|UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-QSB
|----------------------------------------------------------------------------------------
|                                                                                        
|(Mark One)                                                                              
|x                                                                                       
|For the quarterly period ended:September 30, 2006                                       
|                                                                                        
|Or                                                                                      
|                                                                                        
|o                                                                                       
|For the transition period from ____________ to _____________                            
|                                                                                        
|Commission File Number: 000-50983                                                       
|                                                                                        
|MERCHANDISE CREATIONS, INC.                                                             
|(Exact name of registrant as specified in its charter)                                  
|                                                                                        
|Nevada                                                                                  
|(State or other jurisdiction of incorporation or organization)                          
|                                                                                        
|8201 Towne Main Drive #1421

Plano, Texas                                               
|(Address of principal executive offices)                                                
|                                                                                        
|(972) 987-5880                                                                          
|(Registrants telephone number, including area code)                                    
|                                                                                        
|N/A                                                                                     
|(Former name, former address and former fiscal year, if changed since last report)      
|                                                                                        
|                                                                                        

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YesxNo o



APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

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 oNo o



APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 10,593,000









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MERCHANDISE CREATIONS, INC.

(A Development Stage Company)



Table of Contents



Page



|PART I  FINANCIAL INFORMATION                | 3 
|--------------------------------------------- | --
|Unaudited Condensed Financial Statements      | 3 
|CONDENSED BALANCE SHEET                       | 4 
|CONDENSED STATEMENTS OF OPERATIONS            | 5 
|CONDENSED STATEMENTS OF CASH FLOW             | 6 
|NOTES TO CONDENSED FINANCIAL STATEMENTS       | 7 
|Managements Discussion and Plan of Operation | 15
|Controls and Procedures                       | 16
|PART II  OTHER INFORMATION                   | 17
|Exhibits and Reports on Form 8-K              | 17
|SIGNATURES                                    | 18











2



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Unaudited Condensed Financial Statements



The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission (Commission). While these statements reflect all normal recurring adjustments which are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the financial statements and footnotes thereto, which are included in the Companys Registration Statement on Form 10-KSB for the year ended December 31, 2005 previously filed with the Commission on March 30, 2006, and subsequent amendments made thereto.



















3



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MERCHANDISE CREATIONS, INC.

(A DEVELOPMENT STAGE COMPANY)

CONDENSED BALANCE SHEET

SEPTEMBER 30, 2006

(UNAUDITED)





|ASSETS                                                        |  |   |         |  
|------------------------------------------------------------- |  | - | ------- | -
|                                                              |  |   |         |  
|Current Assets:                                               |  |   |         |  
|Cash and cash equivalents                                     |  | $ | 5,623   |  
|Inventory                                                     |  |   | 5,158   |  
|                                                              |  |   |         |  
|Total Current Assets                                          |  |   | 10,781  |  
|                                                              |  |   |         |  
|Total Asset                                                   |  | $ | 10,781  |  
|                                                              |  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                          |  |   |         |  
|                                                              |  |   |         |  
|LIABILITIES                                                   |  | $ |        |  
|                                                              |  |   |         |  
|Total Liabilities                                             |  |   |        |  
|                                                              |  |   |         |  
|STOCKHOLDERS EQUITY                                          |  |   |         |  
|Common stock, $.001 Par Value; 100,000,000 shares authorized; |  |   |         |  
|10,593,000 shares issued and outstanding                      |  |   | 10,593  |  
|Additional paid-in capital                                    |  |   | 29,057  |  
|Deficit accumulated during the development stage              |  |   | (28,869 | )
|                                                              |  |   |         |  
|Total Stockholders Equity                                    |  |   | 10,781  |  
|                                                              |  |   |         |  
|TOTAL LIABILITY AND STOCKHOLDERS EQUITY                      |  | $ | 10,781  |  









The accompanying notes are an integral part of these condensed financial statements.





4



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MERCHANDISE CREATIONS, INC.

