SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-KSB





FOR
ANNUAL AND TRANSITIONAL REPORTS UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934





(MARK
ONE)





x ANNUAL REPORT UNDER
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934





FOR
FISCAL YEAR ENDED DECEMBER 31, 2007





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





COMMISSION
FILE NUMBER: 000-30785









CAMELOT
ENTERTAINMENT GROUP, INC.


(EXACT
NAME OF SMALL BUSINESS REGISTRANT AS SPECIFIED IN ITS CHARTER)






DELAWARE
            52-2195605(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.
      Employer Identification No.)






CAMELOT ENTERTAINMENT GROUP,
      INC.130
      Vantis, Suite 140Aliso
      Viejo, California 92656(Address
      of principal executive offices) (Zip Code)(949) 334-2950Registrant's
      telephone number, including area
code




SECURITIES
REGISTERED UNDER SECTION 12(B) OF THE ACT:


NONE





SECURITIES
REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:


(TITLE OF
CLASS)


COMMON
STOCK, PAR VALUE $0.001





1


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


Check if
no disclosure of delinquent filers in response to Item 405 of Regulation S-B is
contained in this form, and no disclosure will 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. x
 
 The
approximate aggregate market value of 91,961,333 Common Stock shares held by
non-affiliates of the Registrant, based on 224,506,332 total outstanding shares
less 132,544,999 shares held by affiliates, calculated at a market price of
$.005, had a market value of $459,806 as of December 31, 2007. Total market
value of all outstanding shares was $1,122,531 as of December 31,
2007.
 
 Of the
224,506,332 total Common Stock shares outstanding, 140,564,436 were restricted.
83,941,896 were classified as non-restricted.  As of December 31,
2007, there were 36,046,462 shares held in CEDE, also known as the public float.
There were an additional 30,833,333 shares issued, but not outstanding, held in
reserve for financing activities.
 
 On
December 31, 2007, the Registrant had outstanding 224,506,332 shares of Common
Stock, $0.001 par value. The Registrant had outstanding 28,152,047 shares of
Preferred Stock, $0.001 par value.
  As of
April 15, 2008, the Registrant had outstanding 235,006,332 shares of Common
Stock, $0.001 par value and 29,402,047 shares of Preferred Stock, $0.001 par
value.
 
 The
Registrant's revenues for the year ended December 31, 2007 were $0.
 
 DOCUMENTS
INCORPORATED BY REFERENCE: SEE ITEM 13





















2




TABLE OF
CONTENTS


FORM
10-KSB ANNUAL REPORT


FISCAL
YEAR ENDED DECEMBER 31, 2007





CAMELOT
ENTERTAINMENT GROUP, INC.







ITEM
              
              PagePART
      I
              51.
              Description
      of Business
              52.
              Description
      of Properties
              373.
              Legal
      Proceedings
              374.
              Submission
      of Matters to a Vote of Security Holders
              37PART
      II
              385.
              Market
      for Common Equity and Related Stockholder
    Matters
              386.
              Management's
      Discussion and Analysis
              447.
              Financial
      Statements
              598.
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosures
              598A.
              Controls
      and Procedures
              60PART
      III
              619.
              Directors,
      Executive Officers, Promoters and Control Persons
              6110.
              Executive
      Compensation
              6311.
              Security
      Ownership of Certain Beneficial Owners and
Management
              6412.
              Certain
      Relationships and Related Transactions
              6713.
              Exhibits
      and Reports on Form 8-K
              6914.
              Principal
      Accountant Fees and Services
              70F-1
              Financial
      Statements with Footnotes
              F-1S-1
              Signatures
              S-1








3






THIS
REPORT ON FORM 10-KSB CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND WITHIN THE MEANING OF
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, WHICH ARE
SUBJECT TO THE "SAFE HARBOR" CREATED BY THOSE SECTIONS. THESE FORWARD-LOOKING
STATEMENTS INCLUDE BUT ARE NOT LIMITED TO STATEMENTS CONCERNING OUR BUSINESS
OUTLOOK OR FUTURE ECONOMIC PERFORMANCE; ANTICIPATED PROFITABILITY, REVENUES,
EXPENSES OR OTHER FINANCIAL ITEMS; AND STATEMENTS CONCERNING ASSUMPTIONS MADE OR
EXCEPTIONS AS TO ANY FUTURE EVENTS, CONDITIONS, PERFORMANCE OR OTHER MATTERS
WHICH ARE "FORWARD-LOOKING STATEMENTS" AS THAT TERM IS DEFINED UNDER THE FEDERAL
SECURITIES LAWS. ALL STATEMENTS, OTHER THAN HISTORICAL FINANCIAL INFORMATION,
MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. THE WORDS "BELIEVES", "PLANS",
"ANTICIPATES", "EXPECTS", AND SIMILAR EXPRESSIONS HEREIN ARE INTENDED TO
IDENTIFY FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS ARE SUBJECT TO
RISKS, UNCERTAINTIES, AND OTHER FACTORS, WHICH WOULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE STATED IN SUCH STATEMENTS. FORWARD-LOOKING
STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "FACTORS THAT MAY
AFFECT FUTURE RESULTS," AND ELSEWHERE IN THIS REPORT, AND THE RISKS DISCUSSED IN
THE COMPANY'S OTHER SEC FILINGS.































































































4





PART
I





ITEM
1. DESCRIPTION OF BUSINESS





Our
Business




Camelot
Entertainment Group, Inc. (the “Company” or “Camelot”), a Delaware corporation,
is a film, television, digital media and entertainment company. We have a
limited operating history and as a result we are classified as a development
stage company. The Company classifies its businesses into the following three
major divisions:





·
              Camelot
      Film and Media Group, consisting principally of feature film, television,
      home video, and digital media production and
  distribution;





·
              Camelot
      Studio Group, consisting principally of site acquisition, design,
      development and operation of Camelot Studio locations domestically and
      internationally;





·
              Camelot
      Production Services Group, consisting principally of consulting,
      education, finance, production support and technology
      services.





At
December 31, 2007, Camelot had a total of 4 employees and
approximately 8 consultants which provide services to the Company on an as
needed basis. The Company also retains independent contractors on a project by
project basis. Our main activity during the past two years has been conducted
within our Camelot Studio Group division. As a result, we have had very limited
operations in our Camelot Film and Media Group and Camelot Production Services
Group divisions.





Camelot
is being built utilizing five steps that are critical to our development as a
film, television, digital media and entertainment company:





·
            Education





·
            Infrastructure





·
            Utilization





·
            Opportunity





·
            Success





For
convenience, the terms the “Company,” “Camelot” and the “Registrant” are used in
this report to refer to both the parent company and collectively to the parent
company and the divisions and/or subsidiaries through which its various
businesses are conducted or are planned to be conducted in the future, unless
the context otherwise requires. As a development stage company, our operations
to date have been limited and as a result Camelot has not generated any revenue
through December 31, 2007.




Caution
Concerning Forward-Looking Statements and Risk Factors




This
Annual Report on Form 10-KSB includes certain “forward-looking statements”
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements are based on management’s current expectations or beliefs and
are subject to uncertainty and changes in circumstances. Actual results may vary
materially from the expectations contained herein due to changes in economic,
business, competitive, technological, strategic and/or regulatory factors, and
other factors affecting the operation of the businesses of Camelot. For more
detailed information about these factors, and risk factors with respect to the
Company’s operations, see “Risk Factors,” and “Management’s Discussion and
Analysis of Results of Operations and Financial Condition — Caution
Concerning Forward-Looking Statements” below. Camelot is under no obligation to
(and expressly disclaims any obligation to) update or alter its forward-looking
statements, whether as a result of new information, subsequent events or
otherwise.




Available
Information and Website
  The
Company’s annual reports on Form 10-KSB, quarterly reports on
Form 10-QSB, current reports on Form 8-K and any amendments to such
reports filed with or furnished to the Securities and Exchange Commission
(“SEC”) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), are available free of charge on the
Company’s website at www.camelotfilms.comas soon
as reasonably practicable after such reports are electronically filed with the
SEC.





5




ITEM
1. DESCRIPTION OF BUSINESS - continued




Business
Development





Camelot
Films®, Inc., now a subsidiary of the Company, was originally founded in 1978 by
our current Chairman, Robert P. Atwell, as a feature film production and film
finance management company. Camelot Films was originally incorporated in
Delaware and had offices in London, England, Los Angeles, California and New
York, New York. Between 1978 and 1988, Camelot Films was actively involved in
the development, finance and production of independent feature films. Between
1988 and 2003, Camelot Films was primarily active in the development and
financial structuring of independent feature films and the ongoing development
of its Camelot Production Model (“CPM”). Beginning in 2003, Camelot became
active once again in the production and distribution of independent feature
films, along with its development and finance activities.





On
October 1, 1999, the Company’s predecessor corporate entity was incorporated in
Delaware as Dstage.com, Inc.





On March
31, 2003, the operations of Camelot Films were absorbed into the Company as part
of a corporate restructuring. As a result of this restructuring, the Company’s
new management team, headed by Mr. Atwell, adopted a new business model to
pursue the development, production, marketing and distribution of motion
pictures.





On April
16th, 2004, the Company officially changed its name to Camelot Entertainment
Group, Inc.





Our
initial business development plan was to become a vertically integrated media
enterprise that creatively conceptualizes, finances, produces, and distributes
original entertainment content across various media, including motion pictures,
television, interactive gaming, radio and a multitude of digital media
channels.  Through the absorption of Camelot Films and the
establishment of key operating divisions, including Camelot Distribution Group
Inc., a Nevada corporation, we began to implement our new business model of
acquiring, developing, producing, marketing and distributing motion pictures,
television and digital media on a limited basis.





During
2004 and 2005, we formally acquired our three Camelot Films subsidiaries,
Camelot Films, Inc., a Nevada corporation, Camelot Films, Inc., a California
corporation, and Camelot Films, Inc., a Delaware corporation. We established a
family film subsidiary, Ferris Wheel Films, Inc., a Nevada corporation. In
September 2005, we established Camelot Studio Group with the responsibility of
acquiring, designing, developing and operating our planned major studio
complexes. Also in September 2005, we began the process of assessing the
feasibility of an educational studio complex in Tustin, California. Designed to
be a state-of-the-art education and technology campus with an emphasis on film,
television and digital media, the project known as the “Advanced Technology and
Education Park”, which will be the home for “Camelot Studios at ATEP”, is now in
the entitlement process.





During
fiscal year 2006, with the emergence of our studio group operations, we decided
to implement a corporate structure that would feature the parent company,
Camelot Entertainment Group, Inc., and three subsidiaries, Camelot Film Group,
Camelot Studio Group and Camelot Production Services Group. By establishing
three top-level divisions, we expect to be able to streamline our management
efforts in the future, concentrate cost centers and expand revenue
potential.





During
fiscal year 2007, our efforts were focused on our first major studio complex
through our Camelot Studio Group division and on the continuing development of
projects through our Camelot Film Group division. We also continued to make
progress toward the planned launch of our various divisions described
herein.





Business
of the Issuer





Our
Structure





We are
comprised of the following three top-level divisions that can act in concert on
our projects or autonomously as circumstances warrant. Our activity in CFG and
CPS has been limited. Our main activity has been in our CSG division. As we
progress through the implementation of our business model, each of our divisions
are expected to become fully operational. This process is expected to take
approximately three to five years.





