... (560) (223) (465) 2,074 3,020 2,102 1,015 2,347 1,536
U.S. GAAP
Earnings (loss) per
common share:(1)
Basic.................. $ (2.00) $(1.05) $ (1.68) $ (0.80) $ 0.23 $ 0.16 $ (0.25) $ 0.35 $ 0.24
Diluted................ $ (2.00) $(1.05) $ (1.68) $ (0.80) $ 0.23 $ 0.16 $ (0.25) $ 0.35 $ 0.24
Weighted average number
of common shares...... 579 892 1,247 1,511 2,304 2,304 2,154 2,876 2,876
Diluted number of
common shares......... 579 892 1,247 1,511 2,304 2,304 2,154 2,882 2,882
</TABLE>

5
<PAGE>

<TABLE>
<CAPTION>
As of February 28, 1999
----------------------------------------
Actual As Adjusted
-------------------- -------------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............ Cdn$ 445 US$ 296 Cdn$ 3,431 US$2,269
Tax credits receivable............... 13,213 8,787 13,213 8,787
Production costs in progress......... 3,771 2,508 3,771 2,508
Investments in television
programming, net.................... 9,534 6,340 9,534 6,340
Property and equipment, net.......... 9,565 6,361 9,565 6,361
Goodwill............................. 2,479 1,649 2,479 1,649
Total assets......................... 43,561 28,968 46,547 30,941

Debt financing(3).................... 17,461 11,612 16,061 10,683
Deferred revenue..................... 2,947 1,960 2,947 1,960
Total liabilities.................... 24,217 16,104 22,885 15,221
Shareholders' equity................. 19,344 12,864 23,662 15,728
</TABLE>
- --------
(1) Basic earnings per share are based on the weighted average number of
shares outstanding during the period. Diluted per share information is not
presented if it would disclose a smaller loss per share than the basic earnings
per share. All share and per share data has been restated to give retroactive
effect to the share reclassification and conversion.

(2) EBITDA represents earnings before interest, taxes, provision against
limited partnership revenue interests, depreciation and amortization. For
purposes of EBITDA, amortization excludes amortization of programming. We have
included EBITDA because we feel that some investors will find it useful for
evaluating our business and this investment. However, EBITDA should not be
considered as an alternative to net earnings, as determined in accordance with
Canadian GAAP, as an indicator of our operating performance. In addition, it
should not be considered as an alternative to cash flows from operations, as
determined in accordance with Canadian GAAP, or as an indicator of our
liquidity or available cash. To the extent that EBITDA does represent cash
generated by operations, this cash may not be available for management's
discretionary use, due to debt service requirements, requirements to invest in
television programming, and uncertainties. EBITDA as presented, may not be
comparable to similar computations presented by other companies.

(3) Debt financing shown above includes both bank indebtedness and long-term
debt.

Included in operations for fiscal years ended after 1996 are the accounts of
Sugar Entertainment Ltd., which was acquired on September 1, 1996. Years
subsequent to fiscal 1996 may not be comparable with fiscal 1996 and prior
years. Sugar Entertainment made up approximately 73% of revenues in 1997 and
86% in 1998.

The adjusted balance sheet data shown above is adjusted to give effect to the
sale of the Class B shares in this offering and the application of the net
proceeds, using the Canada:U.S. dollar exchange rate at July 23, 1999, as if
this offering occurred on February 28, 1999.

About Us

We were incorporated on October 22, 1986, under the laws of British Columbia,
Canada, under the name Vidatron Enterprises Ltd. We changed our name to
Vidatron Entertainment Group Inc. on February 5, 1997 and to Peace Arch
Entertainment Group Inc. on July 14, 1999. Our head office is located at #302,
1132 Hamilton Street, Vancouver, B.C. V6B 2S2 Canada. Our telephone number is
(604) 681-9308, and our facsimile number is (604) 681-3299. We maintain a
website at www.vidatron.com. Information available on our website is not part
of this prospectus.

We intend to furnish to our shareholders annual reports containing financial
statements audited by an independent public accounting firm and quarterly
reports for the first three fiscal quarters of each fiscal year containing
unaudited interim financial information.

"Vidatron" is our trademark. In addition, we intend to register the "Peace
Arch" mark in the U.S. and Canada. All other trademarks or tradenames referred
to in this prospectus are the property of others. We do not own or have any
rights to these marks.

6
<PAGE>

RISK FACTORS

An investment in our Class B shares involves a high degree of risk. Please
carefully consider the following risk factors before deciding whether to invest
in the Class B shares. If one or more of these risks actually materialize, our
business and the trading price of our Class B shares would likely suffer and
you could lose all or part of the money you invested in the Class B shares.

Risks Relating To Our Company

Because We Have a Limited Operating History in Television Programming Our
Future Operating Results Are Difficult to Predict.

Our business has been focused on television programming only since September
1996, when we acquired Sugar Entertainment Ltd. This limited operating history
in proprietary television programming makes future operating results more
difficult to predict. For example, our 66-episode order for "First Wave" will
be complete in February 2001. There can be no assurance that this series will
be renewed beyond the current 66-episode order. Our immediate prospects for
future growth depend on our ability to identify, develop and acquire the rights
to ideas, storylines and other creative concepts suitable to be produced and
distributed as television programming. There can be no assurance that we will
be able to grow.

Because We Have Grown Rapidly, We May Not Be Successful in Managing Our Growth.

Since 1996, our revenues have grown from Cdn$5.7 million to Cdn$32.5 million.
This rapid growth has placed increasing demands on our managerial and financial
resources, and will continue to do so as we pursue our expansion strategy. As
we grow, we will need to hire additional creative and managerial personnel. We
cannot assure you that we will be able to attract and hire such personnel, or
that we will continue to manage our growth effectively or that we will be
successful in expanding our business.

If We No Longer Qualify For or Canada Eliminates or Amends Government Incentive
Programming, Our Results of Operations and Financial Condition Will Be
Adversely Affected.

We currently finance a significant portion of our production budgets through
Canadian government agencies and incentive programs, including federal and
provincial tax credits, as well as through similar international arrangements
in the case of our international co-productions. These tax credits combined
represent approximately 19% of our production budgets. We will continue to
qualify for these tax credits if, among other things, Canadians beneficially
own or control a majority of the voting rights of Peace Arch. Upon completion
of the offering, approximately 64% of the voting power of our outstanding
shares will be held of record by Canadians. However, because we have no way of
confirming the actual beneficial ownership of our shares, it is possible that
non-Canadians could acquire and beneficially own a majority of our voting
rights. If Canadians fail to beneficially own or control a majority of our
voting rights at any time, we could lose such tax incentives and the costs of
our productions would increase substantially.

Canadian law requires Canadian conventional, specialty, pay and pay-per-view
television services to devote a certain amount of their programming schedules,
including prime time, to Canadian productions. If we fail to qualify as a
Canadian producer, it would be more difficult to obtain time slots in Canada
for our programming, a "slot" being a broadcast time period for a program. We
believe we will continue to qualify as a Canadian producer for this purpose as
long as, among other things, Canadians beneficially own or control a majority
of our voting rights.

These incentive programs, including federal and provincial tax credit
programs, may be amended or eliminated in the future, which could result in a
material increase in the effective cost of our productions. The loss or
elimination of these tax and business incentives would have a material adverse
effect on our results of operations and financial condition. For a more
detailed description of Canadian federal and provincial incentive programs, see
"Business--Regulatory Considerations."

7
<PAGE>

Because We Depend on a Limited Number of Entities for Much of Our Product
Distribution, the Loss of Any One Customer Could Cause a Material Decrease in
Our Revenues.

In fiscal 1998, we derived 85% of our revenues from five customers, including
four customers, Showtime Networks, Pearson Television International Ltd., Buena
Vista Television and MGM Worldwide Television, who each accounted for 10% or
more of our revenues. We expect that a significant amount of our revenues will
continue to be derived from a relatively small number of customers. The loss of
any of these customers could have a material adverse impact on our results of
operations and financial condition.

If the Exchange Rate of U.S. Dollars For Canadian Dollars Decreases, Our
Results of Operations May Be Adversely Affected.

Our costs are generally paid in Canadian currency while our revenues are
customarily paid in U.S. currency. Therefore, our revenues and operating
results may be affected by fluctuations in the exchange rate of U.S. dollars.
Currency exchange rates are determined by market factors beyond our control and
may vary substantially during the course of a production period. If the
Canadian dollar were to strengthen in relation to the U.S. dollar, our
effective costs would rise in relation to our revenues, adversely affecting our
profitability.

Since We Have Changed Our Name, We May Lose Recognition in Our Industry and
Increase the Difficulty of Protecting Our Intellectual Property.

On July 14, 1999, we changed our name from Vidatron Entertainment Group Inc.
to Peace Arch Entertainment Group Inc. Our name change may impair our
recognition in the industry and may make it more difficult to protect our
intellectual property rights.

If We Lose Key Personnel We May Not Be Able to Successfully Operate Our
Business.

Our success depends to a significant degree upon the services of certain key
personnel, particularly Timothy Gamble, our President, W.D. Cameron White, our
Chief Executive Officer and Larry Sugar, President of our subsidiary, Sugar
Entertainment Ltd. Because we are a relatively small company, these members of
management are involved in many aspects of the production process and virtually
all significant decisions are made or significantly influenced by these
individuals. The loss of the services of any one or more of our key personnel
could have a material adverse effect on our business. Although we intend to
obtain and maintain "key man" life insurance coverage with respect to these
personnel, there is no assurance that the proceeds would be sufficient to
compensate fully for the loss of the services of any of these individuals if
they were to die.

Since Our Business is Seasonal, Our Quarterly Operating Results Are Likely to
Fluctuate Materially From Period-to-Period.

Our results of operations for any period depend on the number of television
programs we deliver in the period. Consequently, our operating results may
fluctuate materially from period-to-period, and the results of any one period
may not necessarily indicate results for future periods. Cash flows also may
fluctuate and may not correspond closely with revenue recognition. As a result,
our quarterly results of operations in any particular period may not meet the
expectations of persons considering an investment in or seeking to sell our
shares, which could cause the price of the Class B shares to decline or
fluctuate materially.

Since Protection of Our Intellectual Property Is Limited, Unauthorized Parties
May Copy Our Productions Which Could Decrease Our Ability to Fully Exploit Our
Productions.

We attempt to retain and protect all proprietary and intellectual property
rights to our productions through international copyright laws and licensing
and distribution agreements with reputable international companies

8
<PAGE>

for specified territories and media channels for limited duration periods.
Despite these precautions, existing copyright laws afford only limited
practical protection in some jurisdictions and, in fact, our programming is
sold in some jurisdictions in which there is no system or assurance of
copyright protection. As a result, unauthorized parties may copy and distribute
our productions or portions or applications of our programming, inhibiting our
ability to fully exploit our programming. In addition, other companies may
independently develop and produce programming which is similar to, or imitates,
our programming but which legally circumvents our intellectual property rights.

If We or Third Parties With Which We Do Business Suffer Equipment Failure At
the Year 2000, Our Business Could Be Disrupted.

Many existing computer programs and other systems in use today were designed
and developed without considering the upcoming change in the century, which
could lead to the failure of computer applications or create erroneous results
by or at the Year 2000. The Year 2000 issue is a broad business issue, the
impact of which extends beyond traditional computer hardware and software, to
possible failure of other systems and instrumentation, including equipment used
by us and by third parties with which we do business. Either we or third
parties with which we do business may suffer a Year 2000 business disruption
that may adversely affect our business.

Risks Relating to Our Industry

If Some or All of Our Television Projects Are Not Accepted by the Public, We
May Not Recoup Our Costs or Realize the Profits We Anticipate.

The television industry involves inherent risks, since revenues derived from
the production and distribution of a television program depend primarily upon
acceptance by the public, which is difficult to predict. The audience of a
television program responds not only to the artistic components of the program,
but also to the reviews by critics, promotion by the distributor, the
availability of alternative forms of entertainment and leisure time activities,
general economic conditions, public tastes generally and other intangible
factors, all of which can change rapidly. Further, the audience ratings for a
television series is generally a key factor in generating revenues from other
distribution channels, such as syndication and from ancillary opportunities.
Therefore, some or all of our television projects may not be commercially
successful, resulting in costs not being recouped or anticipated profits not
being realized.

Because There Are a Limited Number of Prime Time Slots for Television
Programming, We May Not Be Able to Increase Our Penetration of the Prime Time
Television Market.

As one means of expanding our television production business, we intend to
increase our penetration of the prime time North American television market.
There are a limited number of prime time slots, even though the total number of
outlets for television programming has increased over the last decade. We
compete for time slots with national networks and a variety of independent
companies which produce television programming and cannot assure you that we
will be able to increase our penetration of the prime time television market.

If Budget Overruns and Other Production Risks Occur, We May Not Be Able to
Recoup the Additional Costs.

Actual production costs for our programming may exceed budget, sometimes
significantly. Risks, such as labor disputes, death or disability of a star
performer, technology changes relating to special effects or other aspects of
production, shortages of necessary equipment, damage to film negatives, master
tapes and recordings, or adverse weather conditions, may cause cost overruns or
delay or prevent completion of a production. If there are substantial budget
overruns, we may have to seek additional financing to complete production of a
television program. Financing, on terms acceptable to us, may not be available.
In addition, if there are substantial budget overruns, we may not recoup the
additional costs, which could have a material adverse impact on our results of
operations and financial condition.

9
<PAGE>

Because the Market in Which We Operate Is Highly Competitive, We May Not Be
Successful in Acquiring Storylines, Attracting Personnel Necessary to Expand
Our Business or Selling Our Programming.

We derive a large portion of our revenues from producing and distributing
television programming and intend to expand this part of our business. The
business of producing and distributing television programming is highly
competitive. We face intense competition with other producers and distributors,
many of whom are substantially larger and have greater financial resources than
we have. We compete with other television and motion picture production
companies for ideas and storylines created by third parties, as well as for
actors, directors and other personnel required for a production.

If Our Accounting Practices Result in a Change in the Rate of Amortization or
Write-Downs, Our Results of Operations Could Be Adversely Affected.

In accordance with generally accepted accounting principles and industry
practice, we amortize filmed entertainment and television programming costs
using the individual film forecast method. Under this method, costs for each
television program are amortized in the ratio that revenues earned in the
current period for such title bears to our estimate of the total revenues to be
realized from all media and markets for such title. We regularly review and,
when necessary, revise our total revenue estimates on a title-by-title and
contract-by-contract basis, which may result in a change in the rate of
amortization or a write-down of the programming asset to net realizable value.
Any changes or write-downs could adversely affect our results of operations.

Risks Relating to this Offering

Because We Have Significant Discretion in the Use of Funds from this Offering,
the Proceeds May Be Used For Projects Not Yet Identified and Which Might Not
Improve Our Results of Operations.

We intend to use the net proceeds of this offering primarily for working
capital and general corporate purposes relating to increased development,
acquisition, licensing and distribution of our television programming and our
exploitation of ancillary rights. In addition, we may use a portion of the net
proceeds to acquire businesses, libraries and other assets we believe are
complementary to our current businesses or that further our strategic goals. As
a result, a significant portion of the net proceeds will be available for
projects that are not yet identified, and our management will have broad
discretion with respect to the application of such proceeds. There can be no
assurance that the projects for which the net proceeds are used will be
successful or will improve our results of operations.

Because There Is a Limited Trading Market in Our Stock, You May Not Be Able to
Sell the Class B Shares or May Only Be Able to Sell Them For Less Than the
Initial Public Offering Price.

Prior to this offering, there will be no trading market for the Class B
shares in the U.S. Although the Class B shares have been approved for listing
on the American Stock Exchange, there can be no assurance that an active
trading market will develop or be maintained in the U.S. or that the Class B
shares will trade in the public market after this offering at or above the
initial public offering price in this offering. Therefore, you may not be able
to sell the Class B shares or may only be able to sell them for less than the
initial public offering price. There also can be no assurance that an active
trading market for the Class B shares will develop or be maintained in Canada
on The Toronto Stock Exchange.

Since We Are a Canadian Corporation, It May Be Difficult to Sue Us or to
Enforce a Judgment Against Us.

We are a Canadian corporation with our principal place of business in
Vancouver, British Columbia. Substantially all of our directors and executive
officers and some of the experts named in this prospectus are not residents of
the U.S. and virtually all of the assets of these persons and substantially all
of our assets are located outside the U.S. As a result, it may not be possible
for you to serve summons and complaints within the

10
<PAGE>

U.S. upon these persons or upon us. Similarly, it may not be possible to
enforce in U.S. courts, against such persons or against us, judgments of U.S.
courts based upon civil liability provisions of the U.S. federal or state
securities laws. In addition, it may be difficult in Canadian courts for you,
in original suits or in suits for the enforcement of judgments of U.S. courts,
to enforce civil liabilities based upon U.S. federal or state securities laws
against us or our directors or executive officers, or our experts. We have
appointed National Registered Agents, Inc. of Washington, D.C., to act as agent
for service of process in any action in any U.S. federal or state court brought
against us under the securities laws of the U.S. arising out of this offering
or any purchase or sale of securities in connection with this offering.

Sales of Shares Following this Offering Could Adversely Affect the Market Price
of the Class B Shares

Upon completion of this offering, we will have outstanding approximately
1,517,971 Class A shares and 2,267,971 Class B shares. The 750,000 Class B
shares being offered under this prospectus will be freely tradeable.

The remaining outstanding shares have not been registered under the
Securities Act and therefore will be treated as "restricted securities" and may
be publicly sold into the U.S. only if registered or if the sale is made in
accordance with an exemption from registration, such as Rule 144 or Regulation
S promulgated under U.S. federal securities laws. Under these exemptions,
however, substantially all of the other 1,517,971 Class B shares held by
persons other than those held by "affiliates," as well as the 1,517,971 Class B
shares issuable to such persons upon conversion of Class A shares, generally
will be eligible for resale in the U.S. without registration. This may
adversely affect the market price of the Class B shares and could affect the
amount of trading of such shares on the American Stock Exchange, particularly
if the trading price on the American Stock Exchange were to be higher than the
trading price on The Toronto Stock Exchange at any particular time.

Our officers, directors and some of our shareholders are expected to agree
with the underwriter not to sell any of our securities for a period of six
months from the date of this prospectus. The number of shares to be subject to
this restriction is approximately 558,375 Class A shares and 558,375 Class B
shares.

As of April 30, 1999, and giving retroactive effect to the share
reclassification, options to purchase a total of 196,850 Class A shares and
196,850 Class B shares and warrants to purchase an aggregate of 50,000 Class A
shares and 50,000 Class B shares were outstanding.

Sales of a significant number of such shares, or the perception that such
sales could occur, could adversely affect prevailing market prices for the
Class B shares and could impair our future ability to raise capital through an
offering of equity securities, which in turn could adversely affect our
business or results of operations. For a more detailed description, see "Shares
Eligible for Future Sale."

Because the Holders of Class A Shares Will Have Disproportionate Voting Control
of Peace Arch, the Market Price of the Class B Shares May Be Adversely Affected
and Investors May Be Discouraged From Attempting to Acquire Us.

The Class B shares have the right to only one vote per share compared to ten
votes per share possessed by the Class A shares, placing disproportionate
voting control of Peace Arch in the hands of the holders of Class A shares. The
effect of the allocation of voting control may be to limit the price that
investors will pay in the future for Class B shares, or to prevent or delay a
merger, takeover or other change in control and thus discourage attempts to
acquire us. A merger, takeover or other change in control might be in the best
interests of shareholders since any of these might cause the market price of
our shares to rise or a substantial premium to be payable to shareholders. In
addition, if an acquiror domiciled outside of British Columbia or Canada sought
to acquire us, the potential acquiror could be deterred by the prospect that
the Canadian and British Columbia tax credits would be eliminated if, after the
transaction, we were no longer controlled by Canadians.

11
<PAGE>

If We Issue Preference Shares, Your Rights May Be Adversely Affected.

We are authorized to issue up to 25,000,000 preference shares. Our articles
authorize our board to determine the price, rights, preferences and privileges
of those shares without any further vote or action by the shareholders. The
rights of the holders of any preference shares may adversely affect the rights
of holders of the Class B shares. Our ability to issue preference shares gives
us flexibility concerning possible acquisitions and financings, but it could
make it more difficult for a third party to acquire a majority of our
outstanding voting shares.

Our Stock Price May Be Volatile and You May Be Unable to Resell Your Shares at
or Above the Initial Public Offering Price.

In recent years and months, the U.S. stock market has experienced significant
price and volume fluctuations. These fluctuations, which are often unrelated to
the operating performances of specific companies, have had a substantial effect
on the market price of stocks, particularly stocks of companies such as ours in
the "small cap" category. It is also possible that our operating results will
not meet the expectations of our public market analysts, which could have an
adverse effect on the trading price of the Class B shares. Accordingly, the
market price for the Class B shares may fluctuate substantially. There also is
no assurance that the market price for the Class B shares will ever exceed the
initial public offering price.

If We Become Subject to Penny Stock Rules, the Market Liquidity for the Class B
Shares Could Be Adversely Affected.

The Securities and Exchange Commission's regulations define a "penny stock"
to be any equity security that has a market price less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. The penny stock restrictions will not apply to the Class B shares
if they are listed on the American Stock Exchange and we provide certain price
and volume information on a current and continuing basis, or meet required
minimum net tangible assets or average revenue criteria. We cannot assure you
that the Class B shares will qualify for exemption from these restrictions. If
the Class B shares were subject to the penny stock rules, the market liquidity
for the Class B shares could be adversely affected.

Special Note Regarding Forward Looking Statements

We intend some statements in this prospectus, including statements set forth
under the captions "Prospectus Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this prospectus, regarding, among other things, our
plans to grow, future financial position, business strategies, budgets,
projected costs and plans and objectives of management for future operations,
to be "forward-looking statements." Forward-looking statements generally can be
identified by the use of forward-looking terminology, such as "may," "will,"
"expect," "intend," "estimate," "anticipate," or "believe," or the negative
thereof, or variations thereon or similar terminology. Prospective investors
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. Forward-looking statements involve
unknown and uncertain risks, uncertainties and other factors which may cause
our actual results, performance or achievements, or industry results, to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Important factors that
could cause actual results to differ materially from our expectations are
disclosed under "Risk Factors" and elsewhere in this prospectus. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. We undertake no obligation to publicly release any revisions
to these forward-looking statements to reflect events or circumstances after
the date hereof, or to reflect the occurrence of unanticipated events.

Unless otherwise indicated, references to outstanding shares and per share
amounts throughout this prospectus reflect our previous share capital
consolidations and the share reclassification and conversion effective July 14,
1999.

12
<PAGE>

USE OF PROCEEDS

The net proceeds of the offering are estimated to be $2,909,000 (after
deducting the estimated underwriting discount, non-accountable expense
allowance and other offering expenses). Based on the Noon Buying Rate on July
23, 1999 of Cdn$1.00 per US$0.6633 the net proceeds are estimated to be
Cdn$4,386,000. If the underwriters' over-allotment is exercised in full, the
net proceeds of the offering are estimated to be $3,417,000 (Cdn$5,152,000).

We have allocated approximately $2.0 million (Cdn$3.0 million) of the net
proceeds to working capital and other general corporate purposes to accelerate
the expansion of our business primarily by expanding our proprietary
programming. These uses include the following:

. Expanding our proprietary programming by optioning literary properties,
engaging writers, directors, cast and crew, carrying out production and
post-production and exploiting worldwide distribution rights. We have
currently allocated approximately $1.7 million of the net proceeds for
these uses.

. Opening and staffing an office in Los Angeles to source and market our
programming in the U.S., for which we have currently allocated $0.1
million.

. Seeking acquisitions to add complementary assets, personnel and
distribution channels.

We also plan to use a portion of the net proceeds to repay approximately $0.9
million (Cdn$1.4 million) principal amount of indebtedness, of which $0.3
million (Cdn$0.5 million) relates to debentures originally convertible into
common shares at $12.60 (Cdn$19.00) per share and bearing interest at 12% per
annum. The original maturity date of the debentures was March 31, 1999, which
date has been extended by agreement with the holders to July 31, 1999. An
aggregate of Cdn$0.2 million (US$132,660) principal amount relates to the
debentures due to our officers. Cdn$0.6 million (US$397,980) relates to a
debenture, dated November 5, 1998 and maturing in November 2000, due to Working
Opportunity Fund (EVCC) Ltd. The balance of Cdn$0.3 million (US$0.2 million)
relates to a loan bearing interest at 12% per annum due March 1, 1999, which
has been extended to July 31, 1999. This loan is personally guaranteed by two
of our officers. The proceeds have been used for working capital expenditures
as needed.

Prior to the application of net proceeds, we will invest them in short-term,
investment grade securities.

Although we intend to use the proceeds of the offering as described above,
our actual use may differ. We presently have no agreements or commitments for
any acquisitions.

13
<PAGE>

DETERMINATION OF OFFERING PRICE

Although our Class A shares and Class B shares have been listed on The
Toronto Stock Exchange prior to this offering, trading in our shares has been
limited and sporadic. There has been no trading market for the Class B shares
in the U.S. prior to this offering.

We and the underwriter believe that the limited trading that has occurred in
our Class A shares and Class B shares does not represent an active market and
that prices for our shares on The Toronto Stock Exchange do not reflect the
prices at which the shares would have traded if an established and active
trading market existed. Accordingly, we determined the initial public offering
price of the Class B shares in this offering through consultation and
negotiation with the underwriter. Among the factors considered in these
negotiations were prevailing market and economic conditions, our recent
historical results of operations, estimates of our future business prospects
and earnings potential, the present state of our business operations, an
assessment of our management, the number of Class B shares being offered and
the total number of Class A shares and Class B shares to be outstanding upon
completion of this offering, the price that purchasers might be expected to pay
for the Class B shares given the nature of Peace Arch and the general condition
of the securities markets at the time of the offering, the consideration of
these factors in relation to the market valuation of comparable companies in
related businesses or whose operations are similar to ours, and the current
condition of the markets in which we operate.

