ARTAGRAPH REPRODUCTION TECHNOLOGY INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
--------------------------------

FORM 10-K
[ X ] ANNUAL REPORT UNDER SECTION 13

OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED November 30, 1997

[ ] TRANSITION REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __n/a________ to ___n/a_______

Commission File No. 0-16008
--------------------------

ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED
Ontario, Canada 98-0082514
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)

5-7100 Warden Avenue, Markham, Ontario, L3R 8B5 Canada (905) 477-0252
----------------------------------
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Shares, without par value; Class A Preference Shares, Series 1, without par
value; Class A Preference Shares, Series 2, without par value.

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. [ X ]

The aggregate market value of the Common Shares held by non-affiliates
based upon closing price of US$0.001, based on the average of the bid and
ask price per share, on November 30, 1997, was approximately US$266,630.

As of November 30, 1997 there were 266,629,785 Common Shares outstanding.
Documents incorporated by reference: Yes. (See Item 14 page 25)

PART I

Item 1. Business.

General

The Company manufactures high quality fine art reproductions of original
paintings using the Company's patented and proprietary technologies and
markets them through a variety of channels and programs, including retail
stores, art publishers, joint ventures, overseas distributors, direct
marketing campaigns and various other sources. The Company replicates both
the color and brush stroke texture of the original, so that the resulting
works of art are almost indistinguishable, by the average person, from
original paintings. The Company's reproductions on canvas are marketed
using the registered trademark of Artagraph(R) Editions, (sometimes
referred to as "Artagraph(R)" or Artagraphs(R)"), while its reproductions
on paper are marketed as Works of A.R.T.TM

The Artagraph(R) Editions include signed and numbered limited editions by
contemporary artists, as well as limited editions of works by the great
masters, and have a suggested retail price of between US$399 and US$849.
Some limited edition reproductions of contemporary artists retail
considerably higher, but this is solely due to the Artist's reputation.

The Works of A.R.T.TM product line, which retailed at significantly lower
prices, was originally introduced to allow the Company to broaden its
universe of customers through volume-oriented North American retailers.
Sales from this product line have always been disappointing. Consequently,
while the Company continues to sell Works of A.R.T.(TM) from its current
inventories, it has not introduced any new product or programs for the last
three years.

The majority of the Company's sales represent exports, principally to the
United States, and to a lesser extent, to other countries. The following
table shows the Company's sales to its principal geographic markets for the
last four fiscal years.

Year Ended November 30
----------------------
1997 1996 1995 1994
---- ---- ---- ----
(In Canadian Dollars)

Canada................................... 60,046 41,379 170,630 278,223
United States............................ 887,833 1,668,104 1,810,427 4,417,669
Overseas................................. 45,645 847,067 158,214 151,420
----------------------------------------------------------------------
993,524 2,556,550 2,139,271 4,847,312
----------------------------------------------------------------------

Sales outside Canada are invoiced in United States Dollars. Thus, the
Company is at risk to unfavourable changes in the exchange rates between
Canadian and United States dollars.

In the second half of 1994, the Company discovered a product quality
problem with a significant number of ARTAGRAPH(R) reproductions previously
shipped to a major customer in the publishing business. After several
months of investigation, including analyses of raw materials and production
processes, the Company modified its operations in an effort to eliminate
repetition of such problems in the future. No subsequent product quality
problems have since come to the Company's attention. As a consequence of
this problem, and the time and resources required to resolve it, the
Company's sales have not returned to the historic levels experienced prior
to fiscal 1994.

2

During 1995, the major publishing customer who had distributed the
defective Artagraph(R) reproductions agreed to accept replacement product
and also placed new orders for Artagraphs(R) with the Company. By August,
1995, the Company had replaced all the returned product. Replacement of the
defective reproductions created severe financial and cash flow restrictions
which have continued to severely impact all areas of the Company's business
through to 1997.

Library of Titles and Acquisitions of Paintings
Many of the works reproduced by the Company are in the public domain. Works
which are not in the public domain are reproduced pursuant to agreements
with various museums or other copyright holders. The agreements range from
a one time charge for reproduction rights to royalty payments of up to 10%
of the wholesale unframed price of each Artagraph(R) sold. The types of
agreements depend largely on each Museum's policy for reproductions and the
amount of time and assistance provided to the Company by the museum's staff
to reproduce the originals.

The Company manufactures reproductions of Impressionist and
Post-Impressionist paintings as well as paintings by contemporary artists.
The Company does not always create a replication directly from an original
painting. Semi-originals are also created by a contract artist engaged to
replicate the texture and brush strokes of the original artist's style.

Commencing in fiscal 1993, the Company's publishing division, under
contracts with art publishers, has produced and sold replications of
contemporary works of art for a fixed price which are then distributed by
the publisher.

As of November 30, 1997, the Company had a library of approximately 170
different Artagraph(R) Edition titles, of which 100 are Impressionist or
Post-Impressionist paintings and 70 are by contemporary artists, some being
limited edition reproductions. These reproductions are of paintings by such
artists as Monet, Manet, Van Gogh, Degas, Renoir, Turner and other well
known artists. Once the Company has a reproduced title in its library, it
can manufacture as many reproductions from that title as the market will
bear, subject only to limitations imposed by contracts with third parties
that limit the availability of certain Artagraph(R) Editions.

Manufacturing Process
The replication process is a two-stage process. The first stage is
replication of the painting's color. The second stage, which directly
involves the Company's patented process, is the reproduction of texture and
brush strokes. The Company works from transparencies of the original art,
preparing color separations and then printing the image on a specially
designed "paper" called a litho. The Company subcontracts with third
parties to produce the transparencies and printed lithos in accordance with
the Company's proprietary specifications. In the second stage, the Company
produces a relief mold from either the original oil painting or, in cases
where the original oil painting is not available, from the semi-original of
the painting.

The final stage of processing involves precise application of heat and
pressure to the relief mold, the printed litho, and to a specially coated
canvas to create the finished product. Currently, the Company has three
sets of equipment in operation for the production of Artagraphs(R).

Sales and Marketing
The Company markets through specialty retail, overseas distributors, direct
mail and carries out contract printing for publishers.

3

In September, 1995, the Company signed a five year Agreement with ART
ATELIER ("ATELIER") being an exclusive, world-wide marketing and sales
agreement for the contract printing business in the publishing market, and
ATELIER is paid a commission of 25% of gross sales. ATELIER was responsible
for developing contract printing business with the Company's fine art
publishing customers over 1994 and 1995, worth approximately Cdn$3,000,000
in gross sales. However, subsequent to 1995 the sales revenues from this
source have not reached the minimum contract requirement of Cdn$2,000,000
per annum.

Specialty Retailers, Home Furnishings and Mass Merchandising
During fiscal 1997, the Company continued to support existing customers in
these markets. The Company's ability to initiate new opportunities and to
continue to develop its marketing efforts to attract new customers has been
severely limited due to severe cash flow constraints experienced by the
Company since fiscal 1995.

A major customer is The Museum Company, a 90-plus store chain located
principally in the US that specializes in the retailing of high quality
museum reproduction products. In an effort to boost sales in 1996, the
Company provided new point-of-sale materials, including new catalogues, to
all Museum Company stores and, to one of its flagship stores, provided
video materials promoting the Artagraph(R) product. Sales in fiscal 1997
were 20% higher than in fiscal 1996 (see table on page 12 in the management
discussion and analysis section).

Overseas Distributors
Sales of Cdn$1.9 million in earlier periods (through 1992) were
attributable to the efforts of a Japanese distributor that is no longer
marketing the Company's products. Since 1994 the Company has been seeking
to expand its business in foreign markets, extending some territories with
existing distributors and signing new agreements with new distributors. One
such new distributor was successful in creating significant sales into
Spain's direct mail markets of Cdn$653,514 during fiscal 1996. This success
was partly attributable to the discounted selling prices that this Company
offered in exchange for cash sales. However, sales to this customer in 1997
are Cdn$Nil, owing to the lack of new programs and images.

During the second quarter of 1996, the Company and a Chinese business
partner signed an exclusive distribution agreement for the People's
Republic of China. As of November 30, 1997, sales to China have been a very
disappointing Cdn$31,000. The Chinese business partner believes that the
lack of success to date is partly attributable to the undeveloped Fine Art
Reproduction market in that country. This experience is not unique. The
Spanish distributor had conducted marketing activities and had experienced
a similar lack of sales in the first year, following the signing of its
distribution agreement.

The Company's international distributors, as of November 30, 1997, include
the following:

4

Min. Purchase
Name of Distributor Exclusive Territory Term Requirement
------------------- ------------------- ---- -------------

Gipa Trading SPRL........... Belgium, Austria November 1, 1996 1000 Units to Dec 1997
Germany, Hungary to December 1997 Thereafter 1500 per year
Poland Target not met

Beijing Ouhe Science and Peoples Republic of China August 1996 to
Trading Corp................ December 1997 2100 Units
January 1998 to
December 1999 5000 Units

A.R.T. (sea) Pte. Ltd. Singapore Expired Month to month
Malaysia, Brunei;

Museo Albierto Luxembourg September 1996 to US$100,000
Switzerland December 1998
Spain, Portugal November 1994 to US$200,000
Andorra December 1998
Monaco

In addition, the Company has signed short-term (6 months trial period)
Distribution Agreements in the following territories: Argentina, Brazil,
Chile, and Uruguay. Also, the Company signed non-exclusive agreements
(dealer only) in Bahrain, Indonesia, Hong Kong, Kuwait, Mexico, Oatar,
Oman, Saudi Arabia, Taiwan, and Thailand. Sales to these territories in
fiscal 1997 were not significant, however the Company has not terminated
any agreements, and agreements that have expired were continued informally
on a month to month basis. All these agreements are on a best efforts basis
and, like all the Company's distributor agreements, there can be no
assurance of future revenues or profits from the efforts of any of these
distributors.

Publishing
There are many publishers who represent contemporary artists engaged in
publishing art reproductions, such as lithographs, serigraphs and posters.
The Company believes that its products offer a unique alternative to these
publishers to add an important new and more accurate reproduction medium to
their existing product lines.

The Company produces custom pieces under fixed price contracts for art
publishers and agents, with product development costs paid by the
publisher. Prices charged vary depending upon the size of the product, the
number of colors and the size of the edition.

Commencing in February, 1994, the Company entered into a series of ten
contracts with a major art publisher to produce a total of ten (10)
Artagraphs Editions(R) depicting marine wildlife. The Company completed
shipment of 15,000 reproduction ("pieces") based on these 10 reproduction
images. However, due to product quality problems the Company had to replace
approximately 60% of these reproductions in 1995. The Company secured
further orders from this publisher in fiscal 1995 totalling Cdn$1,317,200,
of which Cdn$592,600 was shipped in fiscal 1996. In 1997, the company did
not receive any orders from this customer other than a small shipment for
approximately Cdn$41,000. The loss of business from this customer is
attributed to their decision to

5

only sell reproductions in paper-based product, in order to minimize their
capital investment. The Company also believes that the market for marine
wildlife images has become saturated, and consequently sales will not
return to previous levels.

In 1996, Company modified its policies for pricing and shipment to
customers in the limited edition contract printing market in order to widen
the potential customer base and to make the Artagraph(R) reproductions more
competitive. Deposits on future contracts now cover only initial process
costs, such as color printing, thereby reducing publisher customers'
initial capital commitments. Under these new policies, the Company
processes the product only through the final texturing phase , on an as
needed basis, in order to more closely match customers' actual sales
orders.

While this new "just-in-time" policy, has stimulated considerable interest
by art publishers in the Artagraph(R) reproductions, such efforts did not
result in significant increased contract printing business for the Company.
Again, the results reflect the Company's inability to finance new
initiatives, such as attending trade shows or hiring dedicated sales
personnel to market to potential customers.