§
            Camelot
      Film and Media Group (“CFG”)


§
            Camelot
      Studio Group (“CSG”)


§
            Camelot
      Production Services Group (“CPS”)





Camelot Film and Media Group
is expected to be responsible for all content production and distribution. It
plans to be organized into nine divisional units:





§
            Camelot
      Films®


§
            Camelot
      Features


§
            Camelot
      Television Group


§
            Camelot
      Urban Entertainment


§
            Camelot
      Latin Entertainment


§
            Ferris
      Wheel Films


§
            Camelot
      Gaming


§
            Camelot
      Digital Media


§
            Camelot
      Distribution Group






6




ITEM
1. DESCRIPTION OF BUSINESS - continued




Business of the
Issuer-
continued




Camelot Studio Group is solely
focused on the development, financing, design, planning, building, completion
and operation of our major production studio projects, including the proposed
educational studio complex located at the Advanced Technology & Education
Park (“ATEP”) campus in Tustin, California. The studio group includes the
following three divisions:





§
            Camelot
      Development Group, LLC


§
            Camelot
      Studio Operations


§
            Camelot
      Studios Financial Group





Camelot Production Services
Group is expected to be comprised of ten divisional units:





§      Camelot
Entertainment Financial Group


§      Camelot
Studio Services


§      Camelot
Technology Group


§      Camelot
Entertainment Consulting Group


§      Camelot
Post Production


§      Camelot
Event Management


§      Camelot
University


§      Camelot
Sales and Marketing


§      Camelot
Merchandising


§      Camelot
Web





Camelot
Entertainment Group





Our
parent Company, Camelot Entertainment Group, along with its three main
divisions, Camelot Film Group, Camelot Studio Group and Camelot Production
Services Group, all come together under a truly unique business model whose
vision is to transform Hollywood by building a different kind of motion picture
studio through redefining the development, finance, production and distribution
process. Focusing on higher quality, lower costs productions, utilizing in-house
distribution expertise, maximizing profits through innovative fiscal
disciplines, embracing education and digital technology, establishing creative
and physical infrastructures and creating, controlling and monetizing content,
Camelot is in the process of modernizing the original studio
system.





Our
unique business model, which we are planning to apply for a business process
patent on, has been thirty years in the making. Its primary goal is simple: to
create a world where filmmaking dreams come true. Each step of the process is
critical to achieving success, providing creative and financial opportunity
while meeting the increasing world-wide demand for quality content. To achieve
success, the Company is focused on creating, developing, controlling and
monetizing the content; acquiring, building and exploiting library assets; and
acquiring, developing, building and operating studios domestically and
internationally. The underlying principal of our business model is education.
Through education comes infrastructure, which leads to utilization, which in
turn provides opportunity, which eventually leads to success.





There are
four main business principles that matriculate through each of Camelot’s three
main divisions: Financial Transparency, Full-Time Employment, Stock Ownership
and Revenue Sharing. Each of these supplies the foundation from which the
Company is implementing its business strategy as it pursues success in the film,
television and digital media marketplace.





Camelot
Film and Media Group





Our core
business model, while going through different structures during the years, has
remained basically the same since the inception of Camelot Films in 1978:
modernize in a creative and fiscally responsible way the development, production
and distribution of feature films. While in recent years our business model has
matured to include television and digital media, the foundation of our business
model remains entrenched in the motion picture industry.





We
currently are negotiating agreements or have in development the following
feature film projects as of December 31, 2007:




Title
            
            Expected Production Year*Girls
      Day Out
            
            2009Eyes
      of the Red Skull
            
            2010Drop
      the Elephant
            
            2010Hasten
      the Dawn
            
            2011Dying
      to Live
            
            2010Back
      to Life
            
            2011Digby
      The Gunpowder Plotters Legacy
            
            2011Mea
      Culpa
            
            2010R
      & J The Movie
            
            2010Will
      Triumph Fights Alone
            
            2011Mexican
      Alarm Clock
            
            2010Gracelawn
            
            2011Road
      Kill
            
            Hold






7




ITEM
1. DESCRIPTION OF BUSINESS - continued




Camelot Film and Media
Group-
continued




We
currently have the following feature documentary project in
Production:


Title
            
            Expected Release
      Year*Damn
      Right I’m Mad*
            
            2009*
      Note: Feature Documentary; Camelot Urban Entertainment




This full
length documentary production is the first production undertaken by Camelot
Urban Entertainment, a division of Camelot Film and Media Group. The current
version of the film is in post production with additional material expected to
be added in 2008. The documentary is a multi-year project. It is being directed
by Omar McGee, who has been working with us to establish Camelot Urban
Entertainment. We expect to commence distribution of the film in
2009.





Our film,
television and digital media development and production activity has been
limited during the past two and one half years as the focus has been on
successful completion of the Camelot Studios at ATEP project. Now that the
project is in the entitlement stage, our activity in film, television and
digital media should steadily increase during 2008.





Camelot
Films®





Camelot
Films is home to our unique “Camelot Production Model”, also known as “CPM”.
Formerly referred to as the “Camelot Studio Model”, or “CSM”, the advent of our
Camelot Studio Group division in 2005 necessitated a name change for this
different approach to the development, production and distribution of feature
films. The CPM provides for multiple feature films to be produced in annualized
schedules known as “Slates”.  The CPM incorporates the basic features
previously described, including financial transparency, full time employment,
stock ownership and revenue sharing. The CPM offers maximum flexibility, cost
reductions, increased productivity, embraces new technologies and provides
education and employment opportunities.





With
proposed annualized budgets and a production schedule that would propose
multiple feature films being produced in a short-term period (“Slates”), Camelot
Films takes the best of the old studio system, and merges it into the 21st
century. By proposing to eliminate many of the old studio system drawbacks, such
as long term, non-negotiable actor contracts which tied an actor to a single
studio for years, and by incorporating new business methods and technologies,
such as creative freedom and digital, Camelot Films is designed to provide the
filmmaker with the tools necessary to develop, produce and distribute their
projects, either through Camelot Films® or through another entity with the
assistance of Camelot.





Camelot
Features





A
traditional production company, Camelot Features offers complete script
development, full packaging services, co-productions and through Camelot
Production Services Group financial structuring. Camelot Features is currently
developing a slate of small to mid-range budget features (see table above) for
production to begin in late 2009. Camelot Features also incorporates elements of
the CPM described above. The division will also establish production company
incubators to assist new production entities.





Camelot
Television Group





The
newest addition to the Camelot family, Camelot Television Group plans to be
active in pilot production, series development, providing show running services
and transitioning television programming into syndication. The division will
also establish production company incubators to assist new production
entities.




Camelot
Urban Entertainment





Camelot
Urban Entertainment is developing, producing and distributing entertainment
aimed at the urban marketplace, a fast growing segment of the entertainment
industry. It plans to produce features, television, documentaries, music and
live events. The division will also establish production company incubators to
assist new production entities. The divisions first feature documentary, “Damn
Right I’m Mad”, is currently in post production.








8





ITEM
1. DESCRIPTION OF BUSINESS - continued




Camelot
Latin Entertainment





As with
Camelot Urban Entertainment, the Latin entertainment consumer market is growing
rapidly, creating demand and opportunity for filmmakers in that industry
sector.  Our proposed Camelot Latin Entertainment division plans to
develop, produce and distribute entertainment aimed at the Latin marketplace, a
fast growing segment of the entertainment industry. It plans to produce
features, television, documentaries, music and live events. The division also
plans to establish production company incubators to assist new production
entities.





Ferris
Wheel Films





Ferris
Wheel Films is our family entertainment division, concentrating specifically on
entertainment product suitable for all ages and especially directed at families.
Ferris Wheel plans to concentrate initially on features, television and
documentaries.  The division also plans to establish production
company incubators to assist new production entities.





Camelot
Gaming





Gaming
has become a major ancillary market in the motion picture business. Movies are
made into games, and games are made into movies. Once established, Camelot
Gaming plans to become very active in this market segment, acquiring,
developing, producing and distributing 2D and 3D games, interactive gaming and
all other formats, including VOD gaming and internet gaming. The division also
plans to develop games based on television shows and television shows based on
games. Camelot Gaming also plans to develop new forms of digital media based on
games.





Camelot
Digital Media





Camelot
Digital Media plans to become a major part of the Company’s operating structure.
Camelot Digital Media plans to focus on content and the digital delivery
systems, including cell phones, portable email devices, internet phones, MP3
players, internet, internet 2 and wireless applications which will deliver the
content to consumers.





Camelot
Distribution Group





Camelot
Distribution Group is expected to be responsible for all distribution activities
of the Company, including all film, television and digital media productions.
This division plans to handle domestic, international, theatrical, DVD, cable,
satellite, ancillary markets, network television, syndication, direct
distribution, wireless distribution, PPV, VOD and digital downloads. In
addition, this division plans to have regional distribution centers both
domestically and internationally, strategically located to provide customer
service to theater owners, distribution retail outlets and consumers. In the
United States, the regional centers are planned to be located in California,
Nevada, Louisiana, Florida, North Carolina, Alabama, New Mexico, Illinois,
Michigan, New York, Texas and the state of Washington. Internationally, these
centers are planned for Belgium, Germany, London, Beijing, Singapore, Tokyo,
Sydney, Vancouver, Toronto, Dubai and in Latin America. These distribution
centers are expected to provide critical support and customer service to our
planned distribution operations throughout the world. With an average of 70% of
all film industry revenues generated internationally, the global nature of our
business requires ongoing diligence and support. DVD, which has matured into a
steady, albeit slower growth segment of the market, should receive a shot in the
arm in 2008 with the high definition player battle between Blue-Ray and HD
finally over, with the HD format abandoned and Blue-Ray now the singular
technology in the marketplace. As video on demand (“VOD”) gains a larger market
share, as theaters become all digital and upon the arrival of digital
distribution to the theaters and other public venues, customer service will be a
key component in our potential success.





Camelot
Studio Group





Camelot
Studio Group is responsible for the development, financing, design, planning,
construction and operation of our major physical studio projects. The division
has three sub-divisions, including Camelot Development Group, LLC, Camelot
Studio Operations and Camelot Studio Financial Group. Utilizing the latest
technology, Camelot Studio Group plans to develop a series of major motion
picture studios both domestically and internationally from which the Company
plans to produce slates of films, television and digital media productions. The
studios are critical to the production process, as they allow the creative teams
to control the production environment, which in turns provides the opportunity
for higher quality productions. The studios also plan to have the ability to
generate revenues from non-film activity, including events.





The
planned studios are the backbone of our planned education integration into the
filmmaking process. By providing fully integrated educational opportunities at
the studios, production infrastructure can be developed, which in time should
lead to utilization and additional opportunity. The planned studios are expected
to provide the space where students and professionals can work side by side. In
a rapidly changing technology landscape, the students in some cases actually
become the teachers, and the teachers (the professionals) become the students.
This and other factors provide a unique opportunity for all involved. This
unique relationship should provide student employment, job training and an
innovative integration of students into the workforce.




The
studio designs plan to feature large, functional stages, including some of the
world’s largest stages, and a minimum of 12 stages per location. Modern advances
in studio technology are expected to be incorporated into the studio design,
including digital video walls, retractable roofs, water tanks and mechanized
lighting grids.





9




ITEM
1. DESCRIPTION OF BUSINESS - continued




Camelot
Development Group





Our
Camelot Development Group division is responsible for property acquisition,
studio development, entitlements, project design, project financing, site
management and acquisition of existing studios. Each project is expected to have
its own development entity to implement the specific studio project. For Camelot
Studios at ATEP, the Company and its development partner formed Camelot
Development Tustin, LLC. That entity is designated to be the entity developing
and financing the Tustin project.





Camelot
Development Group plans to establish similar development entities in areas where
additional studio sites are anticipated to be located, including an additional
Orange County site, Los Angeles, Las Vegas, New Orleans, Florida, North
Carolina, Alabama, New Mexico, Europe, Latin America, United Kingdom, Asia,
Australia, Canada, Chicago, New York, Texas, Washington, Reno and
Dubai.





Camelot
Studio Operations





Camelot
Studio Operations responsibility is to oversee the operation of the physical
studios. This division will identify and retain experienced studio operators for
each site, identify potential revenue sources, work with the local operators in
minimizing costs while maximizing profits, insure aggressive community relation
activities at each location, oversee governmental relations and work to sustain
growth for the studio operations.





For
Camelot Studios at ATEP, Raleigh Studios, one of the industry’s leading studio
operators, has been retained to manage that facility and to work with Camelot
Studio Group in identifying and securing additional studio
locations.





Camelot
Studio Financial Group





The
financial arm of Camelot Studio Group, this division is expected to be
responsible for identifying and securing fiscal resources, both public and
private, for the Camelot Studio Group projects. In addition, the financial group
could assist Camelot in identifying profitable venture opportunities for studio
group operations. The financial group is expected to arrange for and/or provide
land acquisition costs, studio financing, incubator financing, studio
acquisition financing, studio related financing and establishing fiscal
operating procedures.