There can be no assurance that an active trading market will develop for the
Class B shares after this offering, or that the Class B shares will trade in
the public market subsequent to this offering at or above the initial public
offering price in this offering.

14
<PAGE>

DILUTION

Our net tangible book value as of February 28, 1999 was $11.2 million, or
$3.71 per share based on the inverse of the Noon Buying Rate of Cdn$1.00 per
US$0.6650 in effect on that date. Net tangible book value per share represents
the amount of our total tangible assets less total liabilities, divided by
3,025,942 shares, which is the number of shares outstanding on February 28,
1999 after giving effect to every five common shares having been reclassified
and converted into one Class A share and one Class B share. After giving effect
to the receipt of the net proceeds from the sale of Class B shares in this
offering, after deducting the underwriting discount, non-accountable expense
allowance and other estimated offering expenses, and without taking into
account any change in assets or liabilities since February 28, 1999, our
pro forma net tangible book value as at February 28, 1999, would have been
approximately $14.2 million, or $3.76 per Class B share. This represents an
immediate increase in pro forma net tangible book value of $0.05 per share to
existing shareholders and an immediate dilution of $1.24 per share to new
investors purchasing Class B shares in this offering. The following table
illustrates the dilution for each Class B share:

<TABLE>
<S> <C> <C>
Initial public offering price per share.......................... $5.00
Net tangible book value per share as of February 28, 1999...... $3.71
Increase per share attributable to new investors............... $0.05
-----
Pro forma net tangible book value per share after offering....... $3.76
-----
Dilution per share to new investors.............................. $1.24
=====
</TABLE>

15
<PAGE>

CAPITALIZATION

The following table sets forth our consolidated capitalization as of February
28, 1999 on an actual and as adjusted basis. The as adjusted capitalization
gives effect to the sale of the Class B shares in this offering and our
application of the net proceeds (after deducting the underwriting discount,
non-accountable expense allowance and other estimated offering expenses). This
table should be read in conjunction with the consolidated financial statements
and notes appearing elsewhere in this prospectus.

<TABLE>
<CAPTION>
February 28, 1999
--------------------
Actual As Adjusted
------- -----------
(Canadian dollars
in thousands)
<S> <C> <C>
Bank indebtedness....................................... $ 9,357 $ 9,357
Long-term debt, including current portion............... 8,104 6,704
------- -------
17,461 16,061
Shareholders' Equity:
Class B shares, 100,000,000 authorized, 1,512,971
outstanding, actual; 100,000,000 authorized,
2,267,971 outstanding, as adjusted................... 13,322 17,708
Class A shares, 100,000,000 authorized, 1,512,971
outstanding, actual and as adjusted.................. 13,322 13,322
Preference shares, 25,000,000 authorized, none
outstanding.......................................... -- --
Other paid-in capital................................. 136 136
Deficit............................................... (7,436) (7,504)(1)
------- -------
Total shareholders' equity.......................... 19,344 23,662
------- -------
Total capitalization................................ $36,805 $39,723
======= =======
</TABLE>
- --------
(1) Includes Cdn$68,000 adjustment resulting from the use of proceeds of the
offering to repay debentures.

The table assumes no exercise of options, outstanding as of April 30, 1999,
to purchase 196,850 Class A shares and 196,850 Class B shares at a weighted
average exercise price of Cdn$10.10 per share.

The table also assumes no exercise of warrants, outstanding, as of May 10,
1999, to purchase 50,000 Class A shares and 50,000 Class B shares at an
exercise price of Cdn$6.25 per share.

The table also excludes the possible issuance of 112,500 Class B shares
pursuant to the underwriter's over-allotment option and 75,000 Class B shares
upon exercise of the underwriter's warrant.

16
<PAGE>

PRICE RANGE AND TRADING VOLUME OF COMMON SHARES

The following table sets out the market price range and trading volume of our
common shares which traded on the Vancouver Stock Exchange and The Toronto
Stock Exchange (the "TSE") for the periods indicated. Until July 19, 1999, our
common shares traded on the TSE under the symbol "VE." Effective July 19, 1999,
our Class A shares and Class B shares began trading on the TSE under the
symbols "PAE.A" and "PAE.B", respectively, at which time our common shares were
delisted.

The information contained in this table has been restated to reflect our
previous share capital consolidations and the share conversion consummated
prior to the completion of this offering. The information has not been adjusted
to reflect the reclassification of our common shares into Class B shares and
Class A shares under the assumption that these classes of shares would trade in
substantially the same manner as our common shares. The Class B shares have
been approved for listing on the American Stock Exchange under the symbol
"PAE", subject to official notice of issuance. There will be no trading market
for the Class B shares in the U.S. prior to this offering. For the convenience
of the reader, the share prices in the table below have been translated into
U.S. dollars where indicated, at the inverse of the noon buying rate in effect
on May 7, 1999 of Cdn$1.00 per US$0.6856.

<TABLE>
<CAPTION>
Average
Daily Trading Cdn$ Cdn$ US$ US$
Volume High Low High Low
------------- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Vancouver Stock Exchange:
Fiscal year ended August 31, 1997:
First Quarter................... 2,710 $15.00 $14.00 $10.28 $9.60
Second Quarter.................. 5,026 18.40 16.80 12.62 11.52
Third Quarter................... 2,894 14.05 13.45 9.63 9.22
Fourth Quarter.................. 1,858 12.45 11.85 8.54 8.12
Fiscal year ended August 31, 1998:
First Quarter................... 5,664 8.60 8.13 5.90 5.57

The Toronto Stock Exchange:
Fiscal year ended August 31, 1998:
Second Quarter.................. 3,466 8.05 7.83 5.52 5.37
Third Quarter................... 7,330 10.38 9.95 7.12 6.82
Fourth Quarter.................. 3,982 9.40 8.93 6.44 6.12
Fiscal year ending August 31,
1999:
First Quarter................... 3,695 5.93 5.63 4.07 3.86
Second Quarter.................. 4,780 8.10 7.68 5.55 5.27
Third Quarter (includes up to
May 10, 1999).................. 3,300 8.38 8.05 5.75 5.52
</TABLE>

On June 23, 1999, the last reported sale price of our common shares was
Cdn$10.57, or US$7.17, based on the inverse of the Noon Buying Rate at June 23,
1999 of Cdn$1.00 per US$0.6793.

On July 28, 1999, the last reported sale price of our Class B shares was
Cdn$8.10, or US$5.36, based on the inverse of the Noon Buying Rate at July 28,
1999 of Cdn$1.00 per US$0.6618.

On May 26, 1999 we had 235 registered shareholders and 3,025,942 shares
outstanding. Of these shareholders, 150 were U.S. residents, owning 999,696
shares representing approximately 33% of the outstanding shares.

DIVIDEND POLICY

Since our incorporation, we have not paid any dividends on our shares. We do
not currently plan to pay dividends, but intend instead to reinvest any
earnings to the expansion of our business. Under the terms of outstanding
debenture held by Working Opportunity Fund (EVCC) Ltd. ("WOF"), we may not
declare or pay any dividend or purchase, redeem or acquire any shares, options
or warrants, or issue any bonuses to our shareholders without the prior
approval of WOF. This debenture will be repaid from the net proceeds of this
offering.

17
<PAGE>

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The consolidated statement of operations and deficit presented below for each
of the years in the three-year period ended August 31, 1998 and the
consolidated balance sheet data as of August 31, 1997 and 1998, are derived
from the audited consolidated financial statements included elsewhere in this
prospectus. The consolidated statement of operations and deficit for each of
the years in the two-year period ended August 31, 1995 and the consolidated
balance sheet data as of August 31, 1996, are derived from our audited
financial statements which are not included or incorporated by reference
herein. The consolidated financial data as of and for the six-month periods
ended February 28, 1998 and 1999 are derived from our unaudited consolidated
financial statements included elsewhere in this prospectus and, in the opinion
of management, reflect all adjustments, consisting solely of normal, recurring
adjustments, necessary for a fair presentation of such data. The results for
the six-month period ended February 28, 1999 are not necessarily indicative of
the results to be expected for the full 1999 fiscal year. This information
should be read together with the consolidated financial statements, including
the notes thereto, included elsewhere in this prospectus. Each of the financial
statements from which the selected consolidated financial data and operating
data is derived was prepared in accordance with Canadian GAAP.

The selected consolidated financial and operating data set forth below is
reported in Canadian dollars. However, for the convenience of the reader, the
annual 1998 and the six-month 1999 Canadian dollar statement of operations and
deficit have been translated into U.S. dollars using the average exchange rate
in effect for such periods, and the Canadian dollar balance sheet data have
been translated using the rates in effect as of August 31, 1998 and February
28, 1999. These translations are not necessarily representative of the amounts
that would have been reported if we had historically reported our financial
statements in U.S. dollars. In addition, the rates utilized are not necessarily
indicative of the rates in effect at any other time.

18
<PAGE>

Selected Consolidated Financial and Operating Data
(in thousands, except per share data)

19
<PAGE>

<TABLE>
<CAPTION>
As of
As of August 31, February 28,
-------------------------------------------- ---------------
Cdn$ Cdn$ Cdn$ Cdn$ Cdn$ US$ Cdn$ US$
1994 1995 1996 1997 1998 1998 1999 1999
------ ------ ------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and marketable
securities............. $ 42 $ 70 $ 123 $ 1,744 $ 1,876 $ 1,207 $ 445 $ 296
Tax credits receivable.. -- -- 2,370 7,730 4,975 13,213 8,787
Production costs in
progress............... 144 112 64 3,862 11,906 7,663 3,771 2,508
Investments in
television programming,
net.................... 21 77 462 2,057 5,632 3,625 9,534 6,340
Property and equipment,
net.................... 2,368 2,787 4,847 5,048 9,498 6,113 9,565 6,631
Goodwill................ 63 560 736 597 2,544 1,770 2,479 1,649
Total assets............ 3,083 5,370 7,710 18,510 42,187 27,153 43,561 28,968

Debt financing(4)....... 1,958 2,730 4,706 4,152 10,367 6,672 17,461 11,612
Deferred revenue........ 147 77 83 4,230 10,770 6,932 2,947 1,960
Total liabilities....... 2,640 3,818 5,692 9,390 24,454 15,759 24,217 16,104
Shareholders' equity.... 443 1,552 2,018 9,120 17,733 11,414 19,344 12,864
</TABLE>
- --------
(1) Basic earnings per share shown above are based on the weighted average
number of shares outstanding during the period. Diluted per share information
is not presented if it would disclose a smaller loss per share than the basic
earnings per share. All share and per share data has been restated to give
retroactive effect to the share reclassification and conversion.

(2) EBITDA represents earnings before interest, taxes, provision against
limited partnership revenue interests, depreciation and amortization. For
purposes of EBITDA, amortization excludes amortization of programming.We have
included EBITDA because we feel that some investors will find it useful for
evaluating our business and this investment. However, EBITDA should not be
considered as an alternative to net earnings, as determined in accordance with
Canadian GAAP, as an indicator of our operating performance. In addition, it
should not be considered as an alternative to cash flows from operations, as
determined in accordance with Canadian GAAP, or as an indicator of our
liquidity or available cash. To the extent that EBITDA does represent cash
generated by operations, this cash may not be available for management's
discretionary use, due to debt service requirements, requirements to invest in
television programming, and uncertainties. EBITDA, as presented, may not be
comparable to similar computations presented by other companies.

(3) Differences to U.S. GAAP shown above reflect the transfer of 160,000
performance shares to three of our officers and directors. Under Canadian GAAP,
the transfer is a capital transaction outside of Peace Arch and is not
accounted for as compensatory to any of the individuals who acquired the
shares. For U.S. GAAP purposes only, a compensation expense of Cdn$1.2 million
was recorded in the year ended August 31, 1998.

(4) Debt financing shown above includes both bank indebtedness and long-term
debt.

20
<PAGE>

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

The following discussion should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this prospectus.

General

In 1996, we began shifting our principal business focus to the production and
distribution of proprietary television programming for worldwide markets. While
we have continued to provide production services for third parties on a
contract basis, the most significant portion of our revenues now comes from
proprietary programming. We have achieved our significant growth in this
business through internal expansion and our acquisition of Sugar Entertainment
Ltd., which was effective in September 1996. Since then we have produced and
distributed two dramatic television series, "First Wave" and "Dead Man's Gun,"
and approximately 20 hours of other proprietary programming. Our immediate
prospects for future growth depend on our ability to identify, develop and
acquire the rights to ideas, storylines and other creative concepts suitable to
be produced and distributed as television programming.

During the year ended August 31, 1997, approximately 73% of our revenues were
derived from the distribution of our proprietary programming. In fiscal 1998,
the production and distribution of proprietary programming represented
approximately 86% of our total revenues, reflecting 60% revenue growth over the
prior year. Our overall revenue growth in fiscal 1998 was 38%.

The following table shows the breakdown of our total revenues during our past
three fiscal years by activity and by geographical market:

<TABLE>
<CAPTION>
Year Ended August Six Months
31, Ended
----------------- February 28,
1996 1997 1998 1999
----- ----- ----- ------------
(Canadian dollars in millions)
<S> <C> <C> <C> <C>
Revenues by Activity
Proprietary programming.......................... $ -- $17.5 $28.0 $28.4
Production services.............................. 2.2 3.0 4.2 1.8
Software and video distribution.................. 3.2 3.0 -- --
Other............................................ 0.3 0.1 0.3 0.1

Revenues by Geographic Market
Canada........................................... $ 5.7 $ 6.1 $ 5.9 $ 3.6
U.S.............................................. -- 9.6 10.8 7.8
Europe and other markets......................... -- 7.9 15.8 18.9
</TABLE>

We realize revenues and expenses for television programming when the license
period has commenced and the program or episode has been shipped. Deferred
revenues represent payments received in advance of a program or episode being
shipped.

We operate through separate subsidiaries established for each production or
series. We finance the budgeted production costs of programming through
advances obtained from customers, borrowings under our bank credit facility and
from working capital. Typically, we retain the rights to our proprietary
programming for exploitation in future periods or in additional markets and
media.

We generally capitalize the costs we incur in producing a film or television
program net of tax credits. These costs include direct production costs,
certain exploitation costs, production overhead and interest relating to
financing the project. Until the date a program is completed, we capitalize
these costs into "Production costs in progress" on our consolidated balance
sheet. Costs related to completed proprietary programming are

21
<PAGE>

included, net of amortization, in "Investments in television programming" on
our consolidated balance sheet. Tax credits are recorded when a program or
episode is complete.

Our investments in television programming are amortized against revenues in
the ratio that the current period's gross revenues from all sources for the
program bear to management's estimate of anticipated total gross revenues for
such film or program from all sources. Generally, we amortize substantially all
of our production costs over a three-year period. In the event that management
reduces its estimates of the future gross revenues associated with a particular
program, a write-down, with a corresponding decrease in our earnings in the
period the write-down is taken, could occur. To date, we have taken no material
write-downs due to reevaluations of our future estimates of revenues for film
or television programs.

Our results of operations for any period depend on the number of television
programs we deliver. Consequently, our results may fluctuate materially from
period-to-period, and the results of any one period may not necessarily
indicate results for future periods. Cash flows also may fluctuate and may not
closely correspond with revenue recognition.

Our revenues from U.S. and international sources generally are payable to us
in U.S. dollars while our costs are denominated primarily in Canadian dollars.
Accordingly, our results can be affected by fluctuations in the U.S. dollar
exchange rate. The results of these fluctuations may be material. To date, we
have not entered into any material currency hedging instruments. In addition,
we have not maintained significant amounts of U.S. dollar balances in order to
reduce the risk of exchange rate fluctuations.

Because of the timing of U.S. television seasons and the lead time to produce
and deliver programs, we historically have had lower revenues in our third
fiscal quarter than in our other quarters. Production services have represented
13% of our revenues in the last two completed fiscal years and are not subject
to significant seasonal variation.

As consideration for the acquisition of Sugar Entertainment Ltd. in 1996, we
issued an aggregate of 372,500 Class A shares and Class B shares, giving
retroactive effect to our share reclassification and conversion, including
350,000 performance shares which were issued and held in escrow as required by
Canadian provincial securities policies to which we are subject. The
performance shares are subject to release with the consent of the British
Columbia securities regulatory agencies, as specified financial performance
standards are met. At the time the shares are released from escrow, we record
increases to goodwill and share capital based on the fair value of the shares
at the date the performance can be determined. This additional goodwill is
amortized over 20 years. During fiscal 1998, 200,000 of the performance shares
were released from escrow, resulting in increases in both goodwill and share
capital of Cdn$2.0 million. The remaining 150,000 performance shares are
expected to be released during calendar 1999 and to result in additional
goodwill and share capital increases of approximately Cdn$1.5 million.

In December 1997, beneficial ownership of an aggregate of 160,000 of the
performance shares was transferred to three of our officers and directors. The
transfer was subject to all of the escrow conditions at the same price per
share as was recorded when the performance shares were issued. Under Canadian
GAAP, the transfer is a capital transaction not involving Peace Arch and was
not accounted for as compensatory to any of the individuals who acquired the
shares. However, under U.S. GAAP, a compensation expense of Cdn$1.2 million was
recorded in the year ended August 31, 1998 in connection with the release from
escrow of 91,428 of the transferred performance shares. See Note 19 to
consolidated financial statements for further discussion of this adjustment. A
further compensation expense is expected to be recorded in calendar 1999 when
the remaining 68,572 of those transferred performance shares still held in
escrow are released with the amount to be determined at that date.

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Results of Operations

Six Months Ended February 28, 1999 and 1998 Compared

Revenues. During the six months ended February 28, 1999, revenues increased
by 86% over the comparable six-month period from Cdn$16.2 million to Cdn$30.2
million due primarily to a significant increase in our proprietary programming.
We derived 93% of our revenues from the production and distribution of
proprietary television programming compared with 83% during the comparable
period. Revenues from this programming increased from Cdn$13.4 million to
Cdn$28.4 million, representing a 111% growth rate, primarily due to the
addition of "First Wave" as our second television series. The increase in
revenues from proprietary programming was partially offset by a Cdn$0.6 million
decline in our production services revenues.

Amortization of Programming. Amortization of our programming increased to
Cdn$25.4 million for the six months ended February 28, 1999 from Cdn$12.5
million in the comparable six-month period, primarily due to the increase in
the proprietary programming revenues.

Other Production Costs. Other production costs declined by 19% from the prior
period primarily because of the decrease in the production service business as
we accelerated our proprietary programming activities.

Selling, General and Administration Expense. Selling, general and
administration expense increased to Cdn$1.3 million from Cdn$0.9 million in the
comparable period. Increased staff accounted for 63% of the increase and higher
marketing costs accounted for 26% of the increase.

Interest Expense. Interest expense of Cdn$0.5 million increased by 141% over
the prior comparable six-month period. Of the increase, 46% was due to the
increase in our bank credit facility and 44% was due to the addition of a
mortgage to acquire real property.

Foreign Exchange. During the six months ended February 28, 1999, we realized
a foreign exchange gain of Cdn$0.3 million compared with a gain of
Cdn$0.03 million of the prior comparable six months. Foreign exchange gains and
losses arise from fluctuations in the market rates of Canadian dollars relative
to U.S. dollars and as such are most often dependent on economic factors
outside our control. As a result, foreign exchange gains and losses may vary
from period-to-period.

Taxes. Income tax expense of Cdn$0.6 million for the six-month period ended
February 28, 1999 is recorded net of the effect of available loss carry
forwards of Cdn$0.2 million. We have utilized substantially all of our
available loss carryforwards. We expect future income to be fully taxed.

1998 Compared to 1997

Revenues. During 1998, revenues increased by 38% from Cdn$23.6 million in
1997 to Cdn$32.4 million in 1998. We derived 86% of our revenues from the
production and distribution of proprietary programming, compared to 73% in the
prior year. Revenues from proprietary programming grew by approximately
Cdn$10.5 million from Cdn$17.5 million to Cdn$28.0 million over the prior year,
representing a growth rate of 60%. This growth was primarily due to the
delivery of the first episodes of the "First Wave" series. The increase in
proprietary programming revenues was partially offset by the loss of revenues
of Cdn$3 million from our software and educational video distribution business
which we sold effective August 31, 1997.

Amortization of Programming. Amortization of programming for 1998 increased
to Cdn$24.1 million as compared to Cdn$15.0 million for the prior year, due to
the increase in proprietary programming revenues. Amortization represented 86%
of proprietary programming revenues for both 1998 and 1997.

Selling, General and Administration Expense. Our selling, general and
administration expense decreased from Cdn$2.5 million in 1997 to Cdn$2.2
million in 1998, representing a 10% reduction. The overall decrease was the net
effect of an approximately Cdn$0.9 million reduction in expense resulting from
the sale of our educational video and software business and a Cdn$0.6 million
increase in expense resulting 64% from

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salaries, 17% from advertising and 19% from other expenses related to the
growth of our proprietary programming activities.

Interest Expense. Interest expense of Cdn$0.6 million for fiscal 1998
increased from Cdn$0.4 million in 1997 representing an increase of 50%. Of this
increase, 50% was due to the addition of a mortgage used to acquire real
property and the balance is due to other increases in debt.

Foreign Exchange. During the year ended August 31, 1998, we realized a
foreign exchange gain of Cdn$0.5 million compared with a gain of Cdn$0.2
million of the prior comparable year. Foreign exchange gains and losses arise
from fluctuations in the market rates of Canadian dollars relative to U.S.
dollars and as such are most often dependent on economic factors outside our
control. As a result foreign exchange gains and losses may vary from period-to-
period. In fiscal 1998 approximately 82% of our revenues were receivable in
U.S. funds compared to 74% in 1997.

Taxes. At August 31, 1998, we had accumulated loss carryforwards for income
tax purposes of approximately Cdn$2.4 million. For 1998, Cdn$1.5 million of
these losses were applied to reduce our income tax expense by approximately
Cdn$0.7 million.

1997 Compared to 1996

Revenues. During 1997, revenues increased to Cdn$23.6 million from Cdn$5.7
million in 1996, representing a 312% increase resulting from our shift in focus
to proprietary programming, which had not been a material part of our business
in earlier periods. In 1997, we delivered two television movies and the first
ten episodes of "Dead Man's Gun."

Amortization of Programming. Amortization for 1997 was Cdn$15.0 million, or
86% of program revenues, reflecting the impact of our shift of focus to
proprietary programming during 1997. There was no amortization expense recorded
during fiscal 1996.

Selling, General and Administration Expense. Despite the significant increase
in revenues, selling, general and administration expense increased only
slightly from Cdn$2.4 million in fiscal 1996 to Cdn$2.5 million in fiscal 1997.
This was principally because we began our shift to proprietary programming in
1997 for which the comparable selling, general and administration expense had
not yet increased.

Interest Expense. Interest expense of Cdn$0.4 million for fiscal 1997
increased from Cdn$0.3 million in 1996 representing an increase of 19%. This
increase was primarily due to an increase in our bank indebtedness.

Foreign Exchange. During 1997, we realized a foreign exchange gain of Cdn$0.2
million compared with a loss of Cdn$0.02 million of the prior comparable year.
Prior to 1997 substantially all of our revenues and expenses were payable in
Canadian dollars. Commencing at the beginning of fiscal 1997, our business
changed with the acquisition of Sugar Entertainment Ltd. In 1997 approximately
74% of our revenues were receivable in U.S. funds.

Taxes. There was no tax expense for 1997, after giving effect to the tax
benefit of available loss carryforwards. In 1996, we reported a loss from
operations and incurred no income tax expense.

Other Expenses. Effective August 31, 1997, we sold the business and assets of
Image Media Ltd., our educational video and software distribution subsidiary,
and recorded a net loss of Cdn$0.3 million. Prior to 1997, we periodically
entered into marketing agreements with limited partnerships to market our
programming and services in exchange for an interest in future revenues that we
capitalized and amortized over ten years. We subsequently acquired the revenue
interests in exchange for common shares and recorded a provision of
Cdn$2.3 million in 1997 and Cdn$1.1 million in 1996.

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Liquidity and Capital Resources

We currently finance the capital costs of our proprietary television
programming and other cash requirements principally through advances obtained
from customers, borrowings under our bank credit facility and from working
capital. In prior periods, we have also funded our capital requirements through
the issuance of shares, warrants and convertible debentures. Net cash proceeds
from the issuance of share capital in 1998 and 1997 were Cdn$4.9 million and
Cdn$5.8 million. We have used real estate mortgages to fund the acquisition of
our production facilities. We have no material capital expenditure commitments.
We earn sufficient cash flow from operations to meet interest commitments on
our debt.

During fiscal 1998 cash flow from operating activities provided Cdn$21.5
million compared with Cdn$13.4 million in fiscal 1997. This increase was
primarily due to an increase in programming revenues.

Cash used for investing activities was Cdn$28.3 million compared with
Cdn$16.9 million for fiscal 1997 due to the increase in production activity
over the prior year. The increased capital cost of programming was due to our
focus on larger-budget, episodic programming. We delivered 40 hours of
programming in fiscal 1998 compared with 14 hours in 1997.

Cash flows from financing activities contributed Cdn$7.0 million in 1998
compared with Cdn$5.1 million in 1997. In 1998, we raised Cdn$4.9 million from
the issuance of common shares compared with Cdn$5.8 million in 1997. We
increased bank indebtedness and long-term debt in the amount of Cdn$3.4 million
compared with Cdn$0.5 million in 1997 and repaid bank indebtedness in the
amount of Cdn$1.7 million compared with Cdn$0.9 million in 1997.

We expect this trend of increased cash used for investing activities to
continue in fiscal 1999 and fiscal 2000 as we employ the net proceeds of this
offering. An increase in investments in television programming is required in
order to maintain sales growth. We expect cash provided by financing activities
will also increase in fiscal 1999 due to the net proceeds of this offering.