(A DEVELOPMENT STAGE COMPANY)

CONDENSED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

(WITH CUMULATIVE TOTALS SINCE INCEPTION)

(UNAUDITED)





|                                             |  | NINE MONTHS ENDED |            | THREE MONTHS ENDED |   | Cumulative Totals           |  
|-------------------------------------------- |  | ----------------- | ---------- | ------------------ | - | --------------------------- | -
|                                             |  | September 30,     |            | September 30,      |   | October 1, 2004 (inception) |  
|                                             |  | 2006              |            | 2005               |   | 2006                        |  
|                                             |  |                   |            |                    |   |                             |  
|OPERATING REVENUES                           |  |                   |            |                    |   |                             |  
|Sales                                        |  | $                 | 1,505      |                    | $ | 7,846                       |  
|                                             |  |                   |            |                    |   |                             |  
|COST OF SALES                                |  |                   | 953        |                    |   | 2,199                       |  
|                                             |  |                   |            |                    |   |                             |  
|GROSS PROFIT                                 |  |                   | 552        |                    |   | 5,647                       |  
|                                             |  |                   |            |                    |   |                             |  
|OPERATING EXPENSES                           |  |                   |            |                    |   |                             |  
|Advertising                                  |  |                   |           |                    |   | 2,729                       |  
|Commissions                                  |  |                   | 452        |                    |   | 3,531                       |  
|Professional fees                            |  |                   | 5,985      |                    |   | 10,687                      |  
|General and administrative expenses          |  |                   | 2,722      |                    |   | 4,079                       |  
|Total Operating Expenses                     |  |                   | 9,160      |                    |   | 21,025                      |  
|                                             |  |                   |            |                    |   |                             |  
|NET (LOSS) BEFORE PROVISION FOR INCOME TAXES |  |                   | (8,606     | )                  |   | (15,379                     | )
|Provision for income taxes                   |  |                   |           |                    |   |                            |  
|                                             |  |                   |            |                    |   |                             |  
|NET (LOSS) APPLICABLE TO COMMON SHARES       |  | $                 | (8,606     | )                  | $ | (15,379                     | )
|                                             |  |                   |            |                    |   |                             |  
|WEIGHTED AVERAGE COMMON SHARES               |  |                   |            |                    |   |                             |  
|OUTSTANDING                                  |  |                   | 10,593,000 |                    |   | 10,432,260                  |  
|                                             |  |                   |            |                    |   |                             |  
|NET (LOSS) PER COMMON SHARES OUTSTANDING     |  | $                 | (0.00      | )                  | $ | (0.00                       | )





The accompanying notes are an integral part of these condensed financial statements.





5



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MERCHANDISE CREATIONS, INC.

(A DEVELOPMENT STAGE COMPANY)

CONDENSED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

(WITH CUMULATIVE TOTALS SINCE INCEPTION)

(UNAUDITED)





|                                                    |  | For the nine months |        | Cumulative Totals           |  
|--------------------------------------------------- |  | ------------------- | ------ | --------------------------- | -
|                                                    |  | ended September 30, |        | October 1, 2004 (inception) |  
|                                                    |  | 2006                |        | 2005                        |  
|                                                    |  |                     |        |                             |  
|CASH FLOWS FROM OPERATING ACTIVITIES                |  |                     |        |                             |  
|Net (loss)                                          |  | $                   | (8,606 | )                           | $
|                                                    |  |                     |        |                             |  
|Changes in assets and liabilities                   |  |                     |        |                             |  
|(Increase) decrease in accounts receivable          |  |                     | 2,796  |                             |  
|(Increase) decrease in inventory                    |  |                     | 1,094  |                             |  
|Increase (decrease) in accounts payable             |  |                     | (446   | )                           |  
|                                                    |  |                     |        |                             |  
|Total adjustments                                   |  |                     | 3,444  |                             |  
|                                                    |  |                     |        |                             |  
|Net cash (used in) operating activities             |  |                     | (5,162 | )                           |  
|                                                    |  |                     |        |                             |  
|                                                    |  |                     |        |                             |  
|CASH FLOWS FROM FINANCING ACTIVITIES                |  |                     |        |                             |  
|Issuance of common stock                            |  |                     |       |                             |  
|                                                    |  |                     |        |                             |  
|Net cash provided by financing activities           |  |                     |       |                             |  
|                                                    |  |                     |        |                             |  
|NET INCREASE (DECREASE) IN                          |  |                     |        |                             |  
|CASH AND CASH EQUIVALENTS                           |  |                     | (5,162 | )                           |  
|                                                    |  |                     |        |                             |  
|CASH AND CASH EQUIVALENTS                          |  |                     |        |                             |  
|BEGINNING OF PERIOD                                 |  |                     | 10,785 |                             |  
|                                                    |  |                     |        |                             |  
|CASH AND CASH EQUIVALENTS  END OF PERIOD           |  | $                   | 5,623  |                             | $
|                                                    |  |                     |        |                             |  
|SUPPLEMENTAL CASH FLOW INFORMATION                  |  |                     |        |                             |  
|During the period, cash was paid for the following: |  |                     |        |                             |  
|                                                    |  |                     |        |                             |  
|Interest                                            |  | $                   |       |                             | $
|Income taxes                                        |  | $                   |       |                             | $



