SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-KSB


                                   (Mark One)

[X]  Annual report  pursuant to section 13 or 15(d) of the  Securities  Exchange
     Act of 1934 for the fiscal year ended June 30, 2003 or

[ ]  Transition  report  pursuant  to  section  13 or  15(d)  of the  Securities
     Exchange Act of 1934 for the transition period from __________ to__________

                         Commission file number: 0-27063

                      FAMILY ROOM ENTERTAINMENT CORPORATION
                      -------------------------------------
                 (Name of small business issuer in its charter)

<TABLE>
<CAPTION>

<S>                                                                     <C>
                                New Mexico                                           85-0206160
                                ----------                                           ----------
     (State or other jurisdiction of incorporation or organization)     (I.R.S. Employer Identification Number)
</TABLE>

    8530 Wilshire Blvd Suite 420 Beverly Hills, Ca.                90211.
      (Address of principal executive offices)                   (Zip code)

Registrant's telephone number, including area code:  (310) 659-9411

Securities registered pursuant to Section 12(b) of the Act:     (NONE)

Securities registered pursuant to Section 12(g) of the Act:     Common Stock

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

Check  if there is no  disclosure  of  delinquent  filers  pursuant  to Item 405
Regulation S-B is not contained herein,  and will not be contained,  to the best
of  Registrant's  knowledge,  in  definitive  proxy  or  information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB.

The issuer had revenues of $ 1,005,441 for the fiscal year ended June 30, 2003.

The aggregate  market value of the voting stock held by  non-affiliates  on June
30, 2003 was approximately $ 2,963,772 based on the average of the bid and asked
prices of the issuer's common stock in the over-the-counter  market on such date
as reported by the OTC Bulletin Board.

 As of June 30,  2003,  24,187,536  shares of the  issuer's  common  stock  were
outstanding.


                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None

             Transitional Small Business Disclosure Format Yes    No X
                                                              ---   ---

                                       1
<PAGE>

PART I

ITEM 1.     DESCRIPTION OF BUSINESS

General Business Development
----------------------------

Family Room  Entertainment  Corporation (the  "Company"(FMLY)),  is a New Mexico
corporation  originally  organized and  incorporated  in 1969 as Cobb  Resources
Corporation.  We are located in Beverly  Hills,  California , and are engaged in
key aspects of motion picture  entertainment,  including production,  production
services, finance and distribution.

Restructuring Transaction

Prior to  February  3, 2000,  we were  engaged in copper  mining and oil and gas
exploration and marketable  equity  securities  trading.  Effective  February 3,
2000, three  individuals and certain entities under their control  (collectively
referred  to as the  "Investors")  acquired  88% of our common  stock  through a
series of transactions as follows:

The  three  individuals  each  acquired  666,666  shares   (approximately   7.8%
individually  and  23.4% in the  aggregate  of our  common  stock  from our most
significant stockholder (the "Stockholder").

We sold  substantially all of our existing assets,  including mineral interests,
cash,  marketable  equity  securities  and other assets,  to the  Stockholder in
exchange for 2,000,000 shares of our common stock (that were placed in treasury)
and the  Stockholder's  assumption of all of our known and unknown  liabilities,
fixed and  contingent,  that had accrued up to February 3, 2000.  The  aggregate
purchase price paid by the Stockholder in connection  with this  transaction was
approximately  $338,000.  As a result of this  transaction,  we discontinued all
current operations in which the FMLY was engaged.

We enacted a ten for one reverse stock split that was effective for stockholders
of record on February 17, 2000.

Asset Purchase

Concurrent  with the  Restructuring  Transaction  described  above,  we acquired
interests  in certain  film  projects  (the "Asset  Purchase")  in exchange  for
12,407,000  post-split  shares of our common  stock.  The  interests in the film
projects  acquired  during  the Asset  Purchase  were  collectively  valued at $
1,912,000 based upon independent appraisal.

Name and Symbol Change

Effective May 22, 2000, COBB Resources  Corporation's name was changed to Family
Room  Entertainment  Corporation,  and its  corresponding  OTC:BB trading symbol
"COBB" was changed to "FMLY".

Entertainment Motion Picture Industry Overview

FMLY  discontinued  all  activities  in  Mining,  Oil and Gas as a result of the
restructure and is now in the entertainment  industry.  FMLY develops,  produces
and performs  production related services for the entertainment  industry mainly
through the following three  wholly-owned  subsidiaries:  (1) Emmett/Furla Films
Productions  Corporation.  (hereafter,  "EFFP"), a California Corporation,  is a
Motion Picture  Development,  Production,  and Production Related Service entity
that primarily  develops,  produces and provides production related services for
motion pictures intended for worldwide  theatrical  release (EFFP's  subsidiary,
Good Entertainment Service, Inc. (hereafter, "GESI), is the signature company to
the  guilds  and has  produced a film "Good  Advice";  (2)  Emmett  Furla  Films
Distribution  LLC, is a Delaware Limited Liability Company set up to oversee and
arrange world wide distribution of FMLYs entertainment  projects and properties,
and  (3)  E  F  F  Entertainment,   Inc.  (hereafter,  "EFFI")  ,  a  California
Corporation,  is setup  primarily to develop and produce  action  adventure  and
family oriented  motion  pictures for television and home video  distribution as


                                       2
<PAGE>

well as episodic television and internet programming.  EFFI has two wholly owned
subsidiaries,  Family Room  Entertainment  Music Publishing  Corporation  (a/k/a
FMLYMusic)




 whose  function  is to  oversee  EFFI's  EFFP's and their  subsidiaries'  music
publishing  (ancillary rights associated with the creation of original music for
motion pictures).  In addition FMLY has other  subsidiaries,  which are inactive
including Family Room Entertainment Live, LLC and its subsidiary Spotlight,  LLC
which were formed to develop and produce Live Broadway type projects.

The motion  picture  industry may be broadly  divided  into two major  segments:
production,  which  involves the  development,  financing  and other  activities
associated with making of motion pictures; and distribution,  which involves the
promotion and exploitation of completed motion pictures in a variety of media.

Historically,  the largest companies,  the so-called "Majors" and "Mini-Majors,"
have dominated the motion picture  industry by both producing and distributing a
majority of the motion pictures which generate significant theatrical box office
receipts.  Over the past 15 years  "Independents"  or  smaller  film  production
and/or  distribution  companies,  such as  FMLY,  have  played  an  increasingly
significant  and  sizable  role in the  production  and  distribution  of motion
pictures  needed  to fill  ever  the  increasing  worldwide  demand  for  filmed
entertainment product.

The Majors (and Mini-Majors) include:  Vivendi-Universal Pictures (a division of
Vivendi-Universal  , Warner  Bros.  Pictures (a  division  of AOL-Time  Warner),
Metro-Goldwyn-Mayer  Inc., Twentieth Century Fox Film Corporation (a division of
News Corporation),  Paramount Pictures Corporation (a division of Viacom),  Sony
Pictures  Entertainment  (including  Columbia  Pictures,  Tri Star  Pictures and
Triumph  Releasing;  altogether  divisions of Sony) and The Walt Disney  Company
(Buena Vista Pictures,  Touchstone Pictures and Hollywood Pictures).  Generally,
the Majors own and operate private  production  studios  (including  lots, sound
stages,  production equipment and post-production  facilities),  have nationwide
and/or  worldwide  distribution  organizations,  release  pictures  with  direct
production  costs  generally  ranging  from  $25,000,000  to  $100,000,000,  and
collectively  provide  a near  continual  source  of  motion  pictures  to  film
exhibitors.

The Majors also have divisions that are promoted as  "independent"  distributors
of motion pictures,  often referred to as the "Mini-Majors." These "independent"
divisions  of the Majors  include  Miramax  Films (a division of The Walt Disney
Company),  Sony  Classics (a  division of Sony  Pictures),  Fox  Searchlight  (a
division of News Corporation),  and New Line (a division of AOL-Time Warner) and
its Fine Line distribution  label. Most of these divisions were formerly private
production and/or distribution companies.

In addition to the  Mini-Majors,  there are private or publicly held  production
and/or  distribution  companies,  such as  FMLY,  (hereafter,  collectively  the
"Independents")  which engage primarily in the production and/or distribution of
motion  pictures  produced by companies  other than those held by the Majors and
Mini-Majors.  Such  Independents  include,  among others,  Trimark  Holdings and
Artisan Entertainment.  The Independents typically do not own production studios
nor do they employ as large a development and/or production staff as the Majors.

Motion Picture Production and Financing

The  production of a motion  picture  requires the financing of the direct costs
and indirect  overhead costs of development,  production and production  related
services.  Direct  production and production  related service costs include film
studio rental,  cinematography,  post-production  costs and the  compensation of
creative, services and other production personnel. Distribution costs (including
costs of advertising and release  prints) are not included in direct  production
costs.

Majors generally have sufficient cash flow from their motion picture and related
activities,  or in some cases,  from unrelated  businesses  (e.g.,  theme parks,
publishing,  electronics,  and merchandising) to acquire new creative properties
(e.g.,  screenplay and novels) and pay for the direct  production costs of their
motion  pictures.  Overhead  costs are, in  substantial  part,  the salaries and
related  costs of the  production  staff and physical  facilities,  which Majors


                                       3
<PAGE>
maintain on a full-time  basis.  Majors often enter into contracts with writers,
producers  and other  creative  personnel  for  multiple  projects  or for fixed
periods of time.  Independents  generally avoid incurring  substantial  overhead
costs by hiring  creative,  services and other production  personnel,  retaining
only  any  essential  elements,  which  will  be  required  for  pre-production,
principal photography and post- production  activities,  on a project-by-project
basis.  Independents  also typically  finance their  production  activities from
various sources,  including bank loans,  "pre-sales," equity offerings and joint
ventures.  Independents  generally  attempt to complete  the  financing of their
motion picture  production  prior to commencement of principal  photography,  at
which  point  substantial  production  costs  begin to be  incurred  and require
payment.

"Pre-sales"  are often used by  Independents  to finance all or a portion of the
direct  production  costs  of a motion  picture.  Pre-sales  consist  of fees or
advances  paid or  guaranteed to the producer by third parties in return for the
right to exhibit the completed  motion picture in theaters  and/or to distribute
it in home video,  television,  international  and/or other  ancillary  markets.
Payment  commitments  for a pre-sale are typically  subject to the approval of a
number of pre-negotiated factors,  including script, production budget, cast and
director and to the delivery of the completed  motion picture in the agreed upon
format(s).

Both Majors and  Mini-Majors  often  acquire  motion  pictures for  distribution
through an  arrangement  known as a "negative  pickup"  under which the Major or
Mini-Major  agrees  to  acquire  from  another  production  company,   often  an
Independent,  some or all of the  rights  to a film  upon  its  completion.  The
Independent  often  finances  the  production  of a motion  picture  pursuant to
financing  arrangements  it has made with  banks or other  lenders  wherein  the
lender obtains a security interest in the film and in the  Independent's  rights
under its distribution arrangement.  When the Major or Mini-Major "picks up" the
completed motion picture, it may assume some or all of the production  financing
indebtedness  incurred by the production company in connection with the film. In
addition,  the  Independent  is often  paid a  production  fee and is  granted a
participation in the profits from the distribution of the motion picture.

Majors,  Mini-Majors and Independents often grant third-party  participations in
connection   with  the   distribution   and  production  of  a  motion  picture.
Participations are the contractual rights of actors,  directors,  screenwriters,
producers,  owners of rights and/or other creative and/or financial contributors
entitling  them to share in revenues or profits (as defined in their  individual
respective  agreements)  from a particular  motion picture.  Except for the most
sought-after  talent,  participations  are  generally  payable  only  after  all
distribution  and marketing fees and costs;  direct  production costs (including
overhead) and financing costs are recouped by the producer in full.

Financing the Major Motion Picture

Majors often produce motion pictures whose direct costs exceed  $20,000,000.  In
order for an  Independent,  such as FMLY, to produce  projects that exceed their
equity capabilities,  they turn to various outside sources for funding.  Some of
those sources, which may be used in any combination, include: (1) foreign equity
contributions,  where a foreign  company will  exchange  equity or the guarantee
thereof  for the  rights  to  distribute  a  motion  picture  in its  respective
territory(s) and  participation in the picture;  (2) a guarantee or advance by a
distributor or exhibitor for a particular right(s) in a particular territory(s);
(3) a sales agent to garner contracts with actual exhibitors which state minimum
guarantee(s)   for  particular  or  aggregate  media;  (4)  a  bank  or  lending
institution  will lend monies based on actual sales  contract(s)  which  license
exhibition  rights;  (5) a bank or lending  institution  which will lend  monies
based on its  calculations of potential  earnings revenue for the motion picture
in question;  (6) by having a third party investor fund a portion,  usually from
10% to 50% of the production costs with a participation in the net profit of the
motion picture,  (6) and/or arrange for or with another  Independent  production
facility to finance and produce the motion pictures. By combining (as necessary)
the afore mentioned  outside funding sources,  the Independent can create motion
pictures  which meet and/or exceed the quality and scope of those created by the
Major and  Mini-Major  at costs which would  normally  exceed the  Independent's
possible equity contribution.


Motion Picture Distribution

Distribution  of a  motion  picture  involves  the  domestic  and  international
licensing of the picture for (i) theatrical  exhibition,  (ii) home video, (iii)
presentation on television, including pay-per-view, video-on-demand, satellites,
pay cable, network, basic cable and syndication, (iv) non-theatrical exhibition,
which includes  airlines,  hotels,  armed forces  facilities and schools and (v)

                                       4
<PAGE>

marketing of the other rights in the picture,  which may include books, CD-ROMs,
merchandising and soundtrack recordings.

Theatrical Distribution and Exhibition.

Motion  pictures are often  exhibited first in theaters open to the public where
an admission fee is charged. Theatrical distribution involves the manufacture of
release  prints,  licensing of motion  pictures to  theatrical  exhibitors,  and
promotion of the motion picture through  advertising and promotional  campaigns.
The size and success of the promotional and advertising  campaign may materially
affect the revenues realized from its theatrical release,  generally referred to
as "box office gross."

Box Office Gross  represents the total amounts paid by patrons at motion picture
theaters  for a  particular  film,  as  determined  from  reports  furnished  by
exhibitors.  The ability to exhibit  films  during  summer and holiday  periods,
which  are  generally   considered  peak  exhibition  seasons,  may  affect  the
theatrical  success  of  a  film.   Competition  among  distributors  to  obtain
exhibition  dates in theaters during these seasons is significant.  In addition,
the costs incurred in connection  with the  distribution of a motion picture can
vary  significantly  depending  on the  number of  screens  on which the  motion
picture is to be exhibited  and whether the motion  picture is exhibited  during
peak exhibition season(s).  Similarly, the ability to exhibit motion pictures in
the most popular theaters in each area can affect theatrical revenues.

Exhibition  arrangements  with  theater  operators  for the  first run of a film
generally provide for the exhibitor to pay the greater of 90% of ticket sales in
excess  of fixed  amounts  relating  to the  theater's  costs of  operation  and
overhead,  or a minimum  percentage of ticket sales which varies from 40% to 70%
for the first week of an engagement  at a particular  theater,  decreasing  each
subsequent week to 25% to 30% for the final weeks of the engagement.  The length
of an engagement depends principally on exhibitors' evaluation of the audience's
response to the film with respect to the current  marketplace (e.g., the success
of other films) as weighed  against the  opportunity  cost of exhibiting a "new"
release.

