**U.S.
      SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-QSB**


(Mark
      One)





x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31,
                2006





OR





o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934





Commission
      file number 333-229903





**SOVEREIGN
      EXPLORATION ASSOCIATES INTERNATIONAL, INC.**


(Name
      of
      small business issuer in its charter)





Utah
            30-0123229(State
                or other jurisdiction of incorporation )
            (IRS
                Employer Identification No.)





503
      Washington Ave, Suite 2d, Newtown PA 18940


(Address
      and Zip Code of Principal Executive Offices)





Registrant's
      Telephone Number: (781) 246-7512




(Former
      Name, Former Address if changed since last report) Securities registered under
      Section 12(b) of the Exchange Act: N/A




Securities
      registered under Section 12(g) of the Exchange Act: Common Stock, $0.001 par
      value per share (Title of Class)





Check
      whether the issuer: (i) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (ii) has been
      subject to such filing requirements for the past 90 days.


Yes
x    No
      o





Indicate
      by check mark whether the registrant is an accelerated filer (see defined Rule
      12b-2 of the Exchange Act).


Yes
o    No 
x





Indicate
      by check mark whether the registrant is a shell company (as defined by Rule
      12b-2 of the Exchange act).


Yes
o    No 
      x





The
      number of shares of the issuer's common stock, $0.001 par value, outstanding
      as
      of February 13, 2007 was 27,940,166





Indicate
      by check mark whether the registrant has filed all documents and reports
      required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange
      Act
      of 1934 subsequent to the distribution of securities under a plan confirmed
      by a
      court. Yes x   No
o










PART
      I -
      FINANCIAL INFORMATION:


Item
      1.  Financial
      Statements





SOVEREIGN
                EXPLORATION ASSOCIATES INTERNATIONAL, INC.(F/K/A
                - CALI Holdings, Inc.)CONSOLIDATED
                BALANCE SHEETSDECEMBER
                31, 2006 AND JUNE 30, 2006




12/31/2006
            
            06/30/2006UNAUDITED
            
            RESTATEDAssetsCash
                and cash equivalents
            
            $
            5,955
            
            $
            570Total
                current assets
            
            
            5,955
            
            
            570Other
                assetsInvestments,
                net of allowance of $173,868
            
            
            -
            
            
            -Notes
                receivable, net of allowance of $832,849
            
            
            -
            
            
            -Capitalized
                costs and permits
            
            
            2,867,615
            
            
            2,365,870Total
                other assets
            
            
            2,867,615
            
            
            2,365,870Total
                assets
            
            $
            2,873,570
            
            $
            2,366,440Liabilities
                and Shareholders' Equity (Deficit)Current
                liabilitiesAccounts
                payable and accrued expenses
            
            $
            478,681
            
            $
            473,934Due
                to related parties
            
            
            1,297,543
            
            
            817,929Notes
                payable
            
            
            126,523
            
            
            121,840Total
                current liabilities
            
            
            1,902,747
            
            
            1,413,703Long-term
                liabilitiesRelated
                party note payables
            
            
            2,678,406
            
            
            2,126,665Notes
                payable, convertible debt
            
            
            -
            
            
            800,000Total
                long-term liabilities
            
            
            2,678,406
            
            
            2,926,665Total
                liabilities
            
            
            4,581,153
            
            
            4,340,368Commitments
                and contingencies
            
            
            -
            
            
            -Shareholders'
                equity (deficit)Common
                stock, $.001 par value, 250,000,000,000 shares authorized and 26,203,166
                issued and outstanding as of June 30, 2006; 27,941,166 issued and
                outstanding as of December 31, 2006
            
            
            27,913
            
            
            26,203Additional
                paid-in capital
            
            
            19,038,949
            
            
            17,876,659Minority
                interest
            
            
            (803,530
            )
            
            (803,530
            )Accumulated
                deficit
            
            
            (19,970,915
            )
            
            (19,073,260
            )Total
                shareholders' equity (deficit)
            
            
            (1,707,583
            )
            
            (1,973,928
            )Total
                liabilities and shareholders' equity (deficit)
            
            $
            2,873,570
            
            $
            2,366,440




See
      accompanying notes





Page
          2 of
          38





SOVEREIGN
                EXPLORATION ASSOCIATES INTERNATIONAL, INC.(F/K/A
                - CALI Holdings, Inc.)CONSOLIDATED
                STATEMENTS OF OPERATIONSFOR
                THE SIX MONTHS ENDED DECEMBER 31, 2006UNAUDITED




12/31/2006REVENUE
            
            $
            -OPERATING
                EXPENSESSalaries
                and wages
            
            
            148,710General
                and administrative
            
            
            146,072Professional
                fees
            
            
            190,149Total
                operating expenses
            
            
            484,931OTHER
                INCOME (EXPENSE)Stock
                issued in conjunction with settlement agreement
            
            
            (364,000
            )Interest
                expense
            
            
            (48,724
            )Total
                other income (expense)
            
            
            (412,724
            )OPERATING
                LOSS BEFORE INCOME TAXES
            
            
            (897,655
            )Provision
                for income taxes
            
            
            -LOSS
                BEFORE DEPRECIATION ON INVESTMENTS
            
            
            (897,655
            )Net
                unrealized depreciation on investments
            
            
            -NET
                LOSS
            
            $
            (897,655
            )NET
                OPERATING LOSS PER COMMON SHARE:Basic
            
            $
            (0.0322
            )Diluted
            
            $
            (0.0322
            )NET
                LOSS PER COMMON SHAREBasic
            
            $
            (0.0322
            )Diluted
            
            $
            (0.0322
            )WEIGHTED
                AVERAGE SHARES OF COMMONBasic
            
            
            27,913,166Diluted
            
            
            27,913,166DIVIDENDS
                DECLARED PER COMMON SHARE
            
            $
            -




See
      accompanying notes





Page
          3 of
          38








SOVEREIGN
                EXPLORATION ASSOCIATES INTERNATIONAL, INC.(F/K/A
                - CALI Holdings, Inc.)CONSOLIDATED
                STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)FOR
                THE SIX MONTHS ENDED DECEMBER 31, 2006UNAUDITED




AdditionalCommon
                Stock
            
            paid-in
            
            Minority
            
            AccumulatedShares
            
            Par
                value
            
            capital (1)
            
            interest
            
            deficit (2)
            
            TotalBalance,
                June 30, 2006, restated
            
            
            26,230,166
            
            $
            26,203
            
            $
            17,876,659
            
            $
            (803,530
            )
            $
            (19,073,260
            )
            $
            (1,973,928
            )Issuance
                of common shares - settlement agreement
            
            
            910,000
            
            
            910
            
            
            363,090
            
            
            -
            
            
            -
            
            
            364,000Conversion
                of convertible debt to common shares
            
            
            800,000
            
            
            800
            
            
            799,200
            
            
            -
            
            
            -
            
            
            800,000Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (897,655
            )
            
            (897,655
            )Balance,
                December 31, 2006
            
            
            27,940,166
            
            $
            27,913
            
            $
            19,038,949
            
            $
            (803,530
            )
            $
            (19,970,915
            )
            $
            (1,707,583
            )




(1)-
                Capital in excess of par value as of June 30, 2006 and includes the
                Company and subsidiaries(2)
                - Accumulated undistributed net income (loss) as of June 30,
                2006




See
                accompanying notes





Page
          4 of
          38





SOVEREIGN
                EXPLORATION ASSOCIATES INTERNATIONAL, INC.(F/K/A
                - CALI Holdings, Inc.)STATEMENTS
                OF CASH FLOWSFOR
                THE SIX MONTHS ENDED DECEMBER 31, 2006UNAUDITED




12/31/2006Operating
                activities:Net
                loss
            
            $
            (897,655
            )Adjustments
                to reconcile net loss from operations tonet
                cash (used in) operating activities:Capitalized
                costs and permits
            
            
            (501,745
            )Increase
                (decrease) in:Accounts
                payable and accrued expenses
            
            
            58,154Due
                to related parties
            
            
            479,614Net
                cash (used in) operating activities
            
            
            (861,632
            )Financing
                activities:Issuance
                of common stock
            
            
            364,000Proceeds
                from related party notes payable
            
            
            660,000Payments
                on related party notes payable
            
            
            (156,983
            )Net
                cash provided by financing activities
            
            
            867,017Net
                increase in cash and cash equivalents
            
            
            5,385Cash,
                beginning of period
            
            
            570Cash,
                end of period
            
            $
            5,955Supplemental
                disclosure of cash flow information:Interest
                paid
            
            $
            -Taxes
                paid
            
            
            -




See
      accompanying notes




Page
          5 of
          38





SOVEREIGN
      EXPLORATION ASSOCIATES INTERNATIONAL, INC.


F/K/A
      -
      CALI Holdings, Inc.)


NOTES
      TO
      FINANCIAL STATEMENTS


SEPTEMBER
      30, 2006


UNAUDITED




NOTE
      A
      - NATURE OF ORGANIZATION





Sovereign
      Exploration Associates International, Inc.
      (the
“Company”) was incorporated in the state of Utah in 1980. The company was
      formerly known as CALI Holdings, Inc. On October 26, 2005 the Company changed
      its name from CALI Holdings, Inc. to Sovereign
      Exploration Associates International ,
      Inc.





On
      January 13, 2004 the Company’s filed form N-54A with the United States
      Securities and Exchange Commission (“SEC”) to become a Business Development
      Company ("BDC") pursuant to Section 54 of the Investment Company Act of 1940
      (the "1940 Act"). As a result, the Company operated as an investment holding
      company and acquired investments designed to build an investment portfolio
      to
      enhance the Company's shareholder value. As a BDC, the Company was, in effect,
      a
      publicly traded private equity fund, where stockholders provided public capital
      in a regulated environment for private investment in smaller companies.
      Congressional intent behind the creation of BDCs was to encourage the flow
      of
      public capital to private and smaller public companies.





On
      September 22, 2006 at a duly called special meeting, the Company’s shareholders
      approved a proposal to withdraw the Company’s election to be a business
      development company under the Investment Company Act of 1940 by filing Form
      N-54C with the SEC.





On
      September 22, 2006, the Company filed a notification of withdrawal of business
      development company election on Form N-54C notifying the SEC that, pursuant
      to
      the provisions of Section 54(c) of the Investment Company Act of 1940
      ("Investment Company Act" or "1940 Act"), the Company withdrew its election
      to
      be subject to Sections 55 through 65 of the 1940 Act. Accordingly, the Company
      is no longer subject to the Investment Company Act but will continue as an
      operating reporting public company subject to the Securities Exchange Act of
      1934.





The
      net
      affect, as of June 30, 2006, of the Company’s election to withdrawal our
      business development company status pursuant to the Investment Company Act
      of
      1940 was as follows:




Additional
                paid in capital
            
            $
            (550,705
            )Deficit
            
            
            (425,068
            )Unrealized
                depreciation on investments
            
            
            1,015,273Net
                adjustments
            
            $
            39,500





As
      a
      result of the change in accounting principle because of the Company’s election
      to withdrawal its business development company election, the Company restated
      its June 30, 2006 Balance Sheet which is included in these consolidated
      financial statements.