The accompanying notes are an integral part of these condensed financial statements.





6



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MERCHANDISE CREATIONS, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006

(UNAUDITED)





|NOTE 1 - | ORGANIZATION AND BASIS OF PRESENTATION
|-------- | --------------------------------------



The condensed financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. The condensed financial statements and notes are presented as permitted on Form 10-QSB and do not contain information included in the Companys annual statements and notes. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read in conjunction with the December 31, 2005 audited financial statements and accompanying notes thereto. While management believes the procedures
followed in preparing these condensed financial statements are reasonable, the accuracy of the amounts are in some respects dependent upon the facts that will exist, and procedures that will be accomplished by the Company later in the year.



These condensed financial statements reflect all adjustments, including normal reoccurring adjustments, which in the opinion of management, are necessary to present fairly the operations and cash flows for the periods presented.



Merchandising Creations, Inc. (the Company), a development stage company, was incorporated in the State of Nevada on October 1, 2004. Merchandising Creations, Inc. (MCI) is a promotional and marketing company that plans to assist bands and artists in the music industry in the State of Texas, design, promote and sell custom designed merchandise. The Company plans to offer music industry customers a total package of merchandising services, including, but not limited to, the design and outsourcing of the manufacture of the promotional merchandise, as well as managing sales at any live performance or on-line.



The merchandising aspects of the music industry have expanded rapidly in the past several years and growth is expected to continue at a strong pace for the foreseeable future. This offers excellent opportunities for new companies to enter the market. Merchandise Creations intends to address the needs of band/artist customers in the music industry who seek a total package of merchandising services.



Certain amounts have been reclassified in the 2005 condensed financial statements to conform to the 2006 presentation. These reclassifications have had no effect on net loss for the nine and three months ended September 30, 2005.







7



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MERCHANDISE CREATIONS, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2006

(UNAUDITED)





|NOTE 2 - | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-------- | ------------------------------------------



Development Stage Company



The Company is considered to be in the development stage as defined in Statement of Financial Accounting Standards (SFAS) No. 7, Accounting and Reporting by Development Stage Enterprises. The Company has devoted substantially all of its efforts to business planning and development. Additionally, the Company has allocated a substantial portion of their time and investment in bringing their product to the market, and the raising of capital.



Use of Estimates



Preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.



Cash and Cash Equivalents



For financial statement presentation purposes, the Company considers short-term, highly liquid investments with original maturities of three months or less to be cash and cash equivalents.



The Company maintains cash and cash equivalent balances at a financial institution that is insured by the Federal Deposit Insurance Corporation up to $100,000. At September 30, 2006 there were no uninsured balances.



Accounts Receivable



The Company conducts business and extends credit based on an evaluation of its customers financial condition, generally without requiring collateral. Exposure to losses on receivables is expected to vary by customer due to the financial condition of each customer. The Company monitors exposure to credit losses and maintains allowances for anticipated losses considered necessary under the circumstances.



Inventory



Inventory consists of promotional merchandise held for sale in the ordinary course of business and is valued at the lower of cost or market, determined using the first-in-first-out (FIFO) basis.







8



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MERCHANDISE CREATIONS, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2006

(UNAUDITED)





|NOTE 2  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-------- | ------------------------------------------

(CONTINUED)



Revenue Recognition



Currently, the Company has one primary source of revenue: the sale of promotional merchandise for local musicians.



The Companys revenue recognition policy for this source of revenue is as follows: the Company relies on Staff Accounting Bulletin Topic 13, in determining when recognition of revenue occurs. The main criteria that the Company meets when determining when revenue is realized or realizable and earned, is when the Company has persuasive evidence of an order being initiated. Typically, the Company recognizes revenue when orders are placed which usually occurs at live events, thus revenue is usually recognized immediately.