Films with theatrical  releases (which generally may continue for several months
domestically)  typically  are made  available  for  release  in  other  media as
follows:

<TABLE>
<CAPTION>
         Market                     Months After Theatrical Release      Approximate Release Period

<S>                                          <C>                                <C>
Domestic pay-per-view                          4 - 6 months                           3 months
Domestic pay cable                            6 - 12 months                     12 - 21 months
Domestic home video                          10 - 12 months                     12 - 24 months
Domestic network or basic cable              30 - 36 months                     18 - 36 months
Domestic syndication                         30 - 36 months                      3 - 15 years
International theatrical                        ---                               4 - 6 months
International home video                      6 - 12 months                           6 months
International television                     18 - 24 months                     18 months - 10 years
</TABLE>

Home Video.

The  home  video  distribution  business  involves  the  promotion  and  sale of
videocassettes,   DVDs  and  videodiscs  to  video  retailers  (including  video
specialty  stores,  convenience  stores,  record stores  "on-line" stores (i.e.,
Amazon.com) and other outlets),  which then rent or sell the  videocassettes and
videodiscs  to consumers for private  viewing.  The home video  marketplace  now
generates total revenues greater than the domestic theatrical exhibition market.

Videocassettes of feature films are generally sold to domestic  wholesalers on a
unit  basis.   Unit-based  sales  typically  involve  the  sales  of  individual
videocassettes to wholesalers or actual retailers (e.g.,  Blockbuster) at $15.00
to $50.00 per unit and  generally  are rented by consumers for fees ranging from
$1.00  to $5.00  per day  (with  all  rental  fees  retained  by the  retailer).
Wholesalers who meet certain sales and performance  objectives may earn rebates,
return credits and cooperative advertising allowances. Selected titles including
certain  made-for-video  programs,  are priced  significantly lower to encourage
direct  purchase  by  consumers.  The  market for direct  sale to  consumers  is
referred to as the "priced-for-sale" or "sell-through" market.


                                       5
<PAGE>


Technological developments,  including video server and compression technologies
which  regional  telephone  companies and others are  developing,  and expanding
markets for DVD , could make competing delivery systems  economically viable and
could   significantly   impact  the  home  video  market  generally  and,  as  a
consequence, FMLY's home video revenues.

Pay-Per-View.

Pay-per-view  television  allows cable and satellite  television  subscribers to
purchase  individual  programs,  primarily  recently released  theatrical motion
pictures,  sporting events and music concerts,  on a "per use" basis.  The fee a
subscriber is charged is typically split among the program distributor, the pay-
per-view operator and the cable operator.

Pay Cable.

The domestic pay cable  industry (as it pertains to motion  pictures)  currently
consists primarily of HBO/Cinemax,  Showtime/The Movie Channel, Encore/Starz and
a number of regional pay services.  Pay cable  services are sold to cable system
operators for a monthly license fee based on the number of subscribers receiving
the service.  These pay programming services are in turn offered by cable system
operators to  subscribers  for a monthly  subscription  fee. The pay  television
networks generally acquire their film programming by purchasing the distribution
rights from motion picture  distributors for a particular  period of time, often
called a "window".

Broadcast and Basic Cable Television .

Broadcast  television  allows viewers to receive,  without  charge,  programming
broadcast over the air by affiliates of the major  networks (ABC,  CBS, NBC, and
Fox),  recently  formed  networks (UPN and WB Network),  independent  television
stations  and cable and  satellite  networks  and  stations.  In certain  areas,
viewers  may  receive  the same  programming  via cable  transmission  for which
subscribers  pay a basic cable  television  fee.  Broadcasters  or cable systems
operators pay fees to distributors  for the right to air programming a specified
number of times.

Foreign Markets

In addition  to their  domestic  distribution  activities,  some motion  picture
distributors  generate  revenue  from the  distribution  of motion  pictures  in
foreign theaters,  home video,  television and other foreign markets.  There has
been a  dramatic  increase  in recent  years in the  world-wide  demand for U.S.
motion  pictures,  accented by the increase in the number of foreign  television
stations,  the introduction of global direct broadcast satellite  services,  and
increased home video and cable penetration world-wide.

Other Markets

Revenues  also may be  derived  from the  distribution  of  motion  pictures  to
airlines,  schools,  libraries,  hospitals  and the  military;  the licensing of
rights  to  perform  musical  works and sound  recordings  embodied  in a motion
picture, and the licensing of rights to manufacture and distribute  merchandise,
clothing  and similar  commercial  articles  derived  from  characters  or other
elements of a particular motion picture.

New Technologies

New means of delivery of  entertainment  product are constantly  being developed
and offered to the  consumer,  including  the  internet.  The impact of emerging
technologies  such as direct  broadcast  satellites and the internet,  on FMLY's
operations  cannot  be  determined  at  this  time.  However,  as  a  holder  of
entertainment copyrights, the FMLY monitors these new media possibilities.


                                       6
<PAGE>

Non-Theatrical Exhibition.

In addition to the  distribution  media described  above, a number of sources of
revenue exist for motion picture  distribution through the exploitation of other
rights, including the right to distribute films to airlines, schools, libraries,
hotels, armed forces facilities and hospitals.

International Markets.

The worldwide demand for motion pictures has expanded significantly as evidenced
by the  development  of new  international  markets  and media.  This  growth is
primarily  driven  by  the  overseas   privatization  of  television   stations,
introduction of direct broadcast  satellite  services,  growth of home video and
increased cable penetration.

FMLY Motion Picture Acquisitions

In  addition to its own  production  and  production  service  activities,  FMLY
continually  seeks  to  acquire  rights  to films  and  other  programming  from
Independent  film  producers,  distribution  companies  and  others  in order to
increase the number of films it can distribute and provide  related  services in
connection  with in existing and emerging  delivery  systems.  To be successful,
FMLY  must  locate  and  track  the   development  and  production  of  numerous
independent feature films.

Types of Motion Pictures Acquired.

FMLY generally seeks to produce, provide production services in connection with,
or acquire  motion  pictures  across a broad range of genres,  including  drama,
thriller,  comedy, science fiction, family, action and fantasy/adventure,  which
will  individually  appeal  to a  targeted  audience.  The FMLY  has  been  very
selective in acquiring  higher budgeted films (over  $3,000,000)  because of the
interest that the Majors have shown in acquiring such films,  and the associated
competition and higher production advances,  minimum guarantees and other costs.
FMLY acquires  projects when it believes it can limit its financial risk on such
projects through, for example, significant presales, and when it believes that a
project has significant  marketability.  In most cases, FMLY attempts to acquire
rights to motion pictures with a recognizable  marquis "name" personalities with
public  recognition,  thereby enhancing  promotion of the motion pictures in the
home video  and/or  international  markets.  FMLY  believes  that this  approach
increases the likelihood of producing a product  capable of generating  positive
cash flow, ancillary rights income and the possibility of a theatrical release.

Methods of Acquisition.

FMLY typically  acquires films on either a "pick-up" basis or a "pre-buy" basis.
The  "pick-up"   basis  refers  to  those  films  in  which  the  FMLY  acquires
distribution  rights  following  completion of most or all of the production and
post-production  process. These films are generally acquired after management of
the FMLY has viewed the film to evaluate its commercial viability.

The "pre-buy" basis refers to films in which FMLY acquires  distribution  rights
prior to completion of a substantial portion of production and  post-production.
Management's  willingness  to  acquire  films on a pre-buy  basis is based  upon
factors  generally  including  the track record and  reputation of the picture's
producer(s),  the quality and commercial value of the screenplay,  the "package"
elements of the picture,  including the director and principal cast members, the
budget of the picture and the genre of the  picture.  Before  making an offer to
acquire rights in a film on a pre-buy basis,  FMLY may work with the producer to
modify  certain  of  these  elements.  Once  the  modifications  are  considered
acceptable, FMLY's obligation to accept delivery and make payment is conditioned
upon receipt of a finished film  conforming  to the script  reviewed by FMLY and
other specifications considered important by the FMLY.

Acquisition Process.

If FMLY  locates  a motion  picture  project  which it  believes  satisfies  its
criteria,  FMLY  may pay an  advance  against  a share or  participation  in the
revenue  actually  received  by FMLY  from  the  exploitation  of a film in each
licensed media (hereafter an,  "Advance") or a guarantee a minimum payment based
on projected revenues actually to be received by FMLY from the exploitation of a
film in each licensed media (hereafter, a "Minimum Guarantee"), all of which are
conditioned  upon  delivery of a completed  film which meets or exceeds  certain
technical standards which are pre-determined in the distribution  agreement with
FMLY.  The minimum  guarantee  is  generally  paid prior to the film's  release.


                                       7
<PAGE>

Typically,  FMLY will have the right to recoup the Advance or Minimum  Guarantee
and certain other amounts from the  distribution  revenues  realized by the FMLY
prior to paying any additional revenue participation to the production company.

FMLY Feature Film Production

FMLY's  feature  film  division,  Emmett/Furla  Films  Productions  Corporation,
develops and produces low to medium  budget  films.  FMLY's low to medium budget
films to date have had production  budgets  ranging from less than $1 million to
$25 million,  although  FMLY,  from time to time,  may produce and release films
having  higher or much higher  budgets.  FMLY's  low-budget  films are primarily
targeted for direct  distribution  to the  television and home video markets and
its medium-budget films are generally targeted for initial theatrical release.

FMLY  generally  retains   distribution   rights  through   Emmett/Furla   Films
Distribution,  LLC.  FMLY's  films  generally  are  distributed  by third  party
licensees  domestically and by third party sales agents for internationally.  In
unique   circumstances,   FMLY  undertakes  limited  domestic   distribution  or
co-distribution activities.

FMLY's  feature  film  strategy  generally  is to  develop,  perform  production
services, and/or produce feature films when the production budgets for the films
are expected to be entirely or  substantially  covered  through a combination of
pre-sales,  output  arrangements,  equity arrangements and production loans with
"gap" financing.  To further limit FMLY's financing risk or to obtain production
loans,  FMLY often  purchases  completion  bonds to guarantee the  completion of
production and delivery of  pre-determined,  technically  acceptable film and/or
video elements.

The following  films were either in production,  completed,  and/or  released or
delivered  by FMLY to  certain  distributors  in 2000,  2001,  and  2002  and/or
scheduled for release in FMLY's fiscal 2002 or 2003

<TABLE>
<CAPTION>
PICTURE                      INITIAL MEDIA                DELIVERY/RELEASE            PRINCIPAL TALENT
                                                               DATE
==============               ================             ================            =================
<S>                          <C>                          <C>                         <C>
Speedway Junky               Theatrical                   September 2001              Jesse Bradford,
                                                                                      Jordan Brower,
                                                                                      Jonathan Taylor
                                                                                      Thomas, Tiffani
                                                                                      Amber Theissen,
                                                                                      Warren G, Daryl
                                                                                      Hannah
-----------------            ------------------           ------------------          ---------------------

Held For Ransom              Video/Cable                  August 2000                 Dennis Hopper,
                                                          (foreign and                Zachery Ty Bryan,
                                                          domestic)                   Kam Heskin, Jordan
                                                                                      Brower Randy
                                                                                      Spelling, Tsianina
                                                                                      Joelson, Morgan
                                                                                      Fairchild
-----------------            ------------------           ------------------          ---------------------
After Sex                    Video/Cable                  August 2000                 Brooke Shields,
                                                          (foreign and                Virginia Madsen,
                                                          domestic)                   D.B. Sweeney, Dan
                                                                                      Cortese, Maria
                                                                                      Pitillo, Johnathon
                                                                                      Schaech
-----------------            ------------------           ------------------          ---------------------
I'm Over Here Now            Pay-per-View/                March 2000                  Andrew "Dice" Clay
(produced                    Video
in conjunction
with an
 Independent
 Production
company)
</TABLE>


                                       8
<PAGE>

<TABLE>
<CAPTION>

PICTURE                      INITIAL MEDIA                DELIVERY/RELEASE            PRINCIPAL TALENT
                                                               DATE
==============               ================             ================            =================
<S>                          <C>                          <C>                         <C>
Good Advice                  Video/Cable                  March 2001                  Charlie Sheen,
                                                          delivery date.              Angie Harmon,
                                                          December 2001               Denise Richards,
                                                          release date.               Rosanna Arquette,
                                                          (Domestic)                  & Jon Lovitz
-----------------            ------------------           ------------------          ---------------------
Ticker                       Video/Cable                  March 2001                  Tom Sizemore,
(produced                                                 delivery date.              Steven Seagal,
in conjunction                                            December 2001               Jamie Pressly, &
with an                                                   (Domestic release)          Dennis Hopper
Independent
Production
company)
-----------------            ------------------           ------------------          ---------------------
The Badge                    Video/Cable                  December 2001               Billy Bob Thornton,
(f/k/a Behind the                                         Delivery date.              Patricia Arquette, &
Sun)                                                      September 2002              Seal Ward
(produced                                                 (Domestic release)
in conjunction
with an
 Independent
Production
company
-----------------            ------------------           ------------------          ---------------------
Run for the Money            Video/Cable                  December 2001               Christian Slater, Val
(a/k/a In God We                                          (Delivery date)             Kilmer, Daryl
Trust)                                                    February 2002               Hannah, Bokeem
(produced                                                 (Domestic Release)          Woodbine, & Vern
in conjunction                                                                        Troyer
with an
 Independent
 Production
company)
-----------------            ------------------           ------------------          ---------------------
Half Past Dead               Theatrical                   June 2002                   Steven Seagal, Morris
(produced                                                 (Delivery date)             Chestnut, Ja Rule
in conjunction with                                       Scheduled for
an Independent                                            release November
Production                                                2002
company)
-----------------            ------------------           ------------------          ---------------------
Narc                         Theatrical                   October 2001                Ray Liotta, Jason
(produced                                                 (Delivery date)             Patric, Busta
in conjunction
with an                                                   Scheduled for               Rhymes
Independent                                               release December
Production                                                2002
company)
-----------------            ------------------           ------------------          ---------------------
</TABLE>



                                       9
<PAGE>


<TABLE>
<CAPTION>
PICTURE                      INITIAL MEDIA                DELIVERY/RELEASE            PRINCIPAL TALENT
                                                                DATE
==============               ================             ================            =================
<S>                          <C>                          <C>                         <C>
The Devil and                Theatrical                   November 2002               Alec Baldwin, Anthony
Daniel Webster                                            (Delivery date.)            Hopkins, Jennifer
(produced                                                                             Love Hewitt
in conjunction with
an Independent
Production
company)
-----------------            ------------------           ------------------          ---------------------
Try Seventeen                Theatrical                   September 2002              Elijah Wood, Franka
(produced                                                 (Delivery date)             Potente, Mandy
in conjunction with                                                                   Moore
an Independent
Production
company)
-----------------            ------------------           ------------------          ---------------------
Shottas                      Theatrical                   March 2003                  Ky-Mani Marley,
                                                          (Delivery date)             Spragga Benz, Wyclef
                                                                                      Jean, Paul Campbell,
                                                                                      Louie Rankin
-----------------            ------------------           ------------------          ---------------------
Out for a Kill               Theatrical                   March 2003                  Steven Seagal
(produced                                                 (Delivery date)
in conjunction with
an Independent
 Production
company
=================            ==================           ==================          =====================
</TABLE>

There is no assurance that any motion picture,  which has not yet been released,
will be released, that a change in the scheduled release dates of any such films
will not occur or, if such motion  picture is released,  it will be  successful.
FMLY has various additional potential feature films under development.  There is
no assurance  that any project under  development  will be  produced.or  that if
produced, that it will be released or successful.