Page
          6 of
          38




NOTE
      B
      - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES





Basis
      of Presentation





The
      accompanying unaudited financial statements have been prepared in accordance
      with generally accepted accounting principles for interim financial information
      and pursuant to the rules and regulations of the SEC. The accompanying financial
      statements for the interim periods are unaudited and reflect all adjustments
      (consisting only of normal recurring adjustments) which are, in the opinion
      of
      management, necessary for a fair presentation of the financial position and
      operating results for the quarterly period presented. These financial statements
      should be read in conjunction with the Company's financial statements for the
      years ended June 30, 2006 and 2005 and notes thereto contained in the Company’s
      Annual Report on Form 10-K for the year ended June 30, 2006 as filed with the
      SEC. See discussion of change in accounting principle below.





The
      results of operations for the six months ended December 31, 2006 are not
      necessarily indicative of the results of operations to be achieved for the
      full
      fiscal year ending June 30, 2007. The election to withdraw the Company as a
      BDC
      under the Investment Company Act has resulted in a significant change in the
      Company’s required method of accounting. BDC financial statement presentation
      and accounting utilizes the fair value method of accounting used by investment
      companies, which allows BDCs to recognize income and value their investments
      at
      market value as opposed to historical cost.





In
      addition, majority-owned subsidiaries are not consolidated and instead,
      investments in those subsidiaries are reflected on the balance sheet as an
      investment in and advances to affiliates, at fair value. As an operating
      company, the required financial statement presentation and accounting for
      securities held by the Company utilize either fair value or historical cost
      methods of accounting, depending on the classification of the investment and
      the
      Company’s intent with respect to the period of time it intends to hold the
      investment, and the Company and its subsidiaries are reflected for financial
      accounting purposes as a consolidated entity. The change in accounting due
      to
      the conversion to an operating company from a BDC is considered a change in
      accounting principle.





As
      an
      operating company, the Company consolidates its financial statements with
      subsidiaries, thus eliminating the investment in and advances to affiliates
      account that was reflected on the Company’s balance sheet as of June 30, 2006
      and 2005, respectively.





Management
      has determined that with the lack of information available from prior management
      of the Company, and because the Company no longer owns any of the portfolio
      companies that were divested as a result of the Exchange Agreement effective
      October 17, 2005 except for Gulf Coast Records, LLC, it is impractical to comply
      with the retroactive application of prior periods being presented on an
      operating and consolidated basis in accordance with Statement of Financial
      Accounting Standards No. 154, Accounting for Changes and Error Corrections
      ("FAS
      #154").





Pursuant
      to paragraph 11 of FAS #154: The Company has deemed it impracticable to apply
      the effects of a change in accounting principle retroactively because the
      following conditions apply as of September 30, 2006:





1.
            The
                Company has made every reasonable effort to apply the requirement;
                however, we are unable to do so.




Page
          7 of
          38





2.
            Retrospective
                application of the change in accounting principle requires assumptions
                about prior management’s intent in prior periods that can not now be
                independently substantiated.




3.
            Retrospective
                application of the accounting principle requires significant estimates
                of
                amounts that at this time, it is impossible to distinguish objectively
                information about those estimates that: (a) provides evidence of
                circumstances that existed on the date(s) at which those amounts
                would be
                recognized, measured, or disclosed under retrospective application,
                and
                (b) would have been available when the financial statements for that
                prior
                period were issued.





See
      Note Q for explanation of the prior period financial statement
      presentation.





As
      of
      December 31, 2006, the Company’s subsidiaries were development stage
      enterprises, except for Gulf Coast Records, LLC, which is accounted for on
      the
      equity method of accounting as described in Investments under Note
      B.





The
      Company’s subsidiaries are development stage enterprises engaged in ocean
      explorations and archaeologically sensitive recoveries of artifacts, treasure
      trove and/or cargo from shipwrecks under various licenses.





Statement
      of Financial Accounting Standards No. 7, Accounting and Reporting by Development
      Stage Enterprises, defines a development stage enterprise as one that is
      devoting substantially all of its efforts to establishing a new business and
      either planned principal operations have not commenced or planned principal
      operations have commenced but there has been no significant revenue. Several
      artifacts have been recovered, but for the six month period ended December
      31,
      2006, there was no revenue.





The
      accompanying financial statements have been prepared on a going-concern basis,
      which contemplates the continuation of operations, realization of assets and
      liquidation of liabilities in the ordinary course of business. The Company’s
      subsidiaries have capitalized all of their ocean
      explorations and archaeologically sensitive recoveries of artifacts, treasure
      trove and/or cargo from shipwrecks costs
      to-date. The Company plans to obtain additional financing through the sale
      of
      publicly traded stock, limited liability company member units of its
      subsidiaries and/or debt financing. There is no assurance these efforts will
      be
      successful. The financial statements do not include any adjustments relating
      to
      the recoverability and classifications of reported asset amounts or the amounts
      of liabilities that might result from the outcome of that uncertainty. See
      Subsequent Events under Note O.





Principles
      of Consolidation





The
      accompanying consolidated financial statements, as presented herein, are
      prepared on the accrual basis of accounting under the principles of
      consolidation consisting of the accounts of the Company and its
      subsidiaries.





As
      of
      December 31, 2006, the Company's subsidiaries and the related equity ownership
      are as follows:





Historic
      Discoveries, Inc.





Historic
      Discoveries is the Company's primary subsidiary and is wholly-owned by the
      Company. Historic Discoveries has two wholly-owned subsidiaries, Artifact
      Recovery & Conservation, Inc. ("ARC") and Sea Research, Inc.
      ("SRI").




Page
          8 of
          38





Artifact
      Recovery & Conservation, Inc.





ARC
      is
      the managing member of Fantome Cove Treasure Trove 150, LLC, of which it owns
      a
      97.05% equity interest. ARC is also the managing member of Interspace
      Exploration, LLC, of which ARC owns a 74% equity interest.





Sovereign
      Exploration Associates International of Spain, Inc.





The
      Company owns a 100% equity interest in Sovereign Exploration Associates
      International of Spain, Inc.





As
      of
      December 31, 2006, the minority interest in Fantome Cove Treasure Trove 150,
      LLC
      and Interspace
      Exploration, LLC is
      $803,530.





Investments




The
      Company accounts for investments, where the Company holds from 20% up to 50%,
      in
      the common stock of an entity, using the equity method. The investment is
      initially recorded at cost and the carrying amount is adjusted to recognize
      the
      Company’s proportionate share of the earnings or losses of the investee after
      the date of acquisition. The amount of the adjustment is included in the
      determination of net income or loss of the Company in the period of the
      adjustment. Any dividends received from the investee reduce the carrying value
      of the investment.





As
      of
      December 31, 2006, the Company’s 49% equity investment in Gulf Coast Records,
      LLC was valued at zero. As of the fiscal year ended June 30, 2006, the Company
      had provided for a write-down of the investment in and advances to this company
      of $1,015,273 to zero.





Revenue
      Recognition





The
      Company recognizes revenue using the accrual method of accounting wherein
      revenue is recognized when earned and expenses and costs are recognized when
      incurred.





Use
      of
      Estimates





The
      preparation of financial statements in conformity with generally accepted
      accounting principles in the United States of America requires management to
      make estimates and assumptions that affect certain reported amounts of assets
      and liabilities and disclosure of contingent assets and liabilities at the
      date
      of the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Accordingly, actual results could differ from
      those
      estimates.





Consolidated
      Statement of Cash Flows





For
      the
      purpose of the Consolidated Statement of Cash Flows, the Company considers
      cash
      equivalents to be all highly liquid securities with an original maturity date
      of
      three months or less.





Segments





The
      Company operates as one segment as defined by the Statement of Financial
      Accounting Standards No. 131 Disclosures
      about Segments of an Enterprise and Related Information.





Page
          9 of
          38





Foreign
      Currency Translation





The
      accompanying financial statements are stated in United States Dollars (USD).





New
      Accounting Pronouncement





In
      September 2006, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No. 157 ("FAS 157"), Fair Value Measurements,
      which defines fair value, establishes a framework for measuring fair value
      in
      generally accepted accounting principles ("GAAP"), and expands disclosures
      about
      fair value measurements. FAS 157 applies under other accounting pronouncements
      that require or permit fair value measurements. Prior to FAS 157, there were
      different definitions of fair value and limited guidance for applying those
      definitions in GAAP. Moreover, that guidance was dispersed among the many
      accounting pronouncements that require fair Value measurements. Differences
      in
      that guidance created inconsistencies that added to the complexity in applying
      GAAP. The changes to current practice resulting from the application of FAS
      157
      relate to the definition of fair value, the methods used to measure fair value,
      and the expanded disclosures about fair value measurements. FAS 157 is effective
      for financial statements issued for fiscal years beginning after November 15,
      2007, and interim periods within those fiscal years. The Company does not expect
      the adoption of FAS 157 to have an effect on its financial
      statements.





NOTE
      C
      - FIXED ASSETS





Fixed
      assets are stated at cost. The cost of equipment is charged against income
      over
      their estimated useful lives, using the straight-line method of depreciation.
      Repairs and maintenance which are considered betterments and do not extend
      the
      useful life of equipment are charged to expense as incurred. When property
      and
      equipment are retired or otherwise disposed of, the asset and accumulated
      depreciation is removed from the accounts and the resulting profit and loss
      are
      reflected in income.





NOTE
      D
      - CAPITALIZED COSTS





As
      of
      December 31, 2006, the Company accounted for its ocean exploration and
      archaeologically sensitive recoveries of artifacts, treasure trove and/or cargo
      from shipwrecks costs
      incurred to-date as capitalized costs.





NOTE
      E
      - STOCK ISSUED FOR SERVICES





During
      the six months ended December 31, 2006 and the year ended June 30, 2006, the
      Company did not issue any stock for services.





NOTE
      F- INCOME TAXES





Pursuant
      to the Exchange Agreement dated October 17, 2005, substantial ownership of
      the
      Company was transferred and according to provisions of the Internal Revenue
      Code, this transaction eliminated all of the loss carryforwards for federal
      income tax purposes starting with fiscal year that ended June 30,
      2006.




Page
          10
          of 38





NOTE
      G
      - LEASE ARRANGEMENTS





The
      Company maintains shared office space in Pennsylvania and Massachusetts with
      unrelated companies controlled by certain officers of the Company. These
      companies sublet space to the Company on a month-to-month basis with monthly
      rent of $4,010, with no formal subleases. Rent expense for the six months ended
      December 31, 2006 was $24,060.





NOTE
      H
      - NOTES PAYABLE





8%
                convertible debenture to an individual dated May 27, 2005 with an
                initialprincipal
                balance of $21,000 due no later than May 27, 2006;
                outstandingprincipal
                and interest. This convertible debenture is currently in
                dispute.
            
            $
            24,8285.25%
                convertible debenture to a company dated June 29, 2005 with an
                initialprincipal
                balance of $40,000 due no later than June 29, 2008;
                outstandingprincipal
                and interest. This convertible debenture is currently in
                dispute.
            
            $
            88,9658%
                convertible debenture to an individual dated May 18, 2005 with an
                initialprincipal
                balance of $21,000 due no later than May 18, 2006;
                outstandingprincipal
                and interest. This convertible debenture is currently in
                dispute.
            
            $
            12,730Total
                notes payable, current
            
            $
            126,523





For
      the
      six months ended December 31, 2006, the Company incurred interest expense on
      these convertible debentures of $4,683. These convertible debentures continue
      to
      be in dispute because of issues related to the conversion rates. There is no
      additional information available from prior management at this
      time.