Cost is recorded on the accrual basis as well, when the services are incurred rather than when payment is made.



Fair Value of Financial Instruments



The Companys financial instruments are all carried at amounts that approximate their estimated fair value as of September 30, 2006.



Income Taxes



The provision for income taxes includes the tax effects of transactions reported in the financial statements. Deferred taxes would be recognized for differences between the basis for assets and liabilities for financial statement and income tax purposes. The major difference relate to the net operating loss carryforwards generated by sustaining deficits during the development stage.



Advertising Costs



Advertising and promotions costs are expensed as incurred. Advertising costs were $0 and $2,729 for the nine months ended September 30, 2006 and 2005, respectively.



Net (Loss) Per Share of Common Stock



Historical net (loss) per common share is computed using the weighted average number of common shares outstanding. Diluted earnings per share (EPS) include additional dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and warrants.







9



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MERCHANDISE CREATIONS, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2006

(UNAUDITED)





|NOTE 2 - | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-------- | ------------------------------------------

(CONTINUED)



Net (Loss) Per Share of Common Stock (Continued)



The following table sets forth the computation of basic and diluted earnings per share:



|                               |  | Nine Months Ended, |           
|------------------------------ |  | ------------------ | ----------
|                               |  | September 30, 2006 |           
|                               |  |                    |           
|Net loss                       |  | $                  | (8,606    
|Weighted average common shares |  |                    |           
|outstanding (Basic)            |  |                    | 10,593,000
|                               |  |                    |           
|Options                        |  |                    |          
|Warrants                       |  |                    |          
|                               |  |                    |           
|Weighted average common shares |  |                    |           
|outstanding (Diluted)          |  |                    | 10,593,000



All dilutive securities were not included in the calculation of dilutive earnings per share because the effect would be anti-dilutive when the Company has incurred a loss from operations. The Company currently has no potentially dilutive securities outstanding.



Recent Accounting Pronouncements



In December 2004, the FASB issued Financial Accounting Standards No. 123 (revised 2004) (FAS 123R), Share-Based Payment,  FAS 123R replaces FAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. FAS 123R requires compensation expense, measured as the fair value at the grant date, related to share-based payment transactions to be recognized in the financial statements over the period that an employee provides service in exchange for the award. The Company intends to adopt FAS 123R using the modified prospective transition method as defined in FAS 123R. Under the modified prospective method, companies are required to record compensation cost prospectively for the unvested portion, as of the date of adoption, of previously issued and outstanding awards over the remaining vesting
period of such awards. FAS 123R is effective January 1, 2006. The Company is evaluating the impact of FAS 123R on its results and financial position.







10



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MERCHANDISE CREATIONS, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2006

(UNAUDITED)





|NOTE 2 - | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-------- | ------------------------------------------

(CONTINUED)



Recent Accounting Pronouncements



In May 2005, the FASB issued FAS No. 154, Accounting Changes and Error Corrections. FAS No. 154 replaces Accounting Principles Board (APB) Opinion No. 20, Accounting Changes and FAS No. 3, Reporting Accounting Changes in Interim Financial Statements. FAS No. 154 requires retrospective application to prior periods financial statements of a voluntary change in accounting principle unless it is impracticable. APB No. 20 previously required that most voluntary changes in accounting principle be recognized by including the cumulative effect of changing to the new accounting principle in net income in the period of the change. FAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of FAS No. 154 did not have a material
impact on the Companys financial position or results of operations.



In February 2006, the FASB issued FAS No. 155, Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140. FAS No. 155 resolves issues addressed in FAS No. 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets, and permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of FAS No. 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of
credit risk in the form of subordination are not embedded derivatives and amends FAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. FAS No. 155 is effective for all financial instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006. The Company is currently evaluating the effect the adoption of FAS No. 155 but believes it will not have a material impact on its financial position or results of operations.