Direct Marketing
In the past, the Company has marketed its products by direct mail. Revenues
in this market were Cdn$Nil in fiscal 1997 and 1996, Cdn$346,000 in fiscal
1995, Cdn$340,000 in fiscal 1994, and Cdn$1,000,000 in fiscal 1993. The
declines since 1993 are attributable to the reduction in marketing through
American Express, because of the Company's inability to finance new
programs due to its continuing liquidity problems.

Patents and Trademarks
The process for manufacturing Artagraph(R) Editions has been patented in a
number of jurisdictions, including Canada and the United States. An
application for improvements to the Artagraph(R) replication process
resulted in the issuance of a new United States patent in November, 1990.
Patents in Europe have expired owing to the Company's inability to finance
renewal fees of approximately Cdn$50,000. In addition, due to similar
financial considerations, patent applications that are pending in Japan and
Korea have been abandoned by the Company at this time.

The Company believes its patents are valid and would withstand a challenge
to their validity. No assurances can be given, however, that a third party
will not attempt to challenge the validity of the patents. The Company
intends to vigorously defend its patent rights against any such challenge,
but no assurance can be given that the Company will be successful. Loss of
protection provided by the patented process could have a material adverse
impact on the Company. Moreover, there can be no assurance that other
companies will not design competitive processes that do not infringe on
such patents.

The Company has a registered trademark for "Artagraph(R)" in the United
States and Canada.

Competition
The Company's reproductions must compete with a variety of decorative art
products, including products from other companies which replicate fine art
as well as original artwork from local artists and others. Small vendors
can compete effectively within the marketplace while larger vendors can
benefit from volume discounts. The Company must competitively price its
products against both the

6

large and the small vendors to successfully build sales volume. Many
companies have processes for reproducing oil paintings, including other
methods of texturing their reproductions, and there are also many companies
which market art reproductions such as lithographs and serigraphs.
Nevertheless, the Company believes that no other known reproduction
processes compare in quality with the Company's processes in accurately
reproducing brush strokes and texture; and the color intensity and other
reproduction characteristics are believed to be at least equal to any other
known reproduction process. The Company's success in the marketplace will
depend upon creating greater awareness of its products, as well as its
pricing and delivery policies. There can be no assurance that the Company
will be successful in the art reproduction markets or that other processes
will not provide successfully-competing products.

Suppliers
The Company purchases frames for its reproductions and obtains its
principal raw materials from several suppliers. The Company also contracts
for printing services principally of lithographs with several companies,
including Herzig Somerville Limited, controlled by a former director of the
Company. The Company believes that the frames and the raw materials are
commodity items that can be obtained from several alternative sources.

Employees
As of November 30, 1997, the Company had 10 employees and consultants,
including management, administrative and production employees.

Item 2. Properties.

The Company's executive offices, production facility and gallery are
located at 7100 Warden Avenue, Markham, Ontario, Canada L3R 8B5, occupying
26,668 square feet of space leased through February 1, 1998. The lease
provides for a fixed annual gross rental ("gross rent")of Cdn$223,325,
including its pro rata share of taxes, insurance, building maintenance and
occupancy costs. Effective February 1998, the Company has negotiated a new
lease for its offices in the same location, but with a reduced space of
approximately 11,000 square feet. The term of the lease is for 5 years, and
the fixed annual gross rent is Cdn$96,611.

The Company believes its leased facilities are in good operating condition
and adequate for its present and future requirements.

Item 3. Legal Proceedings.

None,

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

None

7

PART II

Item 5. Market for the Company's Equity Securities and Related Matters.

During fiscal 1995, the Company was advised by NASDAQ that the Company was
no longer in compliance for continued listing on NASDAQ's Small Cap Market.
The Company believes that this was in part due to the discontinuance of
market-making activities by the Company's market-makers. Accordingly, the
remaining securities, including the Class A Preference Shares, Series 1 and
2, were delisted. As noted in the May 12, 1994, offering prospectus, as a
condition to NASDAQ approval of the Company's application to list the
Units, (12% Convertible Redeemable Class A Preference Share, Series 2, and
Redeemable Class C Preference Share Purchase Warrants) on NASDAQ, the
Company agreed to the delisting of the Common Shares from the NASDAQ Small
Cap Market. The Company's securities are now listed on the NASDAQ sponsored
OTC Bulletin Board; however, there are no market-makers at this time.

The Company's initial public offering of Common Shares occurred in April
1987. In a 1992 Secondary Offering, the Company sold 805,000 Units, each
consisting of one Series 1 Preference A Share, one Class A Warrant and one
Class B Warrant. In a 1994 Offering, the Company sold 373,750 Units, each
consisting of one Series 2 Preference A Share and two Class C Warrants. As
of November 30, 1997 the Company had approximately 1300, 230, and 180
holders of record of the Common Shares, Series 1 Preference A Shares,
Series 2 Preference A Shares respectively. All of the Company's issued
warrants have expired.

The following table sets forth the high and low bid quotations for these
securities, as reported by NASDAQ or the National Quotation Bureau, Inc.,
for each quarterly period within the three most recent fiscal years. The
quotations are reported quotations without retail markup, markdown or
commission and may not represent actual transactions.

----------------------------------------------------------------------------------------------------
In U.S. Series 1 Series 2 Common
Dollars Preference Preference Shares
Shares Shares
----------------------------------------------------------------------------------------------------
Fiscal Year High Low High Low High Low
----------------------------------------------------------------------------------------------------

1995
1st Quarter -- -- -- -- 0.03 0.001
2nd Quarter -- -- -- -- 0.025 0.005
3rd Quarter -- -- 0.0625 0.0625 0.50 0.005
4th Quarter -- -- -- -- 0.15 0.001

1996
1st Quarter 0.5 0.5 -- -- 0.50 0.001
2nd Quarter -- -- -- -- 0.02 0.001
3rd Quarter -- -- -- -- -- --
4th Quarter -- -- -- -- 0.02 0.00025

8

----------------------------------------------------------------------------------------------------
In U.S. Series 1 Series 2 Common
Dollars Preference Preference Shares
Shares Shares
----------------------------------------------------------------------------------------------------
Fiscal Year High Low High Low High Low
----------------------------------------------------------------------------------------------------

Share
Volume
1997 ------
1st Quarter No Market No Market 0.01 .00025 34,001
2nd Quarter For Company's for Company's N/A N/A N/A
3rd Quarter Series 1 Pref Series 2 Pref 0.001 0.001 23,000
4th Quarter Shares Shares N/A N/A N/A

To be legally entitled to pay dividends (whether paid in cash or in Common
Shares) on the Series 1 or Series 2 Preference A Shares (collectively, the
"Preference Shares"), the Company is required to have assets in excess of
liabilities and stated capital after any payment of dividends. If the
Company incurs losses and therefore does not meet this standard, it cannot
pay dividends on the Preference Shares (whether in cash or Common Shares).

Except for the initial four quarterly dividends paid on the Series 1
Preference Shares issued in the 1992 Offering, the Company has never paid
cash dividends. Due to the Company's continuing working capital problems,
the Company has failed to declare and pay US$0.60 per share of dividends on
the Series 1 and Series 2 Preference Shares. As a result, the Company has
accumulated undeclared dividends on the Preference Shares of US$2,763,163,
as at November 30, 1997. The Company does not anticipate that it will
generate sufficient cash, to pay in cash the initial four quarterly
dividends on the Series 2 Preference Shares for the foreseeable future.
Furthermore, it is the Company's present expectation that any additional
dividends payable on the Preference Shares would likely be paid in Common
Shares.

The payment of dividends on the Preference Shares or Common Shares will
depend on the Company's future earnings and financial condition and such
other factors as the Board of Directors of the Company may then consider
relevant.

The Company currently intends to retain its earnings to assist in financing
business development and operations.

Item 6. Selected Financial Data.

The following presents selected consolidated financial data for the Company
in Canadian dollars and in accordance with U.S. Generally Accepted
Accounting Principles (US-GAAP"). It should be read in conjunction with the
separate consolidated financial statements of the Company and related notes
included elsewhere herein, which were prepared under Canadian Generally
Accepted Accounting Principles ("Cdn-GAAP"). This consolidated data should
be compared to the Company's Financial Statements and the reconciliation of
the financial information presented between Cdn-GAAP and US-GAAP. The
financial data as of November 30, 1997, and for the four previous fiscal
years has been derived from financial statements of the Company that have
been examined by independent chartered accountants in Canada.

9

(Stated in Canadian Dollars under U.S. Generally Accepted Accounting Principles)
Year ended November 30
-----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----

Summary of operations:
Sales.................. 993,524 2,556,550 2,139,271 $4,847,312 $ 4,806,543
Cost of goods sold..... 871,656 1,701,238 1,640,343 2,867,246 2,936,674
Gross profit........... 121,868 855,312 498,928 1,919,144 1,797,367
Depreciation and 298,671 356,369 324,792 340,047 386,630
amortization..........
Selling, general and
administrative expenses 489,335 887,692 1,178,399 2,286,914 3,726,280
Interest and finance
expense............... 65,573 47,804 45,739 47,859 47,863
Operating loss......... (731,711) (442,089) (1,050,002) ( 695,384) ( 2,112,802)
Interest income........ -- 5,536 2,907 49,571 5,546
Income taxes........... -- -- -- -- --
Loss before discontinued
operations............ (731,711) (436,553) (1,047,095) ( 645,183) ( 2,107.256)
Discontinued operations -- -- -- -- --
Net loss............... (731,711) (436,553) (1,047,095) ( 645,183) ( 2,107,256)
Dividends: Series 1
Preference Shares..... -- -- -- ( 473,462)
Dividends: Series 2
Preference Shares..... -- -- -- -- --
Net loss after dividends
on Series 1 Preference (731,711) (436,553) (1,047,095) (645,183) ( 2,580,718)
Shares.................
Net loss per Common
Share before dividends
on Series 1 & Series 2
Preference Shares..... (0.003) (0.03) (0.06) ( 0.04) ( 0.13)
Net loss per Common
Share after dividends
on Preference Shares.. (0.003) (0.03) (0.06) ( 0.04) ( 0.16)

Weighted average
number of Common
shares outstanding.... 266,629,785 16,629,785 16,629,785 16,629,785 16,629,785

Summary of balance
sheet data:
Current assets......... 592,381 547,915 869,191 1,761,824 $ 2,328,283
Total assets........... 3,111,323 3,459,221 4,408,070 5,528,932 6,503,470
Current liabilities.... 1,177,886 1,126,573 1,282,925 1,488,522 3,873,479
Long-term liabilities.. -- -- 355,944 230,329 1,164,580
Total liabilities...... 1,177,886 1,126,573 1,638,869 1,718,851 5,038,059
Contributed surplus.... 11,775,000 11,775,000 11,775,000 11,775,000 11,775,000
Accumulated deficit.... (20,560,176) (19,829,005) (19,392,455) ( 18,345,360) ( 17,910,617)
Shareholders' equity... 1,933,437 2,332,648 2,769,201 3,810,081 1,465,411

10

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.

a) General

Certain statements contained herein are not based on historical facts, but
are forward-looking statements that are based on numerous assumptions about
future conditions that could prove not to be accurate. Actual events,
transactions and results may materially differ from the anticipated events,
transactions or results described in such statements. The Company's ability
to consummate such transactions and achieve such events or results is
subject to certain risks and uncertainties. Such risks and uncertainties
include, but are not limited to, the existence of demand for and acceptance
of the Company's products and services, regulatory approvals and
developments, economic conditions, the impact of competition and pricing
results of financing efforts and other factors affecting the Company's
business that are beyond the Company's control. The Company undertakes no
obligation and does not intend to update, revise or otherwise publicly
release the results of any revisions to these forward-looking statements
that may be made to reflect future events or circumstances.

b) Year ended November 30, 1997, compared with year ended November 30, 1996

The Company recorded a loss of Cdn$731,711 for the year ended November 30,
1997, a decline from the loss of Cdn$436,553 for the comparable period in
1996. Sales revenues at Cdn$993,524 for the year ended November 30, 1997,
were a sharp decline from 1996's of Cdn$2,556,550. Sales revenues for the
forth quarter in fiscal 1997 were Cdn$342,706 (1996 -- Cdn$676,576) an
improvement over the first three quarters' sales of Cdn$163,239,
Cdn$175,305 and Cdn$306,295, respectively. The sales revenue decline
reflected the Company's reliance on two customers for approximately 54% of
its total sales revenues, in the previous year. However, in fiscal 1997
there was an almost complete absence of sales to these two customers.
Notably, sales to Lassen International, a major publishing customer, and
sales to its Spanish distributor were Cdn$30,825 and Cdn$nil, year-to-date
in 1997, compared to 1996's revenues of Cdn$596,947 and Cdn$658,319
respectively.