NOTE
      I
      - AGREEMENTS





Prior
      to
      the Exchange Agreement of October 17, 2005, there is a Revenue Agreement as
      outlined in Exhibit B of the Exchange Agreement, that requires 20% revenue
      participation payable to the original owners of the permits from the net
      recovery of the shipwrecks for the permits that have been assigned to the
      subsidiaries of one of the Company's subsidiaries, Historic Discoveries, Inc.
      The 20% revenue participation allows Historic Discoveries, Inc. to defer permit
      transfer fees and align site permit cost with revenue generation, eliminating
      the exposure associated with sites that do not produce a material number of
      artifacts.





Historic
      Discoveries, Inc. is only required to pay the 20% revenue participation when
      sites produce net revenue. The 20% revenue participation also provides Historic
      Discoveries, Inc. the right of first refusal on future sites, creating a
      mechanism for Historic Discoveries, Inc. and its operating companies to build
      site inventory while deferring the associated cost and reducing financial
      risk.





The
      Revenue Agreement with the original owners was executed prior to October 17,
      2005. The original owners of these permits are the beneficial owners of the
      controlling interest in the stock received in the Exchange Agreement.
      Additionally, officers and directors of the Company hold certain executive
      positions in Historic Discoveries, Inc. and its subsidiaries.




Page
          11
          of 38





The
      Fantome project (Fantome Cove Treasure Trove License 150, LLC. a subsidiary
      of
      ARC) sold a 2.06% equity interest for a capital investment of $411,530, and
      the
      LeChameau project (Interspace Explorations, LLC, a subsidiary of ARC) sold
      a
      26.0% ownership interest and 40% profit participation interest for
      $392,000.





Management
      intends to assess the Company's liability under these agreements on a periodic
      basis. No liability has been recorded for these agreements as of December 31,
      2006.





NOTE
      J
      - SETTLEMENT AGREEMENT AND GENERAL RELEASE





Effective
      June 30, 2006, the Company entered into a Settlement Agreement and General
      Release (the “Settlement Agreement") with Former Management, KMA Capital
      Partners, Inc., and CF Holdings, LLC (collectively, the "Settlement Agreement
      Parties") in order to reach a comprehensive resolution of their disputes. The
      Settlement Agreement provides that the Settlement Agreement Parties release
      all
      claims that they may have against the Company, its parents, subsidiaries,
      affiliates, predecessors, successors, assigns, partners, agents,
      representatives, and attorneys (collectively, "affiliated parties") and that
      the
      Company releases all claims it may have against the Settlement Agreement Parties
      and their respective affiliated parties. On December 26, 2006, 910,000
      common shares were issued pursuant
      to the Settlement Agreement effective June 30, 2006. These 910,000 common shares
      are subject to a Leak-Out Agreement and are
      restricted under Rule 144.





NOTE
      K
      - SHAREHOLDERS’ EQUITY





As
      of
      December 31, 2006, the authorized capital of the Company was 250,000,000 shares
      of common stock (with voting rights), par value $.001.





The
      Company is also authorized to issue up to 100,000,000 shares of Preferred Stock,
      par value $.001, in one or more series, with the terms and rights of each such
      series to be as determined by the Board; no such series have been authorized
      by
      the Board to date.





NOTE
      L
      - ISSUANCE OF STOCK





During
      the six months ended December 31, 2006, the Company issued 1,710,000 of common
      stock as follows:





·
            800,000
                common shares were issued for the conversion of the convertible debt
                of
                $800,000. These shares are restricted under Rule
                144.





·
            910,000
                common shares were issuedpursuant
                to the Settlement Agreement effective June 30, 2006. These 910,000
                common
                shares are subject to a Leak-Out Agreement andare
                restricted under Rule 144.




Page
          12
          of 38





NOTE
      M
      - CONCENTRATION OF CREDIT RISK





Financial
      instruments, which potentially expose the Company to concentrations of credit
      risk, consist principally of cash. As of December 31, 2006, the Company
      maintains its cash accounts with financial institutions located in Pennsylvania
      and Canada. The Federal Deposit Insurance Corporation (FDIC) guarantees the
      Company's deposits in US-based financial institutions up to $100,000 per
      account.





The
      Company's deposits with financial institutions that exceeded federally insured
      guarantees amounted to $0 as of December 31, 2006. Historically, the Company
      has
      not experienced any losses on its deposits in excess of federally insured
      guarantees.





As
      of
      December 31, 2006, the Company accounts for its investment in Gulf Coast
      Records, LLC on the equity method of accounting. The amount of $832,849 was
      offset by an allowance to reduce the market value of this note and investment
      to
      zero from Gulf Coast Records as of June 30, 2006. Current management is
      reviewing its options regarding this company and whether it wants to maintain
      its position or divest its holdings in the future, while actively negotiating
      with the management of Gulf Coast Records, LLC regarding the recovery of the
      Company's investment. Prior to June 30, 2006, the Company received information
      from the management of Gulf Coast Records, LLC that has caused the Company
      to
      reduce the fair market value to zero.





NOTE
      N
      - RELATED PARTY TRANSACTIONS





ACCRUED
      PAYROLL AND EXPENSES; DUE TO RELATED PARTIES





As
      of
      December 31, 2006, $1,323,482 was owed to certain officers of the Company for
      accrued payroll and unreimbursed expenses.





RELATED
      PARTY NOTE PAYABLE





Effective
      July 10, 2006, the President of the Company advanced $500,000 to the Company
      for
      working capital purposes. The loan is due on demand and the interest
      requirements and stated rate are a direct pass-through from Nova Savings
      Bank.





Effective
      November 15, 2006, the Chairman of the Company advanced the Company $160,000
      under a note agreement that requires an interest rate of the lesser of 0.9%
      or
      the legal rate under Texas law and is due, in full, with principal and interest
      on November 15, 2007.





Effective
      November 15, 2006, the $600,000 note due to Sea Hunt, Inc. and Venture Planning,
      Inc., related parties to the Chairman of the Company, was renegotiated with
      a
      new due date of November 15, 2007 along with an interest rate of the lesser
      of
      0.9% or the legal rate under Texas law and is due, in full, with principal
      and
      interest on November 15, 2007.





OFFICERS
      AND DIRECTORS OF THE COMPANY





Certain
      officers and directors of the Company hold certain executive positions in
      Historic Discoveries, Inc., Sea Hunt, Inc. and their respective
      subsidiaries.




Page
          13
          of 38





NOTE
      O: LEGAL PROCEEDINGS




On
      December 1, 2006, the Company was named in a
      lawsuit in Orange County, Florida; *Estate
      of Mulligan vs. Cali Holdings, Inc., Sovereign Exploration Associates
      International, Inc., TSB Holdings, Inc., James Jenkins, and Charles Gianetto,
      et
      al.*The
      Plaintiff had invested funds into one of the portfolio companies of prior
      management and has named all parties including successor corporations in the
      suit. Management has the signed representations from prior management that
      no
      other potential lawsuits existed as of the settlement with them on June 30,
      2006, the documentation clearly states otherwise and they were aware of this
      suit at that time.




NOTE
      P: SUBSEQUENT EVENTS





On
      February 9, 2007 the Company filed suit in The Province of Nova Scotia seeking
      an application for judicial review to in effect ask the province to order the
      Nova Scotia Museum to issue the proper permits to the Company. The Company
      believes the Nova Scotia Museum acted improperly in not issuing the necessary
      permits in 2006 and should not have recognized the claims made by the United
      Kingdom. The Company believes its rights are protected under the Special Places
      Protection Act, The Treasure Act and many other acts and considerations of
      established law governing these type of permits.





NOTE Q
      - PRIOR PERIOD FINANCIAL STATEMENT PRESENTATION





As
      stated
      in Note B: pursuant to paragraph 11 of FAS #154: The Company has deemed it
      impracticable to apply the effects of a change in accounting principle
      retroactively because certain conditions apply as of December 31,
      2006.





Since
      the
      Company does not possess the information necessary to restate the comparative
      financial statements as of December 31, 2005 as an operating company; the
      following are the financial statements and corresponding footnotes for the
      Company, presented as on the basis of accounting utilized by business
      development companies:




Page
          14
          of 38




SOVEREIGN
                EXPLORATION ASSOCIATES INTERNATIONAL, INC.(F/K/A
                - Cali Holdings, Inc.)BALANCE
                SHEETS


December
                    31,
                  2005
                
                June
                    30,
                  2005(unaudited)AssetsInvestments
                    in and advances to affiliates
                
                $
                2,661,410
                
                $
                1,777,765Cash
                    and cash equivalents
                
                
                25,130
                
                
                31,034Accounts
                    receivable
                
                
                45,000
                
                
                3,692Prepaid
                    expenses
                
                
                1,803
                
                
                -Fixed
                    assets, net of accumulated depreciation
                
                
                -
                
                
                9,658Notes
                    receivable
                
                
                -
                
                
                439,732Other
                    assets
                
                
                -
                
                
                254,207Goodwill
                
                
                -
                
                
                489,000Security
                    deposit
                
                
                5,572
                
                
                5,572Total
                    assets
                
                $
                2,738,915
                
                $
                3,010,660Liabilities
                    and Shareholders' EquityAccounts
                    payable and accrued expenses
                
                $
                307,883
                
                $
                77,989Related
                    party note payables
                
                
                645,100
                
                
                -Notes
                    payable
                
                
                117,078
                
                
                499,900Total
                    liabilities
                
                
                1,070,061
                
                
                577,889Commitments
                    and contingenciesShareholders'
                    equityClass
                    A - Preferred stock, no par value, 10,000 shares authorized,
                    none issued
                    and outstanding
                
                
                -
                
                
                -Class
                    B - Preferred stock, no par value, 10,000 shares authorized,
                    none issued
                    and outstanding
                
                
                -
                
                
                -Class
                    C - Convertible Preferred stock, $.001 par value, 10,000 shares
                    issued and
                    outstanding
                
                
                10,000
                
                
                10,000Class
                    D - Preferred stock, no par value, 10,000 shares authorized,  none
                    issued and outstanding
                
                
                -
                
                
                -Common
                    stock, $.001 par value, 250,000,000,000 shares authorized and
                    26,203,040
                    issued as of December 31, 2005; 2,000,000,000 shares authorized;
                    53,430
                    outstanding as of June 30, 2005
                
                
                26,203
                
                
                53Capital
                    in excess of par value
                
                
                20,072,488
                
                
                17,316,340Stock
                    subscription receivable
                
                
                -
                
                
                (4,760
                )Accumulated
                    undistributed net income (loss)
                
                
                (17,433,120
                )
                
                (14,231,534
                )Net
                    unrealized depreciation of investments
                
                
                (1,006,717
                )
                
                (657,328
                )Total
                    shareholders' equity
                
                
                1,668,854
                
                
                2,432,771Total
                    liabilities and shareholders' equity
                
                $
                2,738,915
                
                $
                3,010,660Net
                    asset value per share
                
                $
                0.0637
                
                $
                45.53
  See
        accompanying notes
  Page
            15
            of 38




SOVEREIGN
                EXPLORATION ASSOCIATES INTERNATIONAL, INC.(F/K/A
                - Cali Holdings, Inc.)Statements
                of Operations(unaudited)




Three
                Months ended
            
            Six
                Months endedDecember
                31,
            
            December
                31,2005
            
            2004
            
            2005
            
            2004OPERATING
                INCOME:Interest
              and dividend income:Control
                investments
            