Camelot
Production Services Group





The third
major division of Camelot, Camelot Production Services Group is expected to
provide the underlying fabric that supports all of the Company’s operations
while hopefully establishing individual revenue sources from each of its planned
sub-divisions. The production services group is expected to be comprised of
Camelot Studio Services, Camelot Technology Group, Camelot Entertainment
Consulting Group, Camelot Post Production, Camelot Event Management, Camelot
University, Camelot Sales and Marketing, Camelot Merchandising and Camelot Web.
While the other two major divisions, Camelot Film Group and Camelot Studio
Group, are specific in their respective institutional responsibilities, Camelot
Production Services Group should have a wide variety of responsibilities which
will interact with the other major divisions, providing services and
support.





To that
extent, the production services group plans to provide production and related
services to the motion picture, television, radio and music activities of
Camelot, provide production and related services to third-party companies in the
motion picture, television, radio and music industry and provide innovative
fiscal tools for Camelot and its affiliates. In addition, the production
services group will research, develop and deploy new technologies, provide
consulting services to third-party production companies, distributors and
industry professionals and oversee post production activities of
Camelot.





The
production services group will also provide event management services, establish
Camelot University on the studio sites, establish, implement and manage sales
and marketing, merchandising and web activities.





Camelot
Entertainment Financial Group





Our
financial group is expected to oversee all of the financing activities for the
Company. The financial group plans to provide financial services to Camelot,
secure funding for Camelot film, television and digital media projects, oversee
the financial transparency aspects of our business model and oversee collection
of accounts receivable.





In
addition, Camelot Entertainment Financial Group plans to establish, develop and
implement our “Late Stage Bridge Financing Fund” or “LSB”, which will provide
late stage bridge financing for bank or equivalent financed projects with
accelerated or delayed start dates that have a need for this type of short term
financing.





10




ITEM
1. DESCRIPTION OF BUSINESS - continued




Camelot
Studio Services





Our
studio services department plans to provide studio services, including
equipment, expendables, location, transportation and logistical support to
Camelot Studio Group. In addition, studio services hopes to provide these
services through Camelot Studio Group to third-party productions. This
department is expected to establish revenue producing activities utilizing
Camelot assets and will provide equipment, transportation and logistical support
to Camelot (in addition to those services provided to Camelot Studio
Group).





Camelot
Technology Group





Camelot
Technology Group plans to provide Camelot with the latest pre-production
technology, including pre-visualization software, production, post production
and distribution technologies, including digital delivery systems. This
department is expected to also research and develop new technologies for Camelot
and the entertainment industry. Currently, Camelot is involved with various
digital consortiums, SMPTE, NAB and other entities that are actively pursuing
digital technology. In addition, our technology group is expected to be
responsible for the technical side of our corporate communications, which will
become a critical component of our future operations as we expand.





Camelot
Entertainment Consulting Group





Our
consulting group is expected to provide film, television and digital media
consultation services to third-party production companies, distributors and
industry professionals. The group plans to provide banks, funds and other
financial institutions with fiscal consultation specifically related to the
film, television and digital media industry.





Camelot
Post Production





Our post
production department will be responsible for providing Camelot Film and Media
Group with the best post production capabilities available in order to meet
their post production requirements. This department plans to utilize the latest
technology available to support the production process, working with such
companies as Avid and Apple (Final Cut). It will provide sound, special effects,
ADR, editing, digital interface and other digital applications, music and
deliverables.





Camelot
Event Management





Our event
management company will have the responsibility of securing contracts to manage
film markets and festivals worldwide. In addition, the department plans to
provide consulting services to existing festivals and markets, organize and
manage Camelot events, outsource its services for third-party events and manage
corporate travel for the Company.





Camelot
University Division





Our
educational division, currently known as Camelot University, is expected to be
responsible for all of our educational activities, curriculum, disciplines,
integration and interaction with our educational partners, including the South
Orange County Community College District (“SOCCCD”) and the ATEP project.
Education is imbedded in our business foundation and is a critical component of
our business model. In the future, this division plans to establish a world
class college and/or university to provide the traditional and non-traditional
education with our education partners. In addition, we plan to establish
“Camelot College of the Arts”, specifically for motion picture, television and
digital media development, production and distribution.





Camelot
University is expected to be responsible for our innovative integration of
students into the film, television and digital media industry through our
physical studios and other programs, providing job training, infrastructure
establishment, student employment, business community education partnerships and
career opportunities for our students.





Camelot
Sales and Marketing





Our sales
and marketing department plans to establish, implement and manage sales and
marketing activity for the Company, overseeing those efforts in each of our
three main divisions, Camelot Film Group, Camelot Studio Group and Camelot
Production Services Group. They are expected to be responsible for providing
materials, developing and implementing promotional campaigns, press relations,
investor relations, advertising, printing, one-sheets, press packets and on-line
marketing material. Our sales and marketing team, when fully staffed, plans to
work closely with our merchandising and web departments, all critical elements
of our business model.





Camelot
Merchandising





The
merchandising department would be responsible for all of the Company’s
promotional products, promotional tie-ins, clothing, hats, jackets, fleece,
etc., poster, cups, toys, memorabilia, product placement and product tie-ins.
Working with our web department, Camelot merchandising will be expected to
establish our planned on-line retail store and future retail
outlets.





11




ITEM
1. DESCRIPTION OF BUSINESS - continued




Camelot
Web





Our web
division is expected to be responsible for our web sites, IPTV, on-line store,
technical support, internet services, hardware and software support, blogs, chat
rooms, email and all other activities associated with the internet and
computers. Our web department plans to work closely with our technology group
planning and implementing our web related activities.





Recent
Developments





During
2007, we continued the process of revising and then implementing our business
plan, focusing on the operations of Camelot Studio Group and our first major
studio complex, Camelot Studios at ATEP. We completed our first SB2
registration, which registered the shares to be issued in connection with the
$1,000,000 in total funding we received for Camelot Entertainment Group between
December 2006 and June 2007. We also entered into various funding and operating
agreements within our Camelot Studio Group division, most notably joining forces
with Janez Development Tustin to form Camelot Development Tustin (“CDT”), the
entity which represents Camelot Studio Group and the Company in the development
of the Advanced Technology and Education Park (“ATEP”) education campus,
including Camelot Studios at ATEP, in Tustin, California.





We also
continued to develop various potential feature films during 2007 within our
Camelot Film Group division. Camelot Urban Entertainment, part of our film group
division, began production on its first feature length documentary, “Damn Right
I’m Mad”.  The project, currently in post production, is expected to
be released in early 2009.




In
addition, we continued to explore funding options with various domestic and
international resources currently being developed by our management team. The
international regions currently being explored include Europe, specifically
Belgium, Germany and the United Kingdom, and the Far East, specifically
China.




2007 also
saw a changes in our management team, with Chief Operating Officer and board
member Michael Ellis departing the Company in August and board members Jane
Olmstead and Rounsvelle Schaum resigning from the board of directors in July.
All three were ultimately replaced on the board by Joe Petrucelli, Tim Wilson
and Jeff Zuckerman, all of whom joined the board in February 2008. Petrucelli
has been corporate counsel for the Company, while Wilson and Zuckerman are
principals in Camelot Development Tustin. Robert Atwell, our Chairman and Chief
Executive Officer, and George Jackson, our Chief Financial Officer, are the
other current members of our board of directors.





Principal
Products or Services and Their Markets




While our focus in 2007 has been on our Camelot Studio Group projects,
our long term plans focus on the proposed development, production, marketing and
distribution of original motion pictures, television and digital media. Within
Camelot Film and Media Group, our objective is to develop, produce, market and
distribute multiple pictures, television product and various forms of digital
media annually across various genres and budget ranges through our various
divisions which comprise Camelot Film Group.  Camelot Films® continues
to provide the foundation upon which all of our various film, television and
digital media divisions plan to operate. By incorporating our truly unique
business model, which stresses four main objectives: financial transparency,
full time employment, stock ownership and revenue sharing; we are hoping to
redefine the development, finance, production, and distribution process. In
doing so, we plan to produce higher quality, lower cost productions to meet the
growing appetite for content worldwide. Our plan is to market and distribute all
of our production through our Camelot Distribution subsidiary, thereby keeping
as much control as possible over the revenues generated by our
productions.





The
development, finance, production and distribution process for film, television
and digital media can have a lengthy workflow cycle. While we are going through
this process, we are developing the other areas of our business, Camelot Studio
Group and Camelot Production Services Group. All three divisions are critical to
our success.





Key
Additional Components of the Camelot Production Model (“CPM”)




Camelot
Films is home to our unique “Camelot Production Model”, also known as “CPM”. The
CPM provides for multiple feature films to be produced in annualized schedules
known as “Slates”.  The CPM incorporates the basic features previously
described, including financial transparency, full time employment, stock
ownership and revenue sharing. The CPM offers maximum flexibility, cost
reductions, increased productivity, embraces new technologies and provides
education and employment opportunities.





With
annualized budgets and Slates, Camelot Films takes the best of the old studio
system, and merges it into the 21st
century. By eliminating many of the old studio system drawbacks, such as long
term, non-negotiable actor contracts which tied an actor to a single studio for
years, and by incorporating new business methods and technologies, such as
creative freedom and digital, Camelot Films is designed to provide the filmmaker
with the tools necessary to develop, produce and distribute their projects,
either through Camelot Films or through another entity with the assistance of
Camelot.






12




ITEM
1. DESCRIPTION OF BUSINESS - continued




Key Additional Components
of the Camelot Production Model (“CPM”)-
continued




The
following additional components are a crucial part of the CPM:




Cash
Component





Our plan
is to raise sufficient capital to finance our first sixteen months of
operations, production and distribution activities, the time period management
feels it will take for us to realize ongoing revenues substantial enough to
maintain monthly operating, production and distribution expenses. We plan to
file a SB-2 registration statement during the fourth quarter of 2008. We will
not be able to commence our plan to develop, produce, market and distribute
multiple pictures annually until we have raised the necessary capital. In the
event we are unable to secure this funding on a timely basis, our ability to
implement our plan would be jeopardized. See “Risk Factors”.





Deferment
Component





In
addition to reasonable cash payments on budgeted line items, a majority of line
items in the budgets will also have a deferment component. In addition to cash
payments, each individual and vendor would receive a deferment, or delayed
payment, which we anticipate to pay out of revenues generated by our films. By
fully disclosing all financial elements in connection with the pictures, which
we call financial transparency, we believe that the deferment component can
become a trusted and reliable source of payment for our employees and
vendors.





Camelot
Production Services Group Contribution Component





We
anticipate providing each film produced by us certain items in the budget that
normally would have to be either rented or purchased from a third party vendor.
These “in-kind” contributions may include cameras, lights, grip and electrical
equipment, vehicles, legal and accounting services, certain executive producer
and producer services, production and location offices and other goods and
services to be determined on a film by film basis.





Camelot
Entertainment Group Common Stock Component





We plan
to issue every individual working on our films shares of our common stock as
part of their compensation package or vendor contract. We anticipate that this
common stock component will enhance each individual or vendor’s consideration to
such an extent that these individuals and entities will continue to work with us
within the parameters of our budget model.





Key
Components of the Production Process




The key
components of motion picture production are generally viewed as consisting of
development, pre-production, production or principal photography,
post-production, marketing and distribution. While these terms are used in
similar ways by many major studios and independent productions, the relative
resources of the parties involved in producing an original motion picture have a
meaningful impact on both the scale and scope of the specific activities these
components are comprised of. For example, in a major studio production, the
post-production phase may include use of numerous special effects professionals
and companies, composers and music editors, in addition to other personnel. This
is in contrast to many independent productions that might be able to fit a music
editor into their budget, but may not be able to afford hiring a composer to
create an original score, much less an orchestra to perform and record the
score. Similarly, many independent productions might not be able to afford
hiring a leading special effects company for months at a time, but may be able
to fit some stock special effects footage into a production or hire an editor
that also has some experience with editing special effects. As our business
model depends to a large extent on our ability to efficiently mitigate some of
these differences, our description of the motion picture production process
includes certain references to our perception of differences between major
studio productions and independent productions.