Gross profit for the first year fell Cdn$724,570 from Cdn$821,736 in 1996
to Cdn$97,166 in 1997. However, lower operating expenses in 1997 contained
the net loss to Cdn$731,711 compared to the loss in 1996 of Cdn$436,553.
Operating cash flow for the year was negative at Cdn$299,827 a decline
compared to the same period in 1996, when the Company recorded a break-even
cash flow of (Cdn$246). The Company's working capital balance remained
negative at Cdn$585,505, as at November 30, 1997, compared to negative
working capital of Cdn$578,657 at year end November 30, 1996.

There is substantial doubt that the Company has the ability to realize the
carrying value of its assets reported in the consolidated financial
statements which is dependent upon the attainment of profitable operations
and the continued financial support of its creditors.

11

In the last quarter of fiscal 1997, pursuant to a Regulatory S Offering,
the Company raised Cdn$332,500, net of associated costs, to use for working
capital purposes.

Sales
Tabled below are the sales to the Company's major customers, which are also
expressed as a percentage of total sales, for the last three fiscal years.
The loss of any one of these customers would have a serious detrimental
impact on its ability to continue to operate in the future.

1997 % 1996 % 1995 %
In Canadian Dollars
------------------------------------------------------------------------------------------------------------------
Total Sales $993,524 100% $2,556,550 100% $2,139,271 100%
----------- -------- ---- ---------- ---- ---------- ----

Sales to one Publishing Customer $30,825 3% $592,600 23% $798,000 37%

Sales to another Pub. Customer $264,881 27% $149,423 6% $90,950 4%

Sales to one Spanish Customer $Nil - $653,514 26% $Nil -

Sales to one Direct Mail Customer $Nil - $Nil - $345,917 16%

Sales to one Retail Customer $365.556 37% $305,271 12% $346,000 16%

The Company continues to be very reliant on a few customers for the
majority of its sales revenues. In the year ended November 30, 1997, the
Company recorded sales to its main retail customer of Cdn$365,556, which
represents 37% of its total sales revenues. Four other customers
represented a further 37% of the Company's annual sales revenues. The
decline of sales revenues from Cdn$2,556,550 in 1996 to Cdn$993,524 in
1997, represents the almost complete absence of sales, in 1997, to two of
its major customers of 1996. First, the decline of sales to the Spanish
market reflects the inability of the Company to finance new products and
new programs to offer to this customer. Second, one of the Company's
publishing customers experienced significant declining sales in 1997, and
has switched emphasis to paper-based fine art reproductions, as an
alternative to the Company's canvas-based product line.

The publishing customer's switch to an alternative product partly reflects
its desire to reduce its investment in inventories. In order to
re-establish new orders from this customer and other customers in the
limited edition contract printing market, the Company has modified its
policies for pricing and shipment. Deposits on contracts now cover only
initial process costs, such as colour printing, thereby reducing publisher
customers' initial capital commitments. Under these new policies, the
Company processes the product only through the final texturing phase, on an
as needed basis, in order to more closely match customers' actual sales
orders.

Owing to the Company's inability to finance new initiatives, or to attend
trade shows, or to hire dedicated sales personnel to sell in its markets,
the Company continues to achieve limited success in developing new
opportunities to replace the loss of sales revenues from its existing
customers and markets.

The Company believes that the Artagraph process is very price-competitive
with other known canvas-textured products that are available in the market
today. This is in major part due to the

12

Company's new contract pricing and ordering policies. The customers can now
initiate an Artagraph reproduction order for approximately 20% of the
previous initial financial commitment. Further investment in additional
manufacture of Artagraph reproductions for customers under this new program
is directly tied to actual advance sales.

While the Company is currently negotiating with several major publishing
customers, and the Spanish distributor believes that there are
opportunities in the European market -- if the Company can offer new
images, programs and point-of-sale materials -- there can be no guarantee
that these efforts will be successful in generating new revenues.

The Company believes that no other known reproduction processes compare in
quality with the Company's processes in accurately reproducing brush
strokes and texture, and the colour intensity and other reproduction
characteristics are believed to be at least equal to any other known
reproduction process. The Company's success in the marketplace will depend
upon creating greater awareness of its products through aggressive
advertising, attendance at trade shows, as well as updating its library of
images and providing new point-of-sale materials.

Gross Profit

Gross profit for the first year fell Cdn$724,570 from Cdn$821,736 in 1996
to Cdn$97,166 in 1997.

The gross margin fell in fiscal 1997 to 10%, from 32% for the comparable
period in 1996. However the gross margin in the Company's 1997 forth
quarter was 23%, an improvement over the earlier quarters of 1997, when the
gross margin was negative for the first two quarters. In the third quarter
gross margins had returned to a positive number at 19%.

The reduction of gross margin, from 1996 to 1997, and the improvement of
gross margin in the third an fourth quarters, is attributable to the
negative impact of fixed overhead costs to sales revenues. Fixed overhead
costs, including rent and plant salaries, as expressed as percentages of
comparable sales revenues were 67%, 60%, 31% and 34% for the respective
quarters of 1997, as compared to 20% for the year to November 30, 1996. In
the last two quarters retail sales finished strongly, as well, the Company
shipped two new orders to a publishing customer.

Selling Expenses

In 1997, selling expenses at Cdn$84,814 were down Cdn$195,137 from
Cdn$279,951 in 1996. The reduction in selling expenses is mainly attributed
to the lower proportion of sales revenues carrying sales commissions in
1997 over 1996.

13

General and Administration

General and administrative expenses were Cdn$404,521 for 1997, and compare
favourably with the higher administration costs in 1996 of Cdn$549,600. The
major savings resulted from lower salaries, professional and consulting
fees, as well, in 1996 other general and administration expenses included a
one time charge of Cdn$79,000, for a bad-dept provision against accounts
receivable.

c) Year ended November 30, 1996, compared with year ended November 30, 1995

The Company's results for year ended November 30, 1996, under both Canadian
and US GAAP, was a loss of Cdn$436,553, an improvement from the loss of
Cdn$1,047,095 for the 1995 fiscal year. Sales revenues for 1996 of
Cdn$2,556,550 were an increase of Cdn$417,279 over 1995 at Cdn$2,139,271.
Gross profit for year increased Cdn$367,934 from Cdn$453,802 in 1995 to
Cdn$821,736 in 1996. This higher gross profit combined with lower operating
expenses of Cdn$893,228 in 1996, as compared to Cdn$1,189,975 in 1995,
resulted in an improvement of over all results from operations. Included in
1996's operating expenses was a bad debt provision, of approximately
Cdn$78,000, which was booked in the first quarter. Operating cash flow for
the year was approximately break even, an improvement over 1995, when the
Company recorded a negative cash flow of Cdn$174,867. Notwithstanding the
improvement in operating results, the Company's working capital balance as
at November 30, 1996, remained negative at Cdn$578,658, a decline of
Cdn$164,924 from the negative working capital of Cdn$413,734 at the end of
1995.

Sales
The Company continues to be very reliant on a few customers for the
majority of its sales revenues. Tabled below are the sales to these major
customers, which are also expressed as a percentage of total sales, for the
last three fiscal years. The loss of any one of these customers would have
a serious detrimental impact on the Company's ability to continue to
operate in the future.

1996 % 1995 % 1994 %
In Canadian Dollars
-------------------------------------------------------------------------------------------------------------------
Total Sales $2,556,550 100% $2,139,271 100% $4,847,312 100%
----------- ---------- ---- ---------- ---- ---------- ----

Sales to One Publishing Customer $592,600 23% $798,000 37% $2,698,000 56%

Sales to One Spanish Customer $653,514 26% $Nil - $Nil -

Sales to One Direct Mail Customer $Nil - $345,917 16% $314,000 6%

Sales to One Retail Customer $305,271 12% $346,000 16% $340,000 7%

Total sales revenues in 1996 improved over 1995. Sales to customers outside
North America were significantly higher at Cdn$847,067 for 1996, an
increase of Cdn$689,453 over 1995. This increase was offset by a decrease
in sales revenues, for 1996 compared to 1995, to the North American market
of Cdn$271,574. This can be attributed to lower sales of catalogue product
in 1996, at approximately Cdn$431,000 versus Cdn$660,000 in 1995. In
addition, sales revenues also declined

14

because of marginally lower sales to publishing customers, from Cdn$893,163
in 1995 down to Cdn$841,067 in 1996. The growth in the revenues from
outside North America were driven by sales in the Spanish market, which
were to a single new customer in the direct marketing business. Sales to
this customer were Cdn$653,514 in 1996 compared to Cdn$nil in 1995.

The customer-base in the catalogue business changed from 1995 to 1996.
First, approximately Cdn$85,000 of clear-out catalogue product was sold to
a new customer in the framing business working out of New York State.
Second, the Company sold approximately Cdn$135,000 of surplus inventory in
the catalogue product line for cash to a customer in the Florida market.
(The cash proceeds obtained from the latter sale were used to satisfy
certain obligations that were due to the Company's note holders and other
trade creditors.) Both these new customers are not anticipated to provide
repeat business. This business, along with opening sales orders to certain
retail stores off set declines in sales of catalogue product to the North
American direct mail market, principally American Express. Sales to
American Express were Cdn$nil in 1996, compared to Cdn$345,917 in fiscal
1995. Sales to the Company's other major catalogue customer, The Museum
Company, declined in 1996 by Cdn$40,000 to Cdn$305,271.

During 1996 both American Express and The Museum Company have approached
the Company and expressed a desire for new images and programs. In the past
American Express has purchased over one million dollars annually of
catalogue product from A.R.T. Each year the Museum Company has expanded the
number of its retail stores, yet sales to The Museum Company have not grown
proportionally. Many of A.R.T.'s catalogue images have been available for
over five years, and no new images have been introduced in the last three
years. Until the Company can raise additional capital it will not be able
to promote new images or programs. In addition, before it would invest in
new programs with American Express the Company will have to satisfy itself
that its share of American Express coop marketing expenses would be
recovered. In the past, these shared coop expenses have been significant
(Cdn$40 -- 110,000 per program).

During the second quarter of 1996, in conjunction with a local Chinese
business partner, the Company participated in an exhibition in Beijing in
the Peoples Republic of China ("PROC"). The Company provided 100 Artagraphs
from its inventory of catalogue product. The Chinese held the exhibition at
a national art museum and, arranged radio and television advertising. The
event was attended by approximately 30,000 visitors, including senior
representation from the Chinese National and Provincial Governments, as
well as from several foreign embassies. Based on the success of the
exhibition, the Company and the Chinese business partner signed an
exclusive distribution agreement for the Peoples Republic of China.
However, sales to this market have been disappointing, after an opening
sales order of approximately Cdn$31,000 no further orders have been
forthcoming. The local Chinese business partner attributes the lack of
sales growth to the absence of a reproduction art market in the PROC.