            $
            16,768
            
            
            17,622
            
            $
            40,283
            
            $
            31,315Total
                interest and dividend income
            
            
            16,768
            
            
            17,622
            
            
            40,283
            
            
            31,315Fee
                and other income:Control
                investments
            
            
            50,000
            
            
            423,067
            
            
            425,000
            
            
            612,482Other
            
            
            7,121
            
            
            -
            
            
            52,602
            
            
            -Total
                fee and other income
            
            
            57,121
            
            
            423,067
            
            
            477,602
            
            
            612,482Total
                operating income
            
            
            73,889
            
            
            440,689
            
            
            517,885
            
            
            643,797COST
                OF GOODS SOLD
            
            
            -
            
            
            131,414
            
            
            -
            
            
            196,053OPERATING
                EXPENSESDepreciation
                and amortization
            
            
            -
            
            
            17,354
            
            
            615
            
            
            33,819Salaries
                and wages
            
            
            156,506
            
            
            214,426
            
            
            302,692
            
            
            362,625General
                and administrative
            
            
            254,407
            
            
            187,760
            
            
            355,389
            
            
            545,931Interest
            
            
            311
            
            
            43,202
            
            
            1,242
            
            
            87,526Professional
                fees
            
            
            23,410
            
            
            58,655
            
            
            72,156
            
            
            170,463Other
            
            
            -
            
            
            -
            
            
            -
            
            
            15,089Total
                operating expenses
            
            
            434,634
            
            
            521,397
            
            
            732,094
            
            
            1,215,453OPERATING
                (LOSS) BEFORE INCOME TAXES
            
            
            (360,745
            )
            
            (212,122
            )
            
            (214,209
            )
            
            (767,709
            )Provision
                for income taxes
            
            
            -
            
            
            (26,544
            )
            
            -
            
            
            (45,264
            )NET
                OPERATING (LOSS)
            
            
            (360,745
            )
            
            (238,666
            )
            
            (214,209
            )
            
            (812,973
            )




See
      accompanying notes




Page
          16
          of 38




SOVEREIGN
                EXPLORATION ASSOCIATES INTERNATIONAL, INC.(F/K/A
                - Cali Holdings, Inc.)Statements
                of Operations, continued(unaudited)




Three
                Months ended
            
            Six
                Months endedDecember
                31,
            
            December
                31,2005
            
            2004
            
            2005
            
            2004Net
                realized gain (loss) on investmentsControl
                investments
            
            
            (2,525,274
            )
            
            -
            
            
            (2,620,117
            )
            
            -Total
                net realized gain (loss) on investments
            
            
            (2,525,274
            )
            
            -
            
            
            (2,620,117
            )
            
            -Net
                unrealized (depreciation) on investmentsPortfolio
                company investments
            
            
            (558,332
            )
            
            (78,071
            )
            
            (716,649
            )
            
            (7,071
            )Total
                net unrealized (depreciation) on investments
            
            
            (558,332
            )
            
            (78,071
            )
            
            (716,649
            )
            
            (7,071
            )Total
                net loss on investments
            
            
            (3,083,606
            )
            
            (78,071
            )
            
            (3,336,766
            )
            
            (7,071
            )NET
                INCOME (LOSS) BEFORE MINORITY INTEREST
            
            
            (3,444,351
            )
            
            (316,737
            )
            
            (3,550,975
            )
            
            (820,044
            )Minority
                interest
            
            
            -
            
            
            (44,583
            )
            
            -
            
            
            (161,152
            )Total
                minority interest
            
            
            -
            
            
            (44,583
            )
            
            
            
            
            (161,152
            )NET
                DECREASE IN NET ASSETSRESULTING
                FROM OPERATIONS
            
            $
            (3,444,351
            )
            $
            (272,154
            )
            $
            (3,550,975
            )
            $
            (658,892
            )NET
                OPERATING LOSS PER COMMON SHARE:Basic
            
            $
            (0.0168
            )
            $
            (268.16
            )
            $
            (0.0197
            )
            $
            (1,566.42
            )Diluted
            
            $
            (0.0168
            )
            $
            (268.16
            )
            $
            (0.0197
            )
            $
            (1,566.42
            )NET
                LOSS PER COMMON SHAREBasic
            
            $
            (0.1608
            )
            $
            (305.79
            )
            $
            (0.3270
            )
            $
            (1,269.54
            )Diluted
            
            $
            (0.1608
            )
            $
            (305.79
            )
            $
            (0.3270
            )
            $
            (1,269.54
            )WEIGHTED
                AVERAGE SHARES OF COMMONSTOCK
                OUTSTANDING:Basic
            
            
            21,416,875
            
            
            890
            
            
            10,858,934
            
            
            519Diluted
            
            
            21,416,875
            
            
            890
            
            
            10,858,934
            
            
            519DIVIDENDS
                DECLARED PER COMMON SHARE
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -




See
      accompanying notes




Page
          17
          of 38




SOVEREIGN
                EXPLORATION ASSOCIATES INTERNATIONAL, INC.(F/K/A
                - Cali Holdings, Inc.)SCHEDULE
                OF INVESTMENTS IN AND ADVANCES TO AFFILIATESDecember
                31, 2005(unaudited)




Company
            
            Industry
            
            Investment
            
            Cost
            
            Fair
                ValueHistoric
                Discoveries, Inc.
            
            
            Marine
                Exploration
            
            
            Common
                Stock - 100%
            
            $
            1,861,410
            
            $
            1,861,410Sovereign
                Exploration AssociatesInternational
                of Spain, Inc.
            
            
            Marine
                Exploration
            
            
            Common
                Stock - 100%
            
            
            800,000
            
            
            800,000Gulf
                Coast Records, LLC
            
            
            Recording
                Label
            
            
            Member
                Interest - 49%
            
            
            173,868
            
            
            -Gulf
                Coast Records, LLC
            
            
            Recording
                Label
            
            
            Note
                Receivable8%
                Interest; norepayment
                terms
            
            
            832,849
            
            
            -Total
                investments in and advances to affiliates
            
            
            
            
            
            
            
            $
            3,668,127
            
            $
            2,661,410




See
      accompanying notes




Page
          18
          of 38




SOVEREIGN
                EXPLORATION ASSOCIATES INTERNATIONAL, INC.(F/K/A
                - Cali Holdings, Inc.)STATEMENTS
                OF CHANGES IN NET ASSETS(unaudited)




Six
                Months EndedDecember
                31,2005
            
            2004Operations:Net
                operating (loss)
            
            $
            (214,209
            )
            $
            (812,973
            )Net
                realized gain (loss) on investments
            
            
            (2,620,117
            )
            
            -Net
                unrealized (depreciation) of investments
            
            
            (716,649
            )
            
            (7,071
            )Net
                decrease in net assets resulting from operations
            
            
            (3,550,975
            )
            
            (820,044
            )Shareholder
                distributions:Common
                stock dividends
            
            
            -
            
            
            -Net
                decrease in net assets resulting from shareholder
                distributions
            
            
            -
            
            
            -Capital
                share transactions:Issuance
                of common stock
            
            
            2,799,067
            
            
            1,025,895Other
            
            
            (12,009
            )
            
            -Net
                increase in net assets resulting from capital share
                transactions
            
            
            2,787,058
            
            
            1,025,895Total
                increase (decrease) in net assets
            
            
            (763,917
            )
            
            205,851Net
                assets beginning of period
            
            
            2,432,771
            
            
            2,585,093Net
                assets end of period
            
            $
            1,668,854
            
            $
            2,790,944Net
                asset value per common share
            
            $
            0.0637
            
            $
            1,358.98Common
                shares outstanding at end of period
            
            
            26,203,040
            
            
            2,054




See
      accompanying notes




Page
          19
          of 38




SOVEREIGN
                EXPLORATION ASSOCIATES INTERNATIONAL, INC.(F/K/A
                - Cali Holdings, Inc.)STATEMENTS
                OF CASH FLOWS (Unaudited)




Six
                  Months EndedDecember
                31, 2005
            
            Six
                  Months EndedDecember
                31, 2004Operating
                activities:Net
                (decrease) in net assets resulting from operations
            
            $
            (3,550,975
            )
            $
            (658,892
            )Adjustments
                to reconcile net (decrease) in net assets resultingfrom
                operations to net cash providing by operating activities:Net
                unrealized appreciation (depreciation) on investments
            
            
            (716,649
            )
            
            7,071Net
                realized (gain) loss on investments
            
            
            2,620,117
            
            
            -Deferred
                income tax
            
            
            -
            
            
            45,264Stock
                issued for services
            
            
            -
            
            
            88,947Minority
                interest
            
            
            -
            
            
            (161,152
            )Depreciation
                and amortization
            
            
            615
            
            
            28,645(Increase)
                decrease in:Prepaid
                expenses
            
            
            (1,803
            )
            
            -Accounts
                receivable
            
            
            (41,308
            )
            
            (254,847
            )Other
                assets
            
            
            254,207
            
            
            14,002Goodwill
            
            
            489,000
            
            
            -Increase
                in accounts payable and accrued expenses
            
            
            229,893
            
            
            59,809Net
                cash (used in) operating activities
            
            
            (716,903
            )
            
            (831,153
            )Investing
                activities:Decrease
                (increase) in notes receivable
            
            
            (71,758
            )
            
            (571,731
            )Purchase
                of property and equipment
            
            
            -
            
            
            (26,438
            )Purchase
                of investments, portfolio companies
            
            
            (2,661,410
            )
            
            (161,674
            )Net
                cash (used in) investing activities
            
            
            (2,733,168
            )
            
            (759,843
            )Financing
                activities:Proceeds
                from notes payable to related parties
            
            
            645,100
            
            
            845,150Payment
                of notes payable to related parties
            
            
            -
            
            
            (65,000
            )Payment
                of notes payable
            
            
            -
            
            
            (222,917
            )Issuance
                of common stock
            
            
            2,799,067
            
            
            634,474Issuance
                of preferred stock
            
            
            -
            
            
            10,000Distributions
            
            
            -
            
            
            (1,296
            )Net
                cash provided by financing activities
            
            
            3,444,167
            
            
            1,200,411Net
                (decrease) in cash and cash equivalents
            
            
            (5,904
            )
            
            (390,585
            )Cash,
                beginning of period
            
            
            31,034
            
            
            470,940Cash,
                end of period
            
            $
            25,130
            
            $
            80,355




S ee
      accompanying notes




Page
          20
          of 38


SOVEREIGN
      EXPLORATION ASSOCIATES INTERNATIONAL, INC.


(F/K/A
      -
      Cali Holdings, Inc.)


NOTES
      TO
      FINANCIAL STATEMENTS


Unaudited


December
      31, 2005




NOTE
      A
      - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Company
      Activities




Sovereign
      Exploration Associates International, Inc. (the "Company") was incorporated
      in
      the state of Utah in 1980. The company was formerly known as CALI Holdings,
      Inc.
      On October 26, 2005 the Company changed its name from CALI Holdings, Inc. to
      Sovereign Exploration Associates International, Inc.





On
      January 5, 2004 the Company's shareholders consented to the proposal to allow
      the Company to adopt business development company ("BDC") status under the
      Investment Company Act of 1940 ("1940 Act"). A BDC is a specialized type of
      Investment Company under the 1940 Act. A BDC may primarily be engaged in the
      business of furnishing capital and managerial expertise to companies that do
      not
      have ready access to capital through conventional financial channels; such
      companies are termed "eligible portfolio companies". The Company as a BDC,
      may
      invest in other securities, however such investments may not exceed 30% of
      the
      Company's total asset value at the time of such investment. The Company filed
      its BDC election with the SEC (Form N-54A) on January 13, 2004. The Company
      provides equity and long-term debt financing to small and medium-sized private
      companies. The Company's investment objective is to achieve long-term capital
      appreciation in the value of its investments and to provide current income
      primarily from interest, dividends and fees paid by its portfolio
      companies.