In fiscal 1996, cash used by operating activities was Cdn$0.5 million and
from investing activities was Cdn$1.1 million. Cash flows subsequent to fiscal
1996 are not comparable with 1996 due to the acquisition of Sugar Entertainment
that took place at the beginning of fiscal 1997. Financing activities provided
cash flows of Cdn$1.7 million of which Cdn$1.2 million was from the issuance of
common shares.

At February 28, 1999, we had total liabilities of Cdn$24.2 million, which
included Cdn$9.4 million in drawings outstanding under our bank credit facility
and Cdn$8.1 million in other debt, including Cdn$5.5 million in real estate
loans, Cdn$1.6 million in debentures, of which Cdn$0.2 million is due to
officers and directors, and approximately Cdn$1.0 million in other obligations.
Since February 28, 1999, Cdn$0.6 million of the principal amount of the
debentures has been repaid. The maturity date on the balance of the debentures
was originally March 31, 1999, but has been extended by agreement with the
holders of the debentures to July 31, 1999.

Our principal debt funding is through our Cdn$14.0 million bank credit
facility. This facility bears interest at a rate equal to the Canadian prime
rate plus 1.5% per annum, with monthly payments of interest only withdrawn from
an interest reserve held by the bank. The facility is secured by the refundable
tax credits, distribution rights of the film properties to which the loan
relates and a general security interest on substantially all of our assets. At
February 28, 1999, Cdn$9.4 million was outstanding on this facility. We will
apply a portion of the net proceeds to repay Cdn$1.4 million principal amount
of our remaining outstanding debentures, including Cdn$0.2 million due some of
our officers and directors. See "Interest of Management in Certain
Transactions" for the details of these payments.

We have mortgages that come due on February 1, 2000 in the amount of Cdn$1.9
million and on March 1, 2001 in the amount of Cdn$2.7 million. Our mortgages
are held by wholly owned subsidiaries and are secured by their assets. We
intend to renew these mortgages as they come due. On May 1, 1999 a mortgage in
the amount of Cdn$0.9 million came due and was extended for a two-year term at
the rate of 7.2% per annum.

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Based on our current business expectations, we believe that the anticipated
net proceeds from this offering, our cash on hand, operating revenues and
available credit under our bank credit facility will be adequate to fund our
current needs and to support our planned acceleration in our proprietary
programming activities for at least twelve months from completion of this
offering. The funds also should provide capital needed to pursue complementary
acquisitions, as the opportunity arises. Borrowings under our credit facility
are due on demand. If these loans were called, we may not have sufficient
liquidity to repay them. Our ability to repay them would be dependent on our
collection of the refundable tax credits. If we are unable to renew our bank
credit facility or expand the facility as our business grows, we may need to
seek additional financing to fund our business. We currently have no other
agreements or commitments for financing.

There are trends and uncertainties that could impact our revenues or income
from operations. The BC Film industry has been experiencing a trend of rapid
growth. This growth could have a positive effect on our revenues and income
from operations. Refundable tax credits are important to our business. If these
tax credits were to be removed our income from operations and revenues may not
continue to increase or may decline causing a decrease in our liquidity.

Year 2000

Many computer programs and other systems currently used in our business
activities were designed and developed without considering the upcoming change
in the century, which could lead to the failure of computer applications or
create erroneous results by or at the Year 2000. The Year 2000 issue is a broad
business issue, the impact of which extends beyond traditional computer
hardware and software to possible failure of other systems and instrumentation.

To address the Year 2000 issue, we have implemented a five-stage remediation
plan, including analysis, planning, implementation, testing and contingency
planning. The analysis stage involved manual tests of hardware and software,
researching information available from hardware and software providers, and
developing a list of third party suppliers of critical systems. The planning
phase was a process based on the results of our research and analysis. For
example, in some cases decisions were made to upgrade software and hardware, in
some cases software "patches" were available and in some cases decisions were
made to replace hardware and use entirely new software systems. The
implementation stage involved implementing our plans. This involved purchasing
or upgrading equipment and migrating files and records to the new system. The
testing stage is much the same as the analysis stage, but performing it with
the new hardware and software. Finally, the contingency planning stage involves
maintaining computer backup files and paper copies of all critical files and
information. We are nearing completion of the implementation stage and have
completed approximately 75% of the overall remediation plan. We have expended
approximately Cdn$60,000 to date due to Year 2000 related upgrades and
replacements. Our standard for Year 2000 compliance requires that a system or
piece of equipment be designed to be used prior to, on and after January 1,
2000. Such systems and equipment must operate without error in dates and date-
related data, including calculating, comparing, indexing and sequencing prior
to, on and after January 1, 2000. Our total estimated cost of the system
enhancements is estimated to be less than Cdn$100,000, which cost is being
expensed as incurred.

The impact of the Year 2000 issue on us will also be affected by the Year
2000 readiness of our business partners, customers, suppliers and vendors and
providers of facilities, equipment and services. Failure by these third parties
to be Year 2000 compliant may adversely affect, among other things, our
production, revenues and the timing of cash receipts. We have made written
inquiries of all material third-party suppliers advising them that we required
a written response confirming that they were Year 2000 compliant. We are
exploring alternative suppliers to use in the event that our principal
suppliers are not compliant. To date, however, we have received only
preliminary feedback from such third parties, and we have not independently
confirmed any information received from such third parties with respect to Year
2000 issues. As such, we cannot be certain that such third parties will
adequately address the Year 2000 issue and complete their Year 2000 conversion
and remediation efforts in a timely fashion or avoid business disruptions that
could adversely affect our business. Because of these uncertainties, we cannot
predict the costs to us if such third parties are not Year 2000 compliant.

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In the worst-case scenario, we may miss delivery dates for our programs due
to our inability to procure supplies, such as film, and services, such as
special effects work and sound, and to deliver the final program due to
transportation problems. Postponing delivery could cause payments to be
postponed and may cause us to postpone realizing revenues and related costs. In
addition, once our programs are delivered our customers may be unable to
process payments. Contingency planning is the last stage of our remediation
plan, scheduled for completion by August 31, 1999. We will identify alternate
suppliers and ensure we have provided adequate liquidity to meet a possible
delay in cash receipts.

Inflation

Historically, inflation has not had a material impact on our results of
operations.

Recent Accounting Pronouncements

Note 19 to the Consolidated Financial Statements sets forth differences
between Canadian GAAP and U.S. GAAP. In addition to the U.S. GAAP issues taken
into account in the preparation of Note 19, there have been accounting
standards issued by the Financial Accounting Standards Board (the "FASB") or
other bodies in the U.S. that may become applicable to our reported results but
that we have not yet adopted because such standards are not effective for the
periods presented.

In June 1998, FAS 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. FAS 133 provides comprehensive standards for the
recognition and measurement of derivative and hedging activities. Generally,
FAS 133 requires that all derivatives be recorded on the balance sheet at their
fair value and establishes new accounting requirements for different types of
hedging activities. FAS 133 is effective for fiscal years beginning after June
15, 2000. We do not believe that the adoption of FAS 133 will materially impact
our reported historical financial position or results of operations as set out
in the consolidated financial statements.

In October 1998, the FASB released an exposure draft of the proposed
statement on recission of FAS 53. If adopted, companies previously subject to
the requirements of FAS 53 would follow the guidance of a proposed Statement of
Position ("SOP"), "Accounting by Producers and Distributors of Films." This
proposed SOP would be effective for fiscal years beginning after December 15,
1999. We have not concluded what, if any, impact these proposals will have on
our reported historical financial position or results of operations due to the
preliminary stages of the proposed SOP.

In March 1999, the FASB released an exposure draft which deals with a variety
of proposed technical amendments to the accounting for stock option plans and
employee stock compensation. One proposal would no longer allow an entity to
account for stock options issued to non-employee directors by the intrinsic
value method currently used in the measurement of net earnings (loss) under
U.S. GAAP. Instead, under the proposal the fair value of such options would be
recognized as a compensation cost. This proposal, together with others included
in the exposure draft, would apply prospectively to events occurring after
December 15, 1998. In February 1999, we granted options to purchase an
aggregate of 40,000 Class A shares and Class B shares to non-employee
directors, which numbers give effect to our share reclassification.

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BUSINESS

We are a vertically integrated company that develops, produces and
distributes high-quality, proprietary television programming for markets
worldwide. We also provide production services for third parties on a contract
basis. We are based in Vancouver, British Columbia, the third largest film and
television production center in North America. As a British Columbia-based
producer, we enjoy a number of competitive advantages over producers outside of
Canada, including tax and other government incentives. We also enjoy a
competitive advantage over producers in other parts of Canada due to our
proximity to Los Angeles, our varied geography and our temperate climate.

Development

The first stage in the process of creating television programming is concept
development. We select programming concepts that we believe will have domestic
and international market appeal. We develop programming for television,
including episodic series, movies and documentaries. We often arrange for the
involvement of industry recognized creative talent, such as writers, producers,
directors and actors, which will make the programming more saleable and may
increase the value of our library. In some cases, one or more of these people
may already be involved when we become involved.

Our development department receives and evaluates written concepts, scripts,
books or other literary properties from agents, writers and prospective
production partners in the U.S., Canada and Europe. Once we have selected and
acquired the necessary rights to a source material, we may involve broadcasters
or third party investors to participate in the further development of the
concept. These activities may include the preparation of a series "bible,"
script writing or the production of a promotional reel that can be used as a
sales tool. For concepts that have sufficient Canadian content, government and
related funding agencies, such as Telefilm Canada and BC Film, may provide
funding for the development process as described below under "Regulatory
Considerations."

In some cases we get involved at a later stage of development, when creative
materials may have already been prepared or when key creative people are
already attached. Involvement at this stage may shorten our development
process, but involve less opportunity for us to influence the financial
structure of the programming.

Early involvement in the acquisition and development of projects generally
increases our control over the exploitation of the finished program. We believe
that greater control enhances our ability to build targeted brand identities
for our programming that should increase revenues from television distribution
and potential long-term revenue from ancillary markets such as clothing, toys,
novelties, books, CDs, soundtracks and other audio products, electronic and
video games, Internet applications and other merchandise. Increased ownership
and control also will allow us to capitalize on new ancillary markets that may
arise in the future.

Projects in Development. We have several new programs at an early stage of
development with various Canadian, U.S. and international producers,
broadcasters and distributors. We are negotiating with broadcasters interested
in financing and airing our proprietary one-hour drama called "Yaletown" and
our half-hour sit-com with the working title "Acme Agency." Also, we recently
purchased an option for the rights to the screenplay "Jetlag" on which Dave
Thomas, known for his appearances in "Grace Under Fire," "SCTV" and "Strange
Brew," will be the executive producer. The project, a made-for-television
movie, is designed as a pilot for a television series and has been presented
for consideration to Pearson Television International Ltd. and WIC Television
in Canada.

Production

Most of our business activity relates to proprietary programming. The
production of proprietary television programming involves the assembly of a
team of production personnel, including script writers, directors, cast and
crew. In the case of larger-budget productions such as "First Wave" and "Dead
Man's Gun," this team

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can include over 150 people who are hired either as employees or independent
contractors. Typically, we form a wholly-owned production company for each
production which retains the necessary employees and contractors.

One of these contractors hired by the production company is the producer that
we have designated to oversee the production process on our behalf. The
producer carries out a myriad of activities including development and approval
of scripts, casting, selecting directors and supervising the daily shooting
schedule. The producer is also responsible for supervising all post-production
activities, including editing, the insertion of music and special effects, and
ensuring that the finished product, usually in the form of a betacam tape,
meets the delivery specifications of the buyers.

The production of a 22-episode season of a one-hour dramatic series such as
"First Wave" can span 10 months. Each episode takes approximately 11 weeks to
complete, including one week of preparation, one week of shooting and up to 9
weeks of post-production. At any given time there may be one episode in
preparation, one episode shooting and three or four episodes in various stages
of post-production.

In addition to our proprietary programming, we produce creative works that
are directed to training, education and the information needs of third parties
and we offer domestic and foreign language production services for network
television including entertainment segments, news segments and electronic press
kits, as well as sports, entertainment, documentary, television commercial and
music videos, all under various contract arrangements. As the demand for
interactive programming has increased, we have increased our involvement in the
production of CD-ROMs, on-line presentations and other digital programming.
While these production services represent only a small portion of our current
revenues, we plan to continue to pursue production service arrangements because
they provide a training ground for our creative staff, foster our relationships
with key industry participants, provide an incubator for new skills and
industry practices, and keep our facilities utilized during hiatus production
periods of our television series programming. These productions have won
numerous awards, including most recently, the Gold Camera Award in 1998 at the
U.S. International Film and Video Festival for our video production entitled
"Millennium." Our music video entitled "Apparitions" and featuring the Matthew
Good Band also received a Best Directed Music Video Award at the 1998 Canadian
Music Video Awards.

Our proprietary programming and production services offer high production
values and generally require extensive studio and on-location filming or
taping, special visual effects, music scoring, editing and post-production
finishing. Most of these activities are undertaken by our crews using
facilities and equipment that we own or rent. Some key activities, such as
computer-generated imaging, sound mixing and post-production finishing are
subcontracted to companies that specialize in these areas.

Since inception, we have produced five feature length films, three
documentaries and various specialty programs for television. We have also
produced 66 one-hour episodes and 39 half-hour episodes of television series
programming. During fiscal 1998, we delivered one documentary, 26 one-hour
episodes and 27 half-hour episodes. Production is currently underway on an
additional 22 one-hour episodes and 39 half-hour episodes.

Our recent proprietary programming and other productions include:

First Wave. In April 1999, we commenced production of a second 22-episode
season of our science fiction thriller television series "First Wave." "First
Wave" is produced in association with Pearson Television International Ltd.,
Francis Ford Coppola and Chris Brancato. Based in the United Kingdom, Pearson
Television International Ltd. is a large international producer and distributor
of television programming. Mr. Coppola is an Academy Award winner and producer
and director of "The Godfather" and co-screenwriter of "Apocalypse Now" and Mr.
Brancato is an accomplished screenwriter ("Species 2" and "Hoodlum"). We
control North American rights to this series, and recently made an advance sale
of 66 episodes (three seasons of production) to USA Networks' Sci-Fi Channel.
Pearson Television International Ltd. has agreed to distribute the initial
66 episodes of "First Wave" outside of North America. To date, CHUM Television
has ordered 44 episodes for broadcast in Canada. "First Wave" recently was
nominated for a Leo Award for best dramatic

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series. The Leos recognize excellence in British Columbia film and television
production. In December 1998, CHUM's Space: The Imagination Station announced
that it has five of the top ten dramatic series on specialty television and
that "First Wave" is their highest rated series, ahead of "The X-Files."

Dead Man's Gun. In 1997, we commenced delivery of a 22-episode, one-hour
western-themed television series titled "Dead Man's Gun," produced in
association with Showtime Networks and Buena Vista Television and with Henry
Winkler as executive producer. This anthology series was nominated for three
Cable Ace Awards in 1997, including best dramatic series, and won the Western
Heritage Award for Best Western Dramatic Script for the last two years. "Dead
Man's Gun" was renewed for a second 22-episode season by Showtime and MGM
Worldwide Television that commenced production in spring 1998 and was completed
in early 1999. It currently airs on Showtime in the United States and has been
syndicated through most of Canada by CHUM Television. "Dead Man's Gun" has not
been renewed for a third season, but we are actively seeking new U.S. and
international partners in order to continue production.

Contemporary Classics. Since 1996, we also produced two installments of our
ongoing "Contemporary Classics" youth movie series made in association with
Showtime and Hallmark Entertainment Network--"The Prisoner of Zenda, Inc." and
"Ronnie and Julie." Prior pictures in the series include "AnnieO," "The
Halfback of Notre Dame" and "Robin of Locksley." We jointly fund the production
of the Contemporary Classics in association with Showtime and Hallmark and own
all Canadian rights to the movies.

The Electric Playground. In 1997, we began production on "The Electric
Playground," a series of 13 half-hour programming which review and promote
video-games and computer technology for the specialty cable market. The series
was renewed for the 1998-99 television season in Canada and is being shown on
CHUM's Space: The Imagination Station. "The Electric Playground" is also being
syndicated throughout Canada and in selected U.S. markets. Discussions are
underway with a national television syndicator and a number of potential
sponsors with a view to completing a third season which would begin airing in
the fall of 1999. A substantial amount of footage has already been shot for the
third season.

Documentaries. In 1998, we produced two one-hour documentaries for CTV and
The Knowledge Network, "Citizen Shame," about child poverty in Canada, and
"Harm's Way," about youth and violence. These programs were financed through
Canadian broadcast sales and government incentive programs. We retain the
rights to exploit these programs worldwide. These documentaries combined the
efforts of independent Canadian documentary filmmakers and our in-house
production facilities and staff. Writers and producers for the programs
included Helen Slinger, a senior Canadian journalist and documentary writer,
and David Massar, a writer, producer and director of many programs for NBC,
Lifetime Television, ESPN, The Learning Channel, History Channel, Discovery
Channel and A&E.

So Weird. In 1998 we provided non-proprietary production services for the
initial 13 episodes of the children's television series "So Weird" for the
Disney Channel. Production has recently commenced on a further 26 episodes.
Henry Winkler is the executive producer of "So Weird."

Commercials. We have produced commercials for an extensive list of clients
over the last ten years, including Disney, McDonald's, Molson Breweries,
Frisch's and the Canadian Banking Association. Commercials produced by us have
won the Canadian Television Commercial Award (the "Bessies") Gold and Silver
Awards category in 1997 and 1998.

In addition to our current activities, we have participated in the production
of numerous feature films and documentaries, which are now included in our
library. These include: "Cadence," a feature film starring Martin Sheen and
Charlie Sheen; "Island of Whales," a feature documentary narrated by Gregory
Peck and commissioned by the PBS Nova Series; and "Outside Chance of
Maximillian Glick," an award-winning Canadian feature film.

Industry Recognition. We have earned recognition for both our entertainment
and commercial productions. "Dead Man's Gun" has won the Western Heritage Award
for Best Western Dramatic Script for

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the last two years, and earned Cable Ace Award nominations for Best Actor and
Best Dramatic Series in 1997. Certain commercials of ours have won the Canadian
Television Commercial (the "Bessie") Gold and Silver Awards in 1998 and 1997.
We have also won numerous awards for our service productions, including the
Gold Camera Award in 1998 at the U.S. International Film and Video Festival for
our production of "Millennium," a promotional video.

Library

We retain varying ownership interests in our proprietary productions and
believe that this strategy will provide us significant future asset value.
During fiscal 1998, we added 26 hours of dramatic programming, one documentary
and 26 half-hour episodes of magazine-style programming to our library. At
August 31, 1998, our library contained approximately 60 hours of proprietary
programming. We expect to produce an additional 30 hours of dramatic television
programming and two one-hour documentaries in fiscal 1999. Although currently
limited, our library will continue to expand as we produce more proprietary
programming.

Our production group also has accumulated an extensive library of stock
footage on film and video that can be incorporated into future programming. We
also may seek to add to our library through strategic acquisitions.

Marketing and Distribution

We market and distribute our proprietary television programming under
arrangements with U.S., Canadian and international broadcasters and
distributors. We seek to market and distribute titles in our library to
existing pay and free television, home video and other markets worldwide, as
well as through developing technologies. Historically, we have directly
distributed our programming in North America, where there are a limited number
of buyers and the costs of marketing to this group are manageable. We currently
contract with other parties, such as Pearson Television International Ltd., to
distribute our programs in markets outside North America. This provides us with
two principal benefits. We secure distribution advances to provide cash flow
for the production, and we avoid the substantial costs and financial risks of
distributing our programs to markets throughout the world.

Our marketing efforts are focused on creating branded identities for our
proprietary programs. We believe that such branded identities will lead to
additional revenues from television and home video distribution and ancillary
markets such as clothing, toys, novelties, books, CDs, soundtracks and other
audio products, electronic and video games, Internet applications and other
merchandise.

Key Relationships

We expect that our relationships with domestic and international
broadcasters, distributors, financing sources and creative talent will be
important to the successful expansion of our proprietary television business.

U.S. and International Broadcasters and Distributors. We have produced our
programming in association with a variety of U.S. and international
broadcasters and distributors including Buena Vista Television, Pearson
Television International Ltd., Hallmark Entertainment Network, MGM and Showtime
Networks. The recent sale of 66 episodes of our television series "First Wave"
to USA Networks' Sci-Fi Channel represents an important new relationship for
us.

Canadian Domestic Broadcasters. We have long-standing relationships with the
Canadian broadcast community, including CHUM-City, CTV, CanWest Global, Western
International Communications, The Knowledge Network and The Family Channel.
During the past two years, we have sold our series "First Wave," "Dead Man's
Gun," and "Electric Playground" to CHUM-City. We have also licensed two
documentaries, "Harm's Way" and "Citizen Shame," to CTV and The Knowledge
Network, and licensed our television movies, "The Prisoner of Zenda, Inc." and
"Ronnie and Julie," to The Family Channel.

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Canadian broadcaster relationships are an integral part of producing in
Canada, not only for the sales revenues they represent, but also because their
involvement makes it possible to take advantage of various government
incentives. See the discussion under "Regulatory Considerations--Canadian
Content Requirements" for further details of these incentives.

Producing and Writing Talent. We are currently working with Francis Ford
Coppola and screenwriter Chris Brancato ("Species 2" and "Hoodlum"), who is the
creator and lead writer on "First Wave." Our first dramatic television series,
"Dead Man's Gun," was created by Howard and Ed Spielman ("Kung Fu" and "Young
Riders") and produced in association with Henry Winkler ("Happy Days" and
"MacGyver"). Henry Winkler is also the executive producer of "So Weird." We
have also hired Canadian talent at all levels in the production of our
programs, including writers, directors, production designers, editors and
actors.

Four customers, Showtime Networks, Pearson Television International Ltd.,
Buena Vista Television and MGM Worldwide Television, each accounted for 10% or
more of our revenues in fiscal 1998.

Business Strategies

Our primary objective is to accelerate the expansion of our business by
focusing principally on increased development and production of proprietary
programming. Our strategies for achieving this objective are:

. Quality Productions. We will use a portion of the proceeds of the
offering to expand our in-house development staff, enter into new
development agreements with independent writers, producers and other key
industry participants in the U.S., Canada and selected international
markets in order to gain broader access to programming concepts.

. North American Operations. We plan to increase our sales of television
programming to existing North American broadcast customers and actively
market new programming concepts to broadcasters, distributors and co-
production partners in North America. As part of these efforts, we intend
to establish an office in Los Angeles to facilitate interaction with
these sources and to accommodate our increasing marketing requirements.

. International Operations. We plan to increase our presence and production
profile outside of Canada and the U.S. by co-producing programming with
international partners and by entering into distribution agreements with
international broadcasters and distributors. We believe that effective
use of concepts in programs that have local and international appeal will
allow us to increase our visibility in markets outside North America and
open up new markets for our programming.

. Branded Identities. We plan to focus on creating a highly recognizable
name (a "brand" or a "branded identity") for each of our programs. By
increasing the name recognition of our programs and the demand for
related products, we believe that successful branding will allow us to
generate greater revenues from television distribution and ancillary
markets, such as clothing, toys, novelties, books, CDs, soundtracks and
other audio products, electronic games, Internet applications and other
merchandise. By retaining ownership rights to our programming, we add to
our program library, which we believe has the potential to generate
future revenues.

. Complementary Acquisitions. We expect to seek acquisitions that will
provide us with complementary assets, personnel and distribution
channels. We may also utilize acquisitions to provide a platform for new
endeavors or allow us to accelerate entry into a new market or region. We
currently have no agreements or commitments with respect to any
acquisitions.

History

Since our incorporation in 1986, we have been involved in producing and
marketing a variety of products ranging from consumer based instructional
videos, to integrated corporate training programs, to individually contracted
corporate videos, feature films, television documentaries and television
commercials. Historically, we derived the bulk of our revenues from production
service arrangements whereby we were retained to

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produce a video program, film or television commercial for a fee. We expanded
our service production capability through the acquisition of The Eyes
Multimedia Productions Inc. in August 1995. We acquired The Eyes Multimedia
Productions Inc. in August 1995 for purchase consideration of common shares
valued at Cdn$60,000 and periodic cash payments totaling Cdn$215,000.

In 1995, we expanded our operations into the areas of video and software
distribution through the acquisitions of Image Media Services Ltd. and Pilot
Software. The principal business of Image Media was the distribution of video
and software and multi-media titles to primary, secondary schools, and the
post-secondary educational institutions throughout British Columbia and most
regions of Canada. We acquired Image Media Ltd. in February 1995 for purchase
consideration of common shares valued at Cdn$250,000 and periodic cash payments
totaling Cdn$710,413. Pilot Software became a wholly-owned subsidiary of Image
Media and carried out the bulk of Image Media's distribution activities in
Ontario and Eastern Canada. We acquired Pilot Software in December 1995 for
purchase consideration of common shares valued at Cdn$81,250 and periodic cash
payments totaling Cdn$105,000.

In 1996, we commenced a shift in our business toward the production of
proprietary television programming. The first steps in this process were the
production of the feature length family films "The Prisoner of Zenda, Inc." and
"Ronnie and Julie," both of which are discussed above. Our shift into the
business of proprietary television production was accelerated through the
acquisition of Sugar Entertainment Ltd. effective September 1, 1996. Our
principal motivation for expanding this business was that it offered us greater
potential for growth than our prior businesses. We also believe that the
production of proprietary programming offers us the ability to create and
expand a library of produced programming which we believe will have a residual
asset value.

Effective September 1, 1996, we acquired Sugar Entertainment Ltd. for
purchase consideration of common shares valued at Cdn$260,000.