Subsequent to fiscal 1996, the Company has not received new orders from the
Spanish distributor. Unless the Company raises capital to finance new
marketing and sales initiatives, including new images and programs, there
is limited likelihood that the Company will generate new business in the
foreseeable future from this market. Rather the Company will continue to
rely on the sales and marketing efforts of its overseas distributors.

15

Sales to the Company's major publishing customer declined from
approximately Cdn$798,000 in 1995 to Cdn$592,600 in 1996. This was partly
off-set by opening orders from three new publishing customers of
approximately Cdn$150,000. Although the Company believes that there is
potential for significant revenue growth in the Company's contract printing
business for publishers, the inability of the Company to attend trade shows
or promote Artagraph(R) directly to potential publishing customers has
severely hindered growth opportunities. In order to succeed the Company
will need to raise additional capital, to market its product line and
create greater visibility and awareness of the Artagraph(R) process.

The Company believes that the Artagraph(R) process is very competitive with
other known canvas-textured products that are available in the market
today. This is in major part due to the Company's new contract pricing and
ordering policies. Customers can now initiate an Artagraph(R) reproduction
order for approximately 20% of the previous initial financial commitment.
Further investment in additional manufacture of Artagraph(R) reproductions
for customers under this new program is directly tied to actual advance
sales.

In fiscal 1997 the Company's sales revenues have significantly declined in
the nine month period ending November 30, compared to the same period in
fiscal 1996. Based upon the current fiscal 1997 sales revenue trends, the
Company may have annualized sales of approximately Cdn$800-900,000 in
fiscal 1997, compared to Cdn$2,556,550 in fiscal 1996. This decline in
sales revenues is mainly attributable to the complete absence of sales to
the Company's major publishing customer and to the Spanish customer in
fiscal 1997, compared to Cdn$592,600 and Cdn$653,514 respectively in fiscal
1996.

While the Company is currently negotiating with the major publishing
customer to recommence new business, and the Spanish distributor believes
that there are opportunities with the Spanish customer -- if the Company
can offer new images and programs -- there can be no guarantee that these
efforts will be successful in generating new revenues.

Gross Profit

The gross margin increased in 1996 to 32% from 21% in 1995. The increase of
gross margin, from 1995 to 1996, of 11 percentage points can be partly
attributed to the higher sales revenues reducing the impact of fixed
overhead costs. Second, in 1995 the gross margin was negatively impacted by
[1] losses on liquidation of inventory; [2] charge backs by the Company's
major publishing customer, on account of expenses incurred by this customer
in connection with returns of product from their customers; and, [3] the
write-off of the balance of work-in-progress inventory of certain editions,
due to uncertainty that the Company's same publishing customer would take
delivery.

The Company's policy is to periodically evaluate the inventory levels of
each product in its inventory on an image-by-image basis, considering past
sales and estimated future sales of each product and similar products. In
addition, when the Company determines that a product line or market should
be discontinued, the inventory relating to that product line or market is
written down to net realizable value. The purpose of this policy is to
attempt to ensure, as required by Canadian and U.S. GAAP rules, that the
Company's inventory balances, net of reserves, properly excludes excess or
obsolete inventory and are valued at the lower of cost or market value.
Historically, the Company has

16

employed annual physical inventory counts combined with an analysis of each
product's preceding three year's sales record (or for such shorter period
that a particular product may have been in existence) and a review of the
Company's sales expectations for each product, to determine whether the
level and value of the Company's inventory of that product is excessive.

Sales of catalogue product in 1996 reduced the Company's carried inventory
balances and in some instances exhausted all supplies of certain images.
A.R.T. only produced replacement product for images that are turning more
than once per year. The overall reduction in inventory levels, including
product that had been previously written down, resulted in a lower total
provision for obsolete and slow moving inventories by Cdn$209,587.

Selling, General and Administration

These expenses were Cdn$893,228 for 1996, and compare favourably with the
higher costs in 1995 of Cdn$1,189,975. The major savings resulted from
lower salaries, professional and consulting fees, as cuts made in the last
six months of 1995 positively impacted the financial results of the Company
in 1996.

Included in the 1996 expenses was a bad debt provision of Cdn$78,000
compared to 1995 of Cdn$nil. This loss consisted of Cdn$40,000 owed by a
Belgium distributor that was formally placed into bankruptcy and,
Cdn$38,000 being the balance owed by a former customer in the State of New
York. The Company does not anticipate recovering any moneys from the
bankrupt Belgium company but is pursuing legal action against the former
customer in New York State.

d) Liquidity and Capital Resources

There is substantial doubt that the Company has the ability to realize the
carrying value of assets reported in its financial statements which is
dependent upon the attainment of profitable operations and the continued
financial support of its creditors.

During September 1997, the Company's Board of Directors authorized the
preparation of a Regulation S Offering, whereby the Company offered, in a
private placement transaction exempt from registration under Regulation S,
a total of 500 units, each unit consisting of 1,000,000 shares of the
Company's common stock at an offering price of US$1,000 per unit.
The first sale took place on October 2, 1997.

As of February 1998, the Company has completed an offering of its
securities under Regulation S, whereby a total of 250 million shares of the
Company's common stock were issued in consideration for the receipt of a
total of US$250,000. As a result of the offering, the Company now has a
total of 266,629,789 shares of common stock issued and outstanding. The
company intends to use the proceeds derived from the offering for working
capital purposes.

During fiscal 1997, the Company terminated its contract with its transfer
agent, American Stock and Transfer Company, and signed a new agreement with
Equity Transfer Company of Toronto, Canada. The Company believes that the
new transfer agent's services are better suited to the Company's

17

current situation, and the monthly fees charged by Equity Transfer are less
than half the former transfer agent's charges.

The Company's working capital remained negative as at November 30, 1997, at
Cdn$585,505, similar to the balance at the fiscal 1996 year end of negative
Cdn$578,657. The principal reason for the negative working capital is the
Cdn$553,934 owed to the note holders, which has been classified as a
current liability. In addition, certain trade creditors and the Notes
Payable are payable in US dollars, and the sharp decline of the Canadian
dollar against the US dollar resulted in higher reported Canadian
liabilities at November 30, 1997. During the first three quarters of 1997,
the Company's working capital had further declined by approximately
Cdn$300,000. This decline was attributable to reductions in trade accounts
receivable, current inventories and cash balances which were utilized to
fund operations, as well as increases in current liabilities resulting from
Company's negotiations for extended payment terms from its creditors. In
the forth quarter, the working capital position improved, as the Company
was able to raise Cdn$332,500, net of associated costs, through the
Regulation S Offering.

Unless the Company is able to significantly increase sales from the level
experienced in 1996, 1997, and subsequent to November 30, 1997, or raise
additional capital, it may not be able to perform all of its obligations in
a timely manner. Although the Company is seeking additional sales from its
major customers, as well as from other sources, no assurance can be given
that the Company will be successful. The Company does not have sources for
loans. Also, there is no assurance that the Company will be able to obtain
addition working capital from sale of its equity. In the absence of
increased sales, the Company's present inability to obtain additional
working capital from loans or from sale of its equity could have a material
adverse effect on the ability of the Company to continue operations.
Additionally, acquisition of loans or issuance by the Company of additional
equity securities could cause substantial dilution to the interests and
voting rights of current security holders.

The Company did not have a functional Board of Directors from October 1995
until May 1997. Consequently the Company did not have the power to place
equity or borrow funds until such time as a new Board of Directors was
elected by the shareholders. On May 8, 1997 at a special meeting of
shareholders a Board of Directors was elected. Notwithstanding, the
election of a Board of Directors, the Company believes that until the
capital structure of the Company is simplified, including the elimination
of the on-going diluting impact of the Preference A Share cumulative
dividends, the Company's ability to raise additional capital could be
severely restricted.

In May 1994, during the Company's application to list Units (12%
Convertible, Redeemable Class A Preference Shares, Series 2) on NASDAQ, as
a condition to NASDAQ's approval, the Company agreed to cause the Company's
common sales to be removed from the NASDAQ Small-Cap market. In fiscal
1995, the Company was advised by NASDAQ that the Company's Class A
Preference Shares, Series 1 and 2, were no longer in compliance for
continued listing on NASDAQ's Small-Cap Market. The Company believes this
was in part due to discontinuance of market making activities by market
makers. Consequently, the quotation of the Company's securities is now on
the NASDAQ OTC Bulletin Board; however there are no market makers at this
time.

Apart from the first year's dividends paid in cash on the Class A
Preference Shares, Series 1, no dividends have been declared by the
Company. Other than the first year dividends on the Class A Preference
Shares, Series 2, which are payable in cash, dividends in subsequent years
are payable in cash or common shares at the discretion of management. The
Company anticipates that any dividends payable in

18

cash or common shares in the future would be paid in common shares.

The potential dilution to the existing common shareholders to be expected
from conversion of the Company's outstanding convertible securities, and
cumulative dividends expected to be paid in common shares, is summarized on
the following page.

----------------------------------------------------------------------------------------------------------------------
Name of Security Amount Outstanding Conversion Rate Terms Underlying Additional Information
Common Shares
----------------------------------------------------------------------------------------------------------------------

Series 1 Preference Shares 805,000 Convertible into twelve 9,660,000 Cumulative dividends
(12) common shares. payable in cash or
common shares (see
next)
Cumulative Dividends on - n/a - Based on closing price 2,052,750,000 Based on a cum.
Series 1 Preference Shares as at Nov. 30, 1997, of dividend total of
$US0.001. $US2,052,750
Series 2 Preference Share 466,941 Convertible into sixty 28,016,460 Cumulative dividends
(60) common shares. payable in cash or
common shares (see
next)
Cumulative Dividends on - n/a - Based on closing price 700,413,000 Based on a cum.
Series 2 Preference Shares at Nov. 30, 1997 of dividend total of
$US0.001. $US700,413
--------------------------------------------------------------------------------------------------------------------

On August 19, 1995, the Company failed to make the scheduled repayment of
one-half of the principal and payment of accrued interest due under the
notes. By letter of agreement, October 12, 1995, the note holders waived
the default and approved a revised schedule of repayments of principal and
payment of interest.

During the last two fiscal years, the Company was unable to remain current
with this revised schedule and no re-negotiations have been initiated.
Consequently, the total amount due, including interest and principal, has
been reclassified as a current liability. During fiscal 1996, the Company
had paid approximately Cdn$51,000 of accrued interest, however, it made no
payments to the Note holders in fiscal 1997. The notes are secured by a
general security agreement over all the assets of the Company.

Item 8. Financial Statements

Financial statements together with the auditor's report thereon are
attached following the signature page to this Form 10-K.

As stated in the Note 14 to Consolidated Financial Statements -- The
accompanying consolidated financial statements have been prepared on the
basis of accounting principles applicable to a going concern. There is
substantial doubt that the Company has the ability to realize the carrying
value of assets reported in the consolidated financial statements which is
dependent upon the attainment

19

of profitable operations and the continued financial support of its
creditors. The consolidated financial statements do not reflect adjustments
that might be necessary should profits not be attained, or should the
support not be continued.

PART III

Item 9. Not applicable.

Item 10. Directors and Executive Officers of the Registrant.

On May 8, 1997, the Company held a Special Shareholders Meeting. At that
meeting the shareholders voted in favour of the management slate of
directors, consisting of Simon Meredith, Roger Scarr, Michel van
Herreweghe, Francoise Jacquel and Roger Kirby.