Basis
      of Presentation





Different
      accounting principles are used in the preparation of financial statements of
      a
      business development company under the Investment Company Act of 1940 and
      therefore, the financial statements is presented using the guidelines outlined
      under the 1940 Act. By becoming a BDC, the Company has effected a change in
      accounting principle and no longer consolidates its investments in portfolio
      companies in accordance with Article 6 of Regulation S-X under the Securities
      Act of 1933 and Securities Act of 1934 in which a BDC does not consolidate
      portfolio company investments, including those in which it has a controlling
      interest. Certain reclassifications have been made to the December 31, 2004
      and
      June 30, 2005 amounts to make them consistent with the December 31, 2005
      classifications.





Revenue
      Recognition





The
      Company recognizes revenue using the accrual method of accounting. The accrual
      method provides for a better matching of revenues and expenses. The Company
      also
      accrues interest income on loans made to various portfolio companies. The
      Company accrues the interest on such loans until the portfolio company has
      the
      necessary cash flow to repay such interest. If the Company's analysis of the
      portfolio company's performance indicates that the portfolio company may not
      have the ability to pay the interest and principal on a loan, the Company will
      make an allowance provision on that entity and in effect cease recognizing
      interest income on that loan until all principal has been paid. However, the
      Company will make exceptions to this policy if the investment is well secured
      and in the process of collection.




Page
          21
          of 38





For
      certain investment companies, the Company provides management services and
      recognizes an agreed upon fixed monthly fee ("Fee Income") and expenses. Fee
      Income includes fees for services rendered by the Company to portfolio companies
      and other third parties such as diligence, structuring, transaction services,
      management services, and other advisory services. Diligence, structuring, and
      transaction services fees are generally recognized as income when services
      are
      rendered or when the related transactions are completed. Management and other
      advisory services fees are generally recognized as income as the services are
      rendered.





Use
      of
      Estimates





The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions.
      These estimates and assumptions affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from these
      estimates.





Net
      (Loss) Per Common Share





Net
      (Loss) per common share is computed using the weighted average of shares
      outstanding during the periods presented in accordance with *Statement
      of Financial Accounting Standards No. 128, Earnings Per Share* .
      As
      discussed further in Notes N and O, any references to amounts per share or
      weighted average common shares have been restated to reflect reverse
      splits.





Cash
      and Cash Equivalents





Cash
      and
      cash equivalents include time deposits with original maturities of three months
      or less.





Fixed
      Assets





Fixed
      assets are stated at cost. The cost of equipment is charged against income
      over
      their estimated useful lives, using the straight-line method of depreciation.
      Repairs and maintenance which are considered betterments and do not extend
      the
      useful life of equipment are charged to expense as incurred. When property
      and
      equipment are retired or otherwise disposed of, the asset and accumulated
      depreciation is removed from the accounts and the resulting profit and loss
      are
      reflected in income.





Goodwill
      and Other Intangibles





The
      Company records Goodwill in accordance with *Statement
      of Financial Accounting Standards No.142, Goodwill and Other Intangible Assets.* Intangible
      assets such as goodwill are not amortized; instead the Company will review
      the
      goodwill not less frequently than annually to see if it has been impaired.
      If
      impairment occurs, it will be recorded as an expense in that period. During
      the
      three months ending December 31, 2005, goodwill was adjusted to zero pursuant
      to
      the calculation of the divesture of the assets in Note J.




Page
          22
          of 38





NOTE
      B
      - INVESTMENTS





Valuation
      of Investments





The
      most
      significant estimate inherent in the preparation of the Company's financial
      statements is the valuation of its investments and the related unrealized
      appreciation or depreciation. The Company has engaged independent business
      valuation experts to value selected portfolio companies, which will have
      significant activity in the Company's first year operating under the new
      registrant. The Board of Directors states all other portfolio companies and
      investments at fair market value, which approximates cost, as determined under
      a
      good faith standard. The Company analyzes the investments on a regular basis
      and
      records unrealized gains or losses if and when an investment significantly
      gains
      or loses market value as determined by a good faith standard.





The
      Company has investments in three (3) controlled portfolio companies as of
      December 31, 2005.





·
            Historic
                Discoveries, Inc.


·
            Sovereign
                Exploration Associates International of Spain, Inc. (SEAI -
                SPAIN)


·
            Gulf
                Coast Records, LLC





The
      portfolio companies consist of Historic Discoveries, Inc.; Artifact Recovery
      & Conservation, Inc. and Sea Research, Inc. (SR) are wholly owned
      subsidiaries of Historic Discoveries, Inc.





*Artifact
      Recovery & Conservation, Inc. (ARC)*





Artifact
      Recovery & Conservation, Inc. (ARC) has secured the rights to five (5)
      sites; several of the sites have revealed multiple ships with historic and
      intrinsic value. Currently ARC operates recovery operations on two of the five
      sites. ARC manages its own dive teams and oversees operations for contracted
      recovery teams. Management is in the process of preparing time lines and
      operating plans for the other sites.





*Sea
      Research, Inc. (SR)*





Sea
      Research, Inc. (SR) has secured the rights to seven (7) sites; several of the
      sites have revealed multiple ships with historic and intrinsic value. Currently
      SR is preparing to initiate recovery operations on one of the seven sites and
      developing timelines for the remainder of the portfolio.





*Sovereign
      Exploration Associates International of Spain, Inc. (SEAI -
      SPAIN)*





Sovereign
      Exploration Associates International of Spain, Inc. (SEAI-SPAIN) has secured
      the
      finder's rights to four (4) shipwrecks in Spain with potential historic and
      intrinsic value, thereby expanding SR's current holdings.




Page
          23
          of 38





*Gulf
      Coast Records, LLC*





Gulf
      Coast Records, LLC is an independent record label. In 2005, Gulf Coast was
      developing record artist Glenn Cummings. There has been no activity in the
      development or promotion of this artist since September 2005. Current management
      is reviewing its options regarding this portfolio company and whether it wants
      to maintain its position or divest its holdings in the future.





Current
      management does not possess adequate information to determine the proper fair
      market value of this portfolio company, at this time, and has reduced the value
      of the investment and note receivable to zero. Once management receives the
      necessary information, it will update the fair market value of these assets.
      Current management is actively negotiating with the management of Gulf Coast
      Records, LLC regarding the recovery of the Company's investment.





NOTE
      C
      - FIXED ASSETS





Prior
      to
      the effective execution of the Exchange Agreement on October 17, 2005, the
      fixed
      assets of the Company consisting of computer and office equipment were sold
      pursuant to a warranty bill of sale for $10 to KMA Capital Partners Ltd. Inc
      of
      Texas.





Depreciation
      expense for the six months ended December 31, 2005 and 2004 was $615 and $642,
      respectively.





Current
      management has requested the appropriate documentation from the management
      of
      KMA Capital, Ltd., in an effort to determine the effect these transactions
      had
      on shareholders and to assess any subsequent actions that may be required by
      current management.





NOTE
      D
      - STOCK ISSUED FOR SERVICES





During
      the six month ended December 31, 2005, the Company did not issue any stock
      for
      services.





During
      the six months ended December 31, 2004, prior management issued 12,250 shares
      of
      the Company's common stock for various professional consulting services. The
      value assigned to the above shares ($52,250) is based on the stocks' traded
      market price on or about the date the shares were issued and are included in
      professional fees.





NOTE
      E
      - UNREALIZED GAINS (LOSSES) ON INVESTMENTS





For
      the
      six months ended December 31, 2005 and 2004, the Company recognized an
      unrealized loss on the Company's investments in the amount of $716,649 and
      $7,071, respectively.





NOTE
      F- INCOME TAXES





At
      June
      30, 2005, the Company had approximately $6,414,480 of tax net operating loss
      carryforwards.





Pursuant
      to the Exchange Agreement dated October 17, 2005, substantial ownership of
      the
      Company was transferred and according to Internal Revenue Service Regulations,
      this is a transaction that will eliminate all of the loss carryforwards for
      federal income tax purposes starting with fiscal year ending June 30,
      2006.




Page
          24
          of 38




NOTE
      G
      - COMMITMENTS





The
      Company leased office and operating facilities under short-term operating leases
      located in Orlando, Florida. Pursuant to the Exchange Agreement, the Company
      terminated its lease agreement for this office space. Subsequent to the Exchange
      Agreement, the Company maintains shared office space in Pennsylvania and
      Massachusetts with unrelated companies controlled by certain officers of the
      Company. There are no formal lease arrangements, however, the Company shares
      in
      the cost for these offices on a monthly basis.





Rent
      expense for the six months ended December 31, 2005 and 2004 was $36,717 and
      $69,778, respectively.





NOTE
      H
      - NOTES PAYABLE





The
      following are convertible debentures as of December 31, 2005 that were not
      converted as part of the Exchange Agreement dated October 17, 2005:





8%
                convertible debenture to an individual dated May 27, 2005 with an
                initial
                principal balance of $21,000 due no later than May 27, 2006; outstanding
                principal and interest
            
            $
            22,1345.25%
                convertible debenture to Golden Gate Investors dated June 29, 2005
                with an
                initial principal balance of $40,000 due no later than June 29, 2008;
                outstanding principal and interest...(this convertible debenture
                is
                currently in dispute)
            
            $
            87,6478%
                convertible debenture to an individual dated May 18, 2005 with an
                initial
                principal balance of $35,000 due no later than May 18, 2006; outstanding
                principal and interest
            
            $
            7,297Total
                notes payable, current
            
            $
            117,078





NOTE
      I
      - RELATED PARTY NOTES PAYABLE





As
      of
      December 31, 2005, $45,100 was owed to certain officers of the Company. These
      funds were advanced to the Company for cash flow purposes in the form of demand
      notes bearing no interest.





As
      of
      December 31, 2005, $600,000 was owed to Sea Hunt, Inc., a related party to
      the
      Company. $300,000 of these funds were advanced to the Company for the payment
      made on October 17, 2005 pursuant to the terms of the Exchange Agreement, and
      $300,000 of these funds were to be paid to the prior management and consulting
      firm on March 31, 2006 for the obligations under the Exchange Agreement dated
      October 17, 2005. However, the Company is currently in litigation with prior
      management and the consulting firm regarding their breach of the obligations
      under the Exchange Agreement dated October 17, 2005.




Page
          25
          of 38





NOTE
      J
      - DIVESTITURE OF ALL PORTOLIO COMPANIES AND OTHER ASSETS





Prior
      to
      the effective execution of the Exchange Agreement on October 17, 2005, the
      Company was required to divest of all of its assets including the investment
      in
      all portfolio companies, notes receivable, and all remaining assets except
      for
      its investment in, and its note receivable due from Gulf Coast Records, LLC
      and
      other assets consisting of prepaid legal fees and security deposits of $7,375.
      As of December 31, 2005, the investment in and the note receivable due from
      Gulf
      Coast has been reduced to zero. Current management is actively negotiating
      with
      the management of Gulf Coast Records, LLC regarding the recovery of the
      Company's investment.