Employees

As of June 30, 2003, FMLY had 6 full-time  employees,  of whom 4 were engaged in
development,  production and  distribution of theatrical  based motion pictures.
None of FMLY's  employees  are  covered by a  collective  bargaining  agreement,
although some of FMLY's subsidiaries are subject to guild agreements. Management
believes that its employee relations are good.


ITEM 2.  PROPERTIES

FMLY leases  approximately  2,602  square feet at 8530  Wilshire  Blvd Suite 420
Beverly  Hills,  California.  The  lease  is a two  year  lease  with a one year
extension with monthly payments of $6,500.


                                       10
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

In January  2003,  the  director  of the movie  Good  Advice  claimed  that Good
Entertainment  Services,  Inc.,  a  subsidiary  of  the  Company,  owes  him  an
additional  $50,000 in director's fees and has requested an arbitration with the
Directors Guild of America.  An arbitration date is approximately  scheduled for
March 2003. The Company feels that the claim is without merit.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS


ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Our common stock trades on the Over-the  Counter  Bulletin Board,  also
called the OTCBB, under the trading symbol "FMLY". The following table set forth
the quarterly  high and low bid prices per share for our common  stock.  The bid
prices  reflect  inter-dealer  prices,  without  retail  markup,   markdown,  or
commission and may not represent actual transactions.

                                        HIGH              LOW
                                         BID              BID
                                       -----             ----

Fiscal 2002

September 30, 2001                     $1.05             $0.45
December 31, 2001                      $0.75             $0.30
March 31, 2002                         $0.56             $0.25
June 30, 2002                          $0.51             $0.25

Fiscal 2003

September 30, 2002                     $0.54             $0.35
December 31, 2002                      $0.50             $0.23
March 31, 2003                         $0.27             $0.07
June 30, 2003                          $0.18             $0.09


To date, the FMLY has not declared or paid dividends on its common stock.

 As of June 30, 2003, there were  approximately  1,109 shareholders of record of
the FMLY's Common Stock.

Recent Sales of Unregistered Securities
---------------------------------------

None

Transfer Agent and Registrar
----------------------------

FMLY's transfer agent is Securities Transfer  Corporation,  2591 Dallas Parkway,
Suite 102, Frisco, Texas, 75034.

ITEM 7. MANAGEMENTS  DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS
OF OPERATIONS

RECENTLY ISSUED ACCOUNTING STANDARDS

In January 2003, the FASB issued  Interpretation  46,  Consolidation of Variable
Interest  Entities.  In general,  a variable  interest  entity is a corporation,
partnership, trust, or any other legal structure used for business purposes that
either (a) does not have equity  investors  with voting rights or (b) has equity
investors that do not provide sufficient  financial  resources for the entity to
support its activities. Interpretation 46 requires a variable interest entity to
be  consolidated  by a company if that  company is subject to a majority  of the
risk of loss from the  variable  interest  entity's  activities  or  entitled to


                                       11
<PAGE>

receive a majority of the entity's  residual returns or both. The  consolidation
requirements  of  Interpretation  46  apply  immediately  to  variable  interest
entities created after January 31, 2003. The consolidation requirements apply to
transactions  entered into prior to February 1, 2003 in the first fiscal year or
interim  period  beginning  after  June  15,  2003.  Certain  of the  disclosure
requirements  apply in all financial  statements  issued after January 31, 2003,
regardless of when the variable interest entity was established. The adoption of
the  Interpretation  on July 1,  2003  did not  have a  material  impact  on our
financial statements.

In April  2003,  the  FASB  issued  SFAS  149,  Amendment  of  Statement  133 on
Derivative  Instruments  and  Hedging  Activities,  which  amends and  clarifies
accounting for derivative instruments,  including certain derivative instruments
embedded in other  contracts,  and for hedging  activities  under SFAS 133.  The
Statement is effective (with certain  exceptions) for contracts  entered into or
modified  after June 30, 2003. We do not believe the adoption of this  Statement
will have a material impact on our financial statements.

In May  2003,  the FASB  issued  SFAS  150,  Accounting  for  Certain  Financial
Instruments with  Characteristics  of both Liabilities and Equity. The Statement
establishes  standards  for  how  an  issuer  classifies  and  measures  certain
financial  instruments with  characteristics  of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a  liability  (or an  asset  in  some  circumstances).  It is  effective  for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period  beginning  after June
15,  2003.  While we do not believe the adoption of this  Statement  will have a
material impact on our financial statements.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Our financial  statements and accompanying notes are prepared in accordance with
U.S. GAAP.  Preparing financial statements requires management to make estimates
and  assumptions  that  affect the  reported  amounts  of  assets,  liabilities,
revenue,  and  expenses.   These  estimates  and  assumptions  are  affected  by
management's  application of accounting  policies.  Critical accounting policies
for us include revenue recognition and accounting for film costs.

We account for revenue from the  distribution of motion pictures as earned under
the criteria  established by American  Institute of Certified Public Accountants
("AICPA") Statement of Position ("SOP") 00-2. Our revenue cycle is generally one
to three years,  with the  expectation  that  substantially  all revenue will be
recognized in the first two years of individual  motion pictures.  In accordance
with SOP 00-2,  we  consider  revenue  earned when we have  achieved  all of the
following:

     o    We have a valid sale or licensing agreement in place.
     o    The motion  picture is complete and in  accordance  with the agreement
          with the customer.
     o    The motion picture has been delivered or is deliverable.
     o    The license period has begun.
     o    The revenue is fixed or  determinable  and  collection  is  reasonably
          assured.

We also  account  for  the  capitalization  of film  costs  under  the  criteria
established  by SOP 00-2.  Film costs include costs to acquire,  develop  and/or
produce  feature  motion  pictures:   mainly  salaries,   equipment,   overhead,
participation  costs  and  exploitation  costs.  Production  costs in  excess of
reimbursable  amounts  are  capitalized.  Once  a film  is  released,  any  film
production  costs  capitalized is amortized in the  proportion  that the revenue
during the year for each film bears to the estimated revenue to be received from
all sources under the individual film forecast method.  Estimates of anticipated
total gross  revenues are  reviewed  periodically  and revised  when  necessary.
Unamortized  film production  costs are compared with net realizable  value each
reporting  period on a film-by-film  basis.  If estimated gross revenues are not
sufficient to recover the  unamortized  film production  costs,  the unamortized
film production costs are written down to their estimated net realizable value.

PLAN OF OPERATION

The short-term  objective of the FMLY is to provide  production related services
in connection with and to produce genre specific  moderate cost movies in the $1
to $25+ million range


                                       12
<PAGE>

The Company's long-term objectives are as follows

          1.   To build a library of film  rights and assets from which FMLY can
               earn revenue from.
          2.   To continue to produce films and provide  production  services in
               connection with motion pictures containing high profile talent.
          3.   To produce films with Major and/or Mini-major studios.

Additionally,   through  Emmett  Furla  Films  Productions  Corp.,  Family  Room
Entertainment  Corporation's  business  plan  emphasized  the  expansion of film
project  development  along  with  acquisitions  and  the  commencement  of  new
productions for the fiscal year 2004. Recent developments include the following:

     On May 28, 2003, the Company  announced that it has joined forces with Iiya
     Salkind to develop  and produce  the  feature  film titled "The  Abominable
     Snowman". The Company believes that the Abominable Snowman is a time tested
     and  thought  provoking  title  that,  when  combined  with the passion Mr.
     Salkind has for the story and new  technologies  that are available to help
     make it a reality,  could have the ingredients for a blockbuster franchise.
     On July 25, 2002, the Company announced that it had signed Hollywood Artist
     Crash McCreery to create the Abominable  Snowman.  "The Abominable Snowman"
     will be produced in association  with Vallhalla  Motion Picture's Gale Anne
     Hurd.

     On July 16, 2003 , the Company  announced  that  Randall  Emmett and George
     Furla will  produce the motion  picture,  "Control"  as part of under their
     fifteen-picture production/finance arrangement with Avi Lerner's Millennium
     Films.  Ray  Liotta and Willem  Dafoe are set to star and Tim  Hunter,  who
     directed  River's Edge is set to direct the  picture.  The  screenplay  for
     "Control" was written by Todd Slavkin and Darren Swimmer.

     "Control"  is the story of a  sociopathic  killer on death  row,  played by
     Liotta,  who's  given a chance  to live if he  agrees to take part in a top
     secret chemical behavioral  modification program run by a brilliant doctor,
     played by Dafoe. As the killer's  personality begins to change, both he and
     the doctor must take drastic  measures  when the violent past comes back to
     haunt them both.  "Control" began principal  photography on August 24, 2003
     in Eastern Europe.

     On August 4, 2003, the Company  announced that they have closed a deal with
     Barstu  Productions  and  Integrated  Films and  Management  to create  and
     produce a feature film which will  re-envision  one of Hollywood's  classic
     horror films and a current cult favorite,  The Amityville  Horror.  The new
     project by the Company,  Barstu and Integrated will be a modern look at the
     myth of the  Amityville  Horror  as told in the novel by Jay Anson on which
     the original 1979 movie,  released by MGM, was based.  When released by MGM
     in the United  States in July of 1979,  the  original  picture went on to a
     cumulative estimated U.S. box office of over $86,000,000.  Steve Whitney of
     Integrated  and Paul Mason of Barstu  will  produce  the  picture  with the
     Company's  Randall Emmett and George Furla. The producers are currently out
     to directors for the picture,  which is scheduled to begin filming in early
     2004.

     On September 4, 2003, the Company  announced  that it had acquired  Beverly
     Brandt's novel "Room Service" and partnered with Gale Anne Hurd's  Valhalla
     Motion  Pictures to produce the  picture.  "Room  Service"  marks the third
     collaboration  for the Company and Valhalla.  The Company's  Randall Emmett
     and George  Furla with Gale Anne Hurd will  produce the  picture,  which is
     currently out to writers.  "Room Service" is a romantic  comedy in the vein
     of  "Maid in  Manhattan".  When  spoiled  young  heiress  Katya  Morgan  is
     disinherited by her father, she's forced to abandon her socialite lifestyle
     and  take a job as a maid in the  hotel  where  she  once  lived  lavishly.
     Working to pay off her tab,  she finds love along the way,  and  manages to
     pass tests secretly laid out in her father's will.  When she earns back the
     inheritance  she  thought  she'd  never  receive,  she learns her  greatest
     lesson:  that  sometimes  getting what you don't want is the best reward of
     all.

     On September 4, 2003, the Company also announced that "Wonderland" starring
     Val  Kilmer,  Lisa  Kudrow,  Kate  Bosworth  and Dylan  McDermott  has been
     accepted  into the 2003 Toronto  International  Film Festival and will have
     its world premier at the Festival.  The Company's Randall Emmett and George
     Furla  executive  produced  "Wonderland"  which was  directed by James Cox.
     Lions Gate will release the film theatrically in September.


                                       13
<PAGE>

     On September 5, 2003 the Company announced that it has signed a development
     deal with Val Kilmer.  The Company's wholly owned subsidiary,  Emmett/Furla
     Films  will  produce  and Val  Kilmer  will star in a yet to be  determined
     production, which will commence filming within twelve months.

FMLY has financed operations through the sale of common stock,  through issuance
of convertible  debentures and through  financing  from major  stockholders  and
financial  institutions.  In the near term, we anticipated that we rely entirely
on outside sources of financing for film projects. In fiscal year 2000 we raised
approximately  $1,374,000  in the  third  quarter  ending  March  31,  2000  and
$1,200,000 in the fourth  quarter June 30, 2000 from a private  placement of our
common stock to qualified  investors  and current  major  shareholders.  For the
fiscal year 2001, FMLY obtained  approximating $600,000 in the aggregate in debt
financing from outside funding. Of this, $250,000 of debt has been retired.  For
the fiscal year 2003, FMLY obtained  approximately  $500,000 in the aggregate of
debt  financing  from  outside  funding.  During  fiscal year 2003,  FMY retired
approximately $165,000 of the debt.

FMLY'S  capital  requirements  will depend on numerous  factors,  including  the
profitability  of our film projects and our ability to control costs. We believe
that our current  assets will be sufficient  to meet our operating  expenses and
capital  expenditures to the successful  commercialization  of our existing film
projects.  However,  we  cannot  predict  when  and  if any  additional  capital
contributions  may be needed and we may need to seek one or more substantial new
investors.   New  investors  could  cause   substantial   dilution  to  existing
stockholders.

RESULTS OF OPERATIONS

Year Ended June 30, 2003 Compared to Year Ended June 30, 2002
-------------------------------------------------------------

During the year ended June 30,  2003 FMLY  generated  revenue of  $1,005,441  as
compared  to  $816,142  for the year ended June 30, 2002 for an increase of 23%.
The increase in revenues was a result of normal  fluctuations  in the  producers
fees and other income from film projects in which we are involved.  FMLY did not
engage in any large  film  project  during  fiscal  2003 as it  continues  to be
engaged in the  development  of multiple  projects  that we believe will, in the
long-term, give FMLY a steady flow of film or production fee revenues. $ 375,000
of FMLY's film revenue in 2003 was derived from producer film projects in motion
pictures produced by other companies for domestic theatrical,  home video, cable
and foreign  markets.  The remaining  fiscal 2003 revenue of was generated  from
producer fees of $562,000 and royalties and other revenue of $68,411.

FMLYs  operating  costs for the year  ended  June 30,  2003 were  $1,312,966  as
compared  to  $2,742,877  for the  year  ended  June 30,  2002,  a  decrease  of
$1,429,911.  The decrease is a result of less released films production costs on
the  balance  sheet  to  amortize  as a  result  of FMLY  focusing  more on film
development and packaging in 2003 as apposed to direct film production in 2002.

FMLY's gross profit  (loss) for fiscal year 2003 was  ($307,525)  as compared to
gross  profit of  ($1,926,735)  for fiscal year 2002.  The increase in our gross
profit  was a direct  result of less  released  films  production  costs plus an
increase in producer fees.

FMLY's  selling,  general  administrative  expenses  for  fiscal  year  2003 was
$1,528,170  as  compared  to  $1,756,771  for fiscal  2002,  for a  decrease  of
$228,601. Our costs for fiscal 2003 consisted primarily of salaries and benefits
of $243,695 Consulting fees of $871,000, D&O insurance of $45,000, Rent $40,658,
telephone ansd cell phone $63,967,  auditors  $35,337,  Public  relations $2900,
legal fees $12,945,  offices  supplies  $11,619,  film festival  costd  428,178,
computer  consulting $11,841  depreciation  $28,130 and miscellaneous of $1,524.
Our costs for fiscal  2002  consisted  primarily  of  salaries  and  benefits of
$302,681, rent and occupancy costs of $81,024, general advertising and promotion
costs of  $97,283,  a one time  charge  (cost)  for stock  option  expense  of $
376,695,  entertainment  and  travel  of  $26,641,  loss on  sale of  marketable
securities  of $679,136  communications  costs of $68,819,  messenger and fright
costs of $13,294, and other general and administrative costs of $ 131,188.