Simon P. Meredith was elected a director of the Company and President and
Chief Operating Officer in November, 1994. Mr. Meredith is a Chartered
Accountant and was Vice President, Finance and Administration of Gormont
Limited (a manufacturer of high voltage electrical products) from April
1991 through December 1993. He was a consultant for Helix Investments
Limited (a private investment group) from October 1990 through March 1991
and Vice President, Finance and Administration of Diecut Group, Inc. (an
automotive parts supplier) from June 1987 through September 1990.

Roger Scarr is President of Zynex Corporation from 1989 to August 1997. He
is also President of HR Capital from 1995 to date.

Michel van Herreweghe was Director of Nickeldale Resources Inc. from 1988
through 1996. He was a Director of Aronos Multinational Inc. From 1991
though 1992; Director of Xxpert Rental Tool Inc. from 1993 through 1994;
CEO Oxford Securities Corporation (Bahamas) 1993 to present; Foreign
accounts Manager Commonwealth Asset Managers Limited (Bahamas) 1994 to June
1997. He was appointed State of Florida Commissioner of Deeds 1994 to
present; Director Creditanstalt Bank of Switzerland, A.G. 1996 to present.

Francoise Jacquel was Director of Xxpert Rental Tool Inc. from 1993 to
1994; Director and Vice President of Finance of Swiss Capital Funds Corp.
from 1994 to present; Director of First Canadian Securities Corporation
(Bahamas) from 1995 to June 1997; Director of Orford Resources Ltd. from
1994 through 1995; Director of Lignex Inc. 1995; Director of Harrington
Financial Inc. from 1995 through 1996.

Roger Kirby is President of Enviro-Lite International Inc; General Manager
of Can-Am Teck Inc. 1991; Vice-President Sales for Demax Inc. 1990;
President of Telephony Communications International Inc. from 1987 through
1990; President of Nickeldale Resources Inc. to November 1996.

20

Compliance With Section 16(a) of the Exchange Act

This item is not applicable because the Company is a foreign private issuer
within the meaning of Rule 3b-4 under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and the Company's securities are therefore
currently exempt from the provisions of Sections 14(a), 14(b), 14(c), 14(f)
and 16 of the Exchange Act.

Item 11. Executive Compensation.

The following table sets forth the aggregate cash compensation paid for
services rendered to the Company during the last three fiscal years by all
individuals who served as the Company's Officers including C.E.O. during
each fiscal year.

(In Canadian Dollars)
- -------------------------------------------------------------------------------------------------------------------------------
Long-Term
Compensation
Annual Compensation Awards
Name and Year Salary Bonus Other Restricted Securities All
-------- ---- ------- ------ ----- ---------- ---------- ---
Principal Position ($) ($) Annual Stock Underlying Other
------------------ --- --- ------ ----- ---------- -----
Compensation Awards ($) Options (#) Compensation ($)
($) ---------- ----------- ----------------
---

Gerald Wilks 1997 -- -- -- -- -- --
Chairman of the Board (1) 1996 -- -- -- -- --
1995 -- -- 75,000(2) -- 2,400,000(3) --
Simon Meredith 1997 -- -- 75,000(5) -- -- --
President 1996 -- -- 120,000(5) -- -- --
1995 -- -- 120,000(5) -- -- --
New Directors (6)
Roger Scarr -- -- -- -- -- -- --
Michel van Herreweghe -- -- -- -- -- -- --
Francoise Jacquel -- -- -- -- -- -- --
Roger Kirby -- -- -- -- -- -- --

1) Mr. Wilks was appointed Chairman of the Board and Chief Executive
Officer in September 1993, and resigned October 20, 1995.

(2) Represents the fees paid in US dollars to a consulting company owned by
members of Mr. Wilks' family. See "Employment and Consulting Agreements".

(3) On March 24, 1994, the Company granted to a consulting company owned by
Mr. Wilks' family an option, exerciseable at US$0.20, per share, to
purchase 6,000,000 common shares. One-fifth became exerciseable at the
completion of the May, 1994, Public Offering; an additional one-fifth vests
and becomes exerciseable on each of the first through the fourth
anniversaries of the initial grant. Effective with Mr. Wilks resignation,
3,600,000 common shares remain unvested (see Employment and consulting
agreements)

(4) In November, 1994, Mr. Meredith was appointed President and Chief
Operating Officer.

21

(5) Represents the fees paid in Canadian dollars to a consulting company
owned by Mr. Meredith. See "Employment and Consulting Agreements.

(6) Newly elected directors -- Special Shareholders Meeting dated May 8,
1997

Employment and Consulting Agreements

The Company and its subsidiary, A.R.T. USA, were under agreement with a
Florida corporation beneficially owned by members of Gerald Wilks' family
(the "Contractor"). The Contractor agreed to provide Mr. Wilks' services as
Chairman of the Board and Chief Executive Officer of the Company and A.R.T.
USA for five years.

For its services under the agreement, the Contractor received an annual
administrative fee of US$75,000. The Contractor was entitled to elect to
receive Common Shares in lieu of all or a portion of each year's fee, with
such shares to be valued for this purpose at their fair market value as of
the time of such election. In addition, on March 24, 1994, the Contractor
was granted an option, exerciseable at a price of US$0.20, per share, to
purchase 6,000,000 Common Shares. One-fifth of the option was to become
exerciseable in 1994 and an additional one fifth was to become exerciseable
on each of the first through the fourth anniversaries of the initial grant.

By agreement dated October 20, 1995, the Company and Gerald Wilks agreed to
the resignation of Mr. Wilks as Chairman of the Board of the Company, and
the termination of the Consulting Agreement between JRB Associates Inc., an
entity affiliated with Wilks through which he served as consultant to the
Company. The termination agreement acknowledges that no termination payment
shall be due and payable; that options to purchase 2,400,000 common shares
of the Company have been vested and become exerciseable; and, that the
remaining 3,600,000 common shares are unvested. The options remain
exerciseable for five years; 1,200,000 at a price of 20 cents per share;
1,200,000 at a price equal to the close of market price, multiplied by
120%, as posted October 20, 1995.

In November, 1994, the Company entered into a five-year consulting
agreement with The Merrick Group Limited, a company beneficially owned by
Simon Meredith. Under the terms of the contract, Mr. Meredith provides
management services to the Company for up to 100 hours per month as
President and Chief Operating Officer.

On October 1, 1997, the Company signed a one year consulting agreement with
Creative Enterprises Inc. (hereinafter referred to as the "Consultant").
The Consultant has provided and will be providing consulting services in
foreign countries excluding Canada, including international managerial
services, distribution, sales and promotion, contract negotiations,
financial services, advertising and such other consulting services in the
international forum from time to time as agreed upon. In consideration for
the services rendered by the Consultant the Company paid a retainer to the
Consultant of US$105,000. A further consulting fee was paid December 18,
1997, of US$35,000 for a total of US$140,000. Either party may terminate
the Agreement by giving the party ninety (90) days written notice.

22

Stock Options

In February, 1987, a Stock Option Plan (the "Plan") was approved by the
Shareholders. The Plan was designed to provide an added incentive for
effective service and performance to participating key employees (including
officers) and directors of the Company by affording them an opportunity to
increase their proprietary interest in the Company's success through
increased stock ownership.

The maximum number of Common Shares for which options may be granted under
the Plan is 1,000,000 shares (subject to adjustment in the event of a stock
dividend, stock split or other change in corporate structure).

The Plan may be administered by either the Board of Directors or a Stock
Option Committee consisting of three members who shall be appointed by the
Board of Directors (the "Committee"). The Board of Directors or, if acting,
the Committee has the authority to select optionees, to establish the
number of shares and other terms applicable to each option and to construe
the provisions of the Plan. The Plan may be amended or terminated at any
time by the Board of Directors of the Company without further approval of
the shareholders.

The option price per share with respect to each option is determined by the
Board of Directors or the Committee. Options may be granted in cumulative
increments over a period of months or years as determined by the Board of
Directors or the Committee. The option price is payable in cash or in part
by the payment for such shares by any other property or in any other form
specified in the applicable option agreement. The period of each option is
fixed by the Board of Directors or the Committee, but in no event may it be
longer than 10 years. Options granted under the Plan are nontransferable.
No options were granted in fiscal 1997.

Aggregate Option/SAR Exercises In Last Fiscal Year And Fiscal Year-End
Option/SAR Values

The following table sets forth certain information with respect to
unexercised options held by such individuals at the end of fiscal 1997.

Shares Number of Securities Value of Unexercised in the
Acquired on Value Realized Underlying Unexercised Money Options at
Name Exercise (#) ($) Options at FY-End (#) FY-End ($)
---- ------------ -------------- --------------------- ----------------------------

Harvey Kalef -- -- 1,000,000 $Nil
Simon Meredith -- -- -- --
Roger Scarr -- -- -- --
Michel van
Herreweghe -- -- -- --
Francoise Jacquel -- -- -- --
Roger Kirby -- -- -- --

The calculations of the value of unexercised options are based on the
difference between the closing bid price of the Common Shares on NASDAQ on
November 30, 1997 of US$.001, and the exercise price of each option,
multiplied by the number of shares covered by the option.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

23

The following table sets forth, as of February 28, 1998, certain
information with respect to the beneficial ownership of the Company's
Common Shares by: (i) each person known to the Company to be the beneficial
owner of more than five percent of the Common Shares; (ii) each director
and executive officer of the Company; and (iii) all directors and officers
of the Company as a group.

Common Shares
Quantity %
Total Shares Issued 266,629,785 100
----------- ---
Directors
S. P. Meredith (1) (2) 0 n/a
M. van Herreweghe (1) (2) 0 n/a
Roger Scarr (1) 0 n/a
F. Jacquel (1) (2) 0 n/a
Roger Kirby (1) 0 n/a
Others [none greater than 5%] n/a

(1) Elected Director May 8, 1997, at the Special Shareholders Meeting. c/o
A.R.T. Inc. 5 -7100 Warden Ave. Markham, Ont. Canada, L3R 8B5.

(2) Simon P. Meredith, President. General Delivery, Kettleby, Ontario,
Canada, L0G 1J0. Michel van Herreweghe, Vice President. 1402 East Las Olas
Blvd. Suite # 909, Fort Lauderdale, Florida. U.S.A. 33301.
Francoise Jacquel, Secretary. 14 Sheppard Square, North York, Ontario.
Canada. M2K 1A1.

Item 13. Certain Relationships and Related Transactions.

At November 30, 1997, amounts due to Herzig Somerville Limited ("HSL"), a
Company controlled by Ernest Herzig, a former member of the Board of
Directors and a significant shareholder of the Company, were Cdn$159,796.
During the fiscal years ended November 30, 1994, 1995, 1996 and 1997, the
Company purchased an aggregate of Cdn$394,094, Cdn$523,388, Cdn$306,806 and
Cdn$117,845, Cdn$nil respectively, of printing services from HSL.

It is the Company's policy that transactions between the Company and
persons or entities affiliated with the officers, directors, employees, or
shareholders of the Company, which relate to the operations of the Company,
will be on terms no less favorable to the Company than could have
reasonably been obtained in arm's-length transactions with independent
third parties.

See "Executive Compensation--Employment and Consulting Agreements" for a
description of certain employment and consulting arrangements with officers
and/or directors of the Company.

24

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.

(a) Exhibits

Exhibit
Number Exhibit
------ -------
3.1(a) Articles of Incorporation, filed as an exhibit to the Company's
Registration Statement on Form S-18 (No. 33-11587C) and incorporated herein
by reference.

3.1(b) Amendment to Articles of Incorporation, filed as an exhibit to the
Company's Registration Statement on Form S-1 (No. 33-47729) and
incorporated herein by reference.