On August 31, 1997, we completed the sale of the assets and operations of
Image Media and Pilot Software and thereby exited the video and software
distribution business. Our decision to sell this business was based on the fact
that gross profit margins were declining as a result of competitive pressures.
We sold the assets and operations of Image Media Services Ltd. and Pilot
Software effective August 31, 1997 for cash proceeds of Cdn$575,000 and the
assumption by the buyer of long-term debt of Cdn$30,000. We realized a loss on
this sale of Cdn$333,325.

Industry Overview

The Television Production Industry

The North American television production and distribution industry serves the
largest broadcast market in the world, with a population of nearly 300 million
people. In the last decade the growth of broadcasting and cable television
markets outside North America through the privatization of broadcasting
systems, the proliferation of broadcast licenses and the introduction of new
delivery technologies, such as cable and satellite transmission systems, has
led to a higher proportion of revenues from international markets.

Generally, the right to broadcast a program is licensed by a production
company to a combination of the U.S., Canadian and international broadcasters,
including free television and cable networks or individual television stations
in the first-run syndication market. After the initial network, cable licensing
or first-run syndication period, the program is available for further
commercial exploitation on cable or in syndication.

North American Markets

In North America, programming is delivered to the end user by way of free
television networks, cable channels and networks, individual television
stations and satellite delivery services. Free television networks include NBC,
CBS, ABC, Fox, UPN, WB and PBS in the U.S. and CBC, CTV and the Global
Television

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Network in Canada. Each of the major free television networks in the U.S. and
Canada currently schedules approximately 22 hours of programming in prime time
during the hours from 8 p.m. to 11 p.m. Monday through Saturday, and 7 p.m. to
11 p.m. on Sunday of each week. Programming generally consists of a mix of
movies-of-the-week, mini-series, half-hour comedy and hour-length drama or
action/adventure series.

In recent years, alternatives to the free television networks in the U.S.
have expanded with the growth of other networks, cable channels and the
development of a first run syndication market leading to more available slots
for television programming. Cable channels include HBO, Showtime, USA Networks,
Lifetime, The Family Channel, TNT and TBS in the U.S. and TMN, Super Ecran,
SuperChannel, Chanel D and Showcase in Canada.

International Markets

The worldwide television industry is experiencing growth as a result of the
development of new television broadcasting systems outside of North America.
These systems represent significant new sources of revenue for television
producers. Factors contributing to the growth of the worldwide television
industry include the introduction of direct broadcast satellite services and
pay television, as well as increased cable penetration and the growth of home
video. Some foreign broadcasters seek out both indigenous programming in order
to satisfy the local content regulations of their broadcast licenses, and
international programming, largely from North America, to appeal to a wide
audience.

Canada's Role in the Television and Feature Film Industry

The Canadian film and television industry in 1998 generated annual production
expenditures of nearly Cdn$3.0 billion. At the same time as the domestic
industry has matured, Canada has become a leading location for internationally
originated productions due to several factors. Canada's geographic proximity to
the U.S. and shared North American values and interests have led to the
establishment of close professional contacts between Canadian and U.S. studios,
independent producers, distributors and buyers. The current favorable exchange
rate of the Canadian dollar, government tax incentives and the availability of
free location assistance to television producers offered by many Canadian
cities and several provinces have also increased production activity in Canada.
Canada has made an effort to increase its pool of highly-trained and
professional crews, technicians and production personnel. Finally, with its
wide ranging topography, stretching 3,400 miles from coast to coast, Canada is
ideally suited for location shooting. Urban centers such as Toronto, Vancouver
and Montreal have been disguised as London, Paris, New York and Chicago. U.S.
companies with a strong presence in Canada include major U.S. studios such as
Paramount, Disney, Universal Pictures and Columbia Pictures/Tri-Star Pictures;
U.S. television networks such as ABC, NBC, CBS, Fox, UPN, WB and PBS; and film
companies such as The Hearst Corporation, Kushner-Locke Company and New World
Entertainment, Inc., among many others. European and Asian film companies have
also found Canada to be an attractive location and have often been able to
access Canada's numerous international film and television co-production
treaties.

Of Canada's ten provinces, the provinces of British Columbia and Ontario are
most actively involved in the motion picture production industry, with 1998
production expenditures equaling approximately Cdn$808 million and Cdn$743
million. These figures represent significant increases over the previous year,
when annual production expenditures in British Columbia and Ontario totaled
approximately Cdn$630 million and Cdn$635 million.

Competition

Television production and distribution are highly competitive businesses. We
face competition from companies within the entertainment business, as well as
alternative forms of leisure entertainment such as travel, sporting events,
outdoor recreation and other cultural activities, among many others. We compete
with numerous suppliers of television programming and related programming,
including national television networks and independent television production
companies, many of which are significantly larger and have substantially

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greater resources than we have. We consider our main competitors in Canada to
be Alliance Atlantis Communications Corporation, Salter Street Films, Ltd.,
Lions Gate Entertainment Corp., Telescene Film Group Inc. and in the U.S. to be
Spelling Entertainment Group Inc., Kushner-Locke Co. and Carsey-Werner. We
believe that we have a competitive advantage over U.S. competitors through our
eligibility for Canadian tax credits described below under "--Regulatory
Considerations--Industry Incentives." We also enjoy a competitive advantage
over producers in other parts of Canada due to our proximity to Los Angeles,
our varied geography and our temperate climate.

Employees

As of February 28, 1999, we had 25 full-time permanent employees. We also
hire additional personnel on a project-by-project basis in connection with the
production of our television programming. We believe that our employee and
labor relations are good.

Regulatory Considerations

Our status as a producer of "Canadian" programming, established and operating
in British Columbia, makes us currently eligible to receive Canadian tax and
business incentives. See Note 3 of Notes to Consolidated Financial Statements
for further description of these incentives.

We will continue to qualify for these tax and business incentives if, among
other things, Canadians beneficially own or control a majority of the voting
rights of Peace Arch. Upon completion of the offering, approximately 64% of the
voting power of our outstanding shares will be held of record by Canadians.
However, we have no way of confirming actual beneficial ownership of our
shares. If Canadians fail to beneficially own or control a majority of our
voting rights, we could lose our eligibility for these tax and business
incentives. These tax and business incentive programs also may be amended or
eliminated in the future. The loss or elimination of these tax or business
incentives would have a material adverse effect on our results of operations
and financial condition.

Canadian Content Requirements

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. Compliance with these
requirements is enforced by the Canadian Radio-Television and
Telecommunications Commission ("CRTC") and failure to comply can result in
fines or the loss of a license. These requirements provide support to the
market for Canadian programming, such as those we produce, as long as they
qualify as Canadian programming for CRTC purposes.

In addition to scheduling requirements, Canadian conventional, specialty, pay
and pay-per-view television services are typically required to invest in, or
acquire, Canadian programming based on the nature of the particular service and
financial performance. The requirement for a broadcaster to spend a specific
amount on Canadian programming typically takes the form of policies or
conditions of license. The nature of such spending ranges from expenditures on
script and concept development to expenditures on specific categories of
Canadian production.

The CRTC determines the criteria for certification of a program as
"Canadian." According to CRTC regulations, a program will qualify if it is
produced by an individual Canadian producer with the involvement of individual
Canadians in key creative functions, and where a substantial portion of the
remuneration paid to individuals is for services provided by Canadians and
processing and final preparation costs are for services provided in Canada. A
program may still qualify as "Canadian" even though some of the producer
functions are performed by non-Canadian individuals, if the production company
is a "Canadian production company" and other requirements are met. A "Canadian
production company" includes a Canadian company which carries on business in
Canada with a Canadian business address, which is owned or controlled by
Canadians

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<PAGE>

and whose principal business is the production of film, videotape or live
programming for distribution on television or in theatrical, industrial or
educational markets. We believe that we will continue to qualify as a "Canadian
production company" for this purpose, so long as Canadian citizens or permanent
residents beneficially own more than 50% of the combined voting power of our
outstanding shares.

The CRTC also requires Canadian conventional broadcasters to adhere to the
Canadian Association of Broadcasters' "Broadcast Code for Advertising to
Children."

International Co-Production

Canada is a party to co-production treaties with more than 50 countries
throughout the world, excluding the U.S. Canada's co-production treaties allow
for the reduction of the risks of production by permitting the pooling of
creative, technical and financial resources of Canadian producers with non-
Canadian producers under prescribed conditions. Canadian co-production treaty
partners include China, France, United Kingdom, Germany, Italy, Hungary,
Israel, Mexico, New Zealand and Australia. A production that qualifies as a co-
production for treaty purposes is considered to be a national product in each
of the participating countries and, as such, is entitled to many local
advantages in each country. More specifically, the co-production usually
satisfies criteria for national certification in regard to content
broadcasting, regulations, government subsidies and tax benefits. The copyright
in the production is shared by the co-producers, while the domestic
distribution rights are generally owned by the respective producers. Sharing of
foreign revenues is based on the respective contribution of each co-producer,
subject to negotiation between the co-producers and approval by the appropriate
government authorities.

Industry Incentives

Since 1995, a refundable tax credit has been available under the Income Tax
Act (Canada) for eligible film and television productions undertaken by
qualified Canadian corporations. The tax credit is equal to 25% of the lessor
of qualified labor expenditure and 48% of eligible costs of production of a
given project. Eligible cost of production are total production costs less any
other government assistance, including any provincial refundable tax credit.
Since our labor expenditures for a production typically exceed this limitation,
we are generally eligible to receive a federal tax credit equal to 12% of the
eligible cost of production. The credit is calculated on the basis of each
individual production and is available only to taxable Canadian corporations
which have activities that are primarily those of a Canadian film or video
production business carried on through a permanent establishment in Canada and
which are Canadian-controlled as determined under the Investment Canada Act. A
corporation is controlled by Canadians for purposes of the Investment Canada
Act where, among other things, Canadians own and control a majority of the
voting interest. We currently qualify for this tax credit, and the
reclassification of our common shares into Class A shares and Class B shares
and other proposed changes to our articles should assist us in continuing
compliance while allowing for non-Canadian investment. We believe that so long
as, among other things, we continue to be Canadian-controlled as determined for
the purposes of the Investment Canada Act, we will continue to so qualify and
we will use our best efforts to ascertain that all our production projects will
continue to be eligible for the tax credit.
Federal tax credits refundable to us pursuant to the Income Tax Act (Canada)
for television programming delivered in fiscal 1998 amounted to Cdn$5.7
million.

In October 1997, the Canadian Minister of Finance announced the creation of a
new program to support film and video productions in Canada. Effective November
1, 1997, the film and video production services tax credit replaced the
privately promoted tax shelters that were affirmatively terminated on October
31, 1997, with a tax credit for films that do not satisfy all the requirements
of a Canadian-certified film or video production described above. This program
currently provides eligible production corporations engaged in an accredited
production with a tax credit equal to 11% of their qualified Canadian labor
expenditures for a production incurred after October 1997. An eligible
production corporation is a corporation that carries on a film or video
production business through a permanent establishment in Canada, and that owns
the copyright on an accredited production throughout the period in which it is
produced in Canada or that has contracted directly

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<PAGE>

with the owner of the copyright to provide production services in Canada where
the owner of the copyright is not an eligible production corporation. An
accredited production is a film or video production with a production cost of
not less than Cdn$1.0 million incurred during the two-year period that begins
with the principal filming or taping of the production. A production that is
part of a series of two or more episodes, or that is a pilot program for such a
series, also qualifies as an accredited production if the production costs of
each episode incurred during a two-year period that begins with the principal
filming or taping of the production exceeds Cdn$100,000 for an episode with a
running time of less than 30 minutes and Cdn$200,000 in any other case.
Accredited productions do not include, among other things, pornography,
advertising and various productions developed primarily for industrial,
corporate or institutional purposes. British Columbia has adopted a similar
program. "So Weird," which we produce for the Disney Channel, qualifies under
this program.

Through Telefilm Canada the Canadian government provides financial assistance
to the Canadian film and television industry in the form of recoupable advances
in script development, equity investment in production, loan guarantees,
recoupable advances of the cost of dubbing into English or French and grants of
up to 75% of advertising and promotion costs. Telefilm Canada recently
announced that their development fund and the international component of their
Marketing Assistance Program would no longer be available to publicly traded
companies. Other than these programs, we are eligible for Telefilm Canada
funding. In fiscal 1997 and 1998, we did not use Telefilm funding from the
development fund or the international component of the Marketing Assistance
Program. In fiscal 1997, we did not use Telefilm funding for which we are
currently eligible. In fiscal 1998, we received less than Cdn$23,000 of
Telefilm funding for which we are currently eligible. We may avail ourselves of
such funding in the future if management believes it is prudent to do so.

Under the terms of the current film and television provincial tax credit
system under the Income Tax Act (British Columbia), British Columbia offers
refundable tax credit incentives for British Columbia film productions. The
incentives are available at the following levels:

. Basic incentives equal to 20% of qualified British Columbia labor
expenditures.

. A regional incentive equal to 12.5% of qualified British Columbia labor
expenditures for productions where principal photography occurs outside
of the Vancouver area in British Columbia.

. A training incentive equal to the lesser of 3% of British Columbia labor
expenditures or 30% of qualified labor expenditures attributable to
payments to eligible industry trainees.

Eligible labor expenditures are limited to 48% of the total production costs,
net of government assistance. The credit is calculated on the basis of each
individual production and is available only to a qualified corporation having a
permanent establishment in British Columbia and carrying on an eligible film or
television production business through a permanent establishment in Canada. In
order to access the basic credit, the corporation must also be controlled by
persons domiciled in British Columbia. We will continue to be controlled by
persons domiciled in British Columbia so long as more than 50% of the members
of our board of directors are persons domiciled in British Columbia and more
than 50% of the combined voting power of our outstanding shares are
beneficially owned by persons domiciled in British Columbia. In addition, in
order to access the basic credit, the producer of the eligible production must
be a British Columbia resident for tax purposes. Since the British Columbia tax
credit system was not established until 1998, we received no tax credits in
fiscal 1998. We expect to receive tax credits under the British Columbia
program on account of television programming delivered in fiscal 1999.

In addition to these governmental incentives, the Canadian Television Fund
("CTF") License Fee Program, a partnership composed of public and private
television industry participants, was created in 1996 to form a television
funding initiative equal to approximately Cdn$80.0 million per year to promote
high-quality Canadian television programming. We believe that we are a
production company eligible for funding under the CTF's License Fee Program
that could, for each project eligible under such program, represent
contributions of up to 20% of the total production budget. The maximum
contribution varies with the categories of programs. The maximum contribution
provided under the program is for big-budget drama series and is limited to the
lower of Cdn$4.4 million and 20% of production costs. We have not utilized this
funding, but may do so in the future if management believes it is prudent.

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DESCRIPTION OF PROPERTY

Our studio buildings, comprising approximately 78,000 square feet of studio,
production office and storage space, are located at 310 West 4th Avenue and 150
West 1st Avenue, Vancouver, British Columbia, Canada. They accommodate many of
our own productions and are available for rental by visiting producers of
feature films, television series and movies-of-the-week. The studios house our
eight digital post-production suites which handle off-line editing for all of
our productions.

We believe our studios are well-positioned to capitalize on the growing trend
within the entertainment industry to complete production work in Vancouver.
Both are located within walking distance of Vancouver's premier film transfer
and post-production facilities and ten minutes from major downtown hotels and
restaurants. In addition to the direct impact on our operating results, we
believe that the studios will be a key asset which can be used to enhance our
participation in a variety of film and television projects by ensuring access
to facilities, increasing our flexibility and reducing our costs. The West 4th
studio is presently fully booked until January 2000 with the production of our
television series "First Wave."

Approximately half of the West 1st Studio is currently being utilized by us
for our productions. The balance has been leased to third parties at local
market rates.

The following sets forth information concerning facilities that we own.

<TABLE>
<CAPTION>
Address Area Purpose
---------------------------- ------------------ -----------------------------
<S> <C> <C>
1132 Hamilton Street........ 24,000 square feet Corporate offices
Vancouver, B.C.
310 West 4th Avenue......... 23,000 square feet Studio and production offices
Vancouver, B.C.
150 West 1st Avenue......... 55,000 square feet Production offices and
Vancouver, B.C. post-production services
</TABLE>

We have entered into an agreement to sell our property at 1132 Hamilton
Street to an independent third party. The agreement to sell is subject to a
number of customary purchaser contingencies, including financing and due
diligence, and there is no assurance that the sale will be completed. In the
event the sale is consummated, we anticipate relocating our corporate offices
to another location. We believe we would be able to find adequate facilities to
relocate.

We believe that our facilities are adequate for our current needs but that as
we expand our productions, additional space must be leased or otherwise
acquired. We are currently considering renting office space in Los Angeles to
facilitate marketing our programming in the U.S.

LEGAL PROCEEDINGS

We are not currently subject to any legal proceedings which, if determined
adversely to us, would have a material adverse effect on our business or
results of operations. We may from time to time become a party to various legal
proceedings arising in the ordinary course of business. We maintain insurance
coverage for such matters in amounts that we believe to be adequate.

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MANAGEMENT

The names, offices and ages as of June 20, 1999 of our corporate directors
and executive officers and other principal officers of our production
subsidiaries are as follows:

<TABLE>
<CAPTION>
Name Age Position
------------------------ --- ------------------------------------------------
<C> <C> <S>
Timothy Gamble.......... 43 President and Director

Chief Executive Officer, Director and Nominating
W.D. Cameron White...... 42 Committee Member

Juliet Jones............ 34 Chief Financial Officer and Secretary

President of Sugar Entertainment Ltd., our
Larry Sugar............. 53 wholly-owned subsidiary

Blair Reekie............ 39 President of The Eyes MultiMedia Productions
Inc., our wholly-owned subsidiary

Stephen Cheikes......... 50 Director and Compensation Committee Member

Director and Member of Compensation and Audit
Darrell Elliott......... 52 Committees

Yad Garcha.............. 40 Director and Member of Audit, Nominating and
Compensation Committees

Director and Member of Nominating and Audit
Vincent Lum............. 39 Committees
</TABLE>

Timothy Gamble is our founder and has served as President and as director
since our inception in 1986. Mr. Gamble takes principal responsibility for
business development, marketing and corporate finance matters. He has been
involved in the production of numerous feature films, such as "Cadence,"
starring Martin Sheen and Charlie Sheen.

W.D. Cameron White is our Chief Executive Officer, having joined us on a
full-time basis in 1994. Prior to joining us, Mr. White was a corporate and
securities lawyer specializing in mergers and acquisitions and public and
private financings for emerging growth companies at White & Associates
Barristers and Solicitors from 1992-1994 and at Worrall Scott & Page Barristers
and Solicitors from 1981-1992. Mr. White is responsible for strategic planning,
acquisitions and corporate finance. Mr. White has been a director since
February 1993.

Juliet Jones has been our Chief Financial Officer since February 1996, and
has been with us since 1991. Ms. Jones is responsible for overseeing all
accounting and audit functions, operations management, financial planning and
cash flow analysis and controls. Ms. Jones is a member of the Certified General
Accountants Association of British Columbia and Canada. Ms. Jones is a director
of Voyager Film Capital Corporation, a publicly traded company listed on the
Alberta Stock Exchange.

Larry Sugar is the President of Sugar Entertainment Ltd., our wholly owned
subsidiary which we acquired from him in 1996, and has served in that capacity
since Sugar Entertainment Ltd. was incorporated in March 1996. Sugar
Entertainment Ltd. produces most of our proprietary television programming. Mr.
Sugar has over 25 years of experience in the feature film and television
industry. Mr. Sugar has held a number of senior industry positions, including
President of International Distribution for Republic Pictures from 1989 to
1991, President of Distribution for CBS Television from 1985 to 1986, President
of International Distribution for Weintraub Entertainment Group from 1987 to
1989 and President of Lorimar International from 1981 to 1985. In addition to
heading up our creative team, Mr. Sugar assists with the development and
financing of television projects, as well as the expansion of our international
distribution presence.

Blair Reekie has been the President of The Eyes MultiMedia Productions Inc.,
our wholly owned subsidiary, and its predecessor company since November 1,
1994. In this capacity, he is responsible for our video and multimedia
production. Prior to joining us, Mr. Reekie was the General Manager/Regional
Manager of Sales and Service in British Columbia and Alberta for Air Canada
Touram.

Stephen Cheikes has been a member of our board of directors since January
1998. He is the co-founder, Chief Executive Officer and a director of Monarch
Entertainment Corporation, a British Columbia film finance

39
<PAGE>

company. Prior to founding Monarch in 1993, Mr. Cheikes was a principal and
senior executive of the Beacon Group of Companies, from 1987 to 1992. He also
practiced entertainment law in Los Angeles from 1977 to 1987.

Darrell Elliott has been a member of our board of directors since August
1998. He has been president of Isuma Strategies Inc., a private strategic
advisory company, since 1998. Mr. Elliott worked for approximately nine years
until August 1998 with Royal Bank Capital Corporation as Regional Vice
President. Mr. Elliott has 27 years of merchant banking, venture capital and
analogous operating experience in Africa, Europe and Canada and has served on
numerous boards of directors. Mr. Elliott is currently a director of Nortran
Pharmaceuticals Inc., a publicly traded company listed on the Vancouver Stock
Exchange and traded on the OTC Bulletin Board. He is also currently a director
of Develcon Electronics Ltd., a publicly traded company on The Toronto Stock
Exchange, and Vianet Technologies Inc., a publicly traded company on the OTC
Bulletin Board.

Yad Garcha has been a member of our board of directors since 1998. He has
been Vice President of Growthworks Capital Ltd., a venture capital company,
since 1998. Prior to joining Growthworks Capital Ltd., Mr. Garcha was Vice-
President of Investment of the Working Opportunity Fund (EVCC) ("WOF"), a
venture capital company, from 1994 to 1998. Mr. Garcha initially worked in
commercial banking with the Bank of Montreal from 1986 to 1988 before becoming
an Investment Manager with the Federal Business Development Bank from 1988 to
1994. Mr. Garcha has an aggregate of more than 12 years experience in banking
and finance and, in addition to serving on our board, currently serves on the
board of several bio-technology companies. Mr. Garcha has been a director since
July 1998. Mr. Garcha was nominated to our board pursuant to the agreement
between WOF and us that so long as WOF continues to hold a specified number of
our shares, WOF will have the right to have a director-nominee nominated to the
board. Mr. Garcha is a director of Angiotech Pharmaceutical Inc., a publicly
traded company on The Toronto Stock Exchange, and is a director of Stressgen
Biotechnologies Corp., a publicly traded company on both The Toronto Stock
Exchange and the Vancouver Stock Exchange.

Vincent Lum has been a member of our board of directors since November 1998.
He has been an Investment Manager of Royal Bank Capital Corporation ("RBCC")
since 1997. From 1993 until 1997, Mr. Lum was involved in early-stage
investments in technology companies for the B.C. Advanced Systems Institute.
Mr. Lum was nominated to our board pursuant to the agreement between RBCC and
us which provides that so long as RBCC or any of its affiliates holds our
shares, RBCC shall have the right to have a director-nominee nominated to the
board.

Our directors are all elected annually at our shareholders meetings for one-
year terms and serve until their successors are elected and qualified or they
sooner resign. RBCC and WOF each have a right to nominate one of the directors.
As a British Columbia corporation, we are required by British Columbia
corporate laws to include on our board of directors at least one person
ordinarily resident in British Columbia and a majority of persons ordinarily
resident in Canada. This requirement may limit the persons eligible to serve on
our board in the future.

At our Annual General Meeting of shareholders held in February 1999, the
shareholders set the number of directors for the current year at six. Our
articles provide that the number of directors can be increased by the board of
directors by up to one-third without shareholder approval. A director may
designate a representative to act on the director's behalf, including in
connection with matters in which the director may have an interest.

Director Compensation

In fiscal 1999, our directors will be paid Cdn$5,000 per year and Cdn$500 per
meeting attended in person and Cdn$300 per telephone meeting or committee
meeting. The chairman of the board and each subcommittee chair will receive
double the compensation described in this paragraph. Pursuant to our share
reclassification and the adjustments under our stock option plan, each director
will be granted options to purchase 10,000 Class B shares when they join the
board of directors and 6,000 Class B shares each year thereafter.

40
<PAGE>

Committees of the Board

Our board of directors has three subcommittees, the Compensation Committee,
the Audit Committee and the Nominating Committee. The Compensation Committee
reviews executive salaries and administers our stock option plan. In addition,
the Compensation Committee consults with management regarding compensation
policies and practices. The Audit Committee reviews the professional services
provided by independent auditors, the independence of such auditors from our
management, our annual financial statements, and our system of internal
accounting controls. The Audit Committee also reviews such other matters with
respect to our accounting, auditing and financial reporting practices and
procedures as it may find appropriate or as may be brought to its attention.
The Nominating Committee recommends individuals to be nominated for director.

41
<PAGE>

CONTROL OF REGISTRANT

The following table sets forth information regarding the beneficial ownership
of our Class A and Class B shares as of April 30, 1999, as adjusted to reflect
the sale of 750,000 Class B shares in this offering for (a) each person known
to us to own beneficially more than 10% of either Class A shares or Class B
shares and (b) all executive officers and directors as a group. The information
in the table gives retroactive effect to the share reclassification and
conversion and does not reflect ownership of options or warrants.

<TABLE>
<CAPTION>
Prior to Offering After Offering
------------------------------------- -------------------------------------
Number of Number of Number of Number of
Class A Percent Class B Percent Class A Percent Class B Percent
Name Shares of Class Shares of Class Shares of Class Shares of Class
- ---------------------------- --------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Working Opportunity Fund
(EVCC) Ltd. ............... 160,000 10.6% 160,000 10.6% 160,000 10.6% 160,000 7.1%
Officers and directors
as a group (9 persons)(1).. 276,557 18.3% 276,557 18.3% 276,557 18.3% 276,557 12.2%
</TABLE>
- --------
(1) Includes 150,000 performance shares held by four persons which are
currently held in escrow. The shares are expected to be released from
escrow in calendar 1999. See "Interest of Management in Certain
Transactions" for a description of the performance shares and escrow.