Prior
      to
      the effective date of the Exchange Agreement dated October 17, 2005, two
      separate bills of sales required the following lists of assets of the Company
      to
      be sold to KMA Capital, Ltd. of Texas for total consideration of $10 and Kairos
      Holdings, Inc. for a total consideration of $10:





Sold
                to KMA Capital Ltd. Of Texas
              
              Sports
                Nation, Inc.
              Buehler
                Earth & Waterworks, LLC
              Brokerage
                account of CALI at NevWest
              TS&B
                Financial Services, Inc.
              Wellstone
                Acquisition Corporation
              TS&B
                Gaming & Entertainment Corp.
              TSB
                Ventures, Inc.
              Three
                (3) Dell notebook computers
              Furniture
                and fixtures
              Office
                and computer equipment
              
              Sold
                to Kairos Holdings, Inc.
              Interest
                in and to investment in KMA Capital Partners Ltd - Nine (9) Limited
                Partnership Units





KMA
      Capital, Ltd. is owned in part by Kairos Holdings, Inc.





Prior
      to
      the execution of the Exchange Agreement on October 17, 2005, total realized
      loss
      on the divestiture of these assets of the Company was $2,525,274. This amount
      was recorded as a net realized loss on investments: control investments. The
      Company does not have any information regarding the valuation of these
      companies. Prior management owns a controlling interest in the divested
      companies.





NEX2U,
      Inc. is listed as a portfolio company investment as of September 30, 2005;
      however, it was not included in either of the above referenced bills of sale
      included in the Exchange Agreement dated October 17, 2005. As of September
      30,
      2005, this portfolio company had a cost basis of $16,000. The Company has
      requested documentation from prior management regarding the transfer of NEX2U,
      Inc. to Kairos Holdings, Inc., and the consideration for such
      transfer.





On
      September 21, 2005, prior management sold the Company's 51% interest in Buehler
      Earth and Waterworks, LLC for $110,000 to Buehler's managing
      member.





Current
      management has requested the appropriate documentation from the management
      of
      KMA Capital, Ltd. and Kairos Holdings, Inc. in an effort to determine the effect
      these transactions had on shareholders.




Page
          26
          of 38





NOTE
      K
      - EXCHANGE AGREEMENT





At
      closing of the Exchange Agreement on October 17, 2005, the Company agreed to
      pay
      to Charles Giannetto, James E, Jenkins and KMA Capital, in total the sum of
      Six
      Hundred Thousand and no/100 dollars ($600,000) in complete termination and
      release of the Executive Management contracts from Cali to Giannetto and Jenkins
      and the consulting contract of Cali to KMA. Three Hundred Thousand ($300,000)
      was paid at closing and the balance of $300,000 was to be paid on or before
      March 31, 2006. Additionally, two of the former officers of the Company, and
      a
      management consulting firm (KMA Capital Partners, Ltd.) were to receive an
      aggregate 5% of the outstanding shares of the Company, post reverse
      split.





Pursuant
      to the Exchange Agreement, the Company received in exchange for total
      consideration under the Exchange Agreement an interest in one controlled
      portfolio company: Historic Discoveries, Inc. See Note B for a description
      of
      this portfolio company. The consideration for the acquisition of this portfolio
      company was $1,861,410 in the form of obligations as outlined in Exhibit G
      of
      the Exchange Agreement.





Under
      the
      requirements of a BDC, management is required to recognize the fair market
      value
      of its ownership interest in its portfolio companies. As of December 31, 2005,
      management's good faith estimate of fair market value of its investment in
      Historic Discoveries, Inc. equals its cost of $1,861,410 as fully disclosed
      in
      the Exchange Agreement.





Prior
      management received consent for the transaction by the holders of 51% of the
      outstanding shares as of the date of the Exchange Agreement. Current management
      is reviewing the consent transaction to determine if all filing requirements
      were completed by prior management as they relate to the shareholder approval
      of
      this transaction.





Senior
      Security Instruments





Prior
      to
      the Exchange Agreement, there is a Revenue Agreement as outlined in Exhibit
      B of
      the Exchange Agreement, that requires 20% revenue participation payable to
      the
      original owners of the permits from the net recovery of the shipwrecks for
      the
      permits that have been assigned to the subsidiaries of the Company's portfolio
      company, Historic Discoveries, Inc. ** The
      20%
      revenue participation allows Historic Discoveries, Inc. ** to
      defer
      permit transfer fees and align site permit cost with revenue generation,
      eliminating the exposure associated with sites that do not produce a material
      number of artifacts. Historic Discoveries, Inc. is only required to pay the
      20%
      revenue participation when sites produce net revenue. The 20% revenue
      participation also provides Historic Discoveries, Inc. the right of first
      refusal on future sites, creating a mechanism for Historic Discoveries,
      Inc. ** and
      its
      operating companies to build site inventory while deferring the associated
      cost
      and reducing financial risk. The Revenue Agreement with the original owners
      was
      executed prior to October 17, 2005. The original owners of these permits are
      the
      beneficial owners of the controlling interest in the stock received in the
      Exchange Agreement. Additionally, officers and directors of the Company hold
      certain executive positions in Historic Discoveries, Inc. ** and
      its
      subsidiaries.





The
      Fantome project (Fantome Cove Treasure Trove License 150, LLC. a subsidiary
      of
      ARC) sold a 2.06% equity interest for a capital investment of $412,000, and
      the
      LeChameau project (Interspace Explorations, LLC, a subsidiary of ARC) sold
      a
      26.0% ownership interest and 40% profit participation interest for $390,000.
      Management intends to assess it liability under these agreements on a periodic
      basis. No liability has been recorded for these agreements as of December 31,
      2005.





Page
          27
          of 38





NOTE
      L
      - STOCKHOLDERS' EQUITY





As
      of
      December 31, 2005, the authorized capital of the Company is 250,000,000,000
      shares of common stock (with voting rights); par value $.001.





The
      Company has authorized 10,000 shares of Class A, no par, preferred stock and
      has
      issued and outstanding 10,000 shares as of December 31, 2005 and 3,725,000
      shares as of December 31, 2004, as discussed further in Note O. The Class A
      preferred stock has conversion rights to the Company's common stock (with voting
      rights) of 4-1.





As
      of
      December 31, 2005, the Company has authorized and issued 10,000 shares of
      convertible Class C, .001 per share, preferred stock. The Class C preferred
      stock has conversion rights to the Company's common voting stock of 1-1. If
      at
      any time or time to time, there is a capital reorganization of the common stock
      (reverse split, forward split, etc.) the number of Class C preferred stock
      authorized, issued and outstanding, and the number of shares of common stock
      into which such Class C preferred shall not be entitled to vote such shares
      (except as otherwise expressly provided herein or as required by law, voting
      together with the common stock as a single class), but shall be entitled to
      notice of any stockholders' meeting in accordance with the Company's bylaws.
      In
      lieu of voting rights, the holders of Class C preferred, voting as a class
      shall
      be entitled to elect two of the Board of Directors at each meeting.





The
      investment in Historic Discoveries, Inc. ** and
      the
      investment in Sovereign Exploration Associates of Spain Inc., individually
      and
      in total of the two investments, exceed 25% of the total investments, at fair
      value which approximates cost, reflected in the financial statements presented
      herein.




As
      of
      December 31, 2005, the Company has authorized but not issued 10,000 shares
      of
      Class D, no par, preferred stock.


As
      of the
      date of this report no preferred shares have been converted to common
      stock.





ISSUANCE
      OF STOCK





On
      October 5, 2005, the prior management issued 800,000 shares of restricted common
      stock (with voting rights) to KMA Capital Partners, Ltd. The Company is in
      dispute with prior management and related consulting firm, over the subsequent
      sale of 400,000 shares of this restricted stock. The Company does not possess
      any documentation, nor does it have any knowledge regarding the consideration
      for which these shares were issued to KMA Capital Partners, Ltd.





The
      Company has requested documentation for the issuance of these shares and this
      matter is part of the ongoing litigation with the prior management.





On
      October 14, 2005, the prior management issued the 556,166,667 common shares
      (556,166 common shares post reverse split of January 17, 2006) referred to
      in
      Note H of the September 30, 2005 Form 10-Q to Sequoia International, Inc. and
      therefore, has satisfied the Escrow Agreement with Sequoia International, Inc. *"Escrow
      Agreement with Sequoia International, Inc. in which the Company has received
      $166,850 and will in turn disburse 556,166,667 shares into an escrow account
      at
      the discretion of Sequoia."*




Page
          28
          of 38




On
      October 14, 2005, the prior management issued the 191,700,000 common shares
      (191,700 common shares post reverse split of January 17, 2006) referred to
      in
      Note H of the September 30, 2005 Form 10-Q to an individual and therefore,
      has
      satisfied the Escrow Agreement with that individual. *"Escrow
      Agreement with an individual in which the Company has received $95,850 and
      will
      in turn disburse 191,700,000 shares into an escrow account at the discretion
      of
      the individual"*





On
      December 26, 2005, the Company issued 100,000 shares of common stock for 100%
      ownership of the stock of Sea Quest, Inc. Sea Quest, Inc. is a wholly owned
      subsidiary of Sea Research, Inc. Sea Quest, Inc. was owned 50% by a private
      unrelated individual and 50% owned by Sea Hunt Holding, LLC, which is owned
      by
      the Chairman of the Company.




NOTE
      M
      - CONCENTRATION OF CREDIT RISK





Financial
      instruments, which potentially expose the Company to concentrations of credit
      risk, consist principally of cash, investments in portfolio companies, and
      notes
      receivable.




As
      of
      December 31, 2005, the Company maintains its cash accounts with financial
      institutions located in Pennsylvania. Federal Deposit Insurance Corporation
      (FDIC) guarantees the Company's deposits in financial institutions up to
      $100,000 per account.





The
      Company's deposits with financial institutions that exceeded federally insured
      guarantees amounted to $0 as of December 31, 2005. Historically, the Company
      has
      not experienced any losses on its deposits in excess of federally insured
      guarantees.





As
      of
      December 31, 2005, the fair value of the investment in Historic Discoveries,
      Inc. or $1,861,400 is approximately 69.9% of the total investments, at fair
      value, of $2,661,410.




The
      investment in Historic Discoveries, Inc. and the investment in Sovereign
      Exploration Associates of Spain Inc., individually and in total of the two
      investments, exceed 25% of the total investments, at fair value which
      approximates cost, reflected in the financial statements presented herein.





As
      of
      December 31, 2005, a note receivable in the amount of $832,849 (offset by an
      allowance to reduce the market value of this note and investment to $0) from
      Gulf Coast Records is included in Investments in and advances to affiliates
      in
      the accompanying balance sheet. Current management is reviewing its options
      regarding this portfolio company and whether it wants to maintain its position
      or divest its holdings in the future, while actively negotiating with the
      management of Gulf Coast Records, LLC regarding the recovery of the Company's
      investment. The Company has recently received information from the management
      of
      Gulf Coast Records, LLC that has caused the Company to reduce the fair market
      value to zero at this time.





NOTE
      N
      - REVERSE STOCK SPLITS





On
      April
      4, 2005, the Board of Directors authorized a 100 to 1 reverse stock split of
      the
      Company's $.001 par value common stock. As a result of the reverse split,
      962,151,879 shares were returned to the Company and additional paid in capital
      was increased by $962,152. All references to the accompanying financial
      statements to the number of common shares and per share amounts for 2005 and
      2004 have been restated to reflect the reverse stock split.