3.1(c) Revised Designations of Rights and Preferences of the 12%
Convertible Preference Shares, Series 1, filed as an exhibit to the
Company's Registration Statement on Form S-1 (No. 33-47729) and
incorporated herein by reference.

3.1(d) Form of Resolution setting conversion rate of the Series 1
Preference Shares, filed as an exhibit to the Company's Registration
Statement on Form S-1 (No. 33-47729) and incorporated herein by reference.

3.2 By-Laws, as amended, filed as an exhibit to the Company's Registration
Statement on Form S-18 (No. 33-11587C) and incorporated herein by
reference.

10.7 Stock Option Plan, as filed as an exhibit to the Company's
Registration Statement on Form S-18 (No. 33-11587C) and incorporated herein
by reference.

10.28 (a) Form of Non-Negotiable 10% Promissory Note, dated September 8,
1993, issued by the Company, filed as an exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-72976) and incorporated
herein by reference.

(b) Form of Non-Negotiable 6% Convertible Promissory Note, dated
September 8, 1993, issued by the Company, filed as an exhibit to the
Company's Registration Statement on Form S-1 (File No. 33-72976) and
incorporated herein by reference.

(c) Form of Security Agreement, dated as of September 8, 1993,
between the Company and the holders of such notes, filed as an exhibit to
the Company's Registration Statement on Form S-1 (File No. 33-72976) and
incorporated herein by reference.

(d) Form of Amendment dated in May 1994, between the Company and
the holders of such notes, filed as an exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-72976) and incorporated
herein by reference.

25

10.30 Consulting agreement, dated November 1994, between the Company and
The Merrick Group Limited, filed as an exhibit to the Company's Annual
Report on Form 10-K for the year ended November 30, 1994, and incorporated
herein by reference.

(b) Financial Statement Schedules.

Not applicable.

(c) Reports on Form 8-K.

1) Filing dated November 7, 1997, reporting that the Company's Board of
Directors had authorized the preparation of a Regulation S Offering,
whereby the Company offered, in a private placement transaction exempt
from registration under Regulation S, a total of 500 units, each unit
consisting of 1,000,000 shares of the Company's common stock at an
offering price of US$1,000 per unit. The first sale took place on
October 2, 1997.

2) Filing dated February 11, 1998, reporting the Company's recently
completed offering of its Securities under Regulation S, whereby a
total of 250,000,000 shares of the Company's Common Stock were issued
in consideration for the total gross receipt of US$250,000.

26

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to April 10, 1998.

ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED

Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

President, Chief Operating Officer and Director

- ------------------------- -----------------------
Simon P. Meredith Date

27

ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED NOVEMBER 30, 1997

T A B L E O F C O N T E N T S

PAGE
----

AUDITORS' REPORT ..............................................................................................1

COMMENTS BY AUDITORS FOR U.S. READERS
ON CANADA - U.S. REPORTING CONFLICT.......................................................................1

CONSOLIDATED BALANCE SHEET - ASSETS............................................................................2

CONSOLIDATED BALANCE SHEET - LIABILITIES AND
SHAREHOLDERS' EQUITY 3

CONSOLIDATED STATEMENT OF CONTRIBUTED SURPLUS..................................................................4

CONSOLIDATED STATEMENT OF DEFICIT..............................................................................5

CONSOLIDATED STATEMENT OF LOSS.................................................................................6

CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL
POSITION..................................................................................................7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.....................................................................8 - 17

AUDITORS' REPORT

To the Shareholders of
Artagraph Reproduction Technology Incorporated

We have audited the consolidated balance sheet of Artagraph Reproduction
Technology Incorporated as at November 30, 1997 and 1996 and the consolidated
statements of contributed surplus, loss, deficit and changes in financial
position for the years ended November 30, 1997, 1996 and 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

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

In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at November 30, 1997
and 1996 and the results of its operations and the changes in its financial
position for the years ended November 30, 1997, 1996 and 1995 in accordance with
generally accepted accounting principles in Canada.

/s/ Armstrong, Szewczyk, Tobias

Toronto, Canada CHARTERED ACCOUNTANTS
March 27, 1998

COMMENTS BY AUDITORS
FOR U.S. READERS ON CANADA - U.S. REPORTING CONFLICT

In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the consolidated
financial statements are affected by significant uncertainties such as that
referred to in the attached balance sheet as at November 30, 1997 and 1996 and
as described in Note 14 to the consolidated financial statements. Our report to
the shareholders dated March 27, 1998 is expressed in accordance with Canadian
reporting standards which do not permit a reference to such an uncertainty in
the auditors report when the uncertainty is adequately disclosed in the
consolidated financial statements.

/s/ Armstrong, Szewczyk, Tobias

Toronto, Canada CHARTERED ACCOUNTANTS
March 27, 1998

PAGE 1

ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED

CONSOLIDATED BALANCE SHEET

NOVEMBER 30, 1997 AND 1996
(STATED IN CANADIAN DOLLARS)

1997 1996
---- ----

ASSETS
CURRENT
Cash $ 89,395 $ 85,422
Cash in Escrow 95,975 -
Accounts Receivable [Note 3] 66,995 149,410
Inventories [Notes 2(b) and 4] 213,811 254,645
Prepaid Expenses and Deposits 126,205 58,438
---------- -----------
592,381 547,915
---------- -----------

CAPITAL [Note 5] 117,667 154,267
---------- -----------

OTHER
Patents 3,931,051 3,931,051
Art Reproduction Rights 441,875 441,875
----------- ----------
4,372,926 4,372,926
Less - Accumulated Amortization 2,014,295 1,752,224
---------- ----------
2,358,631 2,620,702
---------- ----------

Inventories [Notes 2(b) and 4] 42,644 136,337
----------- ----------

TOTAL ASSETS $ 3,111,323 $ 3,459,221
=========== ===========

PAGE 2

ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED

CONSOLIDATED BALANCE SHEET

NOVEMBER 30, 1997 AND 1996
(STATED IN CANADIAN DOLLARS)

1997 1996
---- ----

LIABILITIES
CURRENT
Accounts Payable and Accrued Liabilities $ 464,156 $ 457,303
Accounts Payable - Related Party [Note 6] 159,796 171,411
Customers' Deposits - 11,200
Current Portion of Long-Term Debt 553,934 486,659
---------- ----------
1,177,886 1,126,573
---------- ----------

LONG-TERM DEBT
Notes Payable [Note 7] 553,934 486,659
Less - Current Portion Due Within One Year 553,934 486,659
---------- ----------
- -
---------- ----------
TOTAL LIABILITIES 1,177,886 1,126,573
---------- ----------
SHAREHOLDERS' EQUITY
CAPITAL STOCK [Note 8]
PREFERENCE SHARES:
Series 1
805,000 {1996 - 805,000} 3,701,809 3,701,809
Series 2
466,941 {1996 - 466,941} 2,785,628 2,785,628

COMMON SHARES:
266,629,785 {1996 - 16,629,785} 2,183,961 1,851,461
---------- ----------

8,671,398 8,338,898

CONTRIBUTED SURPLUS 11,775,000 11,775,000

DEFICIT (18,512,961) (17,781,250)
---------- ----------
1,933,437 2,332,648
---------- ----------

TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY $ 3,111,323 $ 3,459,221
========== ==========

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

APPROVED BY THE BOARD: Director ______________________ Director ______________

To be read in conjunction with the Auditors' Report attached hereto dated March
27, 1998.

PAGE 3

ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED

CONSOLIDATED STATEMENT OF CONTRIBUTED SURPLUS

FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
(STATED IN CANADIAN DOLLARS)

1997 1996 1995
---- ---- ----

BALANCE - Beginning of Year $11,775,000 $11,775,000 $11,775,000

ADD - Addition to Contributed Surplus - - -
------------ -------------- -----------

BALANCE - End of Year $11,775,000 $11,775,000 $11,775,000
============ ============== ===========

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

PAGE 4

ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED

CONSOLIDATED STATEMENT OF DEFICIT

FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
(STATED IN CANADIAN DOLLARS)

1997 1996 1995
---- ---- ----

BALANCE - Beginning of Year $17,781,250 $17,344,697 $16,297,602

ADD - Net Loss 731,711 436,553 1,047,095
------------ -------------- ----------
18,512,961 17,781,250 17,344,697
ADD - Dividends [Note 9] - - -
------------ -------------- -----------

BALANCE - End of Year $18,512,961 $17,781,250 $17,344,697
============ ============== ===========

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

PAGE 5

ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED

CONSOLIDATED STATEMENT OF LOSS

FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
(STATED IN CANADIAN DOLLARS)

1997 1996 1995
---- ---- ----

SALES $ 993,524 $ 2,556,550 $ 2,139,271
---------- ---------- -----------
COST OF GOODS SOLD AND OTHER
MANUFACTURING COSTS
Cost of Goods Sold and Other Manufacturing
Costs Before the Undernoted: 871,656 1,701,238 1,640,343

Amortization of Capital Assets 24,702 33,576 45,126
----------- ----------- -----------
896,358 1,734,814 1,685,469
----------- ----------- -----------

GROSS PROFIT 97,166 821,736 453,802
----------- ----------- -----------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES
Selling, General and Administrative Expenses
Before the Undernoted: 489,335 909,564 1,172,227

Foreign Exchange Loss (Gain) 21,359 (16,336) 17,748
Amortization of Capital Assets 11,898 20,443 27,666
Amortization of Patents 262,071 302,350 252,000
Loan Interest 44,214 47,804 45,739
Royalties (Recovered) - - (11,576)
----------- ----------- -----------
828,877 1,263,825 1,503,804
Less - Interest Earned - 5,536 2,907
----------- ----------- -----------
828,877 1,258,289 1,500,897
----------- ----------- -----------

LOSS FROM
OPERATIONS BEFORE TAXES (731,711) (436,553) (1,047,095)

PROVISION FOR INCOME TAXES [Note 13] - - -
----------- ----------- -----------

NET LOSS $ (731,711) $ (436,553) $(1,047,095)
=========== =========== ===========

NET LOSS PER COMMON SHARE $(.003) $(.03) $(.06)
===== ==== ====

WEIGHTED AVERAGE NUMBER OF
COMMON SHARES 266,629,785 16,629,785 16,629,785
=========== ========== ==========

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

PAGE 6

ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED

CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION

FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
(STATED IN CANADIAN DOLLARS)

1997 1996 1995
---- ---- ----

CASH AND CASH EQUIVALENTS
WERE PROVIDED BY (APPLIED TO):
OPERATING ACTIVITIES
Net Loss $ (731,711) $ (436,553) $(1,047,095)
Add - Items not Affecting Cash:
Amortization of Capital Assets 36,600 54,019 72,792
Amortization of Patents 262,071 302,350 252,000
Loss on Disposal of Capital Assets - 38,536 -
------------- ----------- ------------
(433,040) (41,648) (722,303)
Accounts Receivable 82,415 189,039 90,242
Inventories - Current and Long-Term 134,527 340,357 454,582
Prepaid Expenses and Deposits (67,767) 17,561 115,337
Accounts Payable and Accrued Liabilities 6,853 (251,395) (508,848)
Accounts Payable - Related Party (11,615) 5,586 125,177
Customers' Deposits (11,200) (259,746) 270,946
Dividends Accrued on Class "A" Preference Shares,
Series 1 - - -
------------- ----------- ------------
(299,827) (246) (174,867)
------------- ----------- ------------
FINANCING ACTIVITIES
Notes Payable 67,275 (6,741) 32,743
Issuance of Capital Stock for Cash {Net} 332,500 - 6,215
------------- ----------- ------------
399,775 (6,741) 38,958
------------- ----------- ------------
INVESTING ACTIVITIES
Conversion of Capital Assets to Inventory - 41,860 -
Acquisition of Capital Assets - - (32,758)
------------- ----------- ------------
- 41,860 (32,758)
------------- ----------- ------------
INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS POSITION 99,948 34,873 (168,667)

CASH - Beginning of Year 85,422 50,549 219,216
------------- ----------- ------------

CASH AND CASH EQUIVALENTS - End of Year $ 185,370 $ 85,422 $ 50,549
============= =========== ============

SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest Paid $ 44,214 $ 35,150 $ 45,739
============= =========== ============
Income Taxes Paid $ - $ - $ -
============= =========== ============

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

PAGE 7

ARTAGRAPH REPRODUCTION TECHNOLOGY INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 1997
(STATED IN CANADIAN DOLLARS)

1. INCORPORATION AND OPERATIONS

The Company was incorporated in Canada on January 24, 1986 under The Ontario
Business Corporations Act. The Company's primary business is the production,
distribution and marketing of replications of oil paintings.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

(a) Principles of Consolidation

These consolidated financial statements include the consolidation of
Artagraph Reproduction Technology Incorporated with its wholly-owned
subsidiaries as follows:

Artagraph Reproduction Technology (USA) Corporation;
Artagraph Reproduction Technology Corporation; and
Artagraph Reproduction Technology Direct Corporation

The wholly-owned subsidiaries have been inactive since November 30,
1988.