Liquidity and Capital Resources:
--------------------------------

Net cash used in  operating  activities  in fiscal 2003  amounted to $364,769 as
compared to $1,955,080  for fiscal 2002. The use of cash for fiscal year 2003 is
mainly  attributable  to a net loss of  $2,258,164  plus film costs of  $555,383


                                       14
<PAGE>

offset  by  stock  options  of  $  642,864,  film  amortization  write  offs  of
$1,312,966,  provision  for  doubtful  accounts  $131,393,  provision  foe  debt
amortization $348,738 and miscellaneous of $12,817.

Net cash used in investing activities for fiscal year 2003 amounted to ($21,081)
as compared to net cash  provided in  investing  of $932,925 in fiscal year 2002
for a net change of $943,006.  This  differences is  attributable to proceeds of
sale  of  marketable  equity  securities  of  $275,039,   collections  of  notes
receivable of $675,000 in fiscal 2002.

Financing  activities provided net cash of $452,440 in fiscal 2003 compared with
financing activities used net cash of $717,384 in fiscal year 2002. The decrease
in  fiscal  2003  was  attributable  mainly  to  payments  on notes  payable  to
shareholders and payments on a note payable to an investor. .

There is no expected or planned  sale of  significant  equipment by the company.
FMLY's  work force is  expected to remain at the same level over the next twelve
months.

Subsequent Events:

On August 21, 2003 FMLY issued a one year 8%  convertible  note for  $111,000 to
the Churchill Capital Group. On October 8, 2003, this note was amended to change
the conversion  rate from floating to a fixed rate. The conversion rate is fixed
at $.07 per share.

On October 9, 2003, FMLY entered into a subscription  agreement  calling for the
issuance of two year 8% convertible securities in the aggregate of $500,000. The
issuances are to take place in two traunchs, $300,000 on October 9, 2003 and the
remaining  $200,000  five  days  after  the  effectiveness  of the  registration
statement  which will be filed  pursuant to this  transaction.  The  convertible
notes are convertible at a fixed rate of $.07 per share.  Also issued as part of
the funding were "A" and "B" warrants.  "A" warrants are exercisable at $.13 per
share and "B" warrants  are  exercisable  at $.50 per share.  There were two "A"
warrants issued with rights to purchase  3,571,428 shares of common stock in the
aggregate and two "B" warrants issued with rights to purchase  8.750.000  shares
of common stock.

ITEM 7.  FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
INDEX TO AUDITED FINANCIAL STATEMENTS                                                                Page(s)

<S>                                                                                                   <C>
Report of Independent Accountants                                                                     F-3

Financial Statements

  Consolidated Balance Sheet as of June 30, 2003                                                      F-4

  Consolidated Statement of Operations for the years ended June 30, 2003 and 2002                     F-5

  Consolidated Statement of Stockholders' Equity for the years ended June 30, 2003 and 2002           F-6

  Consolidated Statement of Cash Flows for the years ended June 30, 2003 and 2002                     F-7

Notes to Consolidated Financial Statements                                                            F-8
</TABLE>

ITEM 8.     CHANGES IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON ACCOUNTING  AND
            FINANCIAL DISCLOSURE

         Not Applicable

ITEM 8A. CONTROLS AND PROCEDURES

Under the supervision and with the  participation  of our management,  including
the Chief Executive Officer and Chief Financial  Officer,  we have evaluated the
effectiveness  of the  design  and  operation  of our  disclosure  controls  and
procedures  pursuant to Exchange Act Rule  13a-14(c) as of the end of the period
covered by this report.  Based on that evaluation,  the Chief Executive  Officer
and Chief Financial  Officer have concluded that these  disclosure  controls and


                                       15
<PAGE>


procedures  are  effective.  There were no changes in our internal  control over
financial  reporting during the quarter ended June 30, 2003 that have materially
affected,  or are reasonably likely to materially  affect, our internal controls
over financial reporting.



                                       16
<PAGE>


PART III

ITEM 9.      DIRECTORS,  EXECUTIVE  OFFICERS,  PROMOTERS  AND  CONTROL  PERSONS;
             COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

The  following  table  sets forth the names,  ages and all  positions  with FMLY
currently  held by each person who may be deemed an  executive  officer of FMLY.
Executive  officers  serve at the  discretion of the Board of directors.  Unless
otherwise  noted,  all  references  to FMLY  include  Family Room  Entertainment
Corporation and all its wholly owned subsidiaries:

The following table sets forth the directors and executive officers of FMLY

Name                        Age              Executive Position Held

George Furla                43               Co-Chairman, Chief Executive
                                             Officer and President
Randall Emmett              32               Co-Chairman, Chief Operating
                                             Officer and Assistant  Secretary
Stanley Tepper              59               Chief Financial Officer



RANDALL  EMMETT  -  CO-CHAIRMAN  Mr.  Emmett  has  extensive  experience  in the
entertainment  and film industry.  He began his career with  Simpson/Bruckheimer
Films as an Assistant to the Producer after  graduating from the New York School
of Visual Arts in 1994.  While at  Simpson/Bruckheimer,  Randall  worked on film
projects  such as "Bad  Boys" and  "Crimson  Tide".  Randall  later  worked  for
International  Creative  Management  ("ICM") as an  Assistant  within the Motion
Picture  Talent  Division.  Mr.  Emmett  jointly  formed the current  production
company in 1998 and is principally  responsible for talent, agency relationships
and has joint responsibility for concept development.

GEORGE FURLA - CO-CHAIRMAN Mr. Furla has over 18 years of business experience in
entertainment and financial  services.  He began his business career with Cantor
Fitzgerald  where he was a trader in the equity  securities area. After spending
several  years  with  Cantor  Fitzgerald,  George  then  worked  for  Jones  and
Associates for 3 years in a similar capacity.  In 1988, Mr. Furla left Jones and
Associates to run a hedge fund, which he established. Mr. Furla entered the film
business in 1995,  financing  several  productions.  George  jointly  formed the
current production company in 1998 and is principally  responsible for financing
arrangements, distribution and has joint responsibility for concept development.
Mr. Furla is a 1982  graduate of the  University of Southern  California  with a
degree in business administration.

STANLEY  TEPPER-CHIEF  FINANCIAL OFFICER:  Mr. Tepper has held senior management
positions with various entities.  During the period from February,  1998 through
March 2000 Mr.  Tepper was  Controller  of  Operations  for  Time/Warner/Village
Roadshow  Pictures joint  venture.  Prior to that Mr Tepper has over 30 years of
experience as senior  management in accounting  and finance , principally in the
entertainment  industry  such  entities  as  Time/Warner/Orion   Pictures  joint
venture,  Satori Film, ALMI  Distribution/RKO  Warner  Theaters,  and the Cannon
Group,  Inc. Mr.  Tepper began his career with Price  Waterhouse,  New York.  He
earned a BS degree from Southeastern  University of Washington,  DC with a major
in accounting and minor in computer methodology

Compliance with Section 16(a) of the Securities Exchange Act of 1934

Section  16(a) of the  Securities  Exchange Act of 1934  requires the  Company's
directors  and  executive  officers,  and  persons  who own  more  than 10% of a
registered class of the FMLY's equity securities to file with the Securities and
Exchange  Commission  initial  reports of  ownership  and  reports of changes in
ownership  of Common  Stock  and  other  equity  securities  of FMLY.  Officers,
directors and greater than 10%  shareholders  are required by SEC regulations to
furnish FMLY with copies of all Section 16(a) forms they file.

To the best of FMLY's  knowledge,  based  solely on its  review of the copies of
such reports furnished to the company and written  representations that no other


                                       17
<PAGE>

reports were  required  during the fiscal year ended June 30, 2002,  all Section
16(a) filing requirements applicable to its officers, directors and greater than
10% beneficial owners were complied with.

ITEM  10.     EXECUTIVE COMPENSATION

The  following   table  sets  forth  certain   summary   information   regarding
compensation  paid by FMLY for services  rendered  during the fiscal years ended
June 30,  2003 and  2002,  respectively,  to  FMLY's  Chief  Executive  Officer,
President and Chief Financial Officer during such period.

<TABLE>
<CAPTION>

                      Annual Compensation                               Long Term Compensation Awards
                     -------------------------------------------     ------------------------------------------
                                                   Other             Restricted  Securities
Name and                                           Annual             Stock       Underlying     All Other
Principal Position   Year   Salary    Bonus       Compensation(2)    Awards      Options(3)     Compensation(4)
------------------   ----   ------    -----       ---------------    ------      ----------     ---------------
<S>                  <C>      <C>      <C>              <C>            <C>        <C>                <C>
George Furla         2003      0        0                0              0             0               0
Co-Chairman,         2002      0        0                0              0             0               0
Chief Executive      2001      0        0                               0         300,000             0
Officer and
President

Randall Emmett       2003      0        0                0              0             0               0
Co-Chairman          2002      0        0                0              0             0               0
Chief Operating      2001      0        0                0              0         300,000             0
Officer and
Assistant Secretary

Stanley Tepper       2003      0        0                0             0              0               0
Chief Financial      2002      0        0                0             0              0               0
Officer
</TABLE>


OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                        INDIVIDUAL GRANTS
                      ----------------------------------------------------------
                                                                                       POTENTIAL REALIZABLE
                                                                                         VALUE AT ASSUMED
                          NUMBER OF     % OF TOTAL                                    ANNUAL RATES OF STOCK
                         SECURITIES      OPTIONS         EXERCISE                      PRICE APPRECIATION
                         UNDERLYING     GRANTED TO       OR BASE                         FOR OPTION TERM
                           OPTIONS      EMPLOYEES         PRICE      EXPIRATION      ----------------------
                           GRANTED       IN 2003          ($/SH)        DATE             5%         10%
                      ---------------  -------------  -------------  ----------      ----------  ----------
<S>                          <C>           <C>         <C>            <C>             <C>         <C>
George Furla                  0             0
Randall Emmett                0             0
Stanley Tepper                0             0
</TABLE>


2002 OPTION EXERCISES AND YEAR-END OPTION HOLDINGS

The following table sets forth,  with respect to the Named  Executive  Officers,
information  concerning  the  exercise  of stock  options  during the year ended
December 31, 2003, and the year-end value of unexercised options:


                                       18
<PAGE>

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>

                                                   NUMBER OF UNEXERCISED            VALUE OF UNEXERCISED
                          SHARES                      OPTIONS HELD AT             IN-THE-MONEY OPTIONS AT
                         ACQUIRED                      JUNE 30, 2003                 JUNE 30, 2003(1)
                            ON       VALUE       ----------------------------    --------------------------
NAME                     EXERCISE   REALIZED     EXERCISABLE    UNEXERCISABLE    EXERCISABLE  UNEXERCISABLE
------------------       --------   --------     -----------    -------------    -----------  -------------
<S>                       <C>        <C>          <C>           <C>              <C>          <C>

George Furla
Randall Emmett
Stanley Tepper

N/A
</TABLE>


ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  following  table  sets forth  certain  information  regarding  the
beneficial  ownership  of  FMLY's  Common  Stock  as of June 30,  2003  based on
information  available  to FMLY by (I) each  person  who is known by FMLY to own
more than 5% of the  outstanding  Common Stock based upon reports  filed by such
persons  within the  Securities  and  Exchange  Commission;  (ii) each of FMLY's
directors; (iii) each of the Named Executive Officers; and (iv) all officers and
directors of FMLY as a group.

<TABLE>
<CAPTION>

Name and Address of                                  Number of Shares
    Beneficial Owner                                 Beneficially Owned          (1) Percentage
---------------------------                          ------------------------    --------------

<S>                                                            <C>                      <C>
George Furla
The Lot, Mary Pickford Bldg., Suite 101
1041 North Formosa Ave.
Hollywood, CA.   90046                                         3,900,000                16.1%

Randall Emmett
The Lot, Mary Pickford Bldg., Suite 101
1041 North Formosa Ave.
Hollywood, CA.   90046                                         3,031,061                12.5%

Total                                                          6,931,061                28.6%
---------                                                     ----------               ------
</TABLE>


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         As at June 30, 2000,  George Furla has loaned FMLY under a  Convertible
Note  Payable   amounting  to  $350,000  (see  Note  8  of  Notes  to  Financial
Statements).  Subsequently  to June 30,  2000  George  Furla has loaned the FMLY
approximately an additional $ 850,000 under a Convertible Notes Payable.

         As of June 30, 2001,  George  Furla's  loan to FMLY had an  outstanding
balance of $98,263. This note was amended to be non convertible.  (see Note 8 of
Notes to Financial Statements)

         As of June 30, 2002,  George  Furla's loan to FMLY under a Note Payable
had a outstanding  balance of $357,168.  Subsequently  to June 30, 2002,  George
Furla has  loaned  FMLY  approximately  an  additional  $ 28,600.  Additionally,
subsequent to June 30, 2002, FMLY made a repayment of $33,000.

         As of  December  31,  2002  George  Furla's  loan to FMLY  under a Note
Payable had an  outstanding  balance of $440,129.  Subsequently  to December 31,
2002,  George  Furla has  loaned  FMLY  approximately  an  additionally  10,000.
Additionally,  subsequent  to  December  31,  2002,  FMLY  made a  repayment  of
$150,000.


                                       19
<PAGE>

         As of June 30,  2002,  Peter  Benz  loaned  FMLY  $17,000  under a Note
Payable. Subsequent to June 30, 2002, this loan was repaid in full.

         As of June 30, 2002,  Randall  Emmett  Loaned FMLY $50,000 under a Note
Payable.  Additionally,  Randall Emmett, subsequent to June 30, 2002, has loaned
FMLY approximately $2,000. As of June 30, 2002,  approximately $ 12,000 has been
repaid.

         As of December  31,  2002  Randall  Emmett's  loan to FMLY under a Note
Payable  had an  outstanding  balance  of $  30,084.  As of  December  31,  2002
approximately $18,740 has been advanced and/or repaid.

         During the fiscal  year  ending  June 30,  2002,  FMLY  received  under
certain  contractual  agreements,  in relation to producer  fees, for certain of
FMLY's  affiliation  with third party film  producers  that began during  fiscal
2002. FMLY paid George Furla $15,500 and Randall Emmett $17,250.

         During the six months  ending  December  31, 2002 FMLY  received  under
certain  contractual  agreements,  in relation to producer fees from affiliation
with third party film producers that began during the six month period ending

  Through June 30, 2003,  FMLY paid to George Furla $ 88,000 and Randall  Emmett
$121,500 for their share of the producer fees.

ITEM 13.   EXHIBITS AND REPORTS ON FORM 8-K

a) Exhibits


31.1   Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)
                               (Section 302 of the Sarbanes-Oxley Act of 2002)

31.2   Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)
                               (Section 302 of the Sarbanes-Oxley Act of 2002)

32.1   Certification of the Chief Executive Officer pursuant to 18 U.S.C.ss.1350
                               (Section 906 of the Sarbanes-Oxley Act of 2002)

32.2   Certification of the Chief Financial Officer pursuant to 18 U.S.C.ss.1350
                               (Section 906 of the Sarbanes-Oxley Act of 2002)


(b) Reports on Form 8-K:

         Form 8-K filed September 18, 2002

Item 6.  Resignations of Registrant's Directors

Peter Benz has resigned as Director of the Family Room Entertainment Corporation
Board of Directors effective  September 16, 2002 for personal reasons.  Mr. Benz
has also  resigned  as  Secretary  and  Treasurer  of the  Registrant  effective
September 16, 2002.