Development





In
general, the development phase of motion picture production begins with
converting a concept or literary work into a script. In certain cases, a
completed script, or screenplay, may already exist, and require a studio or
independent producer to acquire rights to the script. Such rights could be an
outright purchase of a literary work or an option to purchase the literary work
or script. In the case of a major studio, the next steps in the development
phase of a motion picture could often involve developing a budget, getting
contingent commitments from talent such as directors and cast members, and
assessing the overall creative potential of the project. Independent productions
generally conduct similar activities; the key difference is often that an
independent producer has substantially less financial and human resources with
which to execute these activities. As a result, certain independent productions
must seek external financing from private investment sources to enable shaping
the motion picture concept into an attractive package that could hopefully
result in raising additional funds needed to actually produce the motion
picture.





In the
case of studios and independent production companies, their staffs actively seek
and participate in the acquisition of completed scripts or developing scripts
into motion picture projects, usually with either in-house producers or
non-affiliated producers whose specific projects they desire to produce. Once
the screenplay or story rights have been secured, talent is lined up, a budget
and production schedule has been created, the package is presented to
decision-makers at the studio or independent production company that either
approves the project, or “greenlights” the project, or declines the project. If
the project is approved, it moves into the pre-production phase.





13




ITEM
1. DESCRIPTION OF BUSINESS - continued




Development-
continued




The
decision whether to “greenlight,” or proceed with production of, a film is a
diligent process that typically involves numerous key executives of a major
studio, in contrast to an independent company where possibly the entire process
might be handled by just one person. Generally, the production division presents
projects to a committee comprised of the heads of a studio’s production,
distribution, home entertainment, international, legal and finance departments.
In this process, scripts are discussed for both artistic merit and commercial
viability. The committee considers the entire package, including the script, the
talent that may be attached or pursued and the production division’s initial
budget. They also discuss talent and story elements that could make the product
more successful. Next, the heads of domestic and international distribution
prepare estimates of projected revenues and the costs of marketing and
distributing the film. The studio’s finance and legal professionals review all
of the projections, and the committee decides whether the picture is worth
pursuing by balancing the risk of a production against its potential for
financial success. The studio may seek to mitigate the financial risk associated
with film production by negotiating co-production agreements, pre-selling
international distribution rights and capitalizing on government subsidies and
tax credits. In addition, a studio might attempt to minimize its production
exposure by structuring deals with talent that provide for them to participate
in the financial success of the motion picture in exchange for reducing up-front
payments.




Pre-Production





In
general, the pre-production phase of motion picture production involves
executing binding engagements of creative personnel, scouting and securing
locations for principal photography, firming up the filming schedule and budget,
and taking all other steps necessary to facilitate actual filming during the
production, or principal photography, phase.





Production/Principal
Photography





Principal
photography, or production, is the phase where actual filming of the motion
picture takes place. The actors, producers, directors, staff, locations and
equipment that were engaged and planned for in the pre-production phase must be
brought together to create the primary film footage that should enable a
meaningful creative work to be edited into a quality finished product. While the
planning that took place during the pre-production phase is a critical success
factor, a large amount of uncertainties exist that can positively, or
negatively, impact outcomes of the production phase. For example, weather may
cause delays in the shooting schedule, talent may become injured or sick and the
director may not be able to extract the quality of performances desired from
actors. In the case of a major studio production, access to capital may enable
more resources to be deployed to mitigate these risks. In the case of an
independent production, these uncontrollable factors may be more likely to
result in the failure to complete a motion picture of the quality envisioned
during the pre-production phase.





Post-Production





Following
the last date of principal photography, the film footage produced during that
phase enters the post-production phase. Post-production is the phase where the
film footage captured in the production phase is enhanced and edited into a form
that should, hopefully, strike a cord with the target audience upon release of
the completed motion picture. This phase includes activities such as adding
voices as needed, opticals, music, special effects, soundtracks, and even
additional film footage. These elements must be brought together symbiotically,
to create a completed negative ready to be converted into release prints. This
phase has a substantial impact on how an audience perceives the work that was
performed during the principal photography phase. For instance, although the
performances of actors and directors may have been excellent during the
principal photography phase, if the sound, sequence of visuals and events are
not brought together in the proper manner, the end result may not be
artistically or commercially viable. For major studios, hiring the best
available consultants, editors or other parties to remedy, at least partially,
such an outcome can often mitigate such an event. Few independent productions
can access such resources without exceeding the projected revenues required to
deliver a potential return to their investors.





Studio
Facilities




Currently,
we rent studio space on an as-needed basis. We are in the process of developing
our first major studio facility, Camelot Studios at ATEP, in Tustin, California.
We may own and operate additional studio facilities in the
future.





The Motion Picture
Industry





The
motion picture industry consists of two principal activities: production and
distribution. Production involves the development, financing and production of
feature-length motion pictures. Distribution involves the promotion and
exploitation of motion pictures throughout the world in a variety of media,
including theatrical exhibition, home entertainment, television and other
ancillary markets.





General
Statistics





According
to the Motion Picture Association’s U.S. Theatrical Market: 2007
Statistics, overall domestic box office revenue was approximately
$9.63 billion in 2007. This represents a 5.4% increase in total domestic
box office compared to 2006 statistics. Global box office reached an all-time
high with $26.7 billion in 2007, a 4.9% increase. 64% of the global box office
was generated internationally, up from 51% in 2001. Domestic movie goers
purchased 1.4 billion theater tickets in 2007, a slight .03% increase over 2006.
Although it fluctuates from year to year (including a moderate decline from 2004
to 2005, followed by steady increases since then), the domestic motion picture
industry has grown in revenues and attendance over the past 15 years, with box
office receipts up 111% ($4.563 billion in 1992) and admissions up 27.4% from
1992 to 2007. Worldwide appetite for filmed entertainment continues to escalate,
as seen in the increased international percentage of total world-wide box
office. Domestically, filmed entertainment has historically performed well
during recessionary periods, and the current numbers continue to reinforce that
fact.





14





ITEM 1. DESCRIPTION OF BUSINESS -
continued




General Statistics-
continued




There
were 590 feature films released in 2007, down from 599 in 2006. 30%, or 179, of
those were released by the major studios. 411, or 70%, were released by
independent distributors. That represents a 4% increase over 2006 for the
independents. 4 movies earned more than $300,000,000 at the US box office in
2007, 7 earned between $200,000,000 and $300,000,000, and 17 earned between
$100,000,000 and $199,000,000, representing an overall percentage increase of
47.4% over 2006 in the same categories.





Of the
top performing movies of 2007, 50% of all movies released theatrically were
rated PG-13. 30% were rated PG, 15% were rated R and 5% were rated
G.





Competition





The U.S.
motion picture industry can be divided into major studios and independent
companies, with the major studios and independents affiliated with them
historically accounting for a large majority of the number of theatrical
releases. The major studios are The Walt Disney Company (including Buena Vista,
Touchstone and Miramax Films), Paramount Pictures Corporation (including
DreamWorks), Sony Pictures Entertainment, Inc. (including Columbia Pictures and
MGM), Twentieth Century Fox Film Corp., NBC Universal (including Universal
Studios and Universal Focus) and Warner Bros. (including Turner, New Line Cinema
and Castle Rock Entertainment). The major studios are typically large
diversified corporations that have strong relationships with creative talent,
exhibitors and others involved in the entertainment industry, and have global
film production and distribution capabilities.




Historically,
the major studios have produced and distributed the majority of high grossing
theatrical motion pictures released annually in the United States. In addition,
most of the studios have created or accumulated substantial and valuable motion
picture libraries that generate significant revenues. These revenues can provide
the major studios with a stable source of earnings that partially offsets the
variations in the financial performance of their current motion picture releases
and other aspects of their motion picture operations.




The
independent companies generally have more limited production and distribution
capabilities than do the major studios. While certain independent companies may
produce as many films as a major studio in any year, independent motion pictures
typically have lower negative costs and are not as widely released as motion
pictures produced and distributed by the major studios. Additionally, the
independent companies may have limited or no internal distribution capability
and may rely on the major studios for distribution and financing. There are
exceptions to this, including Lionsgate Films, a major independent that has
continued to experience significant growth since 2005.





Competitor
      Film and Television Companies 2007Major Parent
            DivisionsUniversal
            Focus
            Rogue
            NBC
            Telemundo
            USA
            Sci
      Fi
            BravoSony
            Columbia
            MGM
            UA
            Sony
      Classics
            Screen
      Gems
            TriStar
            DestinationParamount
            DreamWorks
            Vantage
            P.
      Classics
            Nickelodeon
            CBS
            BET
            Comedy
      CWarner
            New
      Line
            Telepicture
            Castle
      Rock
            W.
      Independent
            Picturehouse
            HBO
            W.
      PremierDisney
            Buena
      Vista
            Touchstone
            Miramax
            Hollywood
            Pixar
            ABC
            SpyglassFox
            Fox
      Searchlight
            Faith
            Atomic
            Fox
      TV
            TelecolombiaIndependents
            DivisionsWeinstein
            DimensionNu
      Image
            Millennium
            First
      LookYari
      Film GroupLionsgate
            Ghost
      House
            MandateNewmarketRKO
      Radio Pictures
            RosebloodIFC
      FilmsSamuel
      Goldwyn2929
            Magnolia
            Truly
      Indie
            HDNet
            HDNet
      Films
            LandmarkPalmTartan
      FilmsThinkFilmTroma
      EntertainmentGiant
      Screen FilmsOthersCBSCable
      and SatelliteSmaller
      Independents




Despite
the limited resources generally available to independent studios, independent
films have gained wider market approval and increased share of overall box
office receipts in recent years. Past successful independent films such as My Big Fat Greek Wedding, Bend It
Like Beckham, Sawand Crash highlight moviegoers’
willingness to support high quality and/or commercial motion pictures despite
limited pre-marketing and production budgets.






15




ITEM
1. DESCRIPTION OF BUSINESS - continued




Product Life
Cycle





Successful
motion pictures may continue to play in theaters for more than three months
following their initial release. Concurrent with their release in the United
States, motion pictures are generally released in Canada and may also be
released in one or more other foreign markets. After the initial theatrical
release, distributors seek to maximize revenues by releasing movies in
sequential release date windows, which are generally exclusive against other
non-theatrical distribution channels:





Typical Film Release
Windows*





Months
      After
            
            
            ApproximateRelease
      Period
            
            Initial
      Release
            
            
            Release
      PeriodTheatrical
            
            
            —
            
            
            
            0-3 monthsHome
      video/ DVD (1stcycle)
            
            
            2-6 months
            
            
            
            1-6 monthsPay-per-transaction
      (pay per-view and video-on-demand)
            
            
            2-8 months
            
            
            
            3-4 monthsPay
      television
            
            
            6-12 months
            
            
            
            18 monthsNetwork
      or basic cable
            
            
            21-30 months
            
            
            
            18-72 monthsSyndication
            
            
            48-70 months
            
            
            
            12-72 monthsLicensing
      and merchandising
            
            
            Concurrent
            
            
            
            OngoingAll
      international releases
            
            
            Concurrent
            
            
            
            Ongoing




*
            These
      patterns may not be applicable to every film, and may change with the
      emergence of new technologies. Does not include day and date release
      patterns.




Production





The
production of a motion picture begins with the screenplay adaptation of a
popular novel or other literary work acquired by the producer of the motion
picture or the development of an original screenplay based upon a story line or
scenario conceived or acquired by the producer. In the development phase, the
producer may seek production financing and tentative commitments from a
director, the principal cast members and other creative personnel. A proposed
production schedule and budget are prepared. At the end of this phase, the
decision is made whether or not to “greenlight,” or approve for production, the
motion picture.




After
greenlighting, pre-production of the motion picture begins. In this phase, the
producer engages creative personnel to the extent not previously committed,
finalizes the filming schedule and production budget, obtains insurance or self
insures and secures completion guaranties, if necessary. Moreover, the producer
establishes filming locations, secures any necessary studio facilities and
stages and prepares for the start of actual filming.




Principal
photography, or the actual physical principal production and filming of the
screenplay, generally extends on the average from four to 16 weeks, with some
schedules extending out as much as 52 weeks, depending upon such factors as
budget, location, weather and complications inherent in the
screenplay.





Following
completion of principal photography, the motion picture enters what is typically
referred to as post-production. In this phase, the motion picture is edited,
opticals, dialogue, music and any special effects are added, and voice, effects
and music soundtracks and pictures are synchronized. This results in the
production of the negative from which release prints of the motion picture are
made. Major studios and independent film companies hire editors, composers and
special effects technicians on the basis of their suitability for a particular
picture.