Page
          29
          of 38


On
      August
      13, 2004, the Board of Directors authorized a 40 to 1 reverse stock split of
      the
      Company's $.001 par value common stock. As a result of the reverse split,
      473,185,733 shares were returned to the Company and additional paid in capital
      was increased by $473,186. All references in the accompanying financial
      statements to the number of common shares and per share amounts for 2005 and
      2004 have been restated to reflect the reverse stock split.





NOTE
      O
      - SUBSEQUENT EVENTS





On
      January 17, 2006, the Board of Directors authorized a 1,000 to 1 reverse stock
      split of the Company's $.001 par value common stock. As a result of the reverse
      split, 2,535,359,053 shares were returned to the Company and additional paid
      in
      capital was increased by $2,535,359.





Pursuant
      to the Exchange Agreement, the owners of the stock of Historic Discoveries,
      Inc *.* and Sea
      Hunt, Inc. collectively were to receive 90% of the outstanding shares of the
      Company, post reverse split.





Two
      of
      the former officers of the Company, and a management consulting firm (KMA
      Capital Partners, Ltd.) collectively were to receive an aggregate 5% of the
      outstanding shares of the Company, post reverse split.





Due
      to
      the activities and transactions of prior management and the consulting firm,
      the
      Company did not issue additional shares to prior management and the consulting
      firm pursuant to the Exchange Agreement, and as a result, the public
      shareholders now own 8.47% of the outstanding shares. The Company reduced the
      amount of the shares due to the former officers and the consulting firm, from
      5%
      to 1.53%, taking into account their unauthorized sale of restricted stock and
      other alleged improper activities which are the subject of the ongoing
      litigation previously mentioned.





On
      January 17, 2006, the Board of Directors cancelled the 10,000 shares of Series
      A
      Convertible Preferred Stock, no par value, and the 9,990 shares of Series C
      Convertible Preferred Stock, no par value. The Series A Preferred shares were
      partially owned by the prior management (3,750 shares) and indirectly owned
      by
      the Company through its portfolio company Historic Discoveries, Inc *.* (6,250
      shares). Pursuant to the Exchange Agreement, the Company had the authority
      to
      cancel and retire the shares of prior management. The Company determined that
      it
      was in the best interests of the Company's shareholders to cancel and retire
      all
      issued and outstanding shares of Series A Convertible Preferred Stock. All
      references in the accompanying financial statements to the number of common
      shares and per share amounts for 2005 and 2004 have been restated to reflect
      the
      reverse stock split.





NOTE
      P: RELATED PARTY TRANSACTONS





As
      of
      December 31, 2005, the following is a listing of all related party transactions
      and/or relationships of the Company:





OFFICERS
      LOANS





As
      of
      December 31, 2005, $45,100 was owed to certain officers of the Company. These
      funds were advanced to the Company for cash flow purposes in the form of demand
      notes bearing no interest.





Page
          30
          of 38





RELATED
      PARTY NOTE PAYABLE TO SEA HUNT, INC.





As
      of
      December 31, 2005, $600,000 was owed to Sea Hunt, Inc., a related party of
      the
      Company. $300,000 of these funds were advanced to the Company for the payment
      made on October 17, 2005 pursuant to the terms of the Exchange Agreement, and
      $300,000 of these funds were to be paid to the prior management and consulting
      firm on March 31, 2006 for the obligations under the Exchange Agreement dated
      October 17, 2005. However, the Company is currently in litigation with prior
      management and the consulting firm regarding their breach of the obligations
      under the Exchange Agreement dated October 17, 2005.





SENIOR
      SECURITY INSTRUMENT - HISTORIC DISCOVERIES, INC.





Prior
      to
      the Exchange Agreement, there is a Revenue Agreement as outlined in Exhibit
      B of
      the Exchange Agreement, that requires 20% revenue participation payable to
      the
      original owners of the permits from the net recovery of the shipwrecks for
      the
      permits that have been assigned to the subsidiaries of the Company's portfolio
      company, ** Historic
      Discoveries, Inc. ** The
      20%
      revenue participation allows Historic Discoveries, Inc. to defer permit transfer
      fees and align site permit cost with revenue generation, eliminating the
      exposure associated with sites that do not produce a material number of
      artifacts. Historic Discoveries, Inc *.* is only
      required to pay the 20% revenue participation when sites produce net revenue.
      The 20% revenue participation also provides Historic Discoveries, Inc. the
      right
      of first refusal on future sites, creating a mechanism for Historic Discoveries,
      Inc. ** and
      its
      operating companies to build site inventory while deferring the associated
      cost
      and reducing financial risk. The Revenue Agreement with the original owners
      was
      executed prior to October 17, 2005.




RELATED
      PARTY OWNERSHIP OF PERMITS





The
      original owners of the permits, as identified under Senior Security Instrument
      -
      Historic Discoveries, Inc., are the beneficial owners of the controlling
      interest in the stock of the Company received in the Exchange Agreement dated
      October 17, 2005.





OFFICERS
      AND DIRECTORS OF THE COMPANY





Certain
      officers and directors of the Company hold certain executive positions
      in ** Historic
      Discoveries, Inc., Sea Hunt, Inc. and their respective
      subsidiaries.





ACQUISITION
      OF SEA QUEST, INC.





On
      December 26, 2005, the Company issued 100,000 shares of common stock for 100%
      ownership of the stock of Sea Quest, Inc. Sea Quest, Inc. is a wholly owned
      subsidiary of Sea Research, Inc. Sea Quest, Inc. was owned 50% by a private
      unrelated individual and 50% owned by Sea Hunt Holding, LLC, which is owned
      by
      the Chairman of the Company.





STOCK
      ACQUISTION - EXHANGE AGREEMENT





Pursuant
      to the Exchange Agreement dated October 17, 2005, Sovereign Marine Explorations,
      Inc (owner of Artifact Recovery & Conservation, Inc.) and Sea Hunt, Inc.
      (owner of Sea Research, Inc.) collectively own 90% of the Company's outstanding
      common stock and 100% of the Company's Class C, Convertible Preferred
      Stock.




Page
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**ITEM
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS - DECEMBER 31,
      2006**




The
      following discussion should be read in conjunction with our financial statements
      and notes thereto appearing elsewhere in this report.





CAUTIONARY
      STATEMENT REGARDING FORWARD-LOOKING INFORMATION:





This
      Form
      10-QSB for the quarter ended December 31, 2006 contains forward-looking
      statements within the meaning of Section 27A of the Securities Act of 1933,
      as
      amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
      Forward-looking statements may be identified by the use of forward-looking
      terminology, such as "may", "shall", "could", "expect", "estimate",
      "anticipate", "predict", "probable", "possible", "should", "continue", or
      similar terms, variations of those terms or the negative of those terms. The
      forward-looking statements specified in the following information have been
      compiled by our management on the basis of assumptions made by management and
      are considered by management to be reasonable. Our future operating results,
      however, are impossible to predict and no representation, guaranty, or warranty
      is to be inferred from those forward-looking statements.





The
      assumptions used for purposes of the forward-looking statements specified in
      the
      following information represent estimates of future events and are subject
      to
      uncertainty as to possible changes in economic, legislative, industry, and
      other
      circumstances. As a result, the identification and interpretation of data and
      other information and their use in developing and selecting assumptions from
      and
      among reasonable alternatives require the exercise of judgment. To the extent
      that the assumed events do not occur, the outcome may vary substantially from
      anticipated or projected results, and, accordingly, no opinion is expressed
      on
      the achievability of those forward-looking statements. No assurance can be
      given
      that any of the assumptions relating to the forward-looking statements specified
      in the following information are accurate, and we assume no obligation to update
      any such forward-looking statements.





The
      reader of this discussion, the related financial statements and notes thereto,
      and other recent Company filings should understand that the Portfolio companies,
      the Senior Management team, the Board of Directors, and the Company’s method of
      accounting upon its withdrawal of its election to be treated as a business
      development company under the Investment Company Act of 1940, have all
      materially changed.





RECENT
      DEVELOPMENTS:





REASONS
      FOR CEASING TO BE A BUSINESS DEVELOPMENT COMPANY





Following
      the change in control of Sovereign Exploration Associates International, Inc.
      (the "Company") on October 17, 2005, we determined that many of the regulatory,
      financial reporting and other requirements imposed by the 1940 Act were too
      restrictive and prevented the Company from operating in the manner in which
      it
      desires. Among these restrictions are the following:





·
            A
                BDC is an investment company and is engaged in the business of investing,
                reinvesting, owning, holding, or trading in securities. We instead
                intend
                to carry on our marine recovery and explorations business through
                subsidiaries and controlled
                companies.




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·
            In
                carrying on our business, from time to time we expect to enter into
                joint
                venture and other transactions with affiliates, subject to the oversight
                and approval of the Board of Directors. BDCs generally are unable
                to enter
                into such transactions without the approval of the Securities and
                Exchange
                Commission (the "SEC"), and such approvals generally cannot be obtained
                without undue time and expense.





·
            BDCs
                are subject to restrictions in the 1940 Act on the type and amount
                of
                securities, other than Common Stock, that they can issue. We believe
                that
                the Company would be better served by greater flexibility in our
                capital
                structure. The closely regulated nature of BDCs causes them to be
                subject
                to greater legal and accounting
                expenses.





·
            Because
                of restrictions on the Company' ability to issue stock, we were unable
                to
                comply with the Settlement Agreement effective June 30, 2006, while
                the
                Company was a BDC. We believe that the comprehensive settlement embodied
                in the Settlement Agreement is in the Company's best
                interests.





The
      Company's Board of Directors agreed with our assessment and determined that
      it
      was no longer feasible for the Company to operate as a BDC. The appropriate
      course of action was to withdraw the Company's election to be regulated as
      a BDC
      by filing a Form N-54C with the SEC. Following the withdrawal of the election,
      the Company will continue to be a reporting company under the Exchange Act,
      but
      will be managed so that it will not be subject to the provisions of the 1940
      Act.





EFFECT
      ON SHAREHOLDERS





Upon
      the
      Company's withdrawal of its election to be treated as a BDC, the Company will
      no
      longer be subject to regulation under the 1940 Act, which is designed to protect
      the interests of investors in investment companies. Specifically, our
      shareholders will no longer have the following protections of the 1940
      Act:





·
            We
                will no longer be subject to the requirement in Section 61 of the1940
                Act
                that we maintain a ratio of assets to senior securities (such as
                senior
                debt or preferred stock) of at least 200%. We will no longer be prohibited
                from protecting any director or officer against any liability to
                the
                Company or our shareholders arising from willful malfeasance, bad
                faith,
                gross negligence, or reckless disregard of the duties involved in
                the
                conduct of that person's office.





·
            We
                will no longer be required to provide and maintain a bond issued
                by a
                reputable fidelity insurance company to protect the Company against
                larceny and embezzlement.





·
            We
                will no longer be required to ensure that a majority of our directors
                are
                persons who are not "interested persons," as that term is defined
                in
                section 56 of the Investment Company Act, and certain persons that
                would
                be prevented from serving on our board if we were a BDC (such as
                investment bankers) would be able to serve on our
                board.





·
            We
                will no longer be subject to provisions of the 1940 Act regulating
                transactions between BDCs and certain
                affiliates.





·
            We
                will no longer be subject to provisions of the 1940 Act restricting
                our
                ability to issue shares, warrants and
                options.





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          33
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·
            We
                will be able to change the nature of our business and fundamental
                investment policies without having to obtain the approval of our
                shareholders.