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

  Our financial  statements for the years ended June 30, 2003 and 2002 have been
audited by our principal accountant,  Ham, Langston & Brezina,  L.L.P., who have
also  provided all income tax return  preparation  services  during those years.
Each year the Chief  Executive  Officer  pre-approves  all audit and tax related
services prior to the performance of services by Ham, Langston & Brezina, L.L.P.
The  percentage of hours  expended on the audit by persons other than full time,
permanent employees of Ham, Langston & Brezina, L.L.P was zero.


                                       20
<PAGE>

Audit Fees

      Aggregate fees billed to us for the years ended June 30, 2003 and 2002 for
professional  services  by  Ham,  Langston  &  Brezina,   L.L.P,  our  principal
accountant,  for the audit of our annual financial  statements and the review of
quarterly financial statements were $30,000 and $29,000, respectively.

Audit-Related Fees

      There  were no fees  billed to us in the  previous  two  fiscal  years for
assurance  and  related  services  by Ham,  Langston &  Brezina,  L.L.P that are
reasonably  related to the  performance  of the audit or review of our financial
statements and that are not reported in the previous paragraph.

Tax Fees

      Aggregate fees billed to us for the years ended June 30, 2003 and 2002 for
professional  services by Ham,  Langston & Brezina,  L.L.P tax  compliance,  tax
advice, and tax planning were $3,200 and $3,100, respectively.

All Other Fees

      There were no aggregate fees billed the years ended June 30, 2003 and 2002
for products or other  services by Ham,  Langston & Brezina,  L.L.P that are not
reported in the previous three paragraphs.


SIGNATURES

In  accordance  with  Section 13 or 15(d) of the Exchange  Act,  the  registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

Family Room Entertainment Inc.
By:     /s/ George Furla
   ---------------------
George Furla
Director, Chief Executive Officer and
President

Date October 15, 2003


In  accordance  with the Exchange  Act, this report has been signed below by the
following  persons on behalf of the  registrant and in the capacities and on the
dates indicated.

/s/ George Furla       Director, Chief Executive Officer,       October 15, 2003
    -------------      President and Chief Accounting Officer
     George Furla

/s/ Randall Emmett     Director, Chief Operating Officer        October 15, 2003
    ---------------    Assistant Secretary
     Randall Emmett

/s/ Stanley Tepper     Chief Financial Officer                  October 15, 2003
    ---------------
     Stanley Tepper



                                       21
<PAGE>







                      FAMILY ROOM ENTERTAINMENT CORPORATION

                                   ----------




                        CONSOLIDATED FINANCIAL STATEMENTS
                     WITH REPORT OF INDEPENDENT ACCOUNTANTS
                   FOR THE YEARS ENDED JUNE 30, 2003 AND 2002

















                                       F-1



<PAGE>




                      FAMILY ROOM ENTERTAINMENT CORPORATION

                                TABLE OF CONTENTS

                                   ----------

                                                                         PAGE(S)

Report of Independent Accountants                                          F-3

Audited Financial Statements

  Consolidated Balance Sheet as of June 30, 2003 and 2002                  F-4

  Consolidated Statement of Operations for the
    years ended June 30, 2003 and 2002                                     F-5

  Consolidated Statement of Stockholders' Equity (Deficit)
    for the years ended June 30, 2003 and 2002                             F-6

  Consolidated Statement of Cash Flows for the
    years ended June 30, 2003 and 2002                                     F-7

Notes to Consolidated Financial Statements                                 F-8











                                       F-2




<PAGE>








                        REPORT OF INDEPENDENT ACCOUNTANTS
                        ---------------------------------



To the Stockholders and Board of Directors
Family Room Entertainment Corporation:


We have audited the  accompanying  balance  sheets of Family Room  Entertainment
Corporation  (the  "Company")  as of June 30,  2003 and  2002,  and the  related
statements of operations,  stockholders' equity (deficit) and cash flows for the
years then ended.  These  financial  statements  are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  financial  position of Family Room  Entertainment
Corporation  as of June 30, 2003 and 2002, and the results of its operations and
its cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.


                                        /s/ Ham, Langston & Brezina, L.L.P.


Houston, Texas
October 13, 2003










                                       F-3


<PAGE>



                      FAMILY ROOM ENTERTAINMENT CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                                  JUNE 30, 2003

                                    --------

<TABLE>
<CAPTION>

     ASSETS                                                               2003                   2002
     ------                                                           ------------             ------------

<S>                                                                   <C>                      <C>
Cash and cash equivalents                                             $     94,412             $     27,822
Accounts receivable, net                                                    50,000                  131,239
Film costs, net                                                          1,044,435                1,801,918
Property and equipment, net                                                 44,427                   51,476
Prepaid expenses and other                                                  38,151                    8,836
                                                                      ------------             ------------


      Total assets                                                    $  1,271,425             $  2,021,291
                                                                      ============             ============



LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------

Notes payable                                                         $  1,191,650             $  1,075,647
Accounts payable and accrued liabilities                                   198,181                  160,253
                                                                      ------------             ------------


      Total liabilities                                                  1,389,831                1,235,900
                                                                      ------------             ------------


Commitments and contingencies

Stockholders' equity (deficit):
  Preferred stock; $0.10 par value;
    5,000,000 shares authorized; no shares issued
    and outstanding                                                           --                       --
  Common stock; $0.10 par value; 200,000,000 shares
    authorized; 24,187,536 and 18,245,487 shares
    issued and outstanding at June 30, 2003 and
    2002, respectively                                                   2,418,754                1,866,049
  Additional paid in capital                                            10,530,831                9,777,165
  Deferred compensation                                                     (5,437)                 (37,333)
  Subscription receivable                                                     --                    (16,000)
  Accumulated deficit                                                  (13,062,554)             (10,804,490)
                                                                      ------------             ------------


    Total stockholders' equity (deficit)                                  (118,406)                 785,391
                                                                      ------------             ------------


      Total liabilities and stockholders' equity (deficit)            $  1,271,425             $  2,021,291
                                                                      ============             ============
</TABLE>










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

                                       F-4


<PAGE>

                      FAMILY ROOM ENTERTAINMENT CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                   FOR THE YEARS ENDED JUNE 30, 2003 AND 2002

                                   ----------

<TABLE>
<CAPTION>

                                                              2003                    2002
                                                           -----------             ---------


<S>                                                     <C>                      <C>
Film revenue                                            $  1,005,441             $    816,142


Operating cost - amortization of film costs                1,312,966                2,742,877
                                                        ------------             ------------


      Gross profit                                          (307,525)              (1,926,735)


Selling, general and administrative                        1,528,170                1,756,771
                                                        ------------             ------------


      Loss from operations                                (1,835,695)              (3,683,506)
                                                        ------------             ------------


Other income (expenses):
  Interest income                                               --                    218,124
  Interest expense                                          (422,469)                 (80,000)
  Loss on marketable equity securities                          --                   (679,136)
                                                        ------------             ------------


    Total other income (expenses), net                      (422,469)                (541,012)
                                                        ------------             ------------


      Loss before benefit from income taxes               (2,258,164)              (4,224,518)

Benefit from income taxes                                       --                      6,500
                                                        ------------             ------------


      Net loss                                          $ (2,258,164)            $ (4,218,018)
                                                        ============             ============


Weighted average number of common shares
  Outstanding - basic and fully diluted                   21,956,242               18,638,884
                                                        ============             ============


Net income (loss) per common share-basic and
  fully diluted                                         $      (0.10)            $      (0.23)
                                                        ============             ============
</TABLE>









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

                                       F-5


<PAGE>



                      FAMILY ROOM ENTERTAINMENT CORPORATION
            CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
                   FOR THE YEARS ENDED JUNE 30, 2003 AND 2002

                                   ----------

<TABLE>
<CAPTION>


                                                    COMMON STOCK                       ADDITIONAL
                                            --------------------------------             PAID-IN              DEFERRED
                                              SHARES                AMOUNT               CAPITAL            COMPENSATION
                                            ----------            ----------            ----------            --------
<S>                                         <C>                   <C>                   <C>                   <C>
Balance at June 30, 2001                    18,245,487            $1,824,549            $9,157,172            $(52,000)

Common stock issued for cash                   157,080                15,708                57,792                --

Exercise of stock options                       15,000                 1,500                 6,000                --

Re-pricing of compensatory stock
  options                                         --                    --                 406,828              14,667

Common stock issued for legal
  Services                                     242,920                24,291                89,374                --

Value of conversion feature
  associated with convertible
  debt                                            --                    --                  60,000                --

Net loss                                          --                    --                    --                  --
                                            ----------            ----------            ----------            --------



Balance at June 30, 2002                    18,660,487            $1,866,048            $9,777,166            $(37,333)
                                            ==========            ==========            ==========            ========


<CAPTION>



                                             SUBSCRIPTION           ACCUMULATED
                                              RECEIVABLE              DEFICIT                  TOTAL
                                              --------             ------------             -----------
<S>                                           <C>                  <C>                      <C>
Balance at June 30, 2001                      $   --               $ (6,586,472)            $ 4,343,249

Common stock issued for cash                   (16,000)                    --                    57,500

Exercise of stock options                         --                       --                     7,500

Re-pricing of compensatory stock
  options                                         --                       --                   421,495

Common stock issued for legal
  Services                                        --                       --                   113,665

Value of conversion feature
  associated with convertible
  debt                                            --                       --                    60,000

Net loss                                          --                 (4,218,018)             (4,218,018)
                                              --------             ------------             -----------



Balance at June 30, 2002                      $(16,000)            $(10,804,490)            $   785,391
                                              ========             ============             ===========
</TABLE>


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

                                       F-6


<PAGE>



                      FAMILY ROOM ENTERTAINMENT CORPORATION
            CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
                   FOR THE YEARS ENDED JUNE 30, 2003 AND 2002

                                   ----------

<TABLE>
<CAPTION>
                                                  COMMON STOCK                         ADDITIONAL
                                          --------------------------------              PAID-IN                DEFERRED
                                            SHARES                AMOUNT                CAPITAL              COMPENSATION
                                          ----------            ----------            ------------             --------
<S>                                       <C>                   <C>                   <C>                      <C>
Balance at June 30, 2002                  18,660,487            $1,866,048            $  9,777,166             $(37,333)

Collection of subscription
  receivable                                    --                    --                      --                   --

Interest expense recognized
  on loan from stockholder
  with below market interest
  rate                                          --                    --                    26,228                 --

Compensatory stock options
  subject to variable
  accounting                                    --                    --                  (367,832)              26,460

Amortization of deferred
  Compensation                                  --                    --                      --                  5,436

Value of beneficial conversion
  feature on convertible debt                   --                    --                   256,000                 --

Value of stock warrants issued
  with convertible debt                         --                    --                    83,175                 --

Common stock issued for cash               2,000,000               200,000                 (50,000)                --

Common stock issued for legal
  and consulting services,
  including issuances for cash
  at below market value. Total
  cash received was $145,000               3,316,000               331,600                 792,200                 --

Common stock issued upon
  conversion of debt                         211,049                21,106                  13,894                 --

Net loss                                        --                    --                      --                   --
                                          ----------            ----------            ------------             --------



Balance at June 30, 2003                  24,187,536            $2,418,754            $ 10,530,831             $ (5,437)
                                          ==========            ==========            ============             ========

<CAPTION>

                                            SUBSCRIPTION           ACCUMULATED
                                             RECEIVABLE              DEFICIT                  TOTAL
                                             --------             ------------             -----------
<S>                                          <C>                  <C>                      <C>
Balance at June 30, 2002                     $(16,000)            $(10,804,490)            $   785,391

Collection of subscription
  receivable                                   16,000                     --                    16,000

Interest expense recognized
  on loan from stockholder
  with below market interest
  rate                                           --                       --                    26,228

Compensatory stock options
  subject to variable
  accounting                                     --                       --                  (341,372)

Amortization of deferred
  Compensation                                   --                       --                     5,436

Value of beneficial conversion
  feature on convertible debt                    --                       --                   256,000

Value of stock warrants issued
  with convertible debt                          --                       --                    83,175

Common stock issued for cash                     --                       --                   150,000

Common stock issued for legal
  and consulting services,
  including issuances for cash
  at below market value. Total
  cash received was $145,000                     --                       --                 1,123,800

Common stock issued upon
  conversion of debt                             --                       --                    35,000

Net loss                                         --                 (2,258,164)             (2,258,164)
                                             --------             ------------             -----------



Balance at June 30, 2003                     $   --               $(13,062,654)            $  (118,506)
                                             ========             ============             ===========
</TABLE>



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

                                       F-7


<PAGE>

                      FAMILY ROOM ENTERTAINMENT CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                   FOR THE YEARS ENDED JUNE 30, 2003 AND 2002

                                   -----------

<TABLE>
<CAPTION>
                                                                                            2003                    2002
                                                                                        -----------             -----------

<S>                                                                                     <C>                     <C>
Cash flows from operating activities:
  Net loss                                                                              $(2,258,164)            $(4,218,018)
  Adjustment to reconcile net loss to net cash used by operating activities:
    Compensatory stock options and stock issuances                                          642,864                 535,160
    Imputed interest on below market interest loans
      from stockholders                                                                      26,228
    Film cost amortization and write-offs                                                 1,312,966               2,742,877
    Depreciation                                                                              8,446                   7,563
    Software amortization                                                                    19,684                  17,013
    Provision for doubtful accounts                                                         131,396                    --
    Amortization of debt costs                                                              348,738                  60,000
    Accretion of discount                                                                      --                  (196,500)
    Loss on marketable equity securities                                                       --                   679,136
    Change in operating assets and liabilities:
      Accounts receivable                                                                   (50,157)                 21,313
      Prepaid expenses and other assets                                                     (29,315)                 43,045
      Additions to film costs                                                              (555,383)             (1,682,797)
      Accounts payable and accrued liabilities                                               37,928                  42,628
      Income taxes payable                                                                     --                    (6,500)
                                                                                        -----------             -----------


          Net cash used by operating activities                                            (364,769)             (1,955,080)
                                                                                        -----------             -----------


Cash flows from investing activities:
  Proceeds from sale of marketable equity securities                                           --                   275,039
  Collection of notes receivable                                                               --                   675,000
  Purchase of property and equipment                                                        (21,081)                (17,114)
                                                                                        -----------             -----------


          Net cash provided (used) by investing activities                                  (21,081)                932,925
                                                                                        -----------             -----------


Cash flows from financing activities:
  Proceeds from notes payable to stockholders                                               418,785                 440,883
  Proceeds from bank line of credit                                                          37,500                 460,436
  Proceeds from convertible debentures                                                      397,500                 200,000
  Proceeds from sale of common stock                                                        295,000                  65,000
  Collection of subscription receivable                                                      16,000                    --
  Payments on notes payable to stockholders                                                (510,434)               (123,935)
  Payments on bank line of credit                                                          (201,911)                   --
  Payments on note payable to an investor                                                      --                  (325,000)
                                                                                        -----------             -----------


          Net cash provided by financing activities                                         452,440                 717,384
                                                                                        -----------             -----------


Increase (decrease) in cash and cash equivalents                                             66,590                (304,771)

Cash and cash equivalents at beginning of year                                               27,822                 332,593
                                                                                        -----------             -----------


Cash and cash equivalents at end of year                                                $    94,412             $    27,822
                                                                                        ===========             ===========
</TABLE>



                   The accompanying notes are an integral part
                   of these consolidated financial statements

                                       F-8


<PAGE>



                      FAMILY ROOM ENTERTAINMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   ----------

1.     GENERAL

       Family  Room  Entertainment  Corporation  (the  "Company"),  a New Mexico
       corporation,  is a  motion  picture  company  involved  in  the  creative
       development,  production, distribution, licensing and financing of motion
       pictures and the internet  content that supports  those motion  pictures.
       The Company's  distribution  markets include  primarily the United States
       and  Canadian  markets,  but  extend  to  other  markets  worldwide.  The
       significant  business  activities of the Company  constitute one business
       segment, filmed entertainment.