16




ITEM
1. DESCRIPTION OF BUSINESS - continued




Production-
continued




The
production and marketing of theatrical motion pictures at the studio level
requires substantial capital. The costs of producing and marketing motion
pictures have increased substantially in recent years. These costs may continue
to increase in the future at rates greater than normal inflation, thereby
increasing the costs to us of our motion pictures. Production costs and
marketing costs are generally rising at a faster rate than increases in either
domestic admissions to movie theaters or admission ticket prices, leaving all
producers of motion pictures more dependent on other media, such as home
entertainment, television, and foreign markets.





Distribution





The
distribution of a motion picture involves the licensing of the picture for
distribution or exploitation in various markets, both domestically and
internationally, pursuant to a release pattern. These markets include theatrical
exhibition, non-theatrical exhibition (which includes airlines, hotels and armed
forces facilities), home entertainment (including rental and sell-through of
video and DVD), presentation on television (including pay-per-view, pay,
network, syndication and basic cable) and marketing of the other rights in the
picture and underlying literary property, which may include publishing,
merchandising and soundtracks. The domestic and international markets generally
follow the same release pattern, with the starting date of the release in the
international market varying from being concurrent with the domestic theatrical
release to being as long as nine months afterwards. A motion picture typically
is distributed by a major studio or one or more distributors that acquire rights
from a studio or other producer in one or more markets or media or a combination
of the foregoing.




Both
major studios and independent film companies often acquire pictures for
distribution through a customary industry arrangement known as a “negative
pickup,” under which the studio or independent film company agrees before
commencement of or during production to acquire from a production company all
domestic rights, and in some cases some or all of the foreign rights, to a film
upon completion of production, and also acquire completed films, as well as all
associated obligations.





The
Public’s Love Affair with Movies Continues





According
to the Motion Picture Association of America, the motion picture industry
continues to experience significant growth worldwide over the past five decades,
although certain aspects of the industry have matured in recent years, such as
DVD.





Between
1953 and 2007, a span of 54 years, the U.S. Box Office has gone from $1.34
billion in gross receipts in 1953 to the all time high of $9.629 billion in
2007.





All of
the international regions saw significant growth between July 2006 and July
2007. Europe, the Middle East and Africa saw an increase of 15%. Asia-Pacific
saw an increase of 15%. Latin America’s theatrical market increased 17%. Europe,
the Middle East and Africa (“EMEA”) comprised more than half of the $16.33
billion international box office, accounting for 49.6% of the total with $8.11
billion in receipts. Asia-Pacific box office finished strong with $6.32 billion
between July 2006 and July 2007. These trends are expected to continue in
2008.




Worldwide
admissions bounced back in 2006, reaching an all-time high of 7.81 billion movie
tickets after a 4% increase. The growth was driven primarily by Asia Pacific’s
5% gain to 4.81 billion tickets and EMEA’s 4% gain to 1.1 billion
tickets.





The
number of theatrical screens in the U.S. increased less than 1% to 40,077
in 2007. This follows a 2.1% increase in screens between 2005 and 2007 and an
9.7% increase between 2003 and 2007. Of the 40,077 screens in the U.S.,
39,347 were indoor screens, while 730 were drive-in screens. The number of drive
in screens actually increased by 21 screens between 2005 and 2007. The
number of drive in screens reached an all time low of 601 in 2004, followed by
an increase to 709 screens in 2005. In comparison, in 1986 there were 2,818
drive-in screens in the US.





Digital
screens continued their rapid growth in 2007 with the number of worldwide
digital screens climbing 115% to 6,455 screens. To put this number of
digital screens in a better perspective, in 1999 there were 12 digital screens
worldwide. 4,634 digital screens representing 72% of all digital screens
are in the U.S.





§
            In
      2007, the number of moviegoers reached its highest point in five years,
      topping 1,400,000,000 admissions.





§
            For
      the past eight years, each U.S. resident attended an average of at least
      5.5 movies per year. In 2007, the average was 6.0, up from 4.4 in 1985. In
      2005, the average was 5.4. Admissions per capita reached an all time high
      of 6.2 in 2002.





§
            The
      average annual admission price for 2007 was $6.88, up 5% over the previous
      year.





§
            The
      average box office revenue for all new film releases was $16.1 million in
      2007, compared to $15.4 million in 2006 and $16.7 million in 2005. The
      average box office revenue for major studio film releases was $45.7
      million in 2007, compared to $40.2 million in 2006 and $39.7 million in
      2005.






17




ITEM
1. DESCRIPTION OF BUSINESS - continued




The Public’s Love Affair
with Movies Continues-
continued





§
            The
      average budget of a major studio film in 2007 was $70.8 million. In 1983,
      the average was $11.9 million. The average marketing budget was $35.9
      million in 2007, as compared to $34.5 million in 2006. In 1983, the
      average was $5.2 million.  As a comparison, in 2001 the average
      budget was $47.7 million. The average marketing budget was $31 million in
      2001.





§
            The
      total average cost to produce and launch a studio film in 2007 was $106.6
      million compared to $100.3 million in 2006. In 1983, the total average
      cost to produce and launch a studio film was $17.1 million.  As
      a comparison, the average total cost was $78.7 million in
      2001.





§
            Between
      1993 and 1999, the average budget of a studio film increased 97.7%, from
      $29.9 million in 1993 to $51.5 million in
1999.




§
              Between
      2001 and 2007, the average budget of a studio film increased 48.4% from
      $47.7 million in 2001 to $70.8 million in
2007.




§
            The
      average budget of a major studio subsidiary/classic or
      specialty/independent type film (i.e. Fox Searchlight, New Line, Fine
      Line, Miramax, Sony Pictures Classics, and Lionsgate etc.) in 2007 was
      $49.2 million. The average marketing cost was $25.7 million. The combined
      negative and marketing costs was $74.8 million., contributing to a 54%
      increase in combined negative and marketing costs when compared to 2006,
      when the combined costs was $48.5 million. The average cost in 2003 was
      $46.9 million, a 154.9% increase over the 1999 average of $18.4 million
      and a 37.7% increase over 2002’s average of $34 million. The average
      marketing budget was $15.2 million in 2005.The average marketing budget
      was $11.4 million in 2004. The average marketing budget was $14.7 million
      in 2003. In 1999, the average was $6.5
million.





§
            The
      total average cost to produce and launch a major studio subsidiary or
      specialty/independent type film in 2007 was $74.8 million, the highest
      ever. In 1999, the total average cost to produce and launch a major studio
      subsidiary or specialty/independent type film was $24.9
      million.





§
            Between
      1986 and 2007, there was a 75.2% increase in the total number of screens.
      There was a 95.2% increase in the number of indoor screens and a 74.3%
      decrease in the number of drive-in
screens.





§
            Between
      2006 and 2007 the total number of theatres in the U.S. decreased by 1.2%.
      Between 2000 and 2004, the total number of theaters in the U.S. decreased
      by 2.1%. Between 1994 and 2004 the total number of theaters in the U.S.
      increased by 38%.





§
            In
      2007, there were 6,277 total theaters in the U.S. 1,748 of the theaters
      had single screens. 2,296 theaters had 2 to 7 screens. 1,617 theaters had
      8 to 15 screens and 616 theaters had more than 16 screens, a 4.2% increase
      in megaplexes screens.In 2006, there
      were 6,356 total theaters in the U.S. 1,742 of the theaters had single
      screens. 2,362 theaters had 2 to 7 screens. 1,661 theaters had 8 to 15
      screens and 591 theaters had more than 16 screens. In 2004, there were
      6,012 total theaters in the U.S. 5,620 were indoor theaters, 392 were
      drive-in theaters. In 1980, there were 17,590 total theaters, with 14,029
      indoor and 3,561 drive-in
theaters.





§
            In
      2007, approximately 36% of the screens were miniplexes (2 to 7 screens),
      28% were single screen, 26% were multiplexes (8 to 15 screens) and 10%
      were megaplexes (16 or more screens).In 2006,
      approximately 37% of the
      screenswere miniplexes (2
      to 7 screens), 27% were single screen, 27% were multiplexes (8 to 15
      screens) and 9% were megaplexes (16 or more
  screens).




§
              In
      2007, preliminary estimates show a total of 357,300 employees in the U.S.
      motion picture industry and associated fields. Of that number, 192,800 are
      involved in production and services, with 136,200 in the theater and
      video/DVD rental sector and 28,300 employed in related fields. In 2006,
      there were a a total of 354,400 employees in the U.S. motion picture
      industry and associated fields. Of that number, 192,200 were involved in
      production and services, with 133,700 in the theater and video/DVD rental
      sector and 28,500 employed in related
fields.
 
 §
              In
      2007, the number of cable and satellite television stations eclipsed 400.
      Between 1990 and 2004, the number of cable and satellite television
      channels increased 372% from 60 cable channels in 1990 to 324 cable and
      satellite channels in 2004.
 
 §
              Total
      rental and sell-through of motion picture video DVDs to dealers in the
      United States decreased from 1,309.2 billion units in 2007 to 1,255.8
      billion in 2006, a decrease of 4.1%, reflecting the stagnant growth in DVD
      use by consumers, due in part to format confusion between Blue-Ray and HD
      DVD formats. Previously, this sector had been robust. Since 2002, this
      sector has seen an increase of 113.9% in DVD sales to dealers. Total
      rental and sell-through of motion picture video DVDs to dealers in the
      United States increased from 1,292.9 billion units in 2005 to 1,324.7
      billion in 2006, an increase of 2.5%, reflecting at the time the continued
      growth in DVD use by consumers.
 
 §
              Total
      sales of motion picture video cassettes to dealers in the United States
      decreased from 7.4 million in 2006 to 300,000 in 2007, a 95.4% decrease.
      Total sales had previously decreased from 48.7 million in 2005 to 7.4
      million in 2006, a 84.8% decrease. This followed a 61.2% decrease between
      2005 and 2004.
 
 §
              There
      are currently over 84,000 titles available on DVD, a 19% increase over
      2006. In 2006, there were 68,000 titles available on DVD, a 51% increase
      over 2005. In 1999, there were 5,000.§
              There
      were 12,050 new titles available on DVD during 2007, a 11.4% decrease from
      2006, when there were 13,604 new titles available. This is the second
      consecutive year that the number of new titles has decreased. In 2005,
      there were 13,922 new titles
available.
 
 §
              In
      2007, 21,200,000 DVD players were purchased by retailers, a 7.4% increase
      over 2006, when 19,800,000 were purchased.  In 2006, 19,800,000
      DVD players were purchased by retailers, a 23% increase over 2005, when
      16,100,000 were purchased.
 
 §
              In
      2007, 33,500,000 DVD players were sold to U.S. consumers, a decrease of
      1.19% from 2003, when 33,900,000 were sold. In 2006, 33,900,000 DVD
      players were sold to U.S. consumers, a decrease of 1.45% from 2003, when
      34,400,000 were sold.




18




ITEM
1. DESCRIPTION OF BUSINESS - continued
  The Public’s Love Affair
with Movies Continues-
continued
  §
                The
      average price of a DVD title in 2007 was $22.11. The average price of a
      DVD title in 2006 was $22.29. In 2003 the average was $20.15. In 1999 the
      average was $25.53.§
                The
      average price of a DVD player in 2007 was $72. The average price of a DVD
      player in 2006 was $100. In 2002 the average was
  $136.
 
 §
                Factory
      sales of digital TV sets and displays continue to rise, with 27.1 million
      units sold in 2007, compared to 4.1 million units sold in 2002. The
      average unit has dropped in price from $1,540 in 2002 to $954 in 2007.
      Total sales in 2007 reached $25.866 billion. In 2003, total sales were
      $8.692 billion. 23.9 million units were sold in 2006. The average unit
      price was $989 in 2006. Total sales in 2006 reached $23.661
      billion.
  §
                In
      the U.S., of the 114.9 million homes accounted for in 2007, 112.8 million,
      or 98.2%, have television. Of the 112.8 million homes that have
      television, 98 million, or 86.9%, have DVD players. That represents an
      increase of 5% over 2006, and 50.6% increase since 2002. In comparison,
      86.9 million homes have internet access, an increase of 3% over 2006. 60.8
      million homes have broadband services, an increase of 15% over
      2006.
 