42
<PAGE>

COMPENSATION OF DIRECTORS AND OFFICERS

Compensation of Officers and Directors

The aggregate cash compensation paid or payable to our officers and directors
as a group for services rendered during the fiscal year ended August 31, 1998
was Cdn$1,778,776.

The following table sets forth all compensation awarded to, earned by or paid
for services rendered in all capacities during fiscal 1998 by our chief
executive officer and each other executive officer who earned at least
Cdn$100,000 in fiscal 1998 ("Named Executive Officers").

Summary Compensation Table

<TABLE>
<CAPTION>
Long-Term Compensation
-----------------------------------
Awards(4)
---------------------------
Annual Compensation Class A Class B Payouts
------------------------------- Shares Shares Restricted -------
Other Annual Under Under Shares or All Other
Name and Salary Compensation Option Option Restricted LTIP Compensation
Principal Position Year in Cdn$ Bonus in Cdn$ Granted Granted Share Units Payouts in Cdn$
------------------ ---- ------- ----- ------------ ------- ------- ----------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Timothy Gamble.......... 1998 $90,000 -- $60,000(1) 7,000 7,000 -- -- --
President 1997 60,000 -- -- 4,000 4,000 -- -- --
1996 60,000 -- -- 12,250 12,250 -- -- --
W.D. Cameron White...... 1998 $90,000 -- $60,000(2) 7,000 7,000 -- -- --
Chief Executive 1997 60,000 -- 14,000(2) 16,025 16,025 -- -- --
Officer 1996 60,000 -- 8,000(2) -- -- -- -- --
Larry Sugar............. 1998 -- -- -- 5,000 5,000 -- -- $1,284,777(3)
President, Sugar 1997 -- -- -- -- -- -- -- 725,391(3)
Entertainment Ltd. 1996 -- -- -- 10,000 10,000 -- -- --
</TABLE>
- --------
(1) The amount shown was paid to a company controlled by Mr. Gamble for
consulting services. See "Interest of Management in Certain Transactions"
for further explanation of these fees.

(2) The amount shown was paid to a company controlled by Mr. White for legal
and other services. See "Interest of Management in Certain Transactions"
for further explanation of these fees.

(3) The amount shown was paid to Mr. Sugar as production fees. See "Interest of
Management in Certain Transactions" for further explanation of these fees.

(4) All share data gives effect to the share reclassification.

Mr. Gamble has an employment agreement dated September 1, 1997, which was
amended effective April 1, 1999. Under the amended employment agreement, Mr.
Gamble is entitled to be paid a salary of Cdn$200,000 per annum, plus a
performance bonus of up to 50% of his salary.

Mr. White has an employment agreement dated September 1, 1997, which was
amended effective April 1, 1999. Under the amended employment agreement, Mr.
White is entitled to be paid a salary of Cdn$200,000 per annum, plus a
performance bonus of up to 50% of his salary.

Juliet Jones, our Chief Financial Officer, has an employment agreement dated
September 1, 1997, which was amended effective April 1, 1999. Under the amended
employment agreement, Ms. Jones is entitled to be paid a salary of Cdn$120,000
per annum, plus a performance bonus of up to 50% of her salary.

Under their agreements, Messrs. Gamble and White and Ms. Jones' performance
bonuses are calculated by the same formula based on the trading prices of our
shares. The formula compares the percentage increase or decrease during the
fiscal year of the trading price of our shares against the percentage of a peer
group of companies, determined by the Compensation Committee. If the price
performance of our shares exceeds

43
<PAGE>

specified levels compared to the peer group, the employee is eligible for an
increased percentage of the bonus. All of these employment agreements expire on
August 31, 2002 and provide that if they are terminated by us before
expiration, we will be obligated to pay the annual salaries and bonuses that
would be due for the remaining term of the agreement.

Mr. Sugar entered into an agreement with Sugar Entertainment Ltd., our
subsidiary, dated September 1, 1996 whereby Mr. Sugar is paid Cdn$1.00 per
annum plus producer's fees, writer's fees and director's fees on a case-by-case
basis for projects which he produces, writes or directs. Mr. Sugar's employment
agreement will expire September 1, 1999.

All of the employment agreements described above provide the individuals with
the usual employee benefits provided to our other full-time employees and
executives.

During fiscal 1998, each of our non-employee directors was granted options
under our stock option plan to purchase up to an aggregate 4,000 Class A shares
and 4,000 Class B shares at a price of Cdn$9.50 per share on or before
March 23, 2003, after giving effect to our share reclassification. No stock
options were exercised by any non-employee directors.

Option Grants During the Most Recently Completed Financial Year

Our officers and directors are eligible to receive grants of stock options
under our stock option plan. During fiscal 1998 we granted our officers and
directors options to purchase a total of 42,000 Class A shares and 42,000 Class
B shares at an exercise price of Cdn$9.50 per share, after giving effect to our
share reclassification.

The following tables set forth information concerning the option grants
during fiscal 1998 to the Named Executive Officers, after giving effect to our
share reclassification.

Option Grants During the Most Recently Completed Fiscal Year

<TABLE>
<CAPTION>
% of Total
Class A Shares Class B Shares Options Granted Exercise or
Name of Named Under Options Under Options to Employees Base Price Expiration
Executive Officer Granted(1)(#) Granted(1)(#) in Fiscal Year (Cdn$/Share) Date
- ------------------------ -------------- -------------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Timothy Gamble.......... 7,000 7,000 17% $9.50 March 23, 2003
W.D. Cameron White...... 7,000 7,000 17% $9.50 March 23, 2003
Larry Sugar............. 5,000 5,000 12% $9.50 March 23, 2003
</TABLE>
- --------
(1) Granted pursuant to the terms of our stock option plan. The options are
subject to vesting over various periods up to two and one-half years after
the date of the original grant.

Aggregated Option Exercises During the Most Recently Completed Fiscal Year
and Fiscal Year End Option Values

<TABLE>
<CAPTION>
Value of Unexercised
Unexercised Options in the Money Options
at Fiscal Year End at Fiscal Year End
Name of Named Securities Acquired Aggregate Value Exercisable/ Exercisable/
Executive Officer on Exercise (#) Realized (Cdn$) Unexercisable(1)(#) Unexercisable (Cdn$)
- ------------------------ ------------------- --------------- ------------------- --------------------
<S> <C> <C> <C> <C>
Timothy Gamble.......... -- -- 37,500/9,000 --/--
W.D. Cameron White...... -- -- 37,050/9,000 --/--
Larry Sugar............. -- -- 25,000/4,800 --/--
</TABLE>
- --------
(1) The number of shares shown above consists of one-half Class A shares and
one-half Class B shares.

44
<PAGE>

Stock Option Plan

Our stock option plan is for eligible directors, senior officers and
employees of Peace Arch and our subsidiaries, and other key persons engaged by
us to assist us in the conduct and growth of our business.

Giving effect to the share reclassification, the plan provides that the
aggregate number of shares issuable upon the exercise of options under the plan
will not exceed 250,000 Class A shares and 250,000 Class B shares. The maximum
number of shares reserved for issuance to any one person under the plan and any
other of our share compensation arrangements is 5% of the total number of
shares outstanding immediately prior to such issuance.

Under the plan, the exercise price is determined by the board of directors at
the time the option is granted, but the price may not be less than the higher
of the average of the daily high and low board lot trading prices of the shares
over the 10-day period immediately preceding the date of the grant and the
closing price of the shares on The Toronto Stock Exchange on the last trading
day preceding the date on which the grant of the option is approved by the
board of directors.

The plan provides that:

(1) the number of shares issuable to our insiders pursuant to options
granted under the plan, together with common shares issuable to insiders
under any other share compensation arrangement of Peace Arch, shall not:

(a) exceed 10% of the number of shares outstanding immediately prior
to the grant of any such option; or

(b) result in the issuance to insiders, within a one-year period, of
in excess of 10% of the number of shares outstanding immediately prior
to the grant of any such option;

(2) the number of shares issuable to any insider and the insider's
associates pursuant to options granted under the plan, together with shares
issuable to the insider or the insider's associates under any other share
compensation arrangement of Peace Arch shall not, within a one-year period,
exceed 5% of the number of shares outstanding immediately prior to the
grant of any option.

"Insiders" are defined under the plan as directors, officers and 10%
shareholders. The plan further provides that, if there is any change in the
shares similar to changes which, for example, occurred on the share
reclassification, the number of shares available for option, the shares subject
to option and the option price will be adjusted appropriately by the board of
directors in its sole discretion. The board of directors has determined that
any options outstanding at the time of the share reclassification will be
exercisable into Class A shares and Class B shares and any options granted in
the future will be exercisable into Class B shares only. This determination was
approved by our shareholders on July 14, 1999 and will be effective upon, and
subject to approval by, The Toronto Stock Exchange.

Under the plan, an option must be exercised within a period of ten years from
the date of grant and within 60 days of a holder's termination of his
relationship with us or within six months of such holder's death. Within those
limits, our board of directors has discretion to determine the exercise periods
for individual grants. The plan also includes provision for the option holder
to elect not to exercise all options such holder is entitled to exercise and to
receive instead that number of shares, when multiplied by the fair value per
share of such shares, as is equal to the number of shares originally subject to
option times the difference between the fair value and the exercise price per
share of such shares originally subject to option. Under our current plan we do
not provide financial assistance to holders of stock options to facilitate
their purchasing shares under the plan.

On July 14, 1999, our shareholders approved amendments to the plan which
restructures it to take advantage of United States incentive stock option tax
treatment for U.S. employees, including employee-directors, of Peace Arch and
its subsidiaries and to increase the aggregate number of shares issuable upon
the

45
<PAGE>

exercise of options. In order to take advantage of such United States incentive
stock option tax treatment, the administration of the plan is to be changed
from our board of directors to a committee appointed by the board. Furthermore,
our shareholders have approved an amendment to the plan to provide that the
number of Class B shares issuable upon exercise of options be immediately
increased from 250,000 to 400,000 Class B shares and to 800,000 Class B shares
upon completion of this offering. In accordance with the terms of the plan, the
proposed amendments to the plan are subject to the approval of The Toronto
Stock Exchange or of other regulatory bodies having jurisdiction over our
securities.

We have not instituted any pension plans or retirement benefit plans and none
are proposed at this time.

INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS

As at February 28, 1999, there was no indebtedness of any director, executive
officer, senior officer or associate of them to or guaranteed or supported by
us or any of our subsidiaries either pursuant to an employee purchase program
or otherwise.

Our only material transactions during the past three fiscal years in which
any of our directors or executive officers, or any principal shareholder, or
any associate or affiliate of them, has or had a material interest, direct or
indirect, were as follows.

In March 1996, we issued three-year 12% convertible debentures in the
aggregate principal amount of Cdn$500,000. The debentures are convertible into
13,158 Class A shares and 13,158 Class B shares, after giving effect to the
share reclassification. The debentures originally matured on March 31, 1999.
The maturity date has been extended to July 31, 1999. Messrs. Gamble and White,
two of our directors and officers, each purchased Cdn$100,000 principal amount
of the debentures. We intend to repay such debentures in full with the proceeds
of this offering.

In October 1997, Mr. Cheikes, a director, loaned us Cdn$200,000 toward the
purchase of our property on West 1st Avenue in Vancouver. In February 1998,
Messrs. Gamble and White each loaned us Cdn$100,000 toward the purchase. The
loans bore interest at 12% per annum and were unsecured, with no specific terms
of repayment. These loans were repaid in full in February 1999.

In accordance with his employment agreement, Larry Sugar, the President of
Sugar Entertainment Ltd., our wholly-owned subsidiary, receives an annual
salary of Cdn$1.00 per year and we pay him producer's, writer's and director's
fees. We paid aggregate fees to Mr. Sugar of Cdn$725,000 and Cdn$1,285,000 in
1997 and 1998. For the first six months of fiscal 1999, we paid Cdn$1,196,000
to Mr. Sugar. At February 28, 1999, additional fees payable to Mr. Sugar under
the agreement were Cdn$583,000.

In fiscal 1998, we paid consulting fees to Plantation Capital Corp., a
British Columbia corporation owned and controlled by Mr. Gamble, of Cdn$60,000,
and for the six months ended February 28, 1999, we paid Cdn$30,000 to
Plantation Capital Corp. All of these fees were for consulting services
rendered to us. The arrangement was terminated effective March 31, 1999.

We paid fees to W.D. Cameron White Law Corporation, a British Columbia
corporation owned and controlled by Mr. White, of Cdn$14,000 and Cdn$60,000 in
fiscal 1997 and 1998, and of Cdn$30,000 for the six months ended February 28,
1999 for legal and other services provided to us. The arrangement was
terminated effective March 31, 1999.

In May 1998, WOF, Peace Arch and Messrs. Sugar, White and Gamble entered into
a shareholders agreement which allows WOF to nominate a director, provides WOF
with pre-emptive rights in future securities offerings, registration rights and
includes rights of first refusal and other buy-sell and protective provisions
to each of the parties in the event of proposed transfer by the others. The
agreement, other than

46
<PAGE>

WOF's right to designate a director, terminates in various circumstances,
including in the event we complete a financing that raises more than Cdn$7.0
million from parties other than WOF. In July 1998, we entered into an agreement
with RBCC which grants RBCC substantially the same rights. As a result, except
for the provisions concerning the designation of a director, these agreements
will terminate on the completion of this offering.

By agreement dated September 1, 1996, we acquired all of the issued and
outstanding common shares of Sugar Entertainment Ltd. In consideration for the
acquisition, we issued an aggregate of 22,500 Class A shares and Class B
shares, which are referred to as "trading shares", at a deemed price of
Cdn$10.00 per share and an aggregate of 350,000 Class A shares and Class B
shares, which are referred to as "performance shares", at a deemed price of
Cdn$0.10 per share, giving effect to the share reclassification and conversion.
The trading shares and performance shares were subject to resale restrictions
whereby they could not be traded for a period of one year from the date of
issuance. The performance shares are held in escrow and may only be released at
a rate of one performance share for each Cdn$10.00 of cash flow generated by
Sugar Entertainment Ltd. Additionally, the performance shares may only be
released if we meet our current financial obligations in the ordinary course of
business, remain in good standing under local securities laws and receive the
consent of the British Columbia Securities Commission. All performance shares
not released within five years of the escrow agreement must be returned to us
for cancellation. During the term of the escrow, Mr. Sugar is not entitled to
voting, dividend or any dissolution rights on any of the performance shares not
released. During the year ended August 31, 1998, 200,000 of the 350,000
performance shares were released from escrow. We believe that the remaining
150,000 performance shares will be released during calendar 1999 to be
allocated equally between Class A shares and Class B shares.

In December 1997, 160,000 of the 350,000 performance shares were transferred,
subject to the escrow, to Mr. Gamble and Mr. White, who each received 70,000
shares, and to Ms. Jones, who received 20,000 shares. The transfer was subject
to all of the escrow conditions at the same price per share as was recorded
when the performance shares were issued. These amounts are also allocated
equally between Class A shares and Class B shares.

Of the net proceeds of this offering, Cdn$0.3 million (US$0.2 million) will
be used to repay a loan bearing interest at 12% per annum due March 1, 1999,
which has been extended to July 31, 1999. This loan is personally guaranteed by
Messrs. Gamble and White.

47
<PAGE>

DESCRIPTION OF CAPITAL STOCK

General

We were incorporated on October 22, 1986 under the name Vidatron Enterprises
Ltd. Effective February 13, 1992, we changed our name to The Vidatron Group
Inc., consolidated our share capital on a 1-for-5 basis and increased our
authorized capital to 50,000,000 shares without par value, of which 25,000,000
were designated as common shares and 25,000,000 were designated as preference
shares.

Effective February 5, 1997, we further consolidated our common shares on a 1-
for-4 basis, but maintained our total authorized common share capital at
25,000,000 common shares without par value and changed our name to Vidatron
Entertainment Group Inc.

Until July 14, 1999, our authorized share capital consisted of 50,000,000
shares without par value divided into 25,000,000 common shares and 25,000,000
preference shares.

On February 16, 1999, our shareholders approved a change in our capital
structure, which was made effective July 14, 1999, to increase our authorized
capital to 225,000,000 shares without par value divided into 100,000,000 Class
A Multiple Voting Shares referred to as the "Class A shares", 100,000,000 Class
B Subordinate Voting Shares referred to as the "Class B shares" and 25,000,000
preference shares and to reclassify and convert each of our outstanding common
shares into one-half of a Class A share and one-half of a Class B share. To
facilitate this offering, on July 14, 1999, our shareholders approved a
consolidation of the conversion ratio to 2-for-5, with the combined effect
that, effective July 14, 1999, every five outstanding common shares have been
converted into one Class A share and one Class B share and all previously
authorized but unissued common shares were cancelled. No fractional shares will
be issued and any fractional shares resulting from such conversion will be
combined and issued as one Class B share. Accordingly, we are unable at this
time to determine the exact number of our outstanding shares that will result
from the conversion and all references to our outstanding shares are subject to
the number resulting from such fractional shares.

Except as described below with respect to voting rights, dividends,
conversion and issuer bids, the Class B shares and Class A shares are identical
in all material respects. The Class A shares are entitled to ten votes per
share and the Class B shares to one vote per share. Upon completion of this
offering, the outstanding Class B shares will represent approximately 13% of
the combined voting power of our outstanding shares. The purpose of the share
reclassification and consolidation of the conversion ratio was to facilitate
this offering while helping to assure that we continue to qualify for favorable
Canadian tax and business incentives available to Canadian companies. Upon
completion of this offering, based on our stock transfer records, we believe
approximately 64% of the combined voting power of our outstanding shares will
be held by Canadians.

At the meeting held on July 14, 1999, our shareholders also approved the
change of our name from Vidatron Entertainment Group Inc. to Peace Arch
Entertainment Group Inc.

The changes to our capital structure and our name became effective upon
completion of statutory filings required in British Columbia on July 14, 1999.

Class A Shares and Class B Shares

Except for voting and conversion rights and rights with respect to dividends
and issuer bids, the Class A shares and the Class B shares have the same rights
in all respects.

Voting Rights

The holders of Class A shares and Class B shares are entitled to receive
notice of, to attend, and to vote at, all meetings of shareholders as a single
class, except for meetings when only the holders of shares of one class or a
particular series are entitled to vote separately pursuant to the Company Act
(British Columbia) or our articles. The holders of Class A shares are entitled
to ten votes per share held and the holders of Class B shares are entitled to
one vote per share held.

48
<PAGE>

Dividends

Subject to the prior rights of holders of preference shares, if any, the
Class B shares and Class A shares will share ratably in any dividend declared,
paid or set aside for payment on the Class A shares. However, the board of
directors will have the right to declare dividends on the Class B shares
without declaring dividends on the Class A shares or while declaring a dividend
in a lesser amount. Since inception, we have not paid any dividends. We do not
currently plan to pay dividends, but intend instead to reinvest any earnings.

Subdivision and Consolidation

No subdivision or consolidation of either the Class A shares or Class B
shares can be carried out unless, at the same time, the other of such shares is
subdivided or consolidated in the same manner.

Liquidation or Dissolution

In the event of liquidation or dissolution, the holders of Class A shares and
Class B shares will be entitled to share ratably in the remaining assets of
Peace Arch, subject to the prior rights of holders of preference shares, if
any.

Conversion Privilege of Class B Shares

In the event that an offer is made to purchase Class A shares and the offer
is one which must, pursuant to applicable securities legislation or the rules
of a stock exchange on which the Class A shares are then listed, be made to all
or substantially all the holders of Class A shares in a province of Canada to
which the requirement applies, each Class B share will become convertible at
the option of the holder, at any time while the offer is in effect, into one
Class A share. The conversion right may only be exercised for the purpose of
depositing the resulting Class A shares on behalf of the shareholder.

If Class A shares resulting from the conversion and deposited pursuant to the
offer are withdrawn by the shareholder or are not taken up by the offeror; or
the offer is abandoned or withdrawn by the offeror, the Class A shares will be
re-converted into Class B shares and a share certificate representing the Class
B shares will be sent to the shareholder by the transfer agent.

In the event that the offeror takes up and pays for the Class A shares
resulting from conversion, our transfer agent shall deliver to the holders
thereof the consideration paid for such shares by the offeror.

There will be no right to convert the Class B shares into Class A shares in
the following cases:

. the offer to purchase Class A shares is not required under applicable
securities legislation or the rules of a stock exchange on which the
Class A shares are then listed to be made to all, or substantially all,
holders of Class A shares who are in a province of Canada to which the
legislation applies, that is, the offer is an "exempt take-over bid"
within the meaning of the applicable securities legislation; or

. an offer to purchase Class B shares is made concurrently with the offer
to purchase Class A shares and the two offers are identical in respect of
price per share, percentage of outstanding shares for which the offer is
made, and in all other material respects. The offer to purchase Class B
shares must be unconditional, subject to the exception that the offer for
the Class B shares may contain a condition to the effect that the offeror
not be required to take up and pay for Class B shares tendered in
response to the offer if no shares are purchased pursuant to the
contemporaneous offer for the Class A shares; or

. holders of Class A shares representing, in the aggregate, more than 50%
of the then outstanding Class A shares, excluding shares owned
immediately prior to the offer by the offeror and any person acting
jointly or in concert with the offeror, as defined in the relevant
securities legislation certify to the transfer agent and to the secretary
of Peace Arch that they will not tender any shares in response to the
offer for the Class A shares.

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Conversion of Class A Shares into Class B Shares

Each Class A share is convertible, at any time, at the option of its holder,
into one Class B share.

Normal Course Issuer Bid and Issuer Bid

In each case of a "normal course issuer bid" on the Class A shares, we are
required to extend the normal course issuer bid on an equal percentage of the
Class B shares. However, we may initiate a normal course issuer bid on the
Class B shares without being required to extend the normal course issuer bid to
the Class A shares. Under applicable Canadian securities legislation and
exchange provisions, a normal course issuer bid is generally one which allows
an issuer to acquire, on a recognized stock exchange, up to 5% of a class of
its securities in any twelve month period without complying with the detailed
rules usually applicable to takeover type transactions.

Similarly, subject to applicable securities legislation, in each case of an
issuer bid on the Class A shares (which is not a normal course issuer bid), we
are required to extend the issuer bid on an equal percentage of the Class B
shares, at the same price and upon the same terms and conditions. However, we
may initiate an issuer bid on the Class B shares without being required to
extend the issuer bid to the Class A shares.

Canadian Ownership Restrictions

We rely on our status as a Canadian corporation for our eligibility for
business incentives, tax credits and other financial assistance available only
to Canadian corporations. To further attempt to ensure that we will continue to
be eligible for such benefits, at a meeting of our shareholders held July 14,
1999, our shareholders approved an amendment to our articles to permit us to
prohibit the issuance or transfer of any of our shares to any person who is not
"Canadian", within the meaning of any applicable statute, regulation, guideline
or policy, if the issuance or transfer would cause us to cease to be eligible
for business incentives, tax credits or other financial assistance. The
amendment to our articles, effective July 14, 1999, provides that, before an
issue or transfer of shares is recorded in our register of members, the
purchaser or transferee may be required to submit to us or our agent a
declaration as to its beneficial ownership of our shares, its citizenship and
such other matters as our board of directors may deem relevant in order to
determine whether the registration of the purchaser or transferee should be
prohibited. Such a declaration may also be required at any time when proxies
are being solicited from shareholders, before or at any meeting of shareholders
or at any time when, in the opinion of our directors, the holding of voting
rights attached to shares by any non-Canadian person should be prohibited.
Shareholders may, therefore, be restricted from selling their shares to non-
Canadians to the extent that the resulting holdings would result in a breach of
these restrictions.

Preference Shares

The preference shares are issuable from time to time in one or more series as
may be determined by the board of directors. The directors are authorized to
create and attach special rights and restrictions to each series of preference
shares. No series of preference shares have been created. In the event of
liquidation, dissolution or winding up, the holders of preference shares are
entitled, unless otherwise provided in the special rights and restrictions
attached to such shares, after the payment of declared but unpaid dividends
thereon, to be paid pari passu the amount of capital paid up per share in
priority of the holders of Class A shares and Class B shares. Each series of
preference shares ranks equally within the class as to dividends and return of
capital on winding up, liquidation or otherwise. The holders of preference
shares are not entitled to vote at any general meeting of shareholders unless
voting is expressly provided as a special right, subject to the provisions of
the Company Act (British Columbia). The creation of a series of preference
shares having rights superior to those of the Class A or Class B shares may
give rise to shareholder approval procedures under the policies of Canadian
securities regulatory authorities having jurisdiction at the time.

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Exchange Controls and Other Limitations Affecting Security Holders

There is no law or governmental decree or regulation in Canada that restricts
the export or import of capital, or affects the payment of dividends, interest
or other payments to non-resident holders of Class B shares, other than
withholding tax requirements. See "Tax Considerations" for a discussion of
these withholding requirements.

There is no limitation imposed by Canadian law on the right of a non-resident
to hold or vote Class B shares, other than as provided by the Investment Canada
Act (the "Act") enacted on June 20, 1985, as amended, as further amended by the
North American Free Trade Agreement (NAFTA) Implementation Act (Canada) and the
World Trade Organization (WTO) Agreement Implementation Act, which requires the
prior notification and, in certain cases, advance review and approval by the
Government of Canada of the acquisition by a "non-Canadian" of "control" of a
"Canadian business", all as defined in the Act. For the purposes of the Act,
"control" can be acquired through the acquisition of all or substantially all
of the assets used in the Canadian business or the direct or indirect
acquisition of interests in an entity that carries on a Canadian business, or
which controls the entity which carries on the Canadian business. Under the
Act, control of a corporation is deemed to be acquired through the acquisition
of a majority of the voting shares of a corporation, and is presumed to be
acquired where one-third or more, but less than a majority, of the voting
shares of a corporation are acquired, unless it can be established that the
corporation is not controlled in fact through the ownership of voting shares.
Other rules apply with respect to the acquisition of non-corporate entities.