2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       PRINCIPLES OF CONSOLIDATION

       The consolidated financial statements include the accounts of the Company
       and its wholly-owned subsidiaries.  All significant intercompany balances
       and transactions have been eliminated.

       UNCLASSIFIED CONSOLIDATED BALANCE SHEET

       In  accordance  with the  provisions  of Statement of Position 00-2 ("SOP
       00-2"), the Company presents an unclassified  consolidated  balance sheet
       because the Company has an operating cycle of approximately three years.

       ACCOUNTING ESTIMATES

       The  preparation  of financial  statements in conformity  with  generally
       accepted accounting  principles requires management to make estimates and
       assumptions that affect the reported amount 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.

       REVENUE RECOGNITION

       Revenue from the  distribution of motion pictures is recognized as earned
       under the criteria  established by SOP 00-2. The Company's  revenue cycle
       is generally one to three years, with the expectation that  substantially
       all  revenue  will be  recognized  in the first  two years of  individual
       motion  pictures.  In  accordance  with SOP 00-2,  the Company  considers
       revenue earned when all of the following have occurred:

    o   The Company has a valid sale or licensing agreement in place.
    o   The motion picture is complete and in accordance with the agreement with
        the customer.
    o   The motion picture has been delivered or is deliverable.
    o   The license period has begun.
    o   The  revenue  is fixed or  determinable  and  collection  is  reasonably
        assured.




                                       F-9


<PAGE>



                      FAMILY ROOM ENTERTAINMENT CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                   ----------


2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

       FILM COSTS

       Film costs  include  costs to acquire,  develop  and/or  produce  feature
       motion pictures:  mainly  salaries,  equipment,  overhead,  participation
       costs and exploitation costs.  Production costs in excess of reimbursable
       amounts are  capitalized.  Once a film is released,  any film  production
       costs  capitalized is amortized in the proportion that the revenue during
       the year for each film bears to the estimated revenue to be received from
       all sources  under the  individual  film  forecast  method.  Estimates of
       anticipated  total gross revenues are reviewed  periodically  and revised
       when necessary.  Unamortized  film production costs are compared with net
       realizable  value  each  reporting  period on a  film-by-film  basis.  If
       estimated  gross revenues are not  sufficient to recover the  unamortized
       film production  costs, the unamortized film production costs are written
       down to their estimated net realizable value.

       CASH EQUIVALENTS

       The Company  considers all highly  liquid  investments  purchased  with a
       maturity of three months or less to be cash equivalents.

       PROPERTY AND EQUIPMENT

       Property and equipment are stated at cost.  Depreciation  of property and
       equipment is calculated  using the  straight-line  method over  estimated
       useful  lives  ranging  from  three  to  five  years.  These  assets  are
       periodically  reviewed for impairment  whenever  changes in circumstances
       indicate  that the carrying  amount of the asset may not be  recoverable.
       Impaired assets and assets to be disposed of are reported at the lower of
       carrying values or fair values, less costs of disposal.

       INCOME TAXES

       The Company uses the  liability  method of  accounting  for income taxes.
       Under this method,  deferred income taxes are recorded to reflect the tax
       consequences  on future  years of temporary  differences  between the tax
       basis of assets and liabilities and their financial  amounts at year-end.
       The Company provides a valuation  allowance to reduce deferred tax assets
       to their net realizable value.

       INTEREST

       Costs  associated  with the maintenance of debt are charged to expense or
       capitalized to the extent debt is used for productions.

       ADVERTISING COSTS

       All costs  related  to  general  advertising  are  charged  to expense as
       incurred.  During the years  ended June 30,  2003 and 2002,  the  Company
       incurred   general   advertising   costs  totaling   $6,289  and  $4,652,
       respectively.






                                      F-10

<PAGE>

                      FAMILY ROOM ENTERTAINMENT CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                   ----------

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

       NET LOSS PER COMMON SHARE

       Basic loss per common  share  amounts  is based on the  weighted  average
       number  of common  shares  outstanding  during  the  respective  periods.
       Dilutive loss per common share  amounts is based on the weighted  average
       common shares  outstanding  during the period and shares  assumed  issued
       upon  conversion  of stock  options  when the effect of such  conversions
       would have been dilutive to net loss.  There is no assumed  conversion of
       stock options for 2003 or 2002 because the effect would be anti-dilutive.

       STOCK-BASED COMPENSATION

       Stock-based  compensation  is  accounted  for using the  intrinsic  value
       method prescribed in Accounting  Principles Board Opinion ("APB") No. 25,
       "Accounting for Stock Issued to Employees", rather than applying the fair
       value method  prescribed in Statement of Financial  Accounting  Standards
       ("SFAS") No. 123, "Accounting for Stock-Based Compensation".  The Company
       applies the disclosure only provisions of SFAS No. 123.

       COMPREHENSIVE INCOME

       In June 1997, the FASB issued SFAS 130, "Reporting  Comprehensive Income"
       ("SFAS  130")  which   establishes   standards   for  the   reporting  of
       comprehensive   income  and  its  components  in  financial   statements.
       Comprehensive  income  consists  of net income and other gains and losses
       affecting  stockholder's equity that, under generally accepted accounting
       principles,  are excluded from net income,  such as unrealized  gains and
       losses on investments  available for sale,  foreign currency  translation
       gains and losses and minimum pension liability.  For the years ended June
       30, 2003 and 2002, the Company's financial statements include none of the
       additional elements that affect comprehensive  income.  Accordingly,  net
       income and comprehensive income are identical.

       RECLASSIFICATIONS

       Certain amounts  included in the financial  statements for 2002 have been
       reclassified to conform to 2003 financial statement presentation.

       FAIR VALUE OF FINANCIAL INSTRUMENTS

       The Company includes fair value information in the notes to the financial
       statements when the fair value of its financial  instruments is different
       from the book value.  When the book value  approximates  fair  value,  no
       additional disclosure is made.










                                      F-11


<PAGE>



                      FAMILY ROOM ENTERTAINMENT CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                   ----------

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

       CONCENTRATION OF CREDIT RISK

       Cash,  accounts receivable and notes receivable are the primary financial
       instruments  that subject the Company to  concentrations  of credit risk.
       The Company  maintains its cash in banks selected based upon management's
       assessment of the bank's financial  stability.  Balances often exceed the
       $100,000 federal  depository  insurance limit;  however,  the Company has
       experienced no losses on deposits.

       Accounts  receivable arise primarily from  transactions with customers in
       California.  The Company  performs  credit  reviews of its  customers and
       provides  a reserve  for  accounts  where  collectibility  is  uncertain.
       Collateral  is not required for credit  granted.  Accounts  receivable at
       June 30, 2003 arose from transactions with a single customer.

       RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

       In June 2001, the Financial  Accounting  Standards  Board ("FASB") issued
       Statement of Financial  Accounting  Standards ("SFAS") No. 141, "Business
       Combinations",  and No. 142, "Goodwill and Other Intangible Assets". SFAS
       No. 141 requires all business combinations  initiated after June 30, 2001
       to be accounted for using the purchase method. In addition, companies are
       required to review goodwill and intangible  assets reported in connection
       with prior  acquisitions,  possibly  disaggregate  and report  separately
       previously  identified intangible assets, and in certain cases reclassify
       certain  intangible  assets into  goodwill.  SFAS No. 142  eliminates the
       amortization of goodwill and requires that goodwill be reviewed  annually
       for  impairment.  SFAS No. 142 also  requires  that the  useful  lives of
       previously  recognized  intangible assets be reassessed and the remaining
       amortization periods be adjusted  accordingly.  SFAS No. 142 is effective
       for fiscal  years  beginning  after  December  15,  2001 and  affects all
       goodwill and other  intangible  assets recorded on the Company's  balance
       sheet  at  that  date,  regardless  of when  the  assets  were  initially
       recorded.  The  implementation of SFAS No. 142 did not have any impact on
       the Company's results of operations or financial position.

       In June  2001,  the FASB  issued  SFAS No.  143,  "Accounting  for  Asset
       Retirement Obligations".  SFAS No. 143 addresses accounting and reporting
       for  obligations  associated  with the retirement of tangible  long-lived
       assets and the  associated  asset  retirement  costs.  This  statement is
       effective  for  fiscal  years   beginning   after  June  15,  2002.   The
       implementation  of SFAS No. 143 is not expected to have any impact on the
       Company's results of operations or financial position.









                                      F-12

<PAGE>

                      FAMILY ROOM ENTERTAINMENT CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                   ----------

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

       RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS, CONTINUED

       In August 2001, the FASB issued SFAS No. 144, which  supercedes  SFAS No.
       121,  "Accounting  for  the  Impairment  of  Long-Lived  Assets  and  for
       Long-Lived  Assets to Be  Disposed  Of," and  certain  provisions  of APB
       Opinion No. 30,  "Reporting  the Results of  Operations  -- Reporting the
       Effects  of  Disposal  of a Segment  of a  Business,  and  Extraordinary,
       Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144
       retains the  fundamental  provisions  of SFAS No. 121 related to: (i) the
       recognition and measurement of the impairment of long-lived  assets to be
       held and  used,  and (ii) the  measurement  of  long-lived  assets  to be
       disposed by sale. It provides more guidance on estimating cash flows when
       performing   recoverability  tests,  requires  long-lived  assets  to  be
       disposed  of other than by sale to be  classified  as held and used until
       disposal,   and  establishes  more   restrictive   criteria  to  classify
       long-lived assets as held for sale. In addition,  SFAS No. 144 supersedes
       the  accounting  and  reporting  provisions of APB Opinion No. 30 for the
       disposal  of a segment  of a  business.  However,  it  retains  the basic
       provisions  of APB  Opinion  No.  30 to  report  discontinued  operations
       separately  from  continuing  operations  and extends the  reporting of a
       discontinued operation to a component of an entity. The implementation of
       SFAS No. 144 is not expected to have any impact on the Company's  results
       of operations or financial position.

       In June  2002,  the FASB  issued  SFAS No.  146,  "Accounting  for  Costs
       Associated with Exit or Disposal  Activities," which addresses  financial
       accounting  and  reporting  for costs  associated  with exit or  disposal
       activities and supersedes  Emerging  Issues Task Force ("EITF") Issue No.
       94-3,  "Liability  Recognition for Certain Employee  Termination Benefits
       and Other Costs to Exit an Activity  (including Certain Costs Incurred in
       a  Restructuring)."  SFAS No. 146 requires  companies to recognize  costs
       associated with exit or disposal activities when they are incurred rather
       than  at the  date  of a  commitment  to an exit  or  disposal  plan.  In
       addition,  SFAS No. 146 establishes  that fair value is the objective for
       initial measurement of the liability.  SFAS No. 146 is effective for exit
       or disposal  activities  initiated  after  December 31,  2002,  but early
       adoption is permitted. The implementation of SFAS No. 146 is not expected
       to have any impact on the  Company's  results of  operations or financial
       position.

       In October  2002,  the FASB  issued  Statement  of  Financial  Accounting
       Standards No. 147 ("SFAS No. 147"),  "Acquisitions  of Certain  Financial
       Institutions  - an amendment of FASB  Statements  No. 72 and 144 and FASB
       Interpretation  No. 9." The  provisions of this  statement  relate to the
       application of the purchase method of accounting for all  acquisitions of
       financial  institutions,  except transactions  between two or more mutual
       enterprises.  The  provisions  of this  statement  also relate to certain
       long-term  customer-relationship   intangible  assets  recognized  in  an
       acquisition  of a  financial  institution,  including  those  acquired in
       transactions between mutual enterprises. The provisions of this statement
       are effective on or after October 1, 2002. The implementation of SFAS No.
       146 is not  expected  to have any  impact  on the  Company's  results  of
       operations or financial position.







                                      F-13

<PAGE>

                      FAMILY ROOM ENTERTAINMENT CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                   ----------

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

       RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS, CONTINUED

       In December  2002,  the FASB issued SFAS No. 148,  "Accounting  for Stock
       Based  Compensation",  which  amends SFAS No. 123 to provide  alternative
       methods of transaction for an entity that voluntarily changes to the fair
       value method of accounting for stock based employee compensation. It also
       amends the  disclosure  provisions  of SFAS No. 123 to require  prominent
       disclosure  about the  effects  on  reported  net  income of an  entity's
       accounting   policy  decisions  with  respect  to  stock  based  employee
       compensation.  Finally,  SFAS No. 148 amends APB Opinion No. 28, "Interim
       Financial  Reporting",  to require disclosure of those effects in interim
       consolidated  financial statements.  SFAS No. 148 is effective for fiscal
       years ended after December 15, 2002, but early adoption is permitted. The
       Company will  continue to follow the  provisions of APB Opinion No. 25 in
       recognizing employee stock-based compensation;  however, the Company will
       begin following the disclosure  requirements of SFAS No. 148 beginning in
       January 2003.

       In November 2002, the FASB issued  Interpretation  No. 45 ("FIN No. 45"),
       "Guarantor's  Accounting  and  Disclosure  Requirements  for  Guarantees,
       Including  Indirect  Guarantees  of  Indebtedness  of Others." FIN No. 45
       expands on the  accounting  guidance of Statements No. 5, 57, and 107 and
       incorporates without change the provisions of FASB Interpretation No. 34,
       which is being  superseded.  FIN No. 45 will affect leasing  transactions
       involving residual guarantees,  vendor and manufacturer  guarantees,  and
       tax and  environmental  indemnities.  All such guarantees will need to be
       disclosed  in the notes to the  financial  statements  starting  with the
       period  ending  after  December  15, 2002.  For  guarantees  issued after
       December 31, 2002, the fair value of the  obligation  must be reported on
       the balance sheet. Existing guarantees will be grandfathered and will not
       be recognized on the balance sheet. The  implementation  of FIN No. 45 is
       not expected to have any impact on the Company's results of operations or
       financial position.

       In January 2003,  the FASB issued  Interpretation  No. 46 ("FIN No. 46"),
       "Consolidation  of Variable  Interest  Entities." FIN No. 46 expands upon
       and  strengthens  existing  accounting  guidance  that  addresses  when a
       company   should   include  in  its  financial   statements  the  assets,
       liabilities and activities of another entity. A variable  interest entity
       is a corporation,  partnership,  trust, or any other legal structure used
       for business purposes that either (a) does not have equity investors with
       voting rights or (b) has equity investors that do not provide  sufficient
       financial resources for the entity to support its activities.  FIN No. 46
       requires a variable  interest  entity to be  consolidated by a company if
       that  company  is  subject  to a  majority  of the risk of loss  from the
       variable  interest  entity's  activities  or is  entitled  to  receive  a
       majority of the  entity's  residual  returns or both.  The  consolidation
       requirements  of FIN  No.  46  apply  immediately  to  variable  interest
       entities created after January 31, 2003. The  consolidation  requirements
       apply to older  entities  in the  first  fiscal  year or  interim  period
       beginning  after  June 15,  2003.  Disclosure  requirements  apply to any
       financial statements issued after January 31, 2003. The implementation of
       FIN No. 46 is not expected to have any impact on the Company's results of
       operations or financial position.