 §
                As
      of 2007, 34.4 million homes, or 30.5% of the 114.9 million homes with
      television, have basic cable. That represents a decrease of 3.9% from
      2006. 34.8 million have pay cable services, a decrease of 2.2% from
      2006.
 
 §
                Preliminary
      reports show that at the end of 2007, 33.2 million homes subscribed to
      digital cable, a 4.7% increase over 2006. 29.6 million homes have
      satellite service, a 8% increase over
2007.
 
 §
                Video
      on Demand (“VOD”), an advanced pay-per-view programming service which
      enables viewers to order and watch movies on demand and to pause, rewind
      or fast-forward them, according to 2007 preliminary numbers, is available
      in 31 million households, or approximately 27.5% of homes with
      televisions. That represents a 7.3% increase over
  2006.
  Admissions,
box office receipts, DVD sales, VOD sales and increases in cable and satellite
home penetration all are positive signs for our industry. As the demand
continues to increase, as each of the markets continue to mature, the need for
an educated, experienced and skilled workforce rises. However, despite the
attractiveness this growth suggests, the motion picture business remains a very
risky industry. Studios and independent producers must be able to finance a
project, complete production, execute a successful distribution strategy, obtain
favorable press and compete with an unknown quantity of competing releases.
These are just some of the factors that impact the commercial success or failure
of a film, television or digital media project.





Cost
Structure




General





In the
motion picture industry, the largest component of the cost of producing a motion
picture generally is the negative cost, which includes the “above-the-line”and “below-the-line”costs of
producing the film. Above-the-line costs are costs related to the acquisition of
picture rights and the costs associated with the producer, the director, the
writer and the principal cast. Below-the-line costs are the remaining costs
involved in producing the picture, such as film studio rental, principal
photography, sound and editing.




Distribution
expenses consist primarily of the costs of advertising and preparing release
prints. The costs of advertising associated with a major domestic theatrical
motion picture release are significant and typically involve national and target
market media campaigns, as well as public appearances of a film’s stars. These
advertising costs are separate from the advertising costs associated with other
domestic distribution channels and the international market.




The major
studios generally fund production costs from cash flow generated by motion
picture and related distribution activities or bank and other financing methods.
The independent production companies typically use a plethora of creative
financing techniques to fund production. Over the past decade, expenses in the
motion picture industry have increased rapidly as a result of increased
production costs and distribution expenses. Additionally, each of the major
studios must fund substantial overhead costs, consisting primarily of salaries
and related costs of the production, distribution and administrative staffs, as
well as facilities costs and other recurring overhead. Independent production
companies, while usually not faced with major overhead costs, nevertheless have
to function outside the studio system and as a result in many cases they do not
have access to the studio structure, which can make the process of getting a
specific film made more difficult and, in some isolated instances, more
expensive.




Collective Bargaining Agreements





Feature
films produced by the major studios and independent production companies in the
United States generally employ actors, writers and directors who are members of
the Screen Actors Guild, Writers Guild of America and Directors Guild of
America, respectively, pursuant to industry-wide collective bargaining
agreements. The collective bargaining agreement with the Writers Guild of
America was recently renegotiated following a four month work stoppage between
November 2007 and February 2008. The collective bargaining agreement with the
Screen Actors Guild is set to expire on June 30, 2008. The Directors Guild of
America collective bargaining agreement expires on June 30, 2008. Many
productions also employ members of a number of other labor organizations
including, without limitation, the International Alliance of Theatrical and
Stage Employees and the International Brotherhood of Teamsters. The collective
bargaining agreement with Teamsters Local 399, which represents significant
numbers of persons within the motion picture industry, expires on July 31, 2008
and the collective bargaining agreement with the International Alliance of
Theatrical and Stage Employees expires on July 31, 2010. A strike by one or more
of the unions that provide personnel essential to the production of motion
pictures could delay or halt our ongoing production activities. Such a halt or
delay, depending on the length of time involved, could cause delay or
interruption in our release of new motion pictures and thereby could adversely
affect our potential future cash flow and revenues.





19




ITEM
1. DESCRIPTION OF BUSINESS - continued




Industry
Compensation Arrangements





Most of
the creative and production personnel that work on a movie are short-term
employees or "for hire"contractors who are compensated for their services at a predetermined
rate. It is also customary in the motion picture industry to pay contingent
compensation over and above these fees to certain key employees and
contractors.





Three
customary contingent compensation arrangements in the industry
include:





1.
Fixed
Deferrals




Key
creative personnel, including the director, producer, writer and actors, often
negotiate fixed deferral payments of flat fees tied to a film's financial
returns. This is a major component of our business model.




2.Residual
Payments





The
principal collective bargaining organizations for personnel within the movie
industry are: the Directors Guild of America, or DGA; the Writer's Guild of
America, or WGA; the Screen Actors Guild, or SAG; the American Federation of
Musicians, or AFM; and the International Alliance of Theatrical Stage Employees,
or IATSE. When a movie producer involves members of these organizations in a
film, they are required to comply with certain residual payment obligations.
These obligations are set forth in agreements between these organizations and
the Alliance of Motion Picture and Television Producers (“AMPTP”) (which
represents the major studios) and provide that a percentage of a film's gross
revenues in certain markets must be paid to these organizations for the benefit
of their members. As an example, SAG currently requires payment of between 4.5%
and 5.4% of the gross revenue attributable to videocassette exploitation and
3.6% of television exploitation, with no residuals due for theatrical
exploitation. We may be required to accrue and pay standard residual payments
based on the collective bargaining agreements associated with one of our
creative teams. These residual payments are based upon gross revenues in certain
markets and may therefore, depending upon our distribution arrangements, reduce
our revenues in various markets and release windows.





3.
Profit
Participations





The last
form of contingent compensation is a "profit participation", which
entitles the recipient to additional compensation based on the financial
performance of a particular motion picture. Granting profit participation to
certain key creative personnel is common for both larger studio films as well as
smaller independent films. For independent movies, this form of contingent
compensation is critical to attract quality creative personnel who work for less
upfront compensation than they otherwise might receive on a larger, more costly
movie. By paying this contingent compensation, producers are able to attract
these high quality creative personnel while simultaneously reducing the upfront
costs.





Profit
Participations Are Typically "Gross" or "Net"





Gross
profit participation, granted in extremely rare cases where the importance of
the actor or director is critical, is calculated based on gross revenues before
any costs (such as, distribution fees, financing costs and other corporate
costs) are deducted.





Net
profit participation is far more common, and is the arrangement we plan to use
in order to pay a portion of the contingent compensation. Net profit
participation is calculated based on net revenues after deducting certain costs
of a film, including distribution fees, financing costs and general corporate
expenses.




Thus,
gross profit participation receives a percentage of the first dollar received by
a film before any costs are deducted, while net profit participation receives a
percentage of revenue remaining after certain costs are deducted. It is the
industry standard that the producers retain any remaining percentages in the net
participation pool.





Our
planned contingent compensation arrangements require performance of duties under
applicable contracts and can be forfeited in the event of non-performance or
other circumstances. In the instance of forfeiture, this compensation could be
granted to other persons who make up the production or management
team.








20




ITEM
1. DESCRIPTION OF BUSINESS - continued




Distribution
Methods of the Products or Services





Marketing
and Distribution




The key
components of motion picture distribution include licensing the film for
exploitation in the United States and internationally, marketing the film to and
working with exhibitors, promoting the film to and working with members of the
entertainment press and marketing the film to the general public. The
distribution process involves additional complexities and uncertainties beyond
those incurred in producing the motion picture, along with the related capital
requirements. As a result, most independent productions rely on agreements with
the distribution arms of major studios, sales agents engaged to market the film
to a distributor, independent distributors, or a similar partnership arrangement
that essentially engages the distribution expertise of a third party to get
their production to market.





One of
the major roles of a distributor, in addition to their relationships with
theatrical and non-theatrical outlets, is the ability of these parties to
measure the expected demand for a given motion picture. This is a critical
function, because ideally such assessment should help determine an effective
advertising and print budget for the project. A motion picture release print is
the media that in most cases is used by exhibitors and theaters to present the
motion picture to their patrons. The projected demand for a film project can
directly influence the number of prints made, which is important because each
print is rather costly. Similarly, the number and types of geographic locations,
or markets, the film could be released in normally influences the mix and cost
of advertising expenditures. According to the MPAA, the average print and
advertising costs per release per member, as reported by the MPAA, totaled $35.9
million in 2007. Combining this total with the $70.8 million reported average
2007 MPAA member costs to produce film, or motion picture negative, results in
an average production and distribution cost of $106.6 million. When one
considers that the average box office revenue per release for these members was
only $32.7 million in 2006, and for all new releases the average was $15.8
million, the financial risks of distributing and producing a motion picture
should become clearer. Very few independent productions have direct access to
such capital, making their reliance on distributors and distribution partners
essential.





In
general, an independent production attempts to enter into an agreement with a
sales agent, or distributor, by which the distributor plans to market the film
to outlets and consumers. The amount of the distributor’s fee, and therefore the
amount of remaining profits, if any, is largely dependent on the films
anticipated gross receipts, and how contract terms define the gross receipts. As
a result, such fees can vary greatly depending on the nature of the distribution
contract as well as the scale and timing of gross receipts. Under some
arrangements fees can be as low as 12.5%, in others 35%, or even
higher.





In most
cases, the distributor offers to pay for prints and advertising, sparing the
independent production these up front, fixed costs and the associated risk.
However, as the film generates gross receipts, the distributor has the ability
to offset the percentage of such receipts otherwise payable to the independent
production by the amount expended for prints and advertisements until the
distributor has recouped such amount. Such arrangements are sometimes referred
to as a net agreement, or net deal. In other cases, an independent production
may negotiate to receive its share of the proceeds as gross receipts
materialize. Under this type of arrangement, the distributor might still pay for
prints and advertising, but might take a higher share of the gross receipts than
otherwise payable under a net agreement.





Foreign
Distribution





Foreign
distribution is generally taken care of by a distributor which coordinates
worldwide sales in all territories and media. Overseas film sales companies rely
on local subdistributors to physically deliver the motion picture and related
marketing materials and to collect revenues from local exhibitors and other
local distributors of the film. Typically, the territorial rights for a specific
medium such as television exhibition are sold for a "cycle"of approximately
seven years to fifteen years, and in some cases even longer, after which the
rights become available for additional cycles.





Foreign
distribution is normally handled in one of the following ways:





1. Sales
Agency Representation. A Sales Agent undertakes to represent and license a
motion picture in all markets and media on a best-efforts basis, with no
guarantees or advances, for a fee ranging from 12.5% to 25%, and typically for a
term ranging from seven to fifteen years.





2.
Distribution. A distributor may provide the producer of the film a guarantee of
a portion of the budget of the project. This guarantee may be in the form of a
bank commitment to the producer, secured by license agreements with foreign
licensees, which is used by the producer to finance the production.





Typically,
a distributor would receive a distribution fee ranging from 12.5% to 35% over a
term ranging from 15 years to perpetuity. In addition, the distributor may
negotiate, or otherwise acquire, a profit participation in the film
project.





Once the
rights to a picture are obtained (either as sales agent or distributor with
minimum guarantee), the distributor then seeks to license its rights to
subdistributors in the territories for which it has acquired distribution
rights.





21




ITEM
1. DESCRIPTION OF BUSINESS - continued




Foreign Distribution-
continued




In
general, the grant of rights to the subdistributors includes all media in their
respective territories other than satellite, although satellite is included in
some subdistributors' territories.





The
subdistributor in each territory generally pays for its distribution rights with
a down payment at the time the contract is executed with the balance due upon
delivery of the picture to the subdistributor. In some cases, payments may be
extended over a longer period of time, especially when the production does not
live up to the expectations of the subdistributor. Delivery normally occurs upon
the distributor’s acceptance of the master negative and its obtaining access to
certain items necessary for the distribution of the film. In some instances, the
subdistributors' obligations for the payment due on delivery can be secured by a
letter of credit.





Most
films are sold either directly to a buyer that has a pre-existing relationship
with the distributor, or at one of the several film markets that take place
throughout the world. Although there are a number of film markets each quarter,
historically, major sales take place primarily at the MIF in Cannes, France each
May and at the American Film Market in Los Angeles, each November.