Investments requiring review and approval include direct acquisitions of
Canadian businesses with assets with a gross book value of Cdn$5.0 million or
more; indirect acquisitions of Canadian businesses with assets of Cdn$50.0
million or more; and indirect acquisitions of Canadian businesses where the
value of assets of the entity or entities carrying on business in Canada,
control of which is indirectly being acquired, is greater than Cdn$5.0 million
and represents greater than 50% of the total value of the assets of all the
entities, control of which is being acquired. Generally speaking, the value of
the business acquisition threshold (the "Threshold") is increased from those
levels outlined where the acquisition is by a member of NAFTA or a WTO Investor
or by a non-Canadian other than a WTO Investor where the Canadian business that
is the subject of the investment is immediately before the investment
controlled by a WTO Investor. The Threshold is to be determined yearly in
accordance with a formula set forth in the Act.

Different provisions and considerations apply with respect to investment to
acquire control of a Canadian business that, as defined in the Act or
regulations:

.Engages in production of uranium and owns an interest in producing uranium
property in Canada;

.Provides financial services;

.Provides transportation services;

.Is a cultural business.

Peace Arch is considered to be a cultural business pursuant to the Act.

If an investment is reviewable, an application for review in the form
prescribed by regulation is normally required to be filed with the Ministry of
Industry, Director of Investment prior to the investment taking place and the
investment may not be consummated until the review has been completed and
ministerial approval obtained. Applications for review concerning indirect
acquisitions may be filed up to 30 days after the investment is consummated.
Applications concerning reviewable investments in culturally sensitive and
other specified activities referred to in the preceding paragraph are required
upon receipt of a notice for review. There is, moreover, provision for the
Minister (a person designated as such under the Act) to permit an investment to
be consummated prior to completion of review if he is satisfied that delay
would cause undue hardship to the acquirer or jeopardize the operation of the
Canadian business that is being acquired.

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Upon review of an application for review, the Minister will then determine
whether the investment is likely to be of "net benefit to Canada", taking into
account the information provided and having regard to certain factors of
assessment prescribed under the Act. Among the factors to be considered are:

. the effect of the investment on the level and nature of economic activity
in Canada, including the effect on employment, on resource processing, on
the utilization of parts, components and services produced in Canada, and
on exports from Canada;

. the degree and significance of participation by Canadians in the Canadian
business and in any industry in Canada of which it forms a part;

. the effect of the investment on productivity, industrial efficiency,
technological development, product innovation and product variety in
Canada;

. the effect of the investment on competition within any industry or
industries in Canada;

. the compatibility of the investment with national industrial, economic
and cultural objectives enunciated by the government or legislature of
any province likely to be significantly affected by the investment; and

. the contribution of the investment to Canada's ability to compete in
world markets.

See "Business--Regulatory Considerations--Canadian Content Requirements" and
"Description of Capital Stock--Canadian Ownership Restrictions" for a
description of other Canadian and British Columbia ownership requirements.

Transfer Agent and Registrar

The transfer agent and registrar for our Class B shares in the U.S. is
ChaseMellon Shareholder Services, L.L.C., New Jersey.

In order to comply with applicable requirements of Canadian provincial
securities commissions, we have instructed our transfer agent not to register
any transfer of our shares to any resident of Ontario, Canada, for a period of
90 days from the date of the first closing of the offering.

TAX CONSIDERATIONS

The discussions summarize the material tax considerations relevant to an
investment in Class B shares by individuals and corporations who, for income
tax purposes, are resident in the U.S. for purposes of the Convention (as
hereinafter defined) and are not resident in Canada, who hold Class B shares as
a capital asset, and who do not use or hold the Class B shares in carrying on a
business through a permanent establishment in Canada or in connection with a
fixed base in Canada (collectively, "Unconnected U.S. Shareholders" or
"Holders"). The tax consequences of an investment in the Class B shares by
investors who are not Unconnected U.S. Shareholders may differ substantially
from the tax consequences discussed herein. The discussion of U.S. tax
considerations is addressed only to Unconnected U.S. Shareholders whose
"functional currency" within the meaning of section 985 of the Internal Revenue
Code of 1986, as amended (the "Code"), is the U.S. dollar, and to U.S. citizens
who are not residents in the U.S. for purposes of the Convention, but who
otherwise meet the definition of Unconnected U.S. Shareholders. Furthermore,
the discussion of U.S. tax considerations does not address the tax treatment of
Unconnected U.S. Shareholders that own, or are deemed for U.S. federal income
tax purposes to own, 10% or more of the total combined voting power of all
classes of voting stock of Peace Arch. The discussion of Canadian tax
considerations does not address the tax treatment of a trust, company,
organization or other arrangement that is a resident of the U.S. and that is
generally exempt from U.S. tax.

This discussion does not address all of the income tax consequences that may
be applicable to any particular Holder subject to special treatment under the
U.S. federal income tax law or to any particular Holder in light of such
Holder's particular facts and circumstances. Some Holders, including tax-exempt
entities, banks, insurance companies and persons who hold the Class B shares as
part of a synthetic security, conversion transaction or "straddle" or hedging
transactions may be subject to special and/or different rules not discussed
below. Statements of legal conclusion of U.S. tax considerations reflect the
opinion of Brand Farrar &

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Buxbaum LLP as to the material U.S. federal income tax consequences of the
acquisition, ownership and disposition of the Class B shares by Unconnected
U.S. Shareholders and do not purport to be a complete analysis or listing of
all possible tax considerations. The discussion of U.S. tax considerations is
based upon the provisions of the Code, and counsel's understanding of published
administrative practices of the Internal Revenue Service and judicial
decisions, all of which are subject to change possibly with retroactive effect.
Statements of legal conclusions of Canadian tax considerations reflect the
opinion of Thorsteinssons, our Canadian tax lawyers, as to the material
Canadian federal income tax consequences of the acquisition, ownership and
disposition of the Class B shares by Unconnected U.S. Shareholders and do not
purport to be a complete analysis or listing of all possible tax consequences.
The discussion of Canadian tax considerations is based upon the provisions of
the Income Tax Act (Canada) (the "Tax Act"), the Convention between Canada and
the U.S. of America with Respect to Taxes on Income and on Capital, as amended
from time to time (the "Convention"), and counsel's understanding of published
administrative practices of Revenue Canada and judicial decisions, all of which
are subject to change. The discussion does not take into account the tax laws
of the various provinces or territories of Canada or the tax laws of the
various state and local jurisdictions in the U.S.

This discussion is not intended to be nor should it be construed as legal or
tax advice to any particular investor. Therefore, prospective investors should
consult their own tax advisors with respect to the tax consequences of an
investment in the Class B shares.

U.S. Federal Income Tax Considerations

Unconnected U.S. Shareholders generally will treat the gross amount of
distributions paid by us, including the amount of any Canadian tax withheld, as
foreign source dividend income for U.S. federal income tax purposes to the
extent of our current or accumulated earnings and profits, as computed for U.S.
federal income tax purposes. Distributions in excess of that amount will reduce
an Unconnected U.S. Shareholder's tax basis in the Class B shares, but not
below zero, and the remainder, if any, will be treated as taxable capital gain.
In general, in computing its U.S. federal income tax liability, an Unconnected
U.S. Shareholder may elect for each taxable year whether to claim a deduction
or, subject to the limitations described below, a credit for Canadian taxes
withheld from dividends paid on its Class B shares. If the Unconnected U.S.
Shareholder elects to claim a credit for such Canadian taxes, the election will
be binding for all foreign taxes paid or accrued by the Unconnected U.S.
Shareholder for such taxable year. The Code applies various limitations on the
amount of the foreign tax credit that may be available to a U.S. taxpayer based
upon the segregation of foreign source income into separate categories, or
"baskets", of income. For purposes of applying the foreign tax credit
limitation, dividends are generally included in the passive income basket or
the financial services income basket if received by a financial services
entity. The amount of credit that may be claimed with respect to the basket of
income to which the dividend is allocated, and to which the foreign taxes are
attributable, generally may not exceed the same proportion of the U.S. tax on
worldwide taxable income, before applying the foreign tax credit as the U.S.
holder's foreign source taxable income allocable to such basket bears to such
U.S. holder's entire taxable income. The foreign tax credit is disallowed for
dividends on stock unless a minimum holding period requirement is satisfied and
additional limitations may restrict the ability of some individuals to claim
the foreign tax credit. Accordingly, investors should consult their own tax
advisors with respect to the potential consequences to them of the foreign tax
credit limitations. Dividends paid by us generally will constitute "portfolio
income" for purposes of the limitation on the use of passive activity losses by
investors and "investment income" for purposes of the limitation on investors'
investment interest expense. Dividends paid by us will not be eligible for the
"dividends received deduction" generally allowed with respect to dividends paid
by U.S. corporations under Section 243 of the Code, but may be eligible for the
dividends received deduction which may be claimed by 10% corporate shareholders
under Section 245 of the Code.

For U.S. federal income tax purposes, the amount of any distributions made on
Class B shares to an Unconnected U.S. Shareholder in Canadian dollars will
equal the U.S. dollar value of the Canadian dollars calculated by reference to
the appropriate exchange rate in effect on the date of receipt of the
distribution, regardless of whether the Canadian dollars are actually converted
into U.S. dollars upon receipt. Unconnected

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U.S. Shareholders should consult their own tax advisors regarding the treatment
of foreign currency gain or loss, if any, on any Canadian dollars which are
converted into U.S. dollars subsequent to receipt by the Unconnected U.S.
Shareholder.

The sale of Class B shares generally will result in the recognition of gain
or loss to the Holder in an amount equal to the difference between the amount
realized and the Holder's adjusted basis in the Class B shares. Provided the
Holder is not considered a "dealer" in the Class B shares sold, gain or loss
upon the sale of Class B shares will generally be capital gain or loss.

Capital losses are deductible to the extent of capital gains. Individual
taxpayers may deduct excess capital losses up to $3,000 a year, $1,500 in the
case of a married individual filing separately, from ordinary income. Non-
corporate taxpayers may carry forward unused capital losses indefinitely.
Unused capital losses of a corporation may be carried back three years and
carried forward five years.

In the case of individuals, net capital gain from the disposition of property
held for investment is excluded from investment income for purposes of
computing the limitation on the deduction for investment interest applicable.
An individual may, however, elect to include such net capital gain in
investment income if such taxpayer reduces the amount of its net capital gain
that is otherwise eligible for preferential capital gains tax treatment by such
amount. In that event, such investment income would be taxable at ordinary
income rates.

For any taxable year of Peace Arch, if at least 75% of our gross income is
"passive income", as defined in the Code, or if at least 50% of our assets, by
average fair market value, or, prior to fiscal year 1998, possibly by adjusted
tax basis, are assets that produce or are held for the production of passive
income, we will be a passive foreign investment company ("PFIC"). If we are a
PFIC for any taxable year during which an Unconnected U.S. Shareholder owns any
Class B shares, the Unconnected U.S. Shareholder will be subject to special
U.S. federal income tax rules, set forth in Sections 1291 to 1298 of the Code,
with respect to all of such Unconnected U.S. Shareholder's Class B shares. If
we were treated as a PFIC at any time during an Unconnected U.S. Shareholder's
holding period for Class B shares, such Unconnected U.S. Shareholder generally
would be subject to additional tax as well as interest charges with respect to
the deferral of tax for the period during which such Class B shares were held.
Any such additional tax and interest charges would apply upon the disposition
of the Class B shares or the receipt of dividends. Additionally, any gain
realized on the disposition of Class B shares would be treated as ordinary
income or taxable at ordinary income rates rather than as capital gain or
taxable at capital gains rates, and the tax basis of the Class B shares held by
an Unconnected U.S. Shareholder generally would not be stepped up to fair
market value at death. Under some circumstances, shareholders of a PFIC may
elect to be taxed currently on their pro rata shares of PFIC income and capital
gain or, in accordance with recently enacted legislation, report income
currently on a mark to market basis with respect to their shares of stock in
the PFIC.

We do not believe that we are likely to be a PFIC in the current or future
taxable years; however, because the PFIC determination is made annually on the
basis of facts and circumstances that may be beyond our control and because the
principles and methodology for determining the fair market values of our assets
are unclear, there can be no assurance that we will not be a PFIC for such
years. Special rules not described herein will also apply if we become a
"controlled foreign corporation" for U.S. federal income tax purposes. We would
be treated as a controlled foreign corporation if "U.S. Shareholders" were to
own, actually or constructively, more than 50% of the total combined voting
power or total value of the company. For this purpose, the term "U.S.
Shareholder" means a U.S. person who owns, actually or constructively, ten
percent or more of the total combined voting power of Peace Arch. In light of
the ownership requirements necessary for our productions to constitute
"Canadian-content" productions and for us to claim Canadian tax benefits, it is
not anticipated that we will become a controlled foreign corporation for U.S.
federal income tax purposes.

U.S. Information Reporting and Backup Withholding

Under current regulations, the proceeds of a sale of Class B shares through a
U.S. or U.S. related broker will be subject to U.S. information reporting and
may be subject to the 31% U.S. backup withholding

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requirements. Unconnected U.S. Shareholders generally can avoid the imposition
of U.S. backup withholding by reporting their taxpayer identification number on
an Internal Revenue Service Form W-9; non-U.S. shareholders generally can avoid
the imposition of U.S. backup withholding tax by providing to their broker or
paying agent a duly completed Internal Revenue Service Form W-8. Any amounts
withheld under the backup withholding rules will be allowed as a refund or a
credit against the shareholder's U.S. federal income tax, provided the required
information is furnished to the Internal Revenue Service.

In general, dividends paid on the Class B shares, if any, by a foreign paying
agent will not be subject to U.S. backup withholding tax based on currently
effective regulations. Under treasury regulations that are generally effective
with respect to payments made after December 31, 2000 (the "New Withholding
Regulations"), dividends paid in the U.S. on the Class B shares to Unconnected
U.S. Shareholders or to non-U.S. shareholders through a U.S. or U.S. related
person may be subject to the 31% U.S. backup withholding tax unless
certification requirements are satisfied.

The New Withholding Regulations consolidate and modify the current
certification requirements and means by which a holder may claim exemption from
U.S. federal income tax withholding and provide presumptions regarding the
status of holders when payments to the holders cannot be reliably associated
with appropriate documentation provided to the payor. All holders should
consult their tax advisors regarding the application of the New Withholding
Regulations.

Canadian Tax Considerations

Dividends paid or credited, or that we are deemed to pay or credit, on the
Class B shares to Unconnected U.S. Shareholders will be subject to Canadian
withholding tax. Under the Convention, the maximum rate of withholding tax on
dividends paid or credited on the Class B shares is 15% if the beneficial owner
of such dividends is an Unconnected U.S. Shareholder. However, that rate is
reduced to 5% under the Convention if the beneficial owner of such dividends is
an Unconnected U.S. Shareholder that is a corporation that owns at least 10% of
the voting stock of Peace Arch.

An Unconnected U.S. Shareholder will not be subject to tax in Canada on any
capital gain realized upon a disposition or deemed disposition of the Class B
shares, provided that the Class B shares do not constitute "taxable Canadian
property" of the Unconnected U.S. Shareholder within the meaning of the Tax
Act. The Class B shares will not generally constitute taxable Canadian property
of the Unconnected U.S. Shareholder unless, at any time in the five-year period
that ends at the time of the disposition, the Unconnected U.S. Shareholder,
either alone or together with persons with whom the Unconnected
U.S. Shareholder did not deal at arm's length, owned, had an interest in or the
right to acquire 25% or more of the issued Class B shares or any series or
class of our capital stock. Even if the Class B shares are taxable Canadian
property, under the Convention, gains derived by an Unconnected
U.S. Shareholder would generally not be taxable in Canada unless the value of
the Class B shares is derived principally from real property situated in
Canada. We believe that the value of our Class B shares is not currently
principally derived, directly or indirectly, from real property situated in
Canada and do not expect this to change in the foreseeable future.

Canada does not currently impose any estate taxes or succession duties.

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UNDERWRITING

The Seidler Companies Incorporated has agreed to purchase, and we have agreed
to sell to The Seidler Companies Incorporated, 750,000 Class B shares.

The underwriter's obligations are subject to conditions, including the
receipt of opinions and letters from our counsel and independent public
accountants. The underwriter must purchase and pay for all the Class B shares
if any of them are purchased.

We have been advised that the underwriter proposes to offer the Class B
shares directly to the public at the public offering price stated on the cover
page of this prospectus and to securities dealers at that price less a
concession not in excess of $0.21 per share. The underwriter may allow, and the
selected dealers may reallow, a discount not in excess of $0.10 per share to
brokers and dealers. After the public offering of the Class B shares, the
underwriter may change the public offering price and other selling terms, but
no change will affect the amount of proceeds to be received by us as stated on
the cover page of this prospectus.

We have granted the underwriter an option, exercisable for a period of 45
days after the date of this prospectus, to purchase up to an additional 112,500
Class B shares at the public offering price, less the underwriting discount and
commissions, set forth on the cover page of this prospectus. The underwriter
may exercise this option solely to cover over-allotments, if any.

Our directors, officers and some of our shareholders, who own an aggregate of
approximately 558,375 Class A shares and an equal number of Class B shares, are
expected to agree that they will not, without the prior written consent of the
underwriter, offer, pledge, sell, contract to sell, sell any option or contract
to purchase, sell short, purchase any option or contract to sell, grant any
option, right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any Class A shares or Class B shares or any securities
convertible into or exercisable or exchangeable for Class A shares or Class B
shares, or enter into any swap or similar agreement that transfers, in whole or
in part, any of the economic consequences of ownership of Class A shares or
Class B shares, for a period of six months after the completion of this
offering. The underwriter may, in its sole discretion and at any time without
notice, release all or any portion of the shares subject to these lock-up
agreements. In addition, we have agreed that, for a period of six months after
the date of completion of this offering, we will not, without the consent of
the underwriter, purchase or sell any shares of capital stock or issue any
options or warrants or other securities convertible into or exercisable for
shares of our capital stock, except for grants of options under the stock
option plan at an exercise price of not less than the public offering price in
this offering.

We have agreed to issue to the underwriter, for a total of Cdn$75, a warrant
to purchase up to 75,000 Class B shares at an exercise price per share equal to
135% of the public offering price of the Class B shares in this offering. The
warrant will be exercisable for a period of four years beginning one year after
the date of this prospectus and may not be transferred, assigned or
hypothecated for a period of one year, except to officers of the underwriter
and any successors to the underwriter. The underwriter's warrant includes a so-
called net exercise provision permitting the holders to pay the exercise price
by cancellation of a number of the

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Class B shares covered by the warrant with a fair market value equal to the
exercise price of the underwriter's warrant. The holder of the warrant will
have no voting, dividend or other shareholder rights until the warrant is
exercised.

We have agreed to pay The Seidler Companies Incorporated a non-accountable
expense allowance equal to 2% of the total proceeds from the sale of Class B
shares in this offering.

In November 1998, we entered into an agreement with Erickson Consulting
Group, Inc., a consulting company controlled by Dean Erickson, under which Mr.
Erickson and his company agreed to provide us financial relations and similar
consulting services. In connection with entering into the consulting agreement,
we granted Mr. Erickson an option to purchase 25,000 common shares at an
exercise price of Cdn$3.00 per share, which approximated the market price of
the common shares at the time. The number of option shares and the exercise
price of Mr. Erickson's options do not give effect to our recent share
reclassification and consolidation. After entering into the consulting
agreement Mr. Erickson, who died earlier this year, introduced us to The
Seidler Companies Incorporated. In light of this introduction, the options
granted to the late Mr. Erickson could be deemed a finder's fee or other
underwriting compensation.

The underwriter has advised us that they do not expect any sales of the Class
B shares to be made to discretionary accounts controlled by the underwriter.

The underwriting agreement provides that we will indemnify the underwriter
and its controlling persons against liabilities under the U.S. Securities Act
or will contribute to payments the underwriter and its controlling persons may
be required to make in respect thereof. We are generally obligated to indemnify
the underwriter and its controlling persons in connection with losses or claims
arising out of any untrue statement of a material fact contained in this
prospectus or in related documents filed with the Securities and Exchange
Commission or with any state securities administrator or arising out of any
omission to state in any of such documents any material fact required to be
stated in such documents or necessary to make the statements made in such
documents, in light of the circumstances under which they were made, not
misleading. In addition, we are generally obligated to indemnify the
underwriter and its controlling persons in connection with losses or claims
arising out of any breach of any of our representations, warranty agreements or
covenants contained in the underwriting agreement.

The underwriter may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, and penalty bids as permitted under Regulation
M under the U.S. Securities Exchange Act of 1934. Over-allotment involves
syndicate sales in excess of the number of Class B shares to be sold in this
offering, which creates a syndicate short position. Stabilizing transactions
permit bids for and purchases of Class B shares so long as the stabilizing bids
do not exceed a specified maximum. Syndicate covering transactions involve the
purchase of Class B shares in the open market in order to cover a syndicate
short position. Penalty bids permit the underwriters to reclaim a selling
concession from a syndicate member when the Class B shares originally sold by
such syndicate member are purchased in a stabilizing transaction or syndicate
covering transaction to cover syndicate short positions. Stabilizing
transactions, syndicate covering transactions, and penalty bids may cause the
price of the Class B shares to be higher than it would otherwise be in the
absence of such transactions. These transactions may be effected on the
American Stock Exchange, or otherwise, and, if commenced, may be discontinued
at any time.

57
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, we will have outstanding approximately
3,785,942 shares, comprised of approximately 1,517,971 Class A shares and
2,267,971 Class B shares, of which 750,000 Class B shares are offered under
this prospectus. The 750,000 Class B shares to be sold in this offering will be
freely tradeable under the U.S. Securities Act without restriction or
limitation, except for any such shares held by any of our "affiliates," as the
term is defined in Rule 144 of the U.S. Securities Act. Any Class B shares
purchased by our affiliates generally may only be publicly sold subject to the
requirements of Rule 144 or pursuant to a registration statement or an
exemption therefrom.

The remaining 3,035,942 outstanding shares have not been registered under the
U.S. Securities Act and therefore will be treated as "restricted securities"
and may be publicly sold into the U.S. only if registered or if the sale is
made in accordance with an exemption from registration, such as Rule 144 or
Regulation S promulgated under the U.S. Securities Act. Under these exemptions,
substantially all of the other 1,517,971 Class B shares and 1,517,971 Class B
shares issuable to such persons upon conversion of the Class A shares, other
than those held by "affiliates", generally will be eligible for resale in the
U.S. without registration. This may adversely affect the market price of the
Class B shares and could effect the amount of trading of such shares on the
American Stock Exchange, particularly if the trading price on the American
Stock Exchange were to be higher than the trading price on The Toronto Stock
Exchange at any particular time.

Our officers, directors and some of our shareholders have agreed not to sell,
offer or otherwise dispose of any of our securities for a period of six months
from the date of this prospectus without the prior written consent of the
underwriter. Upon the expiration of this six-month lock-up period, or earlier
upon the consent of the underwriter, all of these shares will become eligible
for sale subject to the restrictions of Rule 144.

In general, under Rule 144, as currently in effect, a person, or persons
whose shares are aggregated, who has beneficially owned shares for at least one
year, including an affiliate of Peace Arch, would be entitled to sell, within
any three-month period, that number of shares that does not exceed the greater
of 1% of the then-outstanding Class B shares, approximately 23,000 shares after
this offering, and the average weekly trading volume in our Class B shares
during the four calendar weeks immediately preceding the date on which the
notice of sale is filed with the U.S. Securities and Exchange Commission,
provided manner of sale and notice requirements and requirements as to the
availability of current public information about the company are satisfied. In
addition, our affiliates must comply with the restrictions and requirements of
Rule 144, other than the one-year holding period requirement, in order to sell
Class B shares. As defined in Rule 144, an "affiliate" of an issuer is a person
who, directly or indirectly, through the use of one or more intermediaries
controls, or is controlled by, or is under common control with, such issuer.
Under Rule 144(k), a holder of "restricted securities" who is not deemed an
affiliate of the issuer and who has beneficially owned shares for at least two
years would be entitled to sell shares under Rule 144(k) without regard to the
limitations described above.

As of April 30, 1999, options to purchase a total of 196,850 Class A shares
and 196,850 Class B shares were outstanding, with a weighted average exercise
price of Cdn$10.10 and expiration dates ranging from 1999 to March 2004. Of
such options, our directors and officers as a group, or 9 persons, held options
to purchase a total of 114,075 Class A shares and 114,075 Class B shares, with
exercise prices ranging from Cdn$9.50 to Cdn$14.00 and expiration dates ranging
from March 2001 to February 2004. All such information gives retroactive
effective to the share reclassification. In addition, at our shareholders
meeting held on July 14, 1999, the shareholders approved an increase in the
number of shares eligible for issuance under the option plan to 800,000 Class B
shares upon the completion of this offering. Class B shares issued upon the
exercise of options granted under our option plan or Class B shares issued upon
conversion of Class A shares issued upon exercise of options granted under our
option plan will be eligible for resale in the public market from time to time
subject to vesting and the expiration of the lock-up agreements referred to
above. These shares may be freely

58
<PAGE>

tradable subject to the requirements of Rule 701 and contractual obligations
beginning six months after the date of this prospectus. Any employee, officer
or director of or consultant to the Company who purchased his or her shares
pursuant to a written compensatory plan or contract is entitled to rely on the
resale provisions of Rule 701, which permits non-affiliates to sell their
shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares without having to comply with Rule 144's holding
period restrictions, in each case commencing 90 days after the commencement of
this offering.