                                      F-14

<PAGE>


                      FAMILY ROOM ENTERTAINMENT CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                   ----------


3.     ACCOUNTS RECEIVABLE

       Accounts receivable at June 30, 2003 consisted of the following:

<TABLE>
<CAPTION>
                                                                                2003                2002
                                                                             ----------          ----------

<S>                                                                          <C>                 <C>
       Accrued receivables from film distribution                            $  132,500          $  131,239
       Less allowance for doubtful accounts                                     (82,500)               -
                                                                             ----------          ----------

                                                                             $   50,000          $  131,239
                                                                             ==========          ==========
</TABLE>


       Two customers  account for all receivables at both June 30, 2003 and 2002
       (See Note 12).

4.     FILM COSTS

       Film costs and related amounts  capitalized at June 30, 2003, and related
       activity  during  each of the two years in the period  then ended were as
       follows:

<TABLE>
<CAPTION>
                                                                                    DEVELOPMENT
                                                                      IN             AND PRE-
                                                   RELEASED       PRODUCTION        PRODUCTION         TOTAL


<S>                                               <C>             <C>               <C>              <C>
       Net film cost balance at June 30,
         2001                                     $1,033,820      $     -           $1,828,178       $2,861,998
                                                  ----------      ----------        ----------       ----------

       Cost of acquiring film rights
         in 2002                                        -               -              624,444          624,444

       Production costs incurred during
         2002                                           -          1,043,293              -           1,043,293

       Interest cost capitalized during
         2002                                           -             15,060              -              15,060

       Transfers of film costs between
         categories in 2002                        1,814,612        (830,807)         (983,805)            -
                                                  ----------      ----------        ----------       ----------

       Total film costs incurred and
         paid by the Company during
         2002                                      1,814,612         227,546          (359,361)       1,682,797
                                                  ----------      ----------        ----------       ----------

       Net film cost balance before
         2002 amortization and write
         offs                                      2,848,432         227,546         1,468,817        4,544,795

       Less film cost amortization and
         write offs during 2002                    1,881,508          75,546           785,823        2,742,877
                                                  ----------      ----------        ----------       ----------

       Net film cost balance at June 30,
         2002                                     $  966,924      $  152,000        $  682,994       $1,801,918
                                                  ==========      ==========        ==========       ==========
</TABLE>






                                      F-15

<PAGE>

                      FAMILY ROOM ENTERTAINMENT CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                   ----------

4.     FILM COSTS, CONTINUED

       Film costs and related amounts  capitalized at June 30, 2003, and related
       activity  during  each of the two years in the period  then ended were as
       follows:

<TABLE>
<CAPTION>
                                                                                    DEVELOPMENT
                                                                      IN             AND PRE-
                                                   RELEASED       PRODUCTION        PRODUCTION         TOTAL


<S>                                               <C>             <C>               <C>              <C>
       Net film cost balance at June 30,
         2002                                        966,924         152,000           682,994        1,801,918

       Cost of acquiring film rights
         in 2003                                        -               -              100,000          100,000

       Production costs incurred during
         2003                                           -               -              455,483          455,483

       Transfers of film costs between
         categories in 2003                          183,312          22,083          (205,395)          -
                                                   ---------      ----------         ----------      ---------

       Total film costs incurred and
         paid by the Company during
         2003                                        183,312          22,083           350,088          555,483
                                                  ----------      ----------         ----------      ----------

       Net film cost balance before
         2003 amortization and write
         offs                                      1,150,236         174,083         1,033,082        2,357,401

       Less film cost amortization and
         write offs during 2003                      378,073            -              934,893        1,312,966
                                                  ----------      ----------        ----------       ------------

       Net film cost balance at June 30,
         2003                                     $  772,163      $  174,083        $   98,189       $1,044,435
                                                  ==========      ==========        ==========       ==========
</TABLE>









                                      F-16

<PAGE>

                      FAMILY ROOM ENTERTAINMENT CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                   ----------

4.     FILM COSTS, CONTINUED

       Following is an analysis of film cost  amortization and  write-downs,  by
       project and project type, for the years ended June 30, 2003 an 2002:

                                                       2003              2002
                                                    ----------        ----------

       RELEASED PROJECTS - AMORTIZATION

        Held for Ransom                             $     -            $   2,698
        Good Advice                                   376,725          1,177,959
        Speedway Junkie                                   -              163,427
        Badge                                             -                3,656
        Narc                                            1,348             84,075
        Ticker                                            -              317,750
        Hard Money(a/k/a In God We Trust)                 -              131,943
                                                    ----------        ----------


          Totals                                      378,073          1,881,508
                                                    ----------        ----------


       PROJECTS IN DEVELOPMENT, IN-PRODUCTION, OR PRE-PRODUCTION - WRITE OFFS

        Devil and Daniel Webster                      288,535                -
        Street Pirates                                    -              100,644
        Grizzly Wilderness Project                        -              352,602
        Half Past Dead                                  1,747
        Out for a Kill                                191,620                -
        Belly of the Beast                            164,777                -
        Total of other individual projects with
          costs less than $100,000                    288,214            408,123
                                                   ----------         ---------

          Totals                                      934,893            861,369
                                                   ----------        ----------

       Total all projects                          $1,312,966        $ 2,742,877
                                                   ==========        ==========



       Following  is the  percentage  make-up of net film costs at June 30, 2003
and 2002:

                                                              2003          2002
                                                              -----        -----

       Good Advice                                             32%           33%
       Speedway Junkie                                         10             6

       After Sex                                                9             6
       Held for Ransom                                         15             9
       Shottas                                                 15             8
       Total of other individual projects less than 5%         19            23
                                                              ---           ---

                                                              100%          100%
                                                              ===           ===









                                      F-17

<PAGE>
                      FAMILY ROOM ENTERTAINMENT CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                   ----------

4.     FILM COSTS, CONTINUED

       All  write-offs  during the years  ended June 30,  2003 and 2002 were the
       result of  management's  decisions to abandon the projects.  Management's
       decisions  were  based  on their  analysis  of the  anticipated  economic
       benefit  from each  project.  Management  believes  that on the  average,
       projects currently in release will be amortized within three years.

       Following  is an analysis of  revenues,  by project,  for the years ended
       June 30, 2003 and 2002:

                                                     2003                2002
                                                  ----------          ----------

       FILM PRODUCTION

         Speedway Junkie                          $     -             $  250,000
         Devil and Daniel Webster                    375,000             250,000
                                                  ----------          ----------

           Total film production                     375,000             500,000
                                                  ----------          ----------


       PRODUCER FEES

         Out for a Kill                              300,000                -
         Belly of the Beast                          250,000                -
         Wonderland                                   12,000                -
         Held for Ransom                                -                 55,000
         Speedway Junkie                                -                 30,000
         Devil and Daniel Webster                       -                 30,000
         Narc                                           -                 16,000
         Try Seventeen                                  -                 60,000
         In God We Trust                                -                 28,350
         Cutaway                                        -                 70,000
                                                  ----------          ----------

           Total producer fees                       562,000             289,350
                                                  ----------          ----------

             Total film revenue                      937,000             789,350

       ROYALTIES AND OTHER REVENUE                    68,441              26,792
                                                  ----------          ----------

           Total revenue                          $1,005,441          $  816,142
                                                  ==========          ==========


5.     PROPERTY AND EQUIPMENT

       Property  and  equipment  at June  30,  2003 and  2002  consisted  of the
following:

<TABLE>
<CAPTION>

                                                              LIFE              2003                2002
                                                             -------         ----------          ----------

<S>                                                          <C>              <C>                <C>
       Office furniture and equipment                        7 years          $    8,533         $    4,436
       Computer equipment                                    5 years              41,175             36,482
       Software                                              3 years              68,781             56,490
                                                                              ----------         ----------

                                                                                 118,489             97,408
       Less accumulated depreciation
         and amortization                                                        (74,062)           (45,932)
                                                                              ----------         ----------

                                                                              $   44,427         $   51,476
                                                                              ==========         ==========
</TABLE>
                                      F-18


<PAGE>

                      FAMILY ROOM ENTERTAINMENT CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                   ----------


5.     PROPERTY AND EQUIPMENT, CONTINUED

       During  the  years  ended  June  30,  2003  and  2002,  depreciation  and
       amortization expense was $28,130 and $24,576, respectively.


6.     NOTES PAYABLE

       Notes payable at June 30, 2003 consisted of the following:

<TABLE>
<CAPTION>
                                                                                     2003             2002
                                                                                  ----------       ----------
<S>                                                                               <C>              <C>
       Note payable to a bank under a $322,936 revolving line of credit that was
         converted  to a term loan,  bearing  interest at the bank's  prime rate
         (4.00%  at June  30,  2003)  plus  1.5%  per  year  and due in  monthly
         installments  of $5,382 plus interest  through  January 15, 2008.  This
         note is collateralized  by the guarantees of two major  stockholders of
         the Company including the Company's
         Chief Executive Officer                                                  $  296,025       $  460,436

       Notes    payable     (the     "Stockholder     Note")    to    a    major
         stockholder/director/officer  of the Company. This note is non interest
         bearing,  un-collateralized and is due on demand.  Interest expense has
         been imputed on this and other below market interest notes to
         major stockholder/officers of the Company.                                  323,562          415,211

       Note payable  under a $500,000  convertible debt agreement with Alpha
         Capital Aktiengesellschaft (the "Holder"). The note bears interest at a
         stated annual rate of 8% per year and provides for quarterly payments
         of interest beginning June 30, 2003 and ending on January 10, 2004, the
         maturity date of the note. This note and related accrued interest are
         convertible, at the election of the Holder, into share of the Company's
         common stock at the lower of; a) $0.30 (per share or; b) 65% of the
         average of the three lowest closing bid prices over the thirty trading
         days preceding the conversion date as reported by Bloomberg financial
         for the principal market on which the Company's common stock trades.
         This beneficial conversion feature has been valued at $256,000. The
         Holder was also issued five year warrants to acquire; a) 750,000 shares
         of the Company's common stock at a purchase price of $0.35 per share
         and; b) 2,500,000 shares of the Company's common stock at an exercise
         price of $3.00 per share. The warrants issued to the Holder in
         connection with the funding of the convertible debt have been valued at
         $83,175. Due to the very high exercise price, the 2,500,000 warrants
         had no value at the date of note origination; however the 750,000
         warrants had a value of approximately $0.11 per share using the
         Black-Scholes option pricing model and assumptions of risk free
         interest rate of 3.5%,
</TABLE>


                                      F-19

<PAGE>

                      FAMILY ROOM ENTERTAINMENT CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                   ----------

<TABLE>
<CAPTION>


6.     NOTES PAYABLE, CONTINUED

<S>                                                                               <C>              <C>
         volatility of 70%, strike price of $0.35, stock price of $0.22 and term
         of 5 years.  The Company paid legal fees,  commissions  and other costs
         totaling $102,500 in connection with the origination of the convertible
         debt. These fees and the value of warrants issued to originate the debt
         have been  treated as loan costs and are being  recognized  as interest
         expense over the term of the debt using the effective yield method. The
         value of the  beneficial  conversion  feature  has been  recognized  as
         interest expense at the date of origination because the debt conversion
         is at the discretion of the Holder and,  accordingly,  the  origination
         date represents the
         earliest date that the debt can be converted.                               500,000             -

       Note  payable  under a  $200,000  convertible  debt  Agreement  with  the
         "Holder. The note bears interest at a stated annual rate of 5% per year
         and provides for quarterly payments of interest beginning  September 1,
         2001 and ending on September  30, 2006,  the maturity date of the note.
         This note and related accrued interest are convertible, at the election
         of the Holder,  into share of the Company's  common stock at 70% of the
         average of the three lowest  closing bid prices over the thirty trading
         days preceding the conversion  date as reported by Bloomberg  financial
         for the principal  market on which the  Company's  common stock trades.
         This beneficial  conversion  feature was valued at $60,000.  The Holder
         was also issued five year  warrants  to acquire  250,000  shares of the
         Company's  common  stock at a  purchase  price  of 110% of the  closing
         market price on the date of exercise. The warrants issued to the Holder
         in connection with the funding of the convertible  debt were not valued
         because their  exercise will always be in excess of market price of the
         Company's  common stock. The Company fees of $20,000 in connection with
         the  origination  of  this  convertible  debt.  These  fees  are  being
         recognized  as  interest  expense  over the term of the debt  using the
         effective yield method. The value of the beneficial  conversion feature
         has been  recognized  as  interest  expense at the date of  origination
         because the debt  conversion  is at the  discretion  of the Holder and,
         accordingly, the origination date represents the
         earliest date that the debt can be converted.                               165,000          200,000
                                                                                  ----------       ----------

         Total contractual balance                                                 1,284,587        1,075,647

         Less un-amortized loan costs                                                (92,937)            -
                                                                                  ----------       ----------

                                                                                  $1,191,650       $1,075,647
                                                                                  ==========       ==========
</TABLE>



                                      F-20

<PAGE>

                      FAMILY ROOM ENTERTAINMENT CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                   ----------


6.     NOTES PAYABLE, CONTINUED

       During the year ended June 30, 2003, the Company,  based on requests from
       the Holder,  issued 211,049 shares of common stock to convert  $35,000 of
       convertible  debt  to  equity.  This  conversion  resulted  in a  $35,000
       decrease in the  balance of the  convertible  debenture  with an original
       face value of $200,000.

       Future  annual  maturities  of notes  payable  at June 30,  2003  were as
follows:

         YEAR ENDED
          JUNE 30,                                                      AMOUNT

            2004                                                    $   795,209
            2005                                                         64,584
            2006                                                        229,584
            2007                                                         64,584
            2008                                                         37,689
                                                                    -----------

                                                                    $ 1,191,650


       Interest  incurred  during the years  ended June 30, 2002 and 2001 was as
follows:

                                                      2003              2002
                                                   ----------        ----------

         Interest charged to expense               $  422,468        $   80,000

         Interest capitalized in film costs              -               71,527
                                                   ----------        ----------

         Total interest incurred                   $  422,468        $  151,527
                                                    ==========       ==========

         Interest expense paid in cash             $   20,741        $   70,000
                                                   ==========        ==========


       The Company  periodically  raises capital to participate in film projects
       that  management  feels will provide good current  returns to the Company
       and the potential for  participation  in future  profits.  In its capital
       raising activities the Company is sometimes  dependent on certain members
       of management and  stockholders  to provide or locate sources of capital.
       Accordingly,  included in total interest charges for the years ended June
       30, 2002 is $21,527, respectively, of interest expense paid or payable to
       a major  stockholder/officer  of the Company.  Also  included in interest
       expense  during the years ended June 30,  2003 and 2002 is  $348,738  and
       $80,000, respectively, of interest expense related to the amortization of
       loan origination costs and discounts on the Investor Notes.