In
general, after cash advances to a subdistributor, if any, are recouped, the
distributor applies the distribution receipts from its subdistributors first to
the payment of commissions due to the distributor, then second to the recovery
of certain distribution expenses, then to the reimbursement of the distributor
for its minimum guarantee or advance, if any, and then finally any remaining
distribution receipts are shared by the distributor and the producer according
to the percentages negotiated in the agreement between the distributor and the
producer.





Status
of any Publicly Announced New Product or Service





On April
25, 2007, we announced the unveiling of our three main operational divisions,
Camelot Film and Media Group, Camelot Studio Group and Camelot Production
Services Group. On April 26, 2007, we announced that we had entered into an
Exclusive Right to Negotiate Agreement (“ERNA”) with the South Orange County
Community College District (“SOCCCD”) to master develop the Advanced Education
and Technology Park (“ATEP”), including Camelot Studios at ATEP, in Tustin,
California.





Competitive
Business Conditions and the Small Business Issuer’s Competitive Position in the
Industry and Methods of Competition





Competitive
Strengths





To achieve our goals of becoming a leading independent producer and
distributor of feature films, television and digital media, we plan to exploit
our competitive advantages, which we believe includes our experience in
developing, preparing, producing, finishing, marketing and distributing films
with a economically feasible budget, independent films utilizing a unique an
efficient business model that attempts to minimize costs while maximizing
quality and ultimately attracting the broadest possible consumer base for our
productions. We believe that once our initial slate of pictures begins to reach
market, our reputation and ability to produce and distribute quality films at
the lowest possible price while at the same time maximizing economic potential
for all those working with us should make us an attractive place for independent
filmmakers, whether new or experienced, whether young or old.





Our
disciplined approach to the development, preparation, production,
post-production, marketing and distribution of feature film content should
hopefully enable us to establish and maintain a distinct competitive advantage.
By seeking to minimize the financial risks often associated with film
production, by incorporating “financial transparency”, marketing and
distribution by negotiating co-production agreements, pre-selling international
distribution rights, capitalizing on government subsidies and tax credits,
structuring efficient production schedules and crafting agreements with key
talent attracted to the films we develop and produce, we plan to provide a
unique environment where independent film can flourish, albeit in a fiscally
responsible manner. In each production, we plan to attempt to minimize our
financial exposure by structuring deals with talent that provide for their
participation in the financial success of the motion picture in exchange for
reduced up-front payments. Although the steps that we take to manage these risks
may, in some cases, limit the potential revenues of a particular project, we
believe that our approach to the motion picture business creates operating and
financial stability for us.





Competition





We face
competition from companies within the entertainment business and from
alternative forms of leisure entertainment, such as travel, sporting events,
outdoor recreation and other cultural activities. We compete with the major
studios, numerous independent motion picture and television production
companies, television networks and pay television systems for the acquisition of
literary and film properties, the services of performing artists, directors,
producers and other creative and technical personnel and production financing.
In addition, our motion pictures compete for audience acceptance and exhibition
outlets with motion pictures produced and distributed by other companies. As
mentioned above, we compete with major domestic film studios which are
conglomerate corporations with assets and resources substantially greater than
ours, including several specialty or classic divisions.





22




ITEM
1. DESCRIPTION OF BUSINESS - continued




Competition-
continued




Those
companies we compete with include, at the major studio level, Universal and its
subsidiaries, Focus, USA Films, Rogue and NBC; Sony, and its divisions Columbia,
MGM, UA, Sony Classics, Screen Gems, TriStar and Destination; Paramount and its
subsidiaries DreamWorks, Vantage, Paramount Classics and Go Fish; Warner and its
divisions New Line, HBO, Castle Rock, Warner Independent and Picturehouse;
Disney and its subsidiaries Buena Vista, Touchstone, Miramax, Hollywood
Pictures, Pixar and ABC; and Fox and its divisions Fox Searchlight, Faith,
Atomic and Fox TV.





At the
independent level, in addition to some of the divisions and subsidiaries of the
majors, we compete with companies such as The Weinstein Company and its
Dimension label, Jerry Bruckheimer Films, Nu Image and its subsidiaries
Millennium Films and First Look Studio, Yari Film Group, Lionsgate, Newmarket,
RKO Radio Pictures, IFC, Samuel Goldwyn, 2929 Entertainment and its Magnolia
label, ThinkFilm, Troma Entertainment and others. In addition, we compete with
CBS, Cable and Satellite companies and many smaller independent production
companies and distributors.





Predicting
the success of a motion picture is difficult and highly subjective, as it is not
possible to accurately predict audience acceptance of a particular motion
picture. Our strategy is to assemble a creative team, screenplay and cast that
we believe has the potential for commercial success. In order to evaluate our
potential to obtain distribution and appeal to an audience, we will attempt to
use the following criteria: an exceptional story, compelling character roles,
recognizable actors and actresses, an established and respected director,
experienced producer, and a relatively low production budget.





The
success of any of our motion pictures is dependent not only on the quality and
acceptance of a particular picture, but also on the quality and acceptance of
other competing motion pictures released into the marketplace at or near the
same time. The number of films released by our competitors, particularly the
other major film studios, in any given period may create an oversupply of
product in the market, thereby potentially reducing our share of gross box
office admissions and making it more difficult for our films to
succeed.





With
respect to our domestic theatrical releasing operations, a substantial majority
of the motion picture screens in the United States typically are committed at
any one time to films distributed nationally by the major film studios, which
generally buy large amounts of advertising on television and radio and in
newspapers and can command greater access to available screens. Although some
movie theaters specialize in the exhibition of independent, specialized motion
pictures and art-house films, there is intense competition for screen
availability for these films as well. Given the substantial number of motion
pictures released theatrically in the United States each year, competition for
exhibition outlets and audiences is intense.




Competition
is also intense in supplying motion pictures and other programming for the pay
television, syndicated television and home video markets. Numerous organizations
with which we expect to compete with also distribute to the pay television,
syndicated television and home video markets have significantly greater
financial and other resources than us.





In addition, there also have been rapid technological changes over the
past fifteen years. Although technological developments have resulted in the
creation of additional revenue sources from the licensing of rights with respect
to new media, these developments also have resulted in increased popularity and
availability of alternative and competing forms of leisure time entertainment
including pay/cable television programming and home entertainment equipment such
as DVD’s, videocassettes, interactive games and computer/internet
use.





The entertainment industry in general, and the motion picture industry in
particular, are continuing to undergo significant changes, primarily due to
these technological developments. For example, as motion pictures begin to be
distributed using emerging technologies such as digital delivery, the internet
and online services, the ability to protect intellectual property rights in
motion pictures could be threatened by advances in technology that enable
digital piracy. This is because digital formats currently do not contain
mechanisms for tracking the source or ownership of digital content. As a result,
users may be able to download and distribute unauthorized or “pirated” copies of
copyrighted motion pictures over the internet. In addition, there could be
increased proliferation of devices capable of making unauthorized copies of
motion pictures. As long as pirated content is available to download digitally,
many consumers may choose to digitally download such pirated motion pictures
rather than paying for legitimate motion pictures. Digital piracy of our films
may adversely impact the gross receipts received from the exploitation of such
films. Due to this rapid growth of technology and with it, piracy, as well as
shifting consumer tastes and the popularity and availability of other forms of
entertainment, it is impossible to predict the overall effect these factors
could have on the potential revenue and profitability of feature-length motion
pictures.





The
Major Studios and the Independents





The major studios, which historically have produced and distributed the vast
majority of high-grossing theatrical motion pictures released annually in the
United States, are typically large, diversified corporations that have strong
relationships with creative talent, television broadcasters and channels,
internet service providers, movie theater owners and others involved in the
entertainment industry. The major studios also typically have extensive national
or worldwide distribution organizations and own extensive motion picture
libraries. Motion picture libraries, consisting of motion picture copyrights and
distribution rights owned or controlled by a film company, can be valuable
assets capable of generating revenues from worldwide commercial exploitation in
existing media and markets, and potentially in future media and markets
resulting from new technologies and applications.





23




ITEM
1. DESCRIPTION OF BUSINESS - continued




The Major Studios and the
Independents-
continued




The major
studios also may own or be affiliated with companies that own other
entertainment related assets such as music and merchandising operations and
theme parks. The major studios' motion picture libraries and other entertainment
assets may provide a stable source of earnings which can offset the variations
in the financial performance of their new motion picture releases and other
aspects of their motion picture operations.





During
the past 15 years, independent production and distribution companies, many with
financial and other ties to the major studios, have played an important role in
the production and distribution of motion pictures for the worldwide feature
film market.




These
companies include:





§
            Miramax
      Films Corporation, now owned by The Walt Disney Company, which produced
      Chicago, The Hours, Gangs of New York,
      Scary Movie, the Screamfilm series,
      Shakespeare in Loveand Chocolat;





§
            New
      Line Cinema Corporation/Fine Line Features, now owned by AOL/Time Warner,
      which produced the Lord
      of the Ringsseries, the Austin Powersfilms,
      The Mask, Teenage Mutant
      Ninja Turtlesand the Nightmare on Elm Streetseries;





§
            U.S.A
      Films (formerly October Films and now owned by Vivendi/Universal), which
      produced Traffic,
      Secrets & Liesand Breaking the Wavestogether with Gramercy Pictures, which produced Dead Man Walkingand
      Fargo, is part
      of U.S.A Films and U.S.A Network;





As a
result of consolidation in the domestic motion picture industry, a number of
previously independent producers and distributors have been acquired or are
otherwise affiliated with major studios. However, there are also a large number
of other production and distribution companies that produce and distribute
motion pictures that have not been acquired or become affiliated with the major
studios.





These companies include:





§
            Lion's
      Gate Films, which produced and distributed Narc, Frailty, Monster's Balland American
      Psycho; and its subsidiary, Artisan Entertainment Inc., which
      distributed Boat Trip,
      National Lampoon's Van Wilderand The Blair Witch Project.





§
            The
      Weinstein Company, founded by the Weinstein brothers, who formerly
      controlled and founded Miramax.





In contrast to the major studios, independent production and distribution
companies generally produce and distribute fewer motion pictures and do not own
production studios, national or worldwide distribution organizations, associated
businesses or extensive film libraries which can generate gross revenues
sufficient to offset overhead, service debt or generate significant cash
flow.





The motion picture industry is a world-wide industry. In addition to the
production and distribution of motion pictures in the United States, motion
picture distributors generate substantial revenues from the exploitation of
motion pictures internationally. In recent years, there has been a substantial
increase in the amount of filmed entertainment revenue generated by U.S. motion
picture distributors from foreign sources.





International revenues of motion picture distributors from filmed
entertainment grew from approximately $1.1 billion in 1990 to approximately
$17.1 billion in 2007. This growth has been due to a number of factors,
including the general worldwide acceptance of, and demand for, motion pictures
produced in the United States, the privatization of many foreign television
industries, the emergence of VOD, growth in the number of foreign households
with videocassette and DVD players and growth in the number of foreign theater
screens.




Many countries and territories, such as Australia, Canada, China, France,
Germany, Hong Kong, India, Italy, Japan, Russia, Spain and the United Kingdom
have substantial indigenous film industries. As in the United States, in a
number of these countries the film industry, and in some cases, the
entertainment industry, in general, is dominated by a small number of companies
that maintain large and diversified production and distribution
operations.





However, like in the United States, in most of these countries, there are
also smaller, independent, motion picture production and distribution companies.
Foreign distribution companies not only distribute motion pictures produced in
their countries or regions but also films licensed or sub-licensed from United
States production companies and distributors.





In addition, film companies in many foreign countries produce films not
only for local distribution, but also for export to other countries, including
the United States. While some foreign language films and foreign
English-language films appeal to a wide U.S. audience, most foreign language
films distributed in the United States are released on a limited basis because
they draw a specialized audience.





24





ITEM 1. DESCRIPTION OF BUSINESS -
continued




The
Smaller Independents





Independent production companies generally avoid incurring overhead costs
as substantial as those incurred by the major studios by hiring creative and
other production personnel and retaining the other elements required for
pre-production, principal photography and post-production activities on a
picture-by-picture basis.





As a result, these companies do not own sound stages and related
production facilities, and, accordingly, do not have the fixed payroll, general
administrative and other expenses resulting from ownership and operation of a
studio.