Following the completion of this offering, we intend to file a registration
statement to register for resale the Class B shares reserved for issuance under
our option plan. Such registration statement will become effective immediately
upon filing.

As of April 30, 1999, warrants exercisable for 50,000 Class A shares and
50,000 Class B shares were outstanding, with an exercise price of Cdn$6.25
expiring October 2000, after giving effect to the share reclassification. The
holders had the right to require us to use reasonable efforts to include 25,000
of the Class B shares underlying the warrants in our registration statements to
the extent allowed under applicable securities laws. It is not anticipated that
any of such shares will be included in this offering and therefore, in the
event of future offerings, we may be required to include such shares. In the
alternative, the holders would be entitled to sell, pursuant to Rule 144, their
50,000 Class B shares issuable upon exercise of the warrants and the 50,000
Class B shares issuable upon conversion of the 50,000 Class A shares issuable
upon exercise of the warrants.

We cannot predict the effect, if any, that future sales of Class B shares or
the availability of Class B shares for future sale will have on the market
price of the Class B shares. Sales of substantial numbers of Class B shares in
the public market or the perception that such sales will occur could adversely
affect the market price of the Class B shares and could impair our ability to
raise capital through the offering of our equity securities.

LEGAL MATTERS

Legal matters with respect to the validity of the Class B shares being
offered hereby are being passed upon for us by a member of Page Fraser &
Associates, Vancouver, British Columbia, Canada. Legal matters related to the
offering are being passed upon for us by Brand Farrar & Buxbaum LLP, Los
Angeles, California, with respect to U.S. law, and for the underwriter by Troy
& Gould Professional Corporation, Los Angeles, California. Legal matters
related to Canadian legal matters are being passed upon for the underwriter by
Bull, Housser & Tupper, Vancouver, British Columbia, Canada.

EXPERTS

The consolidated financial statements as of August 31, 1998 and for the year
then ended have been included in this prospectus in reliance upon the report of
KPMG LLP, independent chartered accountants, appearing elsewhere herein and in
the registration statement and upon the authority of said firm as experts in
accounting and auditing. The consolidated financial statements as of August 31,
1997 and for each of the years ended August 31, 1997 and August 31, 1996 have
been included in this prospectus in reliance upon the report of Ellis Foster,
independent chartered accountants, appearing elsewhere herein and in the
registration statement and upon the authority of said firm as experts in
accounting and auditing. In February 1999, we changed auditors from Ellis
Foster to KPMG LLP. There were no reportable disagreements with Ellis Foster in
the two years preceding the date of the change in auditors.

59
<PAGE>

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the U.S. Securities and Exchange Commission a registration
statement on Form F-1 under the U.S. Securities Act of 1933, as amended,
covering the Class B shares offered under this prospectus. This prospectus does
not contain all of the information set forth in the registration statement and
the exhibits. For further information about us and the Class B shares, please
read the entire registration statement. Statements contained in this prospectus
about any contract, agreement or any other document are not necessarily
complete. You should refer to the copy of the document filed as an exhibit to
the registration statement or otherwise with the Securities and Exchange
Commission. Our statements in the Registration Statement are qualified by the
full text of the exhibits. The registration statement, including all exhibits,
may be inspected without charge at the Securities and Exchange Commission's
principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, as well as
the Securities and Exchange Commission's regional offices at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite
1300, New York, New York 10048, and copies may be obtained from the offices.
You may obtain information regarding the operation of the public reference
rooms at 1-800-SEC-0330.

We will furnish our shareholders with annual reports containing financial
statements and a reconciliation with U.S. GAAP audited by an independent
chartered accounting firm. We will also furnish quarterly reports for the first
three quarters of each fiscal year containing unaudited financial information.
Our annual reports and quarterly reports are prepared in accordance with
Canadian GAAP and in Canadian dollars. We will be subject to the reporting
requirements of the U.S. Securities Exchange Act of 1934, applicable to foreign
private issuers and we will file reports and other information with the
Securities and Exchange Commission. As a foreign private issuer, we are exempt
from provisions of the U.S. Securities Exchange Act of 1934 prescribing the
furnishing and content of proxy statements and periodic reports and from
provisions of the U.S. Securities Exchange Act of 1934 relating to short-swing
profits reporting and liability.

In addition, all of our continuous disclosure documents are available on-line
on SEDAR, the System for Electronic Document Analysis and Retrieval, used by
companies to electronically file information with the Canadian Securities
Administrators. SEDAR is located on the internet at www.sedar.com and is
operated by The Canadian Depository for Securities.

FINANCIAL STATEMENT PRESENTATION

Our audited consolidated financial statements as of August 31, 1998 and 1997
and for each of the three years ended August 31, 1998 and related notes,
together with the unaudited interim consolidated financial statements as at
February 28, 1999 and for the six months ended February 28, 1999 and 1998, are
referred to herein as the "consolidated financial statements." Although
unaudited, the interim consolidated financial statements for the six months
ended February 28, 1999 and 1998 reflect all adjustments, consisting solely of
normal recurring adjustments which are, in the opinion of management, necessary
to fairly present the financial results for the periods presented.

60
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Auditors' Report (KPMG LLP)............................................. F-2

Auditors' Report (Ellis Foster)......................................... F-3

Consolidated Balance Sheets as at August 31, 1997 and 1998 (audited),
and February 28, 1999 (unaudited)...................................... F-4

Consolidated Statements of Operations and Deficit for the years ended
August 31, 1996, 1997 and 1998 (audited), and for the six months ending
February 28, 1998 and 1999 (unaudited)................................. F-5

Consolidated Statements of Cash Flows for the three years ended August
31, 1996, 1997 and 1998 (audited), and for the six months ended
February 28, 1998 and 1999 (unaudited)................................. F-6

Notes to Consolidated Financial Statements for the years ended August
31, 1996, 1997 and 1998 (audited), and for the six months ended
February 28, 1998 and 1999 (unaudited)................................. F-7
</TABLE>

F-1
<PAGE>

AUDITORS' REPORT

The Board of Directors
Peace Arch Entertainment Group Inc.
(formerly known as Vidatron Entertainment Group Inc.)

We have audited the consolidated balance sheet of Peace Arch Entertainment
Group Inc. (formerly known as Vidatron Entertainment Group Inc.) as at August
31, 1998 and the consolidated statements of operations and deficit and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

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

In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at August 31,
1998 and the results of its operations and its cash flows for the year then
ended in accordance with generally accepted accounting principles in Canada.

Significant differences between Canadian and United States accounting
principles are explained and quantified in note 19 to the financial statements.

The consolidated financial statements as at August 31, 1997 and for the years
ended August 31, 1997 and 1996 were audited by other auditors who expressed an
opinion without reservation on these statements in their report dated November
12, 1997.

/s/ KPMG LLP
Chartered Accountants

Vancouver, Canada
February 19, 1999, except
as to note 20(c) which
is as of July 14, 1999

F-2
<PAGE>

AUDITORS' REPORT

The Board of Directors
Peace Arch Entertainment Group Inc.
(formerly Vidatron Entertainment Group Inc.)

We have audited the consolidated balance sheet of Peace Arch Entertainment
Group Inc. (formerly Vidatron Entertainment Group Inc.) as at August 31, 1997
and the consolidated statements of income and deficit and cash flows for the
years ended August 31, 1997 and 1996. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.

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

In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at August 31,
1997 and the results of its operations and its cash flows for the years ended
August 31, 1997 and 1996 in accordance with generally accepted accounting
principles in Canada.

Significant differences between Canadian and United States accounting
principles are explained and quantified in note 19 to the financial statements.

/s/ Ellis Foster
Chartered Accountants

Vancouver, Canada
November 12, 1997

F-3
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

CONSOLIDATED BALANCE SHEETS
(Expressed in thousands of Canadian dollars)

<TABLE>
<CAPTION>
August 31,
----------------- February 28,
1997 1998 1999
-------- ------- ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
------

Cash and cash equivalents....................... $ 1,744 $ 1,876 $ 445
Accounts receivable............................. 2,429 2,505 4,104
Tax credits receivable (note 3)................. 2,370 7,730 13,213
Production costs in progress.................... 3,862 11,906 3,771
Prepaid expenses and deposits................... 181 367 290
Investments in television programming (note 4).. 2,057 5,632 9,534
Property and equipment (note 5)................. 5,048 9,498 9,565
Deferred costs.................................. 222 129 160
Goodwill (note 6)............................... 597 2,544 2,479
-------- ------- -------
$ 18,510 $42,187 $43,561
======== ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------

Bank indebtedness (note 7)...................... $ 945 $ 2,649 $ 9,357
Accounts payable and accrued liabilities........ 1,008 3,317 3,604
Due to directors and shareholders (note 8)...... 22 400 --
Deferred revenue................................ 4,230 10,770 2,947
Deferred income taxes........................... -- -- 205
Long-term debt, including current portion
(note 9)....................................... 3,185 7,318 8,104
-------- ------- -------
9,390 24,454 24,217
-------- ------- -------
Shareholders' equity:
Share capital (note 10)....................... 19,323 26,178 26,644
Authorized:
100,000,000 Class A Multiple Voting Shares
without par value; issued--1,512,971
(August 31, 1998--1,512,971; August 31,
1997--1,251,654)
100,000,000 Class B Subordinate Voting
Shares without par value; issued--1,512,971
(August 31, 1998--1,512,971; August 31,
1997--1,251,654)
25,000,000 preference shares, issuable in
series, without par value; issued--nil
Other paid-in capital......................... -- -- 136
Deficit....................................... (10,203) (8,445) (7,436)
-------- ------- -------
9,120 17,733 19,344
-------- ------- -------
$ 18,510 $42,187 $43,561
======== ======= =======
Uncertainty due to the Year 2000 Issue (note 17)
Subsequent events (note 20)
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(Expressed in thousands of Canadian dollars, except per share information)

<TABLE>
<CAPTION>
Six months ended
Years ended August 31, February 28,
--------------------------- -----------------
1996 1997 1998 1998 1999
------- -------- -------- -------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue........................ $ 5,723 $ 23,584 $ 32,457 $ 16,233 $30,252
Expenses:
Amortization of television
programming................. -- 14,972 24,124 12,461 25,406
Other costs of production and
sales....................... 3,767 4,261 3,577 1,866 1,508
Depreciation and
amortization................ 254 273 389 123 204
Selling, general and
administration.............. 2,404 2,453 2,201 925 1,330
Interest (note 11)........... 308 367 576 203 489
Foreign exchange (gain)
loss........................ 17 (176) (465) (34) (339)
------- -------- -------- -------- -------
6,750 22,150 30,402 15,544 28,598
------- -------- -------- -------- -------
Earnings (loss) from operations
before undernoted............. (1,027) 1,434 2,055 689 1,654
Other income (expenses):
Loss on sale of assets (note
12)......................... -- (333) -- -- --
Provision against Limited
Partnership interests
(note 13)................... (1,073) (2,313) -- -- --
------- -------- -------- -------- -------
(1,073) (2,646) -- -- --
------- -------- -------- -------- -------
Earnings (loss) before income
taxes......................... (2,100) (1,212) 2,055 689 1,654
Income taxes (note 14)......... -- -- 297 -- 645
------- -------- -------- -------- -------
Net earnings (loss)............ (2,100) (1,212) 1,758 689 1,009
Deficit, beginning of period... (6,891) (8,991) (10,203) (10,203) (8,445)
------- -------- -------- -------- -------
Deficit, end of period......... $(8,991) $(10,203) $ (8,445) $ (9,514) $(7,436)
======= ======== ======== ======== =======
Basic net earnings (loss) per
common share (note 2(l))...... $ (1.68) $ (0.65) $ 0.68 $ 0.28 $ 0.33
======= ======== ======== ======== =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in thousands of Canadian dollars)

Six months ended
Years ended August 31, February 28,
------------------------- ----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows provided by (used in):
Cash flows from operating
activities:
Net earnings (loss)............. $(2,100) $(1,212) $ 1,758 $ 689 $ 1,009
Items not involving cash:
Depreciation and
amortization................. 254 15,245 24,513 12,584 25,610
Deferred income taxes......... -- -- -- -- 289
Loss on sale of assets........ -- 333 -- -- --
Provision against Limited
Partnership interest......... 1,073 2,313 -- -- --
Other......................... 15 20 19 -- --
Changes in non-cash operating
working capital (note 18)...... 243 (3,257) (4,817) (1,136) (6,004)
------- ------- ------- ------- -------
Cash provided by (used for)
operating activities............. (515) 13,442 21,473 12,137 20,904
------- ------- ------- ------- -------
Cash flows from investing
activities:
Investments in television
programming.................... (385) (16,567) (27,698) (13,387) (29,307)
Increase in deferred costs...... (54) (208) -- (35) (97)
Property and equipment
acquired....................... (687) (709) (633) (272) (161)
Proceeds on asset sale of
subsidiaries, net.............. -- 545 -- -- --
------- ------- ------- ------- -------
Cash flows used for investing
activities....................... (1,126) (16,939) (28,331) (13,694) (29,565)
------- ------- ------- ------- -------
Cash flows from financing
activities:
Net cash proceeds on issue of
common shares.................. 1,246 5,755 4,875 2 --
Increase (repayments) in due to
directors and shareholders..... 206 (221) 378 -- (400)
Increase (decrease) in bank
indebtedness................... (69) 454 1,704 395 6,708
Increase in long-term debt...... 2,341 17 1,737 -- 1,200
Repayment of long-term debt..... (2,029) (887) (1,704) (207) (278)
------- ------- ------- ------- -------
Cash flows provided by financing
activities....................... 1,695 5,118 6,990 190 7,230
------- ------- ------- ------- -------
Increase (decrease) in cash and
cash equivalents................. 54 1,621 132 (1,367) (1,431)
Cash in cash and cash equivalents,
beginning of period.............. 69 123 1,744 1,744 1,876
------- ------- ------- ------- -------
Cash in cash and cash equivalents,
end of period.................... $ 123 $ 1,744 $ 1,876 $ 377 $ 445
======= ======= ======= ======= =======
Supplementary information:
Interest paid (net of amounts
capitalized)................... $ 274 $ 338 $ 543 $ 203 $ 489
Income taxes paid............... -- -- -- -- 10
Non-cash transactions:
Property acquired through
increase in long-term debt..... 1,600 -- 4,100 4,100 --
Value assigned to common shares
issued:
On acquisition of product
revenue interests............ 1,073 2,300 -- -- --
For services and assets....... 246 -- -- -- --
For acquisition of Sugar
Entertainment Ltd............ -- 260 1,980 -- --
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in tables expressed in thousands of Canadian dollars, except
per share amounts)

Years ended August 31, 1996, 1997 and 1998 and
Six months ended February 28, 1998 and 1999 (Unaudited)

1. Operations:

Based in Vancouver, British Columbia, Canada, Peace Arch Entertainment Group
Inc. (formerly Vidatron Entertainment Group Inc.), together with its
subsidiaries, (collectively, the "Company") is a fully integrated television
production company that produces and distributes film, television, video and
interactive programming for world-wide markets. The Company's business
represents a single operating segment, as described above, for financial
reporting purposes.

2. Significant accounting policies:

(a) Basis of presentation:

The consolidated financial statements of the Company are prepared in
accordance with generally accepted accounting principles in Canada and, except
as explained and quantified in note 19, comply, in all material respects, with
generally accepted accounting principles in the United States. In particular,
the Company's accounting policies are in accordance with industry guidance in
the United States as set out in Statement of Financial Accounting Standards No.
53, "Financial Reporting by Producers and Distributors of Motion Picture Films"
("SFAS 53").

These consolidated financial statements include the accounts of the Company
and its subsidiaries all of which are wholly-owned. All material intercompany
balances and transactions have been eliminated. In accordance with the
provisions of SFAS 53, the Company has elected to present an unclassified
balance sheet.

(b) Revenue recognition:

(i) Revenues from television programming distribution licensing
agreements are recognized when the license period has commenced, the
program has been delivered and other conditions as specified in the
agreements have been met.

(ii) Revenues from production services for third parties are recognized
when the production is completed and delivered. All associated production
costs are deferred and charged against earnings when the film is delivered
and the revenue recognized.

(iii) Cash received in advance of meeting the revenue recognition
criteria described above is recorded as deferred revenue.

Cash equivalents includes highly liquid investments with terms to maturity of
90 days or less when acquired.

(d) Production costs in progress:

Production costs in progress, including interest, represent the accumulated
identifiable costs of incomplete programs, which are in the process of being
produced by the Company. Production costs in progress are carried at the lower
of cost and estimated net realizable value.

(e) Investments in television programming:

Investments in television programming represent the unamortized cost of
completed programs (net of related tax credits received or receivable) which
have been produced by the Company or to which the Company

F-7
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

has acquired distribution rights. Completed programs are stated at the lower of
cost, net of amortization, and net realizable value.

The individual film forecast method is used to amortize the net cost of
completed programs whereby the amortization is based on the ratio that current
revenue earned from that program bears to estimated total revenue to be
realized. Management periodically reviews its estimates on a program-by-program
basis, and when unamortized costs exceed net realizable value for a program,
that program's unamortized costs are written down to net realizable value. When
estimates of total revenue indicate that a program will result in an ultimate
loss, the entire loss is recognized.

Based on the Company's current estimates of anticipated future revenues at
August 31, 1998, approximately 94% of the gross investment in television
programming will be amortized by August 31, 2001.

(f) Property and equipment:

Property and equipment are stated at cost and depreciated on the following
annual basis:

<TABLE>
<CAPTION>
Asset Rate
----- ----
<S> <C>
Buildings........................................... 5% declining balance
Computer furniture and equipment.................... 20% declining balance
Production equipment................................ 20% declining balance
Other............................................... 2-5 year straight line
</TABLE>

(g) Deferred costs:

Deferred costs primarily consist of costs related to program development and
the issuance of debt. Deferred costs are recorded net of amortization of
$156,943 at February 28, 1999 (August 31, 1998-- $136,624; August 31, 1997--
$65,422).

Program development costs, including investments in scripts, represent
expenditures incurred on projects prior to production. Upon commencement of
production, the development costs are charged to production costs. Development
costs are written off when it is determined that they will not be recovered.

Amortization of deferred financing costs is provided over the term of the
related debt.

(h) Goodwill:

Goodwill is recorded at cost and is amortized on a straight line basis over
20 years. Management performs annual assessments to determine whether the
amortization of the goodwill balance over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired operation.
When the future cash flows are less than the carrying value, the excess is
charged against income. The assessment of the recoverability of goodwill will
be impacted if the estimated future operating cash flows are not achieved.

(i) Financial instruments:

The Company carries financial liabilities with stated interest rates that may
differ from the prevailing market interest rates on the cost basis.

(j) Income taxes:

The Company accounts for income taxes on the tax allocation basis by the
deferral method. Deferred income taxes are recognized at current rates for all
differences in the timing of recognition of transactions for

F-8
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

accounting and income tax purposes. No adjustment is made to deferred income
taxes for subsequent changes in income tax rates. Deferred income taxes arise
as a result of timing differences primarily occurring when amortization of
investment in films and television programs differs for income tax purposes.

(k) Foreign currency translations:

The Company's functional currency is the Canadian dollar. Foreign currency
denominated monetary assets and liabilities are translated into Canadian
dollars at exchange rates in effect at the end of the period. Revenues and
expenses are translated at exchange rates in effect at the time of the
transaction. Translation gains and losses are included in income except for
unrealized gains and losses arising from the translation of long-term monetary
assets and liabilities which are deferred and amortized over the life of the
asset or liability. At each of the periods presented, the Company has no long-
term monetary assets or liabilities denominated in a foreign currency.

(l) Net earnings (loss) per common share:

Net earnings (loss) per common share has been calculated by dividing into
earnings (loss) the weighted average number of common shares outstanding,
including issued shares held in escrow, after giving retroactive effect to the
share consolidation in 1997 (note 10(a)) and the change in capital structure
and conversion prior to the effective date (note 20(c)). The weighted average
number of shares outstanding for each of the periods presented is as follows:

<TABLE>
<S> <C>
Year ended August 31,
1996......................................................... 1,246,640
1997......................................................... 1,860,616
1998......................................................... 2,602,742

Six months ended February 28,
1998......................................................... 2,503,510
1999......................................................... 3,025,942
</TABLE>

The fully diluted earnings per share amount for the six months ended February
28, 1999 is $0.33 per share (six months ended February 28, 1998--$0.28; year
ended August 31, 1998--$0.63). For all other periods fully diluted per share
amounts have not been presented since the impact of outstanding options,
warrants and convertible securities is anti-dilutive.

(m) Use of estimates:

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results may ultimately differ from those estimates. Significant areas
requiring the use of management estimates relate to the recoverability of
assets and future forecasted revenue used in the assessment of the
recoverability of productions in progress and investments in television
programming.

(n) Unaudited interim financial information:

The financial information as at February 28, 1999 and for the six month
periods ended February 28, 1998 and 1999 is unaudited. However, such interim
financial information reflects all adjustments, consisting solely of normal
recurring adjustments, which are, in the opinion of management, necessary to a
fair statement of the results for the interim periods presented.

F-9
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(o) Comparative figures:

Certain comparative figures have been restated to conform to the basis of
presentation adopted for the current period.

3. Tax credits receivable:

Tax credits receivable are federal and provincial refundable tax credits
related to specific film productions in Canada. The credits are recorded as a
reduction to the related investment in television programming in the period in
which the related production is completed and then amortized in accordance with
note 2(e). During the six months ended February 28, 1999, tax credits
aggregating $6,076,000 were recognized (August 31, 1998--$5,723,000; August 31,
1997--$2,370,000).

4. Investments in television programming:

As at August 31, 1997:
<TABLE>
<CAPTION>
Accumulated Net Book
Cost Amortization Value
------- ------------ --------
<S> <C> <C> <C>
Television movies................................. $ 5,924 $ 5,725 $ 199
Television series................................. 11,105 9,247 1,858
------- ------- ------
$17,029 $14,972 $2,057
======= ======= ======
</TABLE>

As at August 31, 1998:

<TABLE>
<CAPTION>
Accumulated Net Book
Cost Amortization Value
------- ------------ --------
<S> <C> <C> <C>
Television movies................................. $ 5,924 $ 5,725 $ 199
Television series................................. 38,804 33,371 5,433
------- ------- ------
$44,728 $39,096 $5,632
======= ======= ======
</TABLE>

As at February 28, 1999 (unaudited):

<TABLE>
<CAPTION>
Accumulated Net Book
Cost Amortization Value
------- ------------ --------
<S> <C> <C> <C>
Television movies................................. $ 5,924 $ 5,725 $ 199
Television series................................. 68,112 58,777 9,335
------- ------- ------
$74,036 $64,502 $9,534
======= ======= ======
</TABLE>

F-10
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

5. Property and equipment:

As at August 31, 1997:

<TABLE>
<CAPTION>
Accumulated Net book
Cost depreciation value
-------- ------------ --------
<S> <C> <C> <C>
Land.......................................... $ 3,198 $ -- $3,198
Buildings..................................... 1,465 196 1,269
Computer furniture and equipment.............. 385 241 144
Production equipment.......................... 716 299 417
Other......................................... 58 38 20
-------- ------ ------
$ 5,822 $ 774 $5,048
======== ====== ======

As at August 31, 1998:

Land.......................................... $ 6,594 $ -- $6,594
Buildings..................................... 2,432 314 2,118
Computer furniture and equipment.............. 372 219 153
Production equipment.......................... 1,034 421 613
Other......................................... 77 57 20
-------- ------ ------
$ 10,509 $1,011 $9,498
======== ====== ======

As at February 28, 1999:

Land.......................................... $ 6,594 $ -- $6,594
Buildings..................................... 2,521 316 2,205
Computer furniture and equipment.............. 342 227 115
Production equipment.......................... 1,070 470 600
Other......................................... 77 26 51
-------- ------ ------
$ 10,604 $1,039 $9,565
======== ====== ======
</TABLE>

F-11
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

6. Goodwill:

Effective September 1, 1996, the Company acquired 100% of the shares of Sugar
Entertainment Ltd. ("Sugar") for consideration comprised of an aggregate of
22,500 Class A shares and Class B shares and an aggregate of 350,000
performance Class A shares and Class B shares which are releasable from escrow
at a rate of one share for every $10 of cash flow (as defined by regulatory
authorities) generated by Sugar. The acquisition was accounted for by the
purchase method with the results of Sugar's operations consolidated from
September 1, 1996. The release of shares from escrow is subject to regulatory
approval. Shares not released from treasury by September 2001 are returnable to
treasury. At the date of acquisition, the fair value assigned to the shares
issued was $260,000 representing $10 per share for the 22,500 shares and $0.10
per share assigned to the 350,000 performance shares and was allocated to the
fair value of the identifiable assets acquired of $3,320,438 and liabilities
assumed of $3,379,670 with the excess value being assigned to goodwill of
$318,232. The performance shares were accounted for as contingent consideration
at the date of acquisition as they are returnable to treasury if the escrow
release conditions are not met.

During the year ended August 31, 1998, 200,000 of the 350,000 performance
shares were released from escrow, as a result of cash flow generated by Sugar,
resulting in increases in both goodwill and share capital of $1,980,000. This
additional goodwill is being amortized prospectively.

As at February 28, 1999, accumulated amortization of goodwill amounted to
$168,880 (August 31, 1998--$104,258; August 31, 1997--$70,736). As at February
28, 1999, the remaining 150,000 performance shares have not been approved for
release from escrow by the regulatory authority.

7. Bank indebtedness:

Bank indebtedness is drawn under a revolving credit facility of up to $14
million for production financing and is comprised of demand loans bearing
interest at prime plus 1.5% per annum with monthly payments of interest only
withdrawn from interest reserves held by the bank. As at February 28, 1999, the
prime rate was 6.75% (August 31, 1998--7.50%; August 31, 1997--4.75%). The
loans are secured by the refundable tax credits and distribution rights of the
film properties to which the loans relate and a general security agreement.