7.     ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

       Accounts  payable and accrued  liabilities  at June 30, 2003 consisted of
the following:
                                                        2003  _          2002  _
                                                     ----------       ----------

       Accounts payable                              $   85,239       $   45,570
       Accrued film costs                                81,400           81,400
       Accrued professional fees and other               31,542           33,283
                                                     ----------       ----------

                                                     $  198,181       $  160,253
                                                     ==========       ==========

                                      F-21


<PAGE>

                      FAMILY ROOM ENTERTAINMENT CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                   ----------


8.     INCOME TAXES, CONTINUED

       The Company has incurred significant operating losses since its inception
       and,  therefore,  has not generally been subject to federal income taxes.
       As of  June  30,  2003,  the  Company  had  net  operating  loss  ("NOL")
       carryforwards for income tax purposes of approximately $7,042,000,  which
       expire in 2003 through 2023.  Under the  provisions of Section 382 of the
       Internal  Revenue  Code the  greater  than  50%  ownership  changes  that
       occurred  in the  Company  in  connection  with  the  Sales  Transaction,
       subsequent  Asset Purchase and private  placement of the Company's common
       stock  severely  limited  the  Company's   ability  to  utilize  its  NOL
       carryforward to reduce future taxable income and related tax liabilities.
       Additionally,  because United States tax laws limit the time during which
       NOL  carryforwards  may be applied  against  future taxable  income,  the
       Company will be able to use only approximately  $4,116,000 of its NOL for
       federal  income tax  purposes  should  the  Company  generate  sufficient
       taxable income.

       The  composition  of  deferred  tax assets and the related tax effects at
       June 30, 2003 and 2002 are as follows:
                                                      2003  _          2002  _
                                                   ----------       ----------
       Deferred tax assets:
         Net operating losses                      $2,394,581       $2,037,960
         Accounts receivable - allowance
           for doubtful accounts                       28,050             -
         Valuation allowance                       (2,419,631)      (2,032,960)
                                                   ----------       ----------

           Total deferred tax assets                    3,000            5,000

       Deferred tax liabilities:
         Basis of property and equipment                3,000            5,000
                                                   ----------       ----------

             Net deferred tax asset                $     -          $     -
                                                   ==========       ==========



       The  difference  between  the  income  tax  benefit  (provision)  in  the
       accompanying  statement of operations and the amount that would result if
       the U.S.  Federal  statutory  rate of 34% were applied to pre-tax  income
       (loss) for the years ended June 30, 2003 and 2002 is as follows:

<TABLE>
<CAPTION>
                                                                 2003                           2002
                                                        ------------------------       -----------------------
                                                          AMOUNT             %           AMOUNT            %
                                                        ----------         -----       ----------        -----

<S>                                                     <C>                  <C>       <C>                 <C>
       Benefit (provision) for income
         tax at federal statutory rate                  $  767,775           34%       $1,445,267          34%
       Non-deductible stock based
       Compensation                                       (216,874)         (10)         (181,954)         (4)
       Non-deductible loan costs                          (101,146)          (4)          (20,400)         (-)
       Other, including non-deductible
       business meals and entertainment                    (63,084)          (3)          174,686           4
       Change in valuation allowance                      (386,671)         (17)       (1,411,099)        (34)
                                                        ----------          ---        ----------         ---

                                                        $     -              - %       $    6,500          - %
                                                        ==========          ===        ==========         ===
</TABLE>





                                      F-22

<PAGE>

                      FAMILY ROOM ENTERTAINMENT CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                   ----------

8.     INCOME TAXES, CONTINUED

       The benefit  from income taxes for the years ended June 30, 2003 and 2002
consist of the following:
                                                      2003             2002
                                                   ----------       ----------

       Current portion:
         State                                     $     -          $    1,500
         Federal                                         -               5,000
                                                   ----------       ----------

                                                         -               6,500
                                                   ----------       ----------

       Deferred benefit:
         State                                           -                -
         Federal                                         -                -
                                                   ----------       ----------

       Total benefit from income taxes             $     -          $    6,500
                                                   ----------       ==========


       The Company made no cash payments for income taxes during the years ended
June 30, 2003 or 2002.


9.     COMMITMENTS

       LEASE AGREEMENT

       The  Company  operates  in leased  facilities  under a three  year  lease
       agreement  with a current  base rental rate of  approximately  $6,500 per
       month. The lease agreement  provides for two, one year extension  options
       and  requires  the payment of certain  common area  expenses.  Total rent
       expense under operating leases for the years ended June 30, 2003 and 2002
       was $62,218 and $81,024, respectively.


       Future  annual  minimum  lease  payments  under  operating   leases  with
       remaining lease terms of greater than one year are summarized as follows:

        YEAR ENDED
         JUNE 30,

           2004                                                 $   70,546
           2005                                                 $   74,074
           2006                                                     44,077
                                                                ----------

                                                                $  188,697
                                                                ==========





                                      F-23

<PAGE>

                      FAMILY ROOM ENTERTAINMENT CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                   ----------

10.    STOCKHOLDERS' EQUITY

       COMMON STOCK

       During the year ended June 30, 2003, the Company issued  3,316,000 shares
       of common stock for  consulting  services and to its legal  counsel.  The
       Company  originally  issued  3,000,000 of the shares to  consultants  for
       subscriptions  receivable of $0.25 per share; however, the Company, after
       issuance of the shares received only $145,000 in cash.  Accordingly,  the
       shares  were  valued  at  the  $0.35  market  value  at the  date  of the
       consulting agreements and consulting expense of $905,000 recognized.  The
       $905,000  represents the difference  between the $1,050,000 fair value of
       the shares and the $145,000 received.

       During the year ended June 30, 2002, the Company issued 400,000 shares of
       common stock to its legal counsel for $57,500 of cash and a receivable of
       $16,000 that was collected subsequent to year end.

       STOCK OPTIONS

       The Company periodically issues incentive stock options to key employees,
       officers,  and directors to provide additional  incentives to promote the
       success of the  Company's  business and to enhance the ability to attract
       and retain the  services  of  qualified  persons.  The  issuance of stock
       options is approved by the Board of Directors.  The exercise  price of an
       option  granted is generally  determined  by the fair market value of the
       stock on the date of grant;  however,  certain options granted during the
       year ended June 30, 2002 and 2001 included below market  exercise  prices
       and  the  Company  recognized  $461,762  and  $34,250,  respectively,  of
       compensation related to those grants and repricing of existing options.

       The Company has elected to follow Accounting Principles Board Opinion No.
       25,  "Accounting  for Stock  Issued to  Employees"  (APB 25) and  related
       Interpretations in accounting for its employee stock options because,  as
       discussed below, the alternative fair value accounting provided for under
       FASB  Statement  No.  123,  "Accounting  for  Stock-Based  Compensation",
       requires use of option  valuation  models that were not developed for use
       in valuing employee stock options.  Under APB 25, when the exercise price
       of the  Company's  employee  stock  options is greater than or equals the
       market  price  of  the  underlying   stock  on  the  date  of  grant,  no
       compensation expense is recognized.  However,  when the exercise price is
       less  than the  underlying  stock on the date of grant,  compensation  is
       recognized to the extent of the difference.

       Proforma  information  regarding  net  income and  earnings  per share is
       required by Statement 123, and has been  determined as if the Company had
       accounted  for its employee  stock options under the fair value method of
       that  Statement.  The fair value for these  options was  estimated at the
       date of  grant  using a  Black-Scholes  option  pricing  model  with  the
       following weighted-average  assumptions for 2002: risk-free interest rate
       of 4.0%; no dividend yield;  weighted  average  volatility  factor of the
       expected  market  price of the  Company's  common  stock  of 100%;  and a
       weighted-average expected life of the options of 3 years.






                                      F-24

<PAGE>

                      FAMILY ROOM ENTERTAINMENT CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                   ----------

10.    STOCKHOLDERS' EQUITY, CONTINUED

       STOCK OPTIONS, CONTINUED

       The  Black-Scholes  option  valuation  model  was  developed  for  use in
       estimating   fair  value  of  traded   options   which  have  no  vesting
       restrictions and are fully  transferable.  In addition,  option valuation
       models require the input of highly subjective  assumptions  including the
       expected  stock price  volatility.  Because the Company's  employee stock
       options have characteristics significantly different from those of traded
       options,  and because  changes in the subjective  input  assumptions  can
       materially affect the fair value estimate,  in management's  opinion, the
       existing models do not  necessarily  provide a reliable single measure of
       the fair value of its employee stock options.

       For purposes of proforma  disclosures,  the  estimated  fair value of the
       options  is  included  in expense  over the  option's  vesting  period or
       expected life. The Company's proforma information follows:



                                                        2003           2002
                                                     ----------     ----------

         Net income (loss) as reported               $(2,258,164)   $(4,250,785)
         Proforma net income (loss)                  $(2,258,164)   $(4,375,650)
         Proforma basic and dilutive net income
           (loss) per common share                   $     (0.10)   $     (0.24)


       A summary of the Company's stock option activity and related  information
       for the years ended June 30, 2002 and 2001 follows:

                                                NUMBER OF
                                                 SHARES
                                                  UNDER         WEIGHTED-AVERAGE
                                                 OPTIONS         EXERCISE PRICE

       Outstanding at June 30, 2001            1,940,000            $0.50*

       Granted                                   160,000            $0.25
       Exercised                                 (15,000)           $0.50
       Forfeited                                     -
                                               ---------

       Outstanding at June 30, 2002            2,085,000            $0.25

       Granted                                       -                 -
       Exercised                                     -                 -
       Forfeited                                     -                 -
                                               ---------

       Outstanding at June 30, 2003            2,085,000            $0.25
                                               =========

       The weighted-average  fair value of options granted during the year ended
       June 30,  2002 was  approximately  $0.28.  During the year ended June 30,
       2002,  all options were  re-priced to bear an exercise price of $0.25 per
       share.  The  re-pricing of options  resulted in a charge to  compensation
       expense of  $421,495  and  subjected  the  related  options  to  variable
       accounting.






                                      F-25

<PAGE>

                      FAMILY ROOM ENTERTAINMENT CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                   ----------

10.    STOCKHOLDERS' EQUITY, CONTINUED

       STOCK OPTIONS, CONTINUED

       All options  outstanding at June 30, 2003 are  exercisable.  A summary of
       outstanding stock options at June 30, 2003, follows:

<TABLE>
<CAPTION>
                                                                      REMAINING
                                                                     CONTRACTUAL
           NUMBER OF SHARES              EXPIRATION DATE             LIFE (YEARS)         EXERCISE PRICE
           ----------------              ---------------             ------------         --------------

<S>                                      <C>                            <C>                  <C>
               460,000                   February 2004                   0.6                  $0.25
             1,480,000                   April 2005                      1.8                   0.25
                45,000                   December 2006                   3.5                   0.25
               100,000                   June 2007                       3.9                   0.25
             ---------

             2,085,000
             =========
</TABLE>

       STOCK COMPENSATION PLAN

       On September 20, 2002, the Company adopted the Family Room  Entertainment
       Corporation 2002 Stock Compensation Plan (the "Plan") under which a total
       of 4,451,000  shares of the  Company's  stock were reserved for awards to
       officers,  directors,  key employees and consultants.  The Option Plan is
       administered  by the  Company's  board of  directors  and is  designed to
       provide the Company with a means of  compensating  selected key employees
       (including officers and directors) and consultants to the Company and its
       subsidiaries for services  rendered in connection with the development of
       Family Room Entertainment Corporation.  At June 30, 2003, the Company had
       granted  3,316,000 shares of common stock reserved for issuance under the
       Plan. The Plan  terminated May 31, 2003 and,  accordingly,  no additional
       shares may be granted under the Plan.

       STOCK WARRANTS

       During  the years  ended  June 30,  2003 and  2002,  the  Company  issued
       warrants in connection with the funding of convertible  debt. These value
       associated  with the  issuance  of these  warrants  was  treated  as loan
       origination costs. (See Note 6)

       A summary of the Company's stock warrant activity and related information
       for the years ended June 30, 2003 and 2002 follows:

                                                                       NUMBER OF
                                                                        SHARES
                                                                         UNDER
                                                                        OPTIONS

       Outstanding at June 30, 2001                                         -

       Granted                                                           250,000
                                                                       ---------

       Outstanding at June 30, 2002                                      250,000

       Granted                                                         2,250,000
                                                                       ---------

       Outstanding at June 30, 2003                                    2,500,000
                                                                       =========




                                      F-26

<PAGE>

                      FAMILY ROOM ENTERTAINMENT CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                   ----------

10.    STOCKHOLDERS' EQUITY, CONTINUED

       STOCK WARRANTS, CONTINUED

       All warrants  outstanding at June 30, 2003 are currently  exercisable.  A
       summary of outstanding stock warrants at June 30, 2003, follows:

<TABLE>
<CAPTION>
                                                                      REMAINING
                                                                     CONTRACTUAL
           NUMBER OF SHARES              EXPIRATION DATE             LIFE (YEARS)         EXERCISE PRICE

<S>                                      <C>                            <C>               <C>
               250,000                   September 2006                  3.3              110% of market
             1,500,000                   January 2008                    4.5                  $3.00
               750,000                   January 2008                    4.5               65% of market
             ---------

             2,500,000
             =========
</TABLE>

11.    CLAIMS AND CONTINGENCIES

       The Company is  currently a party to dispute  over  $50,000 of  directors
       fees that the director of the movie, "Good Advice" claims he is owed. The
       director has requested  arbitration  with the Directors Guild of America.
       Management  believes  that the claim is without merit and will not have a
       material adverse impact on the Company.

12.    MAJOR CUSTOMERS AND CONCENTRATIONS

       The Company's revenues were derived from a limited number of customers in
       the  motion  picture  industry  in both  2003 and 2002.  Following  is an
       analysis of major customers for the years ended June 30, 2003 and 2002:

<TABLE>
<CAPTION>
                                                                                      2003              2002
                                                                                      ----              ----

<S>                                                                                    <C>                <C>
       Total number of customers                                                        3                  2
       Number of customers accounting for more than 10%
         of total revenue                                                               1                  2
       Percentage of total revenue derived from largest
         customer                                                                      58%                75%
       Percentage of total revenue derived from second
         largest customer                                                              37%                25%
</TABLE>


13.    NON-CASH INVESTING AND FINANCING ACTIVITIES

       During the years ended June 30, 2003 and 2002, the Company engaged in the
       following non-cash investing and financing activities:

<TABLE>
<CAPTION>
                                                                                   2003             2002
                                                                                ----------       ----------

<S>                                                                             <C>               <C>
       Common stock issued to convert debt to equity                            $  35,000         $   -
</TABLE>







                                      F-27

<PAGE>

                      FAMILY ROOM ENTERTAINMENT CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                   ----------

14.    SUBSEQUENT EVENT

       On August 21, 2003 the Company issued a one year 8% convertible  note for
       $111,000 to the Churchill  Capital Group.  On October 8, 2003,  this note
       was amended to change the  conversion  rate from floating to a fixed rate
       of $.07 per share

       On October 9, 2003,  FMLY entered into a subscription  agreement  calling
       for the issuance of convertible  securities in the aggregate of $500,000.
       The  issuances  are to take place in two  stages,  $300,000 on October 9,
       2003 and the remaining  $200,000 five days after the effectiveness of the
       registration  statement which will be filed pursuant to this transaction.
       The convertible notes are convertible at a fixed rate of $0.07 per share.
       Also  issued  as part of the  funding  were  "A"  and "B"  warrants.  "A"
       warrants  are  exercisable  at  $0.13  per  share  and "B"  warrants  are
       exercisable at $0.50 per share.  There were two "A" warrants  issued with
       rights to purchase  3,571,428 shares of common stock in the aggregate and
       two "B"  warrants  issued  with rights to  purchase  8,750,000  shares of
       common stock.











                                      F-28