(b) Inventories

(i) Inventories, whether classified as current or long-term assets,
are valued at the lower of cost and market value. Cost is
determined on a first-in, first-out basis.

(ii) The Company's policy is to periodically evaluate the
inventory levels of each product in its inventory on an
image-by-image basis, both in light of past sales and estimated
future sales of each product and similar products. In addition,
when the Company determines that a product line or market should
be discontinued, the inventory relating to that product line or
market is written down to net realizable value. The purpose of
these policies is to ensure that the Company's inventory
balances, net of reserves, exclude slow-moving and obsolete
inventory and are valued at the lower of cost and market value.
The Company uses annual physical inventory counts combined with
an analysis of each product's preceding three year's (or for such
shorter period that a particular product may have been in
existence) sales and a review of the Company's sales expectations
for each product to determine whether the level and value of the
Company's inventory of a particular product at a given time is
excessive. This three year period has been deemed to be an
appropriate period for evaluating the historical sales of the
Company's products since such products are not perishable and
tend to be marketed over multi-year periods through intermittent
and recurring sales programs. In no event are amounts carried as
a current asset if it is not probable that they will be sold
within one year, nor do amounts carried as long-term inventory
exceed their fair value as determined by the inventory valuation
policies of the Company as described above.

PAGE 8

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: [Continued]

(c) Capital Assets

Capital assets are recorded at cost and are amortized at rates
sufficient to substantially amortize the cost of the assets over
their estimated useful lives on the following basis:

Equipment, Furniture and Fixtures........20% Declining Balance
Leasehold Improvements...................Straight-line over Term
of the Lease

Moulds are recorded at cost and are amortized on the
units-of-production basis which is sufficient to substantially
amortize the cost of the moulds over their estimated useful lives.

Patents are recorded at cost and are amortized on a straight-line
basis, based on the legal life of such intellectual property, which
approximates fifteen years.

At each balance sheet date, the Company reviews the remaining
benefit associated with the Artagraph patents to ensure that the
Company will generate sufficient undiscounted cash flows to recover
their carrying costs.

Art reproduction rights are recorded at cost and are amortized over
their estimated useful lives on a straight-line basis over a period
of three years.

(d) Translation of Foreign Currencies

These financial statements are presented in Canadian dollars.

Transactions in foreign currencies are translated into Canadian
dollars at exchange rates prevailing at the transaction date.
Monetary assets and monetary liabilities are translated at the
exchange rate prevailing at the balance sheet date.

Under Canadian generally accepted accounting principles, the
translation gains or losses arising on translation of long-term
monetary items are deferred and amortized over the lives of the
related monetary item.

(e) Management Representations

In the opinion of management, all adjustments necessary for a fair
presentation of the financial position at November 30, 1997 and 1996
and the results of operations, changes in financial position and
related note disclosures for the fiscal years ended November 30,
1997, 1996 and 1995 have been made.

3. ACCOUNTS RECEIVABLE

Accounts receivable consist of the following:
1997 1996
---- ----

Trade Accounts Receivable $ 75,995 $ 168,410
Less - Allowance for Doubtful Accounts 9,000 19,000
--------- ----------

$ 66,995 $ 149,410
========= ==========

PAGE 9

4. INVENTORIES

Inventories consist of the following:

1997 1996
---------------------------------------------- ---------------------------------------------

Provision for Provision for
Obsolete and Obsolete and
Gross Slow-Moving Net Gross Slow-Moving Net
Amount Inventories Amount Amount Inventories Amount
------ ------------- ------ ------ ------------- ------

Finished Goods $ 72,065 $ - $ 72,065 $ 71,131 $ - $ 71,131
Work-in-Process 990,636 (851,509) 139,127 942,895 (738,393) 204,502
Raw Materials 45,263 - 45,263 115,349 - 115,349
----------- ------------- ------------ ----------- -------------- ------------

$ 1,107,964 $ (851,509) $ 256,455 $ 1,129,375 $ (738,393) $ 390,982
=========== ============= ============ =========== ============== ============

Current Portion ...........................................$ 213,811....................................$ 254,645
Non-current Portion........................................ 42,644.................................... 136,337
------------ ------------

$ 256,455 $ 390,982
============ ============

5. CAPITAL ASSETS

1997 1996
---------------------------------------------------------------
ACCUMULATED NET BOOK NET BOOK
COST AMORTIZATION VALUE VALUE
---------------------------------------------------------------

Equipment, Furniture and Fixtures $ 676,530 $ 579,782 $ 96,748 $ 124,383
Moulds 318,100 297,181 20,919 29,884
Leasehold Improvements 288,958 288,958 - -
----------- ----------- ------------ ------------

$ 1,283,588 $ 1,165,921 $ 117,667 $ 154,267
=========== =========== ============ ============

6. ACCOUNTS PAYABLE - RELATED PARTY - $159,796

This amount is with respect to inventory purchases from a company in which
a shareholder has a financial interest. These purchases amounted to $ Nil
(1996 - $117,845; 1995 - $306,806).

7. NOTES PAYABLE

On August 19, 1995, the Company failed to make the scheduled repayment of
one-half of the principal and payment of accrued interest due under the
notes. By letter of agreement, October 12, 1995, the noteholders waived
the default and approved a revised schedule of repayment of principal and
payment of interest.

During 1996 and 1997, the Company was unable to remain current with this
revised schedule and no re-negotiations have been initiated. Consequently,
the total amount due, including accrued interest and principal, has been
shown as a current liability.

PAGE 10

7. NOTES PAYABLE [Continued}

1997 1996
---- ----
U.S. Dollars Cdn. Dollars U.S. Dollars Cdn. Dollars

Principal $ 315,000 $ 448,497 $ 315,000 $ 428,400
Accrued Interest 74,053 105,437 42,940 58,259
----------- ----------- ----------- -----------

$ 389,053 $ 553,934 $ 357,940 $ 486,659
=========== =========== =========== ==========

These notes are secured by a general security agreement over all the
assets of the Company.

8. CAPITAL STOCK

(a) Share Capital

The Company is authorized by its Articles of Incorporation to issue an
unlimited number, except where noted, of the following classes of
shares:

(i) Non-voting, redeemable, class "A" preference shares, series 1
and series 2; convertible into common shares and have the right to
cumulative dividends as and if declared in the amount of U.S. $0.60
per share per annum, payable quarterly in the first year of
issuance and annually thereafter, as and when declared, subject to
the provisions of The Ontario Business Corporations Act. The future
dividend payments are payable in cash or common shares at the
discretion of the directors.

The directors have authorized 875,000 class "A" preference shares,
series 1, of which 805,000 are issued, each of which is convertible
into twelve common shares.

The directors have authorized an unlimited number of class "A"
preference shares, series 2 of which 466,941 shares were issued on
May 19, 1994 for a cash consideration of $2,779,413, each of which
is convertible commencing November 13, 1995, into 60 common shares;
and

(ii)Common shares

(b) Capital Stock

NON-VOTING, CONVERTIBLE, REDEEMABLE CLASS "A" PREFERENCE SHARES,
----------------------------------------------------------------
SERIES 1:
--------

1997 1996
------------------------------ -----------------------------

Number of Number of
Shares Amount Shares Amount
------------- ----------- ---------- ----------

Balance - Beginning of Year 805,000 $ 3,701,809 805,000 $ 3,701,809

Add - Shares Issued During Year - - - -
---------- ------------- ---------- -----------

Balance - End of Year 805,000 $ 3,701,809 805,000 $ 3,701,809
========== ============= ========== ===========

PAGE 11

8. CAPITAL STOCK [Continued]

(b) Capital Stock [Continued]

NON-VOTING, 12% CONVERTIBLE, REDEEMABLE CLASS "A" PREFERENCE SHARES,
--------------------------------------------------------------------
SERIES 2:
---------

1997 1996
------------------------------ -------------------------------

Number of Number of
Shares Amount Shares Amount
--------- ------- --------- --------

Balance - Beginning of Year 466,941 $ 2,785,628 466,941 $ 2,785,628

Add - Shares Issued During Year - - - -
---------- ------------- ---------- -------------

Balance - End of Year 466,941 $ 2,785,628 466,941 $ 2,785,628
========== ============= ========== =============

COMMON SHARES:
1997 1996
------------------------------ --------------------------------

Number of Number of
Shares Amount Shares Amount
------------ ---------- ------------- ------------

Balance - Beginning of Year 16,629,785 $ 1,851,461 16,629,785 $ 1,851,461

Add - Shares Issued During Year 250,000,000 332,500 - -
----------- ----------- ------------ ------------

Balance - End of Year 266,629,785 $ 2,183,961 16,629,785 $ 1,851,461
=========== =========== ============ ============

During the year, the Company issued 250,000,000 common shares for a
total cash consideration of $250,000 U.S. ($350,000 Cdn.). Issuance
costs of $17,500 were charged against the capital stock. The Company
intends to use the proceeds derived from the offering for working
capital purposes.

(c) Stock Options and Warrants to Purchase Common Shares

The Company has issued various stock options for common shares of
the Company's capital stock. The stock options provide for the
granting of options to key employees, including officers, directors
and independent contractors of the Company. No option may be granted
with a term exceeding ten years. In addition, the Company has
granted warrants from time to time to lenders of the Company.

The options and warrants are allocated as follows:

NUMBER OF SHARES
----------------------------
1997 1996
---- ----

Balance - Beginning of Year 3,625,000 5,069,000

Less - Options and Warrants Expired During Year 150,000 1,444,000
----------- ----------

Balance - End of Year 3,475,000 3,625,000
=========== ==========

PAGE 12

8. CAPITAL STOCK [Continued]

(c) Stock Options and Warrants to Purchase Common Shares [Continued]

The options and warrants granted and outstanding as at November 30,
1997 are as follows:

Common Shares
Under Option
or Subject
to Warrants Exercise Price Expiry Date
-------------- -------------- -----------
25,000 U.S. $0.35 1998
25,000 Cdn. $1.50 1999
25,000 U.S. $1.50 2000
1,200,000 U.S. $0.01 2000
1,200,000 U.S. $0.20 2000
1,000,000 U.S. $0.25 2002
----------
3,475,000
==========

(d) Publicly Traded Warrants to Purchase Preference Shares

In connection with the Company's May 19, 1994 public offering, the
Company has issued 933,882 class "C" warrants which entitle the
holder to purchase one (1) series 2 preference share of the Company
at an exercise price of U.S. $9.60. Each of the warrants is
redeemable at U.S. $0.02 at any time prior to its expiration,
thirty-six (36) months after the closing of the recent public
offering, only if the closing bid price of the series 2 preference
shares for any preceding period of 20 consecutive trading days
exceeded 120% of such warrant's exercise price.