8. Due to directors and shareholders:

Amounts due to directors and shareholders bear interest at 12% per annum, are
unsecured and have no specific terms of repayment.

F-12
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

9. Long-term debt:

<TABLE>
<CAPTION>
August 31,
------------- February 28,
1997 1998 1999
------ ------ ------------
(unaudited)
<S> <C> <C> <C>
Mortgage due May 1, 1999 bearing interest at 8.5%
per annum with aggregate monthly payments of
principal and interest of $9, secured by a first
mortgage on property.............................. $ 973 $ 950 $ 938
Mortgage due February 1, 2000 bearing interest at
8% per annum with aggregate monthly payments of
principal and interest of $19, secured by a first
mortgage and a general security agreement on all
assets located in or on the property.............. 1,461 1,970 1,935
Mortgage due March 1, 2001 bearing interest at
6.55% per annum with aggregate monthly payments of
principal and interest of $25, secured by a first
mortgage on property.............................. -- 2,755 2,700
Loans to purchase equipment, bearing interest at an
average annual rate of the bank rate plus 2.0%
secured by the equipment acquired................. 222 275 137
Loans due $300 on March 1, 1999 and $500 on April
15, 1999 bearing interest at 12% per annum, with
monthly payments of interest only, secured by a
charge on property................................ -- 800 800
Convertible debentures bearing interest at 12% per
annum, payable quarterly and secured by a charge
on the assets of the Company and due March 25,
1999. The principal amount is convertible into
shares of the Company at a deemed price of $19.00
per share on or before March 31, 1999............. 500 500 500
Debentures having an original face value of $1,200
bearing interest at 10% per annum, payable
quarterly, secured by a charge on the assets of
the Company, and due October 21, 2000. Debentures
in the amount of $600 are convertible at a deemed
price of $7.50 per share after April 21, 1999 (net
of deemed debt discount of $136).................. -- -- 1,064
Other.............................................. 29 68 30
------ ------ ------
$3,185 $7,318 $8,104
====== ====== ======
</TABLE>

Included with the issuance of the $1,200,000 debentures, were warrants to
purchase 50,000 Class A and 50,000 Class B shares at an exercise price of $6.25
per share (note 10(d)). A value of $136,000 has been attributed to the warrants
issued and recorded as debt discount and other paid-in capital. This discount
is being amortized against income as interest expense over the term of the
debentures.

As at February 28, 1999, principal due in each of the next three fiscal years
ending August 31 are approximately as follows (unaudited):

F-13
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

10. Share capital:

(a) Issued:

Effective February 5, 1997, the Company consolidated its common shares on a
basis of one new share for four old shares. Prior to the effective date of the
offering, the Company will change its capital structure and convert its
outstanding common shares on a 2-for-5 basis (note 20(c)). Of the number of
shares shown in the following table 1/2 are Class A shares and 1/2 are Class B
shares. The following shares are issued and fully paid for and have been
restated to reflect these capital changes and share consolidations and
conversion.

<TABLE>
<CAPTION>
Number
of common
shares Amount
--------- -------
<S> <C> <C>
Balance, August 31, 1995................................... 1,118,814 $ 8,444
Changes during the year:
Issued for cash.......................................... 184,663 1,279
Issued for consideration for loan guarantees............. 1,100 15
Issued for services...................................... 14,500 150
Issued on acquisition of assets.......................... 6,500 81
Issued on acquisition of product revenue interests....... 50,377 1,073
Less share issue costs................................... -- (33)
--------- -------
Balance, August 31, 1996................................... 1,375,954 11,009
Changes during the year:
Issued for cash.......................................... 45,637 420
Issued for cash, pursuant to private placement........... 534,000 6,007
Issued on acquisition of Sugar Entertainment Ltd. (note
6)...................................................... 372,500 260
Issued on acquisition of product revenue interest (note
13)..................................................... 175,217 2,300
Less share issue costs................................... -- (673)
--------- -------
Balance, August 31, 1997................................... 2,503,308 19,323
Changes during the year:
Issued for cash.......................................... 537,634 5,027
Performance shares returned to treasury.................. (15,000) --
Value assigned to performance shares issued on
acquisition of Sugar released from escrow (note 6)...... -- 1,980
Less share issue costs................................... -- (152)
--------- -------
Balance, August 31, 1998................................... 3,025,942 26,178
Change during the period:
Tax recovery, prior year share issue costs............... -- 466
--------- -------
Balance, February 28, 1999 (unaudited)..................... 3,025,942 $26,644
========= =======
</TABLE>

Shares issued for non-cash consideration have been valued at their estimated
fair value at the date of issuance.

During the year ended August 31, 1998, 15,000 performance shares issued and
held in escrow pending certain earn-out provisions were canceled and returned
to treasury.

F-14
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(b) Options:

For each of the periods presented, the following stock options to directors
and officers were outstanding. Of number the shares shown in the following
table 1/2 are Class A shares and 1/2 are Class B shares.

<TABLE>
<CAPTION>
August 31,
------------------------
1996 1997 1998
------ ------- ------- February 28, Exercise price
Number of shares 1999 per share Expiry date
------------------------------------ -------------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
300 300 -- -- $ 15.50 March 30, 1998
1,850 -- -- -- 4.80 August 31, 1999
11,750 4,400 -- -- 5.20 June 12, 2000
800 800 -- -- 6.20 July 10, 2000
12,925 6,275 1,350 750 11.20 January 24, 2001
49,500 47,500 47,000 47,000 14.00 March 29, 2001
6,000 3,500 1,000 1,000 19.40 May 9, 2001
-- 63,500 49,500 48,350 13.50 October 15, 2001
-- 52,400 39,600 37,600 13.00 June 2, 2002
-- 6,000 6,000 6,000 10.25 August 26, 2002
-- -- 158,200 148,000 9.50 March 23, 2003
-- -- -- 24,000 7.50 November 19, 2003
-- -- -- 1,000 11.25 February 1, 2004
-- -- -- 50,000 US 7.50 February 5, 2002
------ ------- ------- -------
83,125 184,675 302,650 363,700
====== ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
August 31,
------------------------- February 28,
1996 1997 1998 1999
------- ------- ------- ------------
(unaudited)
<S> <C> <C> <C> <C>
Balance, beginning of period......... 81,300 83,125 184,675 302,650
Granted.............................. 78,500 127,900 152,200 75,000
Exercised............................ (76,675) (26,350) (825) --
Expired or cancelled................. -- -- (33,400) (13,950)
------- ------- ------- -------
Balance, end of period............... 83,125 184,675 302,650 363,700
======= ======= ======= =======
</TABLE>

Stock options are granted having exercise prices based on market prices at
the date of grant and vest over a period that does not exceed two and one-half
years.

In connection with a public offering in 1997, the Company granted as
compensation 26,700 two-year underwriter's options exercisable to March 31,
1999 at $11.25 each to purchase one common share and one half of one common
share purchase warrant with each common share purchase warrant exercisable to
purchase one additional common share at $13.75 for one year and $16.25 during
the second year.

F-15
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(d) Share purchase warrants:

For each of the periods presented, warrants were outstanding to acquire
common shares as indicated in the table. Of the number of shares shown in the
following table 1/2 are Class A shares and 1/2 are Class B shares:

<TABLE>
<CAPTION>
August 31,
----------------------- February 28,
1996 1997 1998 1999
------ ------- ------- ------------ Exercise price
Number of shares per share Expiry date
--------------------------------------------------- ------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
12,500 -- -- -- $10.00 December 19, 1996
27,880 -- -- -- 10.00 September 14, 1996
4,400 -- -- -- 17.20 May 10, 1997
-- 267,000 267,000 267,000 16.25 March 31, 1999
-- -- -- 100,000 6.25 October 21, 2000
------ ------- ------- -------
44,780 267,000 267,000 367,000
====== ======= ======= =======
</TABLE>

During the six months ending February 28, 1999, warrants to acquire a total
of 100,000 common shares were issued (August 31, 1998--nil; August 31, 1997--
267,000; August 31, 1996--nil). Warrants to acquire a total of nil common
shares expired (August 31, 1998--nil; August 31, 1997--14,280; August 31,
1996--nil), and nil warrants were exercised (August 31, 1998--nil; August 31,
1997--warrants to acquire 30,500 common shares; August 31, 1996--nil).

(e) Dividends:

Covenants attached to the debentures limit the Company's ability to pay
dividends without the approval of the lenders.

11. Interest expense

<TABLE>
<CAPTION>
Six months
ended
Years ended February
August 31, 28,
-------------- -----------
1996 1997 1998 1998 1999
---- ---- ---- ----- -----
(unaudited)
<S> <C> <C> <C> <C> <C>
Interest expense:
Long-term debt.................................. $269 $337 $447 $ 162 $ 339
Other........................................... 39 30 129 41 150
Interest capitalized.............................. -- -- 32 -- 108
</TABLE>

12. Loss on asset sale of subsidiaries:

During the year ended August 31, 1997, the Company sold the material assets
of its educational video and software distribution subsidiary, Image Media Ltd.
and its wholly owned subsidiary 802117 Ontario Ltd. (D.B.A. Pilot Software
Ltd.) for proceeds of $575,000. For the year ended August 31, 1997 to the date
of sale, the subsidiaries reported combined revenue of $3,064,340, gross profit
of $1,165,339 and a loss from operations of $158,617.

F-16
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

13. Limited partnership product revenue interest:

On March 6, 1996, the Company entered into a joint venture marketing
agreement with New Media Marketing II Limited Partnership whereby the
Partnership would provide marketing services in exchange for an entitlement to
future revenue of the Company above a base level, until December 31, 2006. The
Company purchased the Partnership's revenue interest by issuing 175,217 common
shares of the Company at the fair value of $13.13 per common share. In the year
ended August 31, 1997, the amount was written off resulting in a charge to
earnings of $2,312,722.

14. Income taxes:

The provision for income taxes is comprised of:

<TABLE>
<CAPTION>
Six months
Years ended ended
August 31, February 28,
------------------- --------------
1996 1997 1998 1998 1999
----- ----- ----- ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Corporate statutory income tax rate....... 45.6% 45.6% 45.6% 45.6% 45.6%
Add (deduct) the effect of:
Utilization of previously unrecognized
tax losses............................. (48.6) (48.6) (35.1) (49.5) (14.8)
Miscellaneous, including expenses not
deductible for income tax purposes..... 3.0 3.0 3.9 3.9 8.2
----- ----- ----- ------ ------
-- % -- % 14.4% -- % 39.0%
===== ===== ===== ====== ======
</TABLE>

At August 31, 1998, the Company has operating losses for income tax purposes
of approximately $2,400,000, the benefit of which has been recognized as a
reduction of the Company's deferred income tax. The losses expire as follows:

15. Financial instruments:

(a) Fair values:

As at August 31, 1998 and 1997, the Company's financial instruments included
cash and cash equivalents, accounts receivable, tax credits receivable, bank
indebtedness, accounts payable and accrued liabilities and due to directors and
shareholders. As at these dates, the carrying value of these financial
instruments approximated their fair value due to their ability for prompt
liquidation or short term to maturity with the exception of tax credits
receivable which are receivable over a period of up to two years. As at August
31, 1998, the fair value of tax credits receivable is estimated to be
$7,300,000 (August 31, 1997--$2,225,000).

F-17
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Also included as a financial instrument is long-term debt consisting of
mortgages, demand loans and convertible debentures. The fair value of long-term
debt has been estimated to approximate carrying value based upon discounting
future cash flows at the rate currently offered for debt that is estimated by
management to be of similar maturity and credit quality.

(b) Concentration of credit risk

During the year ended August 31, 1998, the Company derived over 82% (1997--
74%; 1996--nil) of its revenues from export sales denominated in U.S. dollars.
Although all of revenue is generated from Canada, the majority of these
revenues can be attributed to five customers in the USA and Europe and resulted
from the sale of production and distribution of film and video programming. In
the year ended August 31, 1998, one of these customers represented 32%, two
customers represented approximately 20% each and a fourth customer represented
11% of total revenues. In the year ended August 31, 1997, one of these
customers represented 37%, a second customer represented 22% and a third
customer represented 13% of total revenues. No customers represented in excess
of 10% of revenues for the year ended August 31, 1996.

The Company did not use derivative instruments to reduce its exposure to
foreign currency risk.

The Company's exposure to interest rate risk is limited to the cash flow risk
associated with variable rate debt as disclosed in notes 7 and 9.

16. Related party transactions:

Related party transactions not disclosed elsewhere in these consolidated
financial statements are as follows:

<TABLE>
<CAPTION>
Six months
Years ended ended
August 31, February 28,
---------------- -------------
1996 1997 1998 1998 1999
---- ---- ------ -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Production fees paid to an officer of the
Company....................................... $ -- $725 $1,285 $ 490 $ 1,196
Consulting fees paid to companies owned by
officers and directors of the Company......... $ -- $ 58 $ 120 $ 60 $ 60
</TABLE>

At February 28, 1999 additional fees payable to an officer of the Company
totaling $583,090 were accrued and included in accounts payable and accrued
liabilities at period end.

At February 28, 1999 and August 31, 1998 and 1997 long-term debt includes
$200,000 in convertible debentures due to directors of the Company.

17. Uncertainty due to the Year 2000 Issue:

The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. The effects of the Year 2000 Issue may be
experienced before, on, or after January 1, 2000, and, if not addressed, the
impact on operations and financial reporting may range from minor errors to
significant systems failure which could affect a company's ability to conduct
normal business operations. It is not possible to be certain that all aspects
of the Year 2000 Issue affecting the Company, including those related to the
efforts of customers, suppliers, or other third parties, will be fully
resolved.

F-18
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

18. Changes in non-cash operating working capital:

Years ended August Six months ended
31, February 28,
----------------------- ----------------
1996 1997 1998 1998 1999
----- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Accounts receivable................ $ 135 $(1,155) $ (76) $ 1,223 $(1,599)
Production costs in progress....... 47 (667) (8,044) 3,263 8,135
Prepaid expenses and deposits...... 165 (12) (186) 221 97
Tax credits receivable............. -- (2,370) (5,360) (1,855) (5,101)
Accounts payable and accrued
liabilities....................... (109) (120) 2,309 (268) 287
Deferred revenue................... 5 1,067 6,540 (3,720) (7,823)
----- ------- ------- ------- -------
$ 243 $(3,257) $(4,817) $(1,136) $(6,004)
===== ======= ======= ======= =======
</TABLE>

19. United States generally accepted accounting principles:

These consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in Canada ("Canadian GAAP") which
differ in certain respects with accounting principles generally accepted in the
United States ("US GAAP"). Material differences to these consolidated financial
statements are as follows:

(a) Income taxes:

For US GAAP purposes, income taxes are accounted for in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109). SFAS 109 requires the asset and liability method of
accounting for income taxes. Under the asset and liability method of SFAS 109,
deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. A valuation allowance is provided on deferred tax assets
to the extent it cannot be considered at the balance sheet date to be more
likely than not that such deferred tax assets will be realized. Under SFAS 109,
the effect on deferred tax assets and liabilities of a change in tax rate is
recognized in income in the period that includes the enactment date.

F-19
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following sets forth the tax effect of temporary differences that give
rise to significant portions of the deferred tax asset and deferred tax
liabilities:

<TABLE>
<CAPTION>
August 31,
---------------- February 28,
1997 1998 1999
------- ------- ------------
(unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Loss carry forwards...................... $ 1,078 $ 1,039 $ 1,039
Investment in television programming..... 1,360 681 --
------- ------- -------
Gross deferred tax assets.................. 2,438 1,720 1,039
Valuation allowance........................ (1,159) (184) --
------- ------- -------
Net deferred tax assets.................... 1,279 1,536 1,039
Deferred tax liabilities:
Investment in television programming..... -- -- (809)
Property and equipment................... (91) (82) (74)
Deferred revenue......................... (1,188) (1,454) (361)
------- ------- -------
(1,279) (1,536) (1,244)
------- ------- -------
Net deferred tax asset (liability)......... $ -- $ -- $ (205)
======= ======= =======
</TABLE>

(b) Earnings (loss) per share:

Under US GAAP, shares that are contingently returnable to treasury are
excluded from the weighted average number of shares outstanding for purposes of
the calculation of basic earnings (loss) per share for all periods prior to the
period in which the contingency is resolved and the shares are released from
escrow. The exclusion of the escrowed shares issued on the acquisition of Sugar
(note 6) would reduce the weighted average number of shares outstanding to as
follows:

<TABLE>
<S> <C>
Year ended August 31,
1996........................................................... 1,246,640
1997........................................................... 1,510,580
1998........................................................... 2,303,988
Six months ended February 28,
1998........................................................... 2,153,511
1999........................................................... 2,875,942
</TABLE>

In addition, under US GAAP the weighted average number of shares used in the
calculation of diluted earnings (loss) per share would be calculated by the
treasury stock method whereby it is assumed that proceeds received by the
Company from the exercise of dilutive securities are used to repurchase
outstanding shares in the market.

As discussed in note 6, effective September 1, 1996 the Company issued
350,000 performance shares on the acquisition of Sugar. In the year ended
August 31, 1998, and prior to the release of 200,000 shares from escrow, the
holder of the performance shares transferred, within escrow,
160,000 performance shares to three officers of the Company. The 160,000 shares
were transferred subject to the terms and conditions of the escrow agreement
for their initial assigned value of $0.10 per share. Subsequently, 91,428 of
these shares were released from escrow. The balance of the performance shares
transferred continue to be held in escrow.

F-20
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

On transfer, for US GAAP purposes, the excess of the market value over the
transfer price is charged against income as compensation expense.

The effect of this difference on net earnings (loss) and earnings (loss) per
share (calculated by reference to the weighted average number of shares
outstanding) under US GAAP would be as follows:

Six months ended
Years ended August 31, February 28,
------------------------- ---------------
1996 1997 1998 1998 1999
------- ------- ------- ------- ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net earnings (loss), Canadian
GAAP........................... $(2,100) $(1,212) $ 1,758 $ 689 $1,009
Compensatory value of
transferred shares............. -- -- (1,224) (1,224) --
------- ------- ------- ------- ------
Net earnings (loss), US GAAP.... $(2,100) $(1,212) $ 534 $ (535) $1,009
======= ======= ======= ======= ======
Net earnings (loss) per share,
US GAAP:
Basic and diluted............. $ (1.68) $ (0.80) $ 0.23 $ (0.25) $ 0.35
======= ======= ======= ======= ======
</TABLE>

There would be no difference from total assets or shareholders' equity
calculated under Canadian GAAP.

(d) Stock-based compensation:

As described in note 10(b), the Company has granted stock options to certain
directors and employees. These options are granted for services provided to the
Company. For US GAAP purposes, Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS 123), requires that an
enterprise recognize or, at its option, disclose the impact of the fair value
of stock options and other forms of stock-based compensation in the
determination of income. The Company has elected under SFAS 123 to continue to
measure compensation cost on the intrinsic value basis set out in APB Opinion
No. 25. As options are granted at exercise prices based on the market value of
the Company's share at the date of grant, no adjustment for compensation
expense is required.

Under SFAS 123, where a company chooses to continue to apply APB Opinion No.
25 in its basic financial statements supplementary pro forma information as if
the fair value method was applied must be disclosed. This pro forma information
is set out below. The pro forma stock compensation expense has been determined
by reference to an option-pricing model that takes into account the stock price
of the grant date, the exercise price, the expected life of the option, the
estimated volatility of the underlying stock, expected dividends and the risk
free interest rate over the term of the option.

The calculations applied have assumed that the expected life of all options
granted equals the maximum term, no dividends will be paid, and expected
average volatility and risk free interest rates as follows:

<TABLE>
<CAPTION>
Six months
Years ended ended
August 31, February 28,
-------------- -------------
1996 1997 1998 1998 1999
---- ---- ---- ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Volatility %.................................... 50 25 22 -- 38
Risk free interest rate %....................... 7.02 5.46 5.11 -- 4.76
</TABLE>

F-21
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Unaudited pro forma information with respect to impact of the fair value of
stock options at the date of grant on reported loss for the periods presented
is as follows:

<TABLE>
<CAPTION>
Six months
ended
Years ended August 31, February 28,
----------------------- --------------
Notes 1996 1997 1998 1998 1999
----- ------- ------- ----- ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Earnings (loss), US GAAP.......... $(2,100) $(1,212) $ 534 $ (535) $1,009
Stock compensation expense........ (85) (331) (490) (207) (310)
------- ------- ----- ------ ------
Pro forma earnings (loss), US
GAAP............................. $(2,185) $(1,543) $ 44 $ (742) $ 699
======= ======= ===== ====== ======
Pro forma basic earnings (loss)
per share, US GAAP............... $ (1.75) $ (1.02) $0.02 $(0.34) $ 0.24
======= ======= ===== ====== ======
</TABLE>

(e) Provision against Limited Partnership interest:

Under US GAAP, the provision against Limited Partnership interest would be
included in the earnings (loss) from operations.

(f) Supplementary information--allowance for doubtful accounts:

Accounts receivable are disclosed net of allowance for doubtful accounts.
Changes in the allowance for each of the periods presented are as follows:

<TABLE>
<CAPTION>
Six months
ended
Years ended February
August 31, 28,
--------------- ------------
1996 1997 1998 1998 1999
----- ---- ---- ----- -----
(unaudited)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period................... $ -- $ 31 $169 $ 169 $ 245
Charges to expenses:
Expensed..................................... 31 138 76 1 82
Recovered/written-off........................ -- -- -- (7) --
----- ---- ---- ----- -----
Balance, end of period......................... $ 31 $169 $245 $ 163 $ 327
===== ==== ==== ===== =====
</TABLE>

20. Subsequent events (unaudited):

(a) Long-term debt:

Subsequent to February 28, 1999:

(i) the Company exercised its right and repaid the $600,000 10%
convertible debenture in full;

(ii) the $500,000 12% convertible debentures due March 31, 1999 were
extended to July 31, 1999 under the same terms and conditions; and

(iii) the $300,000 12% loan due March 1, 1999 and the $938,000 mortgage
due May 1, 1999 were not repaid on the due date as they are currently being
renegotiated by the Company.

(b) Expiry of warrants and options:

On March 31, 1999, 267,000 warrants and 26,700 underwriter's options expired.
In addition, subsequent to February 28, 1999, 6,000 stock options exercisable
at $10.25 per common share and 4,000 stock options exercisable at $9.50 per
common share were cancelled.

F-22
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In May, 1999 the Company filed a prospectus and registration statement with
the Securities and Exchange Commission in the United States for the sale and
issuance of up to 862,500 Class B Shares at an offering price of US $5.00 per
share.

Effective July 14, 1999, the Company has changed its capital structure as
follows:

(a) the authorized share capital has been increased to 225,000,000 shares
without par value divided into 100,000,000 Class A Multiple Voting
Shares, 100,000,000 Class B Subordinate Voting Shares and 25,000,000
preference shares; and

(b) every five common shares issued and outstanding will be converted into
one Class A share and one Class B share, subject to the condition that
any fractional shares resulting from such conversion will be combined
and issued as one Class B share; and

Except for voting and conversion rights and rights with respect to dividends
and issuer bids, the Class A shares and the Class B shares have the same rights
in all material respects. The holders of Class A shares are entitled to ten
votes per share held and the holders of Class B shares are entitled to one vote
per share held. Subject to the prior rights of holders of preference shares, if
any, the Class B shares and Class A shares will share ratably in any dividend
declared, paid or set aside for payment on the Class A shares. However, the
board of directors will have the right to declare dividends on the Class B
shares without declaring dividends on the Class A shares or while declaring a
dividend in a lesser amount. Finally, in the event that an offer is made to
purchase Class A shares and the offer is one which must, pursuant to applicable
securities legislation or the rules of a stock exchange on which the Class A
shares are then listed, be made to all or substantially all the holders of
Class A shares in a province of Canada to which the requirement applies, each
Class B share will become convertible at the option of the holder, at any time
while the offer is in effect, into one Class A share. The Class B Shares will
not otherwise be convertible. The Class A shares will be convertible, at any
time, at the option of the holder into one Class B share.

The accompanying consolidated financial statements give retroactive effect to
these changes in capital structure, including the 2-for-5 share conversion.

F-23
<PAGE>

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You may rely on the information contained in this prospectus. We have not
authorized anyone to provide information different from that contained in this
prospectus. Neither the delivery of this prospectus nor sale of the Class B
shares means that information contained in this prospectus is correct after
the date of this prospectus. This prospectus is not an offer to sell or a
solicitation of an offer to buy these Class B shares in any circumstances
under which the offer or solicitation is unlawful. Until August 22, 1999, all
dealers that buy, sell or trade in our Class B shares, whether or not
participating in this offering, may be required to deliver a prospectus. This
delivery requirement is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.

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

TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 13
Determination of Offering Price........................................... 14
Dilution.................................................................. 15
Capitalization............................................................ 16
Price Range and Trading Volume of Common Shares........................... 17
Dividend Policy........................................................... 17
Selected Consolidated Financial and Operating Data........................ 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations .............................................................. 21
Business.................................................................. 28
Description of Property................................................... 38
Legal Proceedings......................................................... 38
Management................................................................ 39
Control of Registrant..................................................... 42
Compensation of Directors and Officers.................................... 43
Interest of Management in Certain Transactions............................ 46
Description of Capital Stock.............................................. 48
Tax Considerations........................................................ 52
Underwriting.............................................................. 56
Shares Eligible for Future Sale........................................... 58
Legal Matters............................................................. 59
Experts................................................................... 59
Where You Can Find More Information....................................... 60
Financial Statement Presentation.......................................... 60
</TABLE>

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[LOGO OF PEACH ARCH ENTERTAINMENT GROUP INC.]

750,000 Class B Shares

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

PROSPECTUS

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

The Seidler Companies Incorporated

July 28, 1999

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