EFFECT
      ON FINANCIAL STATEMENTS AND TAX STATUS





The
      election to withdraw the Company as a BDC under the 1940 Act results in a
      significant change in the Company's required method of accounting. BDC financial
      statement presentation and accounting utilizes the value method of accounting
      used by investment companies, which allows BDCs to recognize income and value
      their investments at market value as opposed to historical cost.





Operating
      companies use either the fair-value or historical-cost methods of accounting
      for
      financial statement presentation and accounting for securities held, depending
      on how the investment is classified and how long the company intends to hold
      the
      investment. Because of an absence of reliable market data as to the value of
      its
      assets, the Company has used historical cost as a proxy for fair value,
      mitigating the immediate impact of the change from fair-value to historical-cost
      accounting. In the future, however, changing our method of accounting could
      reduce the market value of our investments in privately held companies by
      eliminating our ability to report an increase in value of our holdings as they
      occur. Also, as an operating company, we will have to consolidate our financial
      statements with subsidiaries, thus eliminating the portfolio company reporting
      benefits available to BDCs.





We
      do not
      believe that the withdrawal of the Company's election to be treated as a BDC
      will have any impact on its federal income tax status, since we never elected
      to
      be treated as a regulated investment company under Subchapter M of the Internal
      Revenue Code. (Electing treatment as a regulated investment company under
      Subchapter M generally allows a qualified investment company to avoid paying
      corporate level federal income tax on income it distributes to its
      shareholders.) Instead, we have always been subject to corporate level federal
      income tax on our income (without regard to any distributions we make to our
      shareholders) as a "regular" corporation under Subchapter C of the Code.





CHANGE
      IN
      ACCOUNTING PRINCIPLE





The
      Company's financial statements for the quarter ended September 30, 2005, as
      presented herein, were prepared using the method of accounting applicable to
      investment companies, while our financial statements, as presented herein,
      for
      the three months ended September 30, 2006, are prepared using the method of
      accounting applicable to operating companies. Our financial statements for
      these
      periods are not comparable. We have determined it is impractical to comply
      with
      the retroactive application of prior periods being presented on an operating
      and
      consolidated basis in accordance with Statement of Financial Accounting
      Standards No. 154, Accounting for Changes and Error Corrections ("FAS
      #154").





Pursuant
      to paragraph 11 of FAS #154, we have deemed it impracticable to apply the
      effects of a change in accounting principle retroactively because the following
      conditions apply as of December 31, 2006:





1.
            We
                have made every reasonable effort to apply the requirement, but are
                unable
                to do.





2.
            Retrospective
                application of the change in accounting principle requires assumptions
                about prior management's intent in prior periods that cannot now
                be
                independently substantiated.




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          34
          of 38





3.
            Retrospective
                application of the change in accounting principle requires significant
                estimates of amounts, and at this time it is impossible to distinguish
                objectively information about those estimates that: (a) provides
                evidence
                of circumstances that existed on the date(s) at which those amounts
                would
                be recognized, measured, or disclosed under retrospective application,
                and
                (b) would have been available when the financial statements for that
                prior
                period were issued.





COMPARATIVE
      ANALYSIS





Since
      the
      Company does not possess the information necessary to restate the financial
      statements as of December 31, 2005, as an operating company, the following
      analysis only provides for the current year information.





REVENUES




Revenue
      for the six months ended December 31, 2006 was $0.





OPERATING
      AND OTHER EXPENSES





Operating
      expenses for the six months ended December 31, 2006 was $484,931 consisting
      of
      salaries and wages, general and administrative expenses and professional fees.
      All of our employees, including officers, have agreed to a 50% reduction in
      their respective salaries and wages effective July 01, 2006.





CAPITALIZED
      COSTS





The
      Company’s subsidiaries are development stage enterprises engaged in ocean
      explorations and archaeologically sensitive recoveries of artifacts, treasure
      trove and/or cargo from shipwrecks under various licenses. FAS #7 defines a
      development stage enterprise as one that is devoting substantially all of its
      efforts to establishing a new business and either planned principal operations
      have not commenced or planned principal operations have commenced but there
      has
      been no significant revenue.





As
      of
      December 31, 2006, the Company accounted for $2,867,615 of its ocean exploration and
      archaeologically sensitive recoveries of artifacts, treasure trove and/or cargo
      from shipwrecks costs
      incurred to-date as capitalized costs.





LIQUIDITY
      AND CAPITAL RESOURCES





At
      December 31, 2006, we had an accumulated deficit of $20,468,882.





Each
      year
      diving operations for ocean
      explorations and archaeologically sensitive recoveries of artifacts, treasure
      trove and/or cargo from shipwrecks must be funded. In order to fund the 2006
      diving operations which ran from July through October 2006, In July 2006 the
      President of the Company advanced the Company $500,000 of which $265,000 was
      directly used for diving operations in Nova Scotia. The remaining funds of
      approximately $235,000 were used for working capital purposes of the Company
      primarily for legal and professional fees related to being an SEC
      registrant.




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          35
          of 38


The
      net
      affect, as of June 30, 2006, of the Company’s election to withdrawal our
      business development company status pursuant to the Investment Company Act
      of
      1940 was as follows:




Additional
                paid in capital
            
            $
            (550,705
            )Deficit
            
            
            (425,068
            )Unrealized
                depreciation on investments
            
            
            1,015,273Net
                adjustments
            
            $
            39,500





As
      a
      result of the change in accounting principle because of the Company’s election
      to withdrawal its business development company election, the Company restated
      its June 30, 2006 Balance Sheet which is included in the accompanying financial
      statements.





Effective
      November 15, 2006, the Chairman of the Company advanced the Company $160,000
      under a note agreement that requires an interest rate of the lesser of 0.9%
      or
      the legal rate under Texas law and is due, in full, with principal and interest
      on November 15, 2007.





Effective
      November 15, 2006, the $600,000 note due to Sea Hunt, Inc. and Venture Planning,
      Inc., related parties to the Chairman of the Company, was renegotiated with
      a
      new due date of November 15, 2007 along with an interest rate of the lesser
      of
      0.9% or the legal rate under Texas law and is due, in full, with principal
      and
      interest on November 15, 2007.





NOTES
      PAYABLE





The
      convertible debentures as outlined in Note H of the accompanying financial
      statements continue to be in dispute. We have no additional information
      regarding the resolution to these disputed convertible debentures which were
      entered into by prior management before October 17, 2005. These convertible
      debentures continue to be in dispute because of issues related to the conversion
      rates. There is no additional information available from prior management at
      this time.





COMMITMENTS
      AND CONTINGENCIES:





Prior
      to
      the Exchange Agreement, there is a Revenue Agreement as outlined in Exhibit
      B of
      the Exchange Agreement, that requires 20% revenue participation payable to
      the
      original owners of the permits from the net recovery of the shipwrecks for
      the
      permits that have been assigned to the subsidiaries of the Company's portfolio
      company, Historic Discoveries, Inc. The 20% revenue participation allows
      Historic Discoveries, Inc. to defer permit transfer fees and align site permit
      cost with revenue generation, eliminating the exposure associated with sites
      that do not produce a material number of artifacts. Historic Discoveries, Inc.
      is only required to pay the 20% revenue participation when sites produce net
      revenue. The 20% revenue participation also provides Historic Discoveries,
      Inc.
      the right of first refusal on future sites, creating a mechanism for Historic
      Discoveries, Inc. and its operating companies to build site inventory while
      deferring the associated cost and reducing financial risk. The Revenue Agreement
      with the original owners was executed prior to October 17, 2005.





As
      of
      December 31, 2006, we have determined that no liability exists under this
      agreement.





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          36
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Item
      4.  Controls
      and Procedures





a)
      Evaluation of Disclosure Controls and Procedures




As
      of
      December 31, 2006, we carried out an evaluation, under the supervision and
      with
      the participation of our Chief Executive Officer and Chief Financial Officer,
      of
      the effectiveness of the design and operation of our disclosure controls and
      procedures. Based on this evaluation, our Chief Executive Officer and Chief
      Financial Officer concluded that our disclosure controls and procedures were
      effective in ensuring that information required to be disclosed by us in our
      periodic reports is recorded, processed, summarized and reported, within the
      time periods specified for each report and that such information is accumulated
      and communicated to our management, including our principal executive and
      principal financial officers, or persons performing similar functions, as
      appropriate to allow timely decisions regarding required
      disclosure.




(b)
      Changes in Internal Controls.




There
      was
      no change in our internal controls over financial reporting that has materially
      affected, or is reasonable likely to materially affect, our internal
      control  over financial reporting during the quarter covered by this
      Report.





PART
      II.  OTHER
      INFORMATION





Item
      1.  Legal
      Proceedings





On
      February 9, 2007 the Company filed suit in The Province of Nova Scotia seeking
      an application for judicial review to in effect ask the province to order the
      Nova Scotia Museum to issue the proper permits to the Company. The Company
      believes the Nova Scotia Museum acted improperly in not issuing the necessary
      permits in 2006 and should not have recognized the claims made by the United
      Kingdom. The Company believes its rights are protected under the Special Places
      Protection Act, The Treasure Act and many other acts and considerations of
      established law governing this type of permits.




On
        December 1, 2006, the Company was named in a lawsuit in Orange County,
        Florida *Estate
        of Mulligan vs. Cali Holdings, Inc., Sovereign Exploration Associates
        International, Inc., TSB Holdings, Inc., James Jenkins, and Charles Gianetto,
        et
        al.* The
        Plaintiff had invested funds into one of the portfolio companies of prior
        management and has named all parties including successor corporations in
        the
        suit. Management also has the signed representations from prior management
        that
        no other potential lawsuits existed as of the settlement with them on June
        30,
        2006. The documentation clearly states otherwise and they were aware of this
        suit at that time. Management feels comfortable they will prevail in this
        suit
        based on the documentation already provided.




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





A.  None


B.  None


C.  None





Item
      3.  Defaults
      upon Senior Securities





None




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          37
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Item
      4.  Submission
      of Matters to a Vote of Security Holders





The
      Company held a special meeting of its shareholders on September 20, 2006, to
      consider a proposal for the company to withdraw its election to be a business
      development company under the 1940 Act. The withdrawal was approved by a vote
      of
      91.33% of the company's outstanding common stock, with 23,931,879 shares voted
      in favor, 20,665 shares voted against, and 252 abstentions.





Item
      5.  Other
      Information





None.




Item
      6.  EXHIBITS





1.
            Articles
                of Incorporation are incorporated by reference to Exhibit 3(i) of
                Form
                10-K as filed electronically with the SEC on October 13,
                2006.





2.
            By-Laws
                are incorporated by reference to Exhibit 3(ii) of Form 10-K as filed
                electronically with the SEC on October 13,
                2006.





3.
            Exchange
                Agreement is incorporated by reference to Exhibit 10.1 of Form 10-K
                as
                filed electronically with the SEC on October 13,
                2006.





4.
            Settlement
                Agreement is incorporated by reference to Exhibit 10.2 of Form 10-K
                as
                filed electronically with the SEC on October 13,
                2006.





5.
            Section
                302 CEO and CFO Certification is filed herewith as
                EX-31





6.
            Section
                906 CEO and CFO Certification is filed herewith as
                EX-32





SIGNATURE





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




SOVEREIGN
              EXPLORATION ASSOCIATES INTERNATONAL, INC.Date:
              February 13, 2007
            By:
            /s/ Robert
              D.
              BacaRobert
                D. Baca
              Chief
                Executive Officer, President, Chief Financial Officer and
                Director




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