In March 2006, the FASB issued FAS No. 156, Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140. FAS No. 156 requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract under a transfer of the servicers financial assets that meets the requirements for sale accounting, a transfer of the servicers financial assets to a qualified special-purpose entity in a guaranteed mortgage securitization in which the transferor retains all of the resulting securities and classifies them as either







11



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MERCHANDISE CREATIONS, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2006

(UNAUDITED)





|NOTE 2 - | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-------- | ------------------------------------------

(CONTINUED)



Recent Accounting Pronouncements (Continued)



available-for-sale or trading securities in accordance with FAS No. 115, Accounting for Certain Investments in Debt and Equity Securities and an acquisition or assumption of an obligation to service a financial asset that does not relate to financial assets of the servicer or its consolidated affiliates.



Additionally, FAS No. 156 requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, permits an entity to choose either the use of an amortization or fair value method for subsequent measurements, permits at initial adoption a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights and requires separate presentation of servicing assets and liabilities subsequently measured at fair value and additional disclosures for all separately recognized servicing assets and liabilities. FAS No. 156 is effective for transactions entered into after the beginning of the first fiscal year that begins after September 15, 2006. The Company is currently evaluating the effect the adoption of FAS No. 156 but believes it will not have a material impact on its financial
position or results of operations.



In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements,(FAS 157). This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands 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 adoption of FAS 157 is not expected to have a material impact on the Companys financial position, results of operations or cash flows.



The FASB also issued in September 2006 Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans  an amendment of FASB Statement No. 87, 88, 106 and 132(R), (FAS 158) . This Standard requires recognition of the funded status of a benefit plan in the statement of financial position. The Standard also requires recognition in other comprehensive income certain gains and losses that arise during the period but are deferred under pension accounting rules, as well as modifies the timing of reporting and adds certain disclosures. FAS 158 provides recognition and disclosure elements to be effective as of the end of the fiscal year after December 15, 2006 and measurement elements to be effective for fiscal years ending after December 15, 2008. The Company has not yet analyzed the impact
FAS 158 will have on its financial condition, results of operations, cash flows or disclosures.







12



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MERCHANDISE CREATIONS, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2006

(UNAUDITED)





|NOTE 3  | STOCKHOLDERS EQUITY
|-------- | --------------------



On October 1, 2004 the Company was formed with one class of common stock, par value $0.001. The Company authorized 100,000,000 shares of common stock.



In October 2004, the Company issued 10,000,000 shares of stock to its officer for cash of $10,000.



In March 2005, the Company issued 593,000 shares of stock in a private placement for cash of $29,650.



|NOTE 4  | GOING CONCERN
|-------- | -------------



As shown in the accompanying financial statements, as is typical of companies going through the development stage, the Company incurred a net loss for the period October 1, 2004 (Inception) through September 30, 2006. The Company is currently in the development stage, and there is no guarantee whether the Company will be able to generate enough revenue and/or raise capital to support current operations and generate anticipated sales. This raises substantial doubt about the Companys ability to continue as a going concern.



Management believes that the Companys capital requirements will depend on many factors including the success of the Companys product development efforts.



The financial statements do not include any adjustments that might result from the outcome of these uncertainties.



|NOTE 5 - | PROVISION FOR INCOME TAXES
|-------- | --------------------------



Deferred income taxes will be determined using the liability method for the temporary differences between the financial reporting basis and income tax basis of the Companys assets and liabilities. Deferred income taxes will be measured based on the tax rates expected to be in effect when the temporary differences are included in the Companys tax return. Deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases.













13



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MERCHANDISE CREATIONS, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2006

(UNAUDITED)





|NOTE 5 - | PROVISION FOR INCOME TAXES(CONTINUED)
|-------- | -------------------------------------



At September 30, 2006 and 2005, deferred tax assets consisted of the following:



|                           |  | September 30, 2006 |        | September 30, 2005 |  
|-------------------------- |  | ------------------ | ------ | ------------------ | -
|Deferred tax assets        |  | $                  | 9,800  |                    | $
|Less: valuation allowances |  |                    | (9,800 | )                  |  
|Net deferred tax assets    |  | $                  |       |                    | $





At September 30, 2006 and 2005, the Company had accumulated deficits during the development stage of approximately $29,000 and $18,000, respectively, available to offset future taxable income through 2026. The Company established valuation allowances equal to the full amount of the deferred tax assets due to the uncertainty of the utilization of the operating losses in future periods.

