(e) Other Warrants and Convertible Securities

In May, 1994, the Company issued to its underwriter in a public
offering of class "A" preference shares, series 2, warrants to
purchase 32,500 units at a price of U.S. $9.60 per unit, each
consisting of:

(i) One (1) 12% non-voting, convertible, redeemable class "A"
preference share, series 2, without par value; and

(ii) Two (2) redeemable class "C" preference share purchase
warrants.

9. DIVIDENDS

(a) Class "A" Preference Shares, Series 1

The holders of the class "A" preference shares, series 1, are
entitled to receive as and when declared by the directors, a fixed
preferential cumulative dividend at the rate of U.S. $0.60 per
annum, payable annually in cash or common shares at the discretion
of the directors.

The Company anticipates that any subsequent dividends declared and
payable on the preference shares in the foreseeable future will be
paid in common shares.

The quarterly dividends payable December 1, 1993 of $120,750 U.S.
($171,920 Cdn.); the dividends payable December 1, 1994 of $483,000
U.S. ($687,700 Cdn.); the dividends payable December 1, 1995 of
$483,000 U.S. ($687,700 Cdn.); the dividends payable December 1,
1996 of $483,000 U.S. ($687,700 Cdn.); and the dividends payable
December 1, 1997 of $483,000 U.S. ($687,700 Cdn.) have not yet been
declared by the Company.

PAGE 13

9. DIVIDENDS [Continued]

(b) Class "A" Preference Shares, Series 2

The holders of the class "A" preference shares, series 2, are
entitled to receive as and when declared by the directors, a fixed
preferential cumulative dividend at the rate of U.S. $0.60 per
annum, payable quarterly in cash for the first year after issuance
and annually thereafter in cash or common shares at the discretion
of the directors.

The quarterly dividends for the first year and each successive year
since, have not been declared and any subsequent dividends declared
in the foreseeable future will be paid in common shares.

10. SEGMENTED INFORMATION

The Company operates in one business segment, the production, distribution
and marketing of replications of oil paintings.

Operations and identifiable assets by geographic segments are as follows:

1997 1996 1995
---- ---- ----

DOMESTIC SALES - CANADA $ 60,046 $ 41,379 $ 170,630
INTERNATIONAL EXPORT SALES - U.S.A. 857,357 1,668,104 1,810,427
EUROPEAN ECONOMIC COMMUNITY 3,178 729,600 111,215
- OTHER 72,943 117,467 46,999
------------ ----------- -----------

$ 993,524 $ 2,556,550 $ 2,139,271
============ =========== ===========

SEGMENT OPERATING LOSS $ (562,752) $ (190,425) $ (603,217)
------------ ----------- -----------

EXPENSES:
General Corporate 124,745 210,978 398,139
Interest and Financing Costs Unallocated
to a Segment 44,214 35,150 45,739
------------ ----------- -----------
168,959 246,128 443,878
------------ ----------- -----------

NET LOSS $ (731,711) $ (436,553) $(1,047,095)
============ =========== ===========

All significant identifiable assets and amortization relate to assets
situated in Canada.

11. COMMITMENTS AND CONTINGENT LIABILITIES

(a) Management Services Agreement

The Company entered into a five year agreement in 1995 with The
Merrick Group Limited and Mr. Simon Meredith to provide management
services as President and Chief Operating Officer of the Company at
a maximum monthly fee of $10,000 Cdn.

If this agreement is terminated by either party, the Company shall
be obligated to pay a termination fee of $20,000 Cdn. payable in two
instalments on the 30th and 60th day following such termination.

Consulting fees for 1997 of $85,040 Cdn.were set up in the financial
statements, of which $18,900 remains in the accounts payable at year
end.

PAGE 14

11. COMMITMENTS AND CONTINGENT LIABILITIES [Continued]

(b) Lease Obligations

Under a long-term lease expiring January 31, 2003, the Company is
obligated for minimum future lease payments, net of occupancy costs,
for office, showroom and factory premises as follows:

FISCAL YEAR ENDED AMOUNT
----------------- ------
1998 - 1999.....................................$ 58,340
1999 - 2000..................................... 58,340
2000 - 2001..................................... 58,340
2001 - 2002..................................... 64,174
2002 - 2003..................................... 64,174

(c) The Company entered into a one year agreement commencing October
1, 1997 with Creative Enterprises Inc. to provide consulting
services for a fee of $140,000 U.S. At year end, $40,000 U.S. of the
balance was outstanding which the Company is obligated to pay in the
next fiscal period.

12. RECONCILIATION BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES

The financial statements of the Company are prepared in accordance
with Canadian generally accepted accounting principles ("Canadian
G.A.A.P."). These principles differ in some respects from United
States generally accepted accounting principles ("U.S. G.A.A.P.").

The effect of such differences on the Company's consolidated balance
sheet and consolidated statement of loss is as follows:

1997 1996 1995
------------------------------- ---------------------------- ---------------------------

Canadian U.S. Canadian U.S. Canadian U.S.
G.A.A.P. G.A.A.P. G.A.A.P. G.A.A.P. G.A.A.P. G.A.A.P.
-------- -------- -------- ------- -------- -------

(a) CONSOLIDATED
BALANCE
SHEET:

Deferred Foreign
Exchange Loss $ - $ - $ - $ - $ - $ -
============ ============== ============= ============= ============= ============

Total Assets $ 3,111,323 $ 3,111,323 $ 3,459,221 $ 3,459,221 $ 4,408,070 $ 4,408,070
============ ============ ============ ============ ============ ============
Total Liabilities $ 1,177,886 $ 1,177,886 $ 1,126,573 $ 1,126,573 $ 1,638,869 $ 1,638,869
============ ============ ============ ============ ============ ============

Capital Stock
Issued $ 8,671,398 $ 10,712,941 $ 8,338,898 $ 10,380,441 $ 8,338,898 $ 10,380,441
============ ============ ============ ============ ============ ============

Contributed
Surplus $ 11,775,000 $ 11,775,000 $ 11,775,000 $ 11,775,000 $ 11,775,000 $ 11,775,000
============ ============ ============ ============ ============ ============

Accumulated
Deficit $(18,512,961) $(20,560,719) $(17,781,250) $(19,829,008) $(17,344,697) $(19,392,455)
============ ============ ============ ============ ============ ============

Shareholders'
Equity $ 1,933,437 $ 1,933,437 $ 2,332,648 $ 2,332,648 $ 2,769,201 $ 2,769,201
============ ============ ============ ============ ============ ============

PAGE 15

12. RECONCILIATION BETWEEN CANADIAN AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES [Continued]

(b) CONSOLIDATED STATEMENT OF LOSS:

1997 1996 1995
---- ---- ----

Net Loss under Canadian G.A.A.P. $ (731,711) $ (436,553) $ (1,047,095)
Add - Compensation under Stock Option Plan - - -
Expense of Deferred Foreign Exchange Losses - - -
------------- -------------- --------------
(731,711) (436,553) (1,047,095)
Less - Recovery of Deferred Foreign Exchange Losses - - -
------------- -------------- --------------

Net Loss under U.S. G.A.A.P. $ (731,711) $ (436,553) $ (1,047,095)
============= ============== ==============

Net Loss per Common Share under U.S. G.A.A.P.
(after Deduction of the Class "A" Preference
Share Dividends [Note 9]) $(.003) $ (.03) $(.06)
============= ============== ==============

(c) WEIGHTED AVERAGE NUMBER OF SHARES
- U.S. G.A.A.P. [Note 12(g)] 266,629,785 16,629,785 16,629,785
============= ============== ==============

(d) WEIGHTED AVERAGE NUMBER OF SHARES
- CANADIAN G.A.A.P. 266,629,785 16,629,785 16,629,785
============= ============== ==============

(e) Opinion 25 of the Accounting Principles Board requires that an
employer recognize compensation costs for stock issued through
non-variable employee stock option plans as the difference between the
quoted market price of the stock at the measurement date (the date of
the grant of the option) less the amount the employee is required to
pay. In Canada, such costs are not recognized. Compensation costs
relating to stock options issued to employees were recognized under
U.S. G.A.A.P. during the year in the amount of $ Nil (1996 - $ Nil;
1995 - $ Nil).

Under U.S. G.A.A.P. the compensation cost is recorded by increasing
the dollar value of the shares under option to the market value of
these shares, to the extent the option price is granted below market.
Earnings are charged, in the period the option is granted, with the
expense for compensation costs equal to the excess of the market value
of the option over the option price granted.

(f) For U.S. G.A.A.P. foreign exchange losses that related to
long-term monetary items must be expensed in the year accrued. Under
Canadian G.A.A.P. these losses are deferred and amortized as disclosed
in Note 2(d).

(g) Opinion 15 of the Accounting Principles Board requires that for
U.S. G.A.A.P. purposes the Company follow the "Treasury Stock Method"
in determining the weighted average number of shares. This method
could result in a difference in the weighted average number of shares
as determined in accordance with Canadian G.A.A.P.

For U.S. G.A.A.P. purposes the "Treasury Stock Method" increases the
weighted average number of shares by a factor which takes into
consideration the number of stock options outstanding, the exercise
price of these stock options and the quoted market price for the
Company's shares. No similar calculation is required under Canadian
G.A.A.P. to determine the weighed average number of shares.

(h) Under U.S. G.A.A.P., accrued dividends on class "A" preference
shares are not considered to be either an operating activity or a
financing activity. Consequently, dividends accrued on class "A"
preference shares would be deleted from operating activities and
dividends would be reduced under financing activities. The cash
position remains the same.

PAGE 16

13. INCOME TAXES

There are no current or deferred income taxes payable in Canada or the
United States.

The Company has combined tax losses for Canadian and U.S. income tax
purposes of approximately $8,752,000 (1996 - $12,105,000) available
for deduction against future years' earnings, the benefit of which has
not been recognized in these financial statements.

These losses expire as follows:

YEAR CANADIAN U.S. TOTAL
---- -------- --- -----

1998...........................$ 976,000 $ - $ 976,000
1999............................ 2,313,000 - 2,313,000
2000............................ 1,993,000 - 1,993,000
2001........................... 302,000 - 302,000
2002.......................... 717,000 400,000 1,117,000
2003........................... 88,000 1,530,000 1,618,000
2004........................... 433,000 - 433,000
----------- ------------- -----------

$ 6,822,000 $ 1,930,000 $ 8,752,000
=========== ============= ===========

14. FUTURE OPERATIONS

The accompanying consolidated financial statements have been prepared
on the basis of accounting principles applicable to a going concern.
There is substantial doubt that the Company has the ability to realize
the carrying value of assets reported in the consolidated financial
statements which is dependent upon the attainment of profitable
operations and the continued financial support of its creditors. The
consolidated financial statements do not reflect adjustments that
might be necessary should profits not be attained, or should the
support not be continued.

15. MAJOR CUSTOMER

Sales to specific major customers of the Company were as follows:

1997 1996
------------------------------ -----------------------------

Percentage Percentage
Percentage of Accounts Percentage of Accounts
of Sales Receivable of Sales Receivable

SALES THROUGH TWO RETAIL
COMPANIES (U.S.) 31.9 79 38 44
==== == == ==

SALES THROUGH ONE ART
PUBLISHING AGENT (U.S.) 26.7 - 23 -
==== ==

16. COMPARATIVE FIGURES

Certain comparative figures have been reclassified, where necessary, to
conform with the presentation adopted for 1997.

PAGE 17