14



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Managements Discussion and Plan of Operation



Forward-Looking Statements



This Quarterly Report contains forward-looking statements about Merchandise Creations, Inc.s business, financial condition and prospects that reflect managements assumptions and beliefs based on information currently available. We can give no assurance that the expectations indicated by such forward-looking statements will be realized. If any of our managements assumptions should prove incorrect, or if any of the risks and uncertainties underlying such expectations should materialize, MCIs actual results may differ materially from those indicated by the forward-looking statements.



The key factors that are not within our control and that may have a direct bearing on operating results include, but are not limited to, acceptance of our services, our ability to expand our customer base, managements ability to raise capital in the future, the retention of key employees and changes in the regulation of our industry.



There may be other risks and circumstances that management may be unable to predict. When used in this Quarterly Report, words such as,believes,expects, intends,plans,anticipates,estimatesand similar expressions are intended to identify forward-looking statements, although there may be certain forward-looking statements not accompanied by such expressions.



Managements Discussion



We were incorporated in the State of Nevada on October 1, 2004, and have begun to implement our planned operations. Since our inception, our efforts have focused primarily on the development and implementation of our business plan, which include the following activities:

| | 1. | Formation of the company and obtaining start-up capital;
| | -- | --------------------------------------------------------

| | 2. | Obtaining capital through sales of our common stock;
| | -- | ----------------------------------------------------

| | 3. | Developing our corporate hierarchy, including naming directors to our board, appointing our executive officers and setting forth a business plan;
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | Establishing relationships with suppliers of promotional merchandise and band/artists;
| | -- | --------------------------------------------------------------------------------------

| | 5. | Establishing a website at www.merchandisecreations.com; and
| | -- | -----------------------------------------------------------

| | 6. | Purchasing an inventory of promotional merchandise for Tommy Alverson.
| | -- | ----------------------------------------------------------------------



In the three months ended September 30, 2006, we generated no revenues. In the prior year ago three months ended September 30, 2005, we also generated $0 in revenues. For the nine months ended September 30, 2006, we generated $1,505, which is a decrease of 81% (or $6,341) from revenues of $7,846 generated in the nine months ended September 30, 2005. Our management attributes the decline in revenues to Tommy Alverson, our sole merchandising client, seeking revenue opportunities not involving our company. As a result, future sales may be severely and adversely impacted. Sales since our inception on October 1, 2004 through September 30, 2006, were $9,351. We do not have any long-term agreements to sell our products to any other artist or group. As a result, we are unable to predict the stability of, and ability to continue to generate, ongoing revenues.



Our cost of sales for the three months ended September 30, 2006 was $0, which led to a gross profit of $0 for the period. During the three months ended September 30, 2005, cost of sales was $0, which negated revenues of the same amount. For the nine months ended September 30, 2006, cost of sales were $953, resulting in a gross profit of $552 for the period. In the comparable nine month period ended September 30, 2005, cost of sales were $2,199, for gross profit of $5,647. Cost of sales from our inception through September 30, 2006 was $3,152, related specifically to sales of our promotion merchandise. The resultant gross profit since our inception on October 1, 2004 was $6,199.



Expenses for the quarter ended September 30, 2006 were $1,465, which consisted of general and administrative expenses of $1,247and professional fees of $218. In the comparable year ago quarter, we incurred $807 in general and



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administrative expenses, as well as $4,463 in professional fees, for aggregate expenses of $5,270. The decrease in expenditures is partially related to the lack of business generated by our arrangement with Mr. Alverson, as well as a general leveling of expenditures related to formation and development of our organization and infrastructure. Since our inception, we accumulated $35,068 in total expenses, $8,079 of which is due to general and administrative expenses, $3,982 in commissions, $2,729 for advertising and $20,278 of which were professional fees. We expect to continue to incur general and administrative expenses for the foreseeable future, although we cannot estimate the extent of these costs.

As a result of expenditures related to pursuing our stated business objective of selling promotional merchandise and lack of material revenues, we have incurred net losses since our inception. For the three months ended September 30, 2006, our net loss was $1,465, as opposed to a net loss of $5,270 during the year ago three month period ended September 30, 2005. From the date of our inception to September 30, 2006, we had a cumulative deficit of $28,869. We expect to incur ongoing losses for the next 12 months of operations unless we are able to increase our revenue generating ability significantly. Our independent registered public accountants have expressed substantial doubt about our ability to continue as a going concern in the footnoted financial statements. If our business fails, our investors may face a complete loss of their investment.

We have inventory of $5,158 as of September 30, 2006, which we believe we can sell to generate revenues. Generating sales in the next 6 to 12 months is important to continue as a going concern. However, we cannot guarantee that we will generate such growth. As of September 30, 2006, we had $5,623 in cash on hand, which we believe will be sufficient to continue our operations for at least the next six to twelve months. However, if our expenses are greater than anticipated or if we do not generate sufficient cash flow to support our operations over the next 6 to 12 months, we may need to raise additional capital by issuing capital stock in exchange for cash in order to continue as a going concern. There are no formal or informal agreements to attain such financing. We cannot assure you that any financing can be obtained or, if obtained, that it will be on reasonable terms. Without realization of
additional capital, it would be unlikely for us to continue as a going concern.

In order to support our planned ongoing operations for the next 12 months, we must continue to generate sales. However, we cannot guarantee that we will continue to generate any revenues. If we do not generate sufficient cash flow to support our operations over the next 6 to 12 months, we may need to raise additional capital by issuing capital stock in exchange for cash in order to continue as a going concern. There are no formal or informal agreements to attain such financing. We can not assure you that any financing can be obtained or, if obtained, that it will be on reasonable terms. Without realization of additional capital, it would be unlikely for us to continue as a going concern.

We expect to have negative cash flows for the remainder of fiscal year 2006, as we have a limited ability to realize cash flows from sales. In addition, if our costs of operations increase unexpectedly, we may need to raise additional capital by issuing equity or debt securities in exchange for cash. There can be no assurance that we will be able to secure additional funds in the future to stay in business. Our independent registered public accountants have expressed substantial doubt about our ability to continue as a going concern because we have limited operations and have not fully commenced planned principal operations.

There are no known trends, events or uncertainties that have had or that are reasonably expected to have a material impact on our revenues from continuing operations. Additionally, we do not believe that our business is subject to seasonal factors. Our management does not expect to incur costs related to research and development. We currently do not own any significant plant or equipment that we would seek to sell in the near future. Our management does not anticipate the need to hire additional full- or part- time employees

We have not paid for expenses on behalf of any of our directors. Additionally, we believe that this fact shall not materially change.



Controls and Procedures



We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in our reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the SECs rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.



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Based upon their evaluation as of the end of the period covered by this report, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are not effective to ensure that information required to be included in our periodic SEC filings is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms.



Our board of directors was advised by Bagell, Josephs, Levine & Company, L.L.C., our independent registered public accounting firm, that during their performance of audit procedures for 2005 Bagell, Josephs, Levine & Company, L.L.C. identified a material weakness as defined in Public Company Accounting Oversight Board Standard No. 2 in our internal control over financial reporting.



This deficiency consisted primarily of inadequate staffing and supervision that could lead to the untimely identification and resolution of accounting and disclosure matters and failure to perform timely and effective reviews. However, our resources and size prevent us from being able to employ sufficient resources to enable us to have adequate segregation of duties within our internal control system. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.





PART II  OTHER INFORMATION



Exhibits and Reports on Form 8-K



|Exhibit Number | Name and/or Identification of Exhibit                                             
|-------------- | ----------------------------------------------------------------------------------
|               |                                                                                   
|3              | Articles of Incorporation & By-Laws                                               
|               |                                                                                   
|               | (a) Articles of Incorporation filed October 1, 2004 *                             
|               |                                                                                   
|               | (b) By-Laws adopted October 5, 2004 *                                             
|               |                                                                                   
|31             | Rule 13a-14(a)/15d-14(a) Certifications                                           
|               |                                                                                   
|32             | Certification under Section 906 of the Sarbanes-Oxley Act (18 U.S.C. Section 1350)



* Incorporated by reference herein filed as exhibits to the Companys Registration Statement on SB-2 previously filed with the SEC on April 29, 2005, and subsequent amendments made thereto.



















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SIGNATURES



Pursuant to the requirements of the Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





|MERCHANDISE CREATIONS, INC.
|---------------------------
|(Registrant)               
|                           
|                           
|Signature                  
|                           
|/s/ Robert B. Turner       
|Robert B. Turner           

















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