Independent production companies also may finance their production
activities on a picture-by-picture basis. Sources of funds for independent
production companies include bank loans, pre-licensing of distribution rights,
foreign government subsidies, equity offerings and joint ventures. Independent
production companies generally attempt to obtain all or a substantial portion of
their financing of a motion picture prior to commencement of principal
photography, at which point substantial production costs begin to be incurred
and require payment.





As part of obtaining financing for its films, an independent production
company often is required by its lenders and distributors who advance production
funds to obtain a completion bond or production completion insurance from an
acceptable completion guarantor which names the lenders and applicable
distributors as beneficiaries. The guarantor assures the completion of the
particular motion picture on a certain date.





If the motion picture cannot be completed for the agreed upon budgeted
cost, the completion guarantor is obligated to pay the additional costs
necessary to complete the picture by the agreed upon delivery date. If the
completion guarantor fails to timely complete and deliver the motion picture on
or before the agreed upon delivery date, the completion guarantor is required to
pay the lenders and distributor, if applicable, an amount equal to the aggregate
amount the lenders and distributor have loaned or advanced to the independent
producer.





In connection with the production and distribution of a motion picture,
major studios and independent production companies generally grant contractual
rights to actors, directors, screenwriters, owners of rights and other creative
and financial contributors to share in net revenues from a particular motion
picture. Except for the most sought-after talent, these third-party
participations are generally payable after all distribution fees, marketing
expenses, direct production costs and financing costs are recovered in
full.





The
Guilds




Major studios and independent film companies in the United States
typically incur obligations to pay residuals to various guilds and unions
including the Screen Actors Guild, the Directors Guild of America and the
Writers Guild of America. Residuals are payments required to be made on a
picture-by-picture basis by the motion picture producer to the various guilds
and unions arising from the exploitation of a motion picture in markets other
than the primary intended market. Residuals are calculated as a percentage of
the gross revenues derived from the exploitation of the picture in these
ancillary markets.





The guilds and unions typically obtain a security interest in all of the
producer's rights in the motion picture being exploited to ensure satisfaction
of the residuals obligation. This security interest usually is subordinate to
the security interest of the lenders financing the production cost of the motion
picture, and the completion bond company guaranteeing completion of the motion
picture.





Under a producer's agreement with the guilds and unions, the producer may
transfer the obligation to pay the residuals to a distributor if the distributor
assumes the obligation to make the residual payment. If the distributor does not
assume those obligations, the producer is obligated to pay those
residuals.





Intellectual
Property





We regard
patents and trademarks as valuable assets and believe that trademarks are an
important factor in marketing our products. Camelot Films®, our feature film
production division, is a registered trademarked brand. We are in the process of
patenting our unique business model.





Copyright
protection is a serious problem in the videocassette and DVD distribution
industry because of the ease with which cassettes and DVDs may be duplicated. In
the past, certain countries permitted video pirating to such an extent that many
companies did not consider these markets viable for distribution. Our management
believes that with new technology, including anti-piracy technology we expect to
license in the near future, the problem should be less critical in the future.
In the event it is necessary, we could initiate legal action to enforce
copyright protection.








25





ITEM 1. DESCRIPTION OF BUSINESS -
continued




The
Completion Bond





In order
to minimize the risk of budget overruns and to add an additional level of
protection for us, a completion bond, also known as a completion guaranty, is
expected to be required for each production. A completion bond is a form of
insurance which provides that, should the producers of a film run into
significant problems completing the film, the bond company would:




§
            advance
      any sums in excess of the budget required to complete and deliver the
      film;





§
            complete
      and deliver the film itself; or





§
            shut-down
      the production and repay the financier all monies spent thus far to
      produce the film.





In
addition to ensuring that the film is completed within budget, the bond company
should also be responsible for ensuring that the film is delivered within a
pre-determined schedule, follows the script and is technically suitable for
exhibition in theaters. The bond company usually places certain restrictions and
limitations on us to ensure that the production is following a pre-determined
schedule. For example, the completion bond agreement normally contains a cash
flow schedule that sets forth the timing and amounts of cash advances required
to finance production of the film. We expect to be required to deposit funds in
a specific production account in accordance with this cash flow
schedule.




Fees for
the completion bond are normally paid out of a particular’s film budget. These
fees, or premiums, can range anywhere from 2.5% to 6% of a specific budget. When
higher rates are charged, it usually reflects the level of risk involved with a
film as determined by the bond company. In most cases, if a high fee is charged
initially, the agreement with the bond company will normally contain a rebate
provision that kicks in if the bond is not called. We plan to negotiate with a
completion bond company to insure our entire slate of films, which will
hopefully minimize the costs while standardizing the production requirements as
deemed applicable by the bond company.





The
completion bond company could have the right to take over a production if they
determine that the film is significantly behind schedule or over budget, or that
the production is otherwise not proceeding in a satisfactory manner. This could
include the right to replace any member of the production team. The involvement
of the completion bond company comes to an end when the film is delivered, or
production monies are refunded, in accordance with the terms and conditions of
the specific completion bond.





In order
to receive a completion bond from a reputable company, we normally have to
submit a budget, script, shooting schedule and other production elements for
their analysis and approval. Typically, a completion bond cannot be issued until
all material aspects of the production have been determined, such as final
locations, cast and crew. These aspects are normally determined throughout the
pre-production phase.





A
completion bond is usually subject to a number of important limitations and
normally does not reimburse us for losses that result from certain occurrences,
including, but not limited to, distribution expenses; residual payments due to
creative guilds, such as the Screen Actors Guild; gross or net profit
participations granted as contingent compensation to actors or production
personnel; elements of the film that are not included in the approved
screenplay, budget or production schedule; insolvency; illegal or fraudulent
acts; violation of any collective bargaining agreements; failure to obtain any
necessary rights to use copyrighted works, such as music; failure to obtain
required insurance coverage; failure to fulfill any conditions required by cast
members that causes them to abandon their commitment to the film; currency
fluctuations in the event the film is produced in another country, such as
Canada; natural disasters; acts of war; or other force majeure
events.





Sources
and Availability of Raw Materials and the Names of Principal
Suppliers





During the
production process, we utilize a number of raw materials contained in such items
such as props, make-up, wardrobe, electrical supplies and equipment,
construction supplies and equipment, as well as materials from almost every
industry. These raw materials are readily available from a wide range of sources
and suppliers throughout the world. We plan to identify principal suppliers once
we begin the production process.





Dependence
on One or a Few Major Customers





We do not plan to
depend on any one customer. As we expect to market and distribute our planned
films directly to the public, we should not be dependent on one or a few major
customers, rather we should be entirely dependent on the willingness of the
public to purchase our entertainment product.





Patents,
Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or Labor
Contracts





Camelot
Films®, our feature film production division, is a registered trademarked brand
and is registered with the United States Patent and Trademark Office. The
trademarks “Camelot Entertainment Group” “Camelot Film Group” “Camelot Film and
Media Group,” “Camelot Features”, “Camelot Television Group”, “Ferris Wheel
Films”, “Camelot Gaming”, “Camelot Digital Media”, “Camelot Distribution Group”,
“Camelot Studio Group”, “Camelot Production Services Group”, “Camelot Studio Model”,
“Camelot Production Model”, “Camelot Urban Entertainment”, “Camelot Latin
Entertainment”, “Camelot University”, “Camelot College of the Arts”, “Camelot
Technology” and “Camelot Merchandising”  are expected to be filed
and/or are in the process of being field with the United States Patent and
Trademark Office. We are also in the process of patenting our unique business
model.





The
Company plans to copyright and own all motion pictures that it makes. This
should result in the Company building a library of its own product over
time.






26




ITEM 1.
DESCRIPTION OF BUSINESS - continued




Need
for any Government Approval of Principal Products or Services





Distribution
rights to motion pictures are granted legal protection under the copyright laws
of the United States and most foreign countries. These laws provide substantial
civil and criminal sanctions for unauthorized duplication and exhibition of
motion pictures. Motion pictures, musical works, sound recordings, art work,
still photography and motion picture properties are separate works subject to
copyright under most copyright laws, including the United States Copyright Act
of 1976, as amended. We are aware of reports of extensive unauthorized
misappropriation of videocassette rights to motion pictures which may include
motion pictures distributed by us. Motion picture piracy is an industry-wide
problem. The Motion Picture Association of America, an industry trade
association, operates a piracy hotline and investigates all reports of such
piracy. Depending upon the results of investigations, appropriate legal action
may be brought by the owner of the rights. Depending upon the extent of the
piracy, the Federal Bureau of Investigation may assist in these investigations
and related criminal prosecutions.





Motion
picture piracy is also an international problem. Motion picture piracy is
extensive in many parts of the world, including South America, Asia including
Korea, China and Taiwan, the countries of the former Soviet Union and other
former Eastern bloc countries. In addition to the Motion Picture Association,
the Motion Picture Export Association, the American Film Marketing Association
and the American Film Export Association monitor the progress and efforts made
by various countries to limit or prevent piracy. In the past, these various
trade associations have enacted voluntary embargoes of motion picture exports to
certain countries in order to pressure the governments of those countries to
become more aggressive in preventing motion picture piracy. In addition, the
United States government has publicly considered trade sanctions against
specific countries that do not prevent copyright infringement of United States
produced motion pictures. We cannot assure you that voluntary industry embargoes
or United States government trade sanctions will be enacted. If enacted, these
actions could impact the amount of revenue that we realize from the
international exploitation of motion pictures depending upon the countries
subject to and the duration of such action. If not enacted or if other measures
are not taken, the motion picture industry as a whole, and our business in
particular, may continue to lose an indeterminate amount of revenues as a result
of motion picture piracy.





The Code
and Ratings Administration of the Motion Picture Association assigns ratings
indicating age-group suitability for theatrical distribution of motion pictures.
We plan to submit our motion pictures for these ratings. In certain
circumstances, motion pictures that we plan to submit for rating might receive
restrictive ratings, including, in some circumstances, the most restrictive
rating which prohibits theatrical attendance by persons below the age of
seventeen. Unrated motion pictures, or motion pictures receiving the most
restrictive rating, may not be exhibited in certain movie theaters or in certain
locales, thereby potentially reducing the total revenues generated by these
films. United States television stations and networks, as well as foreign
governments, impose additional restrictions on the content of motion pictures
which may restrict in whole or in part theatrical or television exhibition in
particular territories. In 1997, the major broadcast networks and the major
television production companies implemented a system to rate television
programs. This television rating system has not had a material adverse effect on
the motion pictures distributed by us. However, the possibility exists that the
sale of theatrical motion pictures for broadcast on domestic free television may
become more difficult because of potential advertiser unwillingness to purchase
advertising time on television programs that are rated for limited audiences. We
cannot assure you that current and future restrictions on the content of motion
pictures may not limit or adversely affect our ability to exploit certain motion
pictures in particular territories and media.




United
States television stations and networks as well as foreign governments impose
content restrictions on motion pictures that may restrict in whole or in part
exhibition on television or theaters in a particular territory. There can be no
assurance that such restrictions will not limit or alter our ability to exhibit
certain motion pictures in such media or markets or that the cost to edit a
particular motion picture would be prohibitive, thereby eliminating a possible
revenue source for the motion picture.





Effect
of Existing or Probable Governmental Regulations on the Business





We expect
to be subject to various federal, state and local laws, rules and regulations
affecting our affiliates and operations. We and each of our potential partners
may be subject to various licensing regulation and reporting requirements by
numerous governmental authorities which may include internet (domestic and
worldwide) oversight regulations, production, manufacturing, OSHA, securities,
banking, insurance, building, land use, industrial, environmental protection,
health and safety and fire agencies in the state or municipality in which each
business is located. Difficulties in obtaining or failures to obtain the
necessary approvals, licenses or registrations, and unforeseen changes in
government regulations directly affecting the internet could delay or prevent
the development or operation of a given business.





In 1994,
the U.S. was unable to reach agreement with its major international trading
partners to include audiovisual works, such as television programs and motion
pictures, under the terms of the World Trade Organization. The failure to
include audiovisual works under GATT allows many countries (including members of
the European Union, which currently consists of Austria, Belgium, Denmark,
Germany, Greece, Finland, France, Ireland, Italy, Luxembourg, The Netherlands,
Portugal, Spain, Sweden and the United Kingdom) to continue enforcing quotas
that restrict the amount of U.S. produced product which may be aired on
television in such countries. The European Union Council of Ministers has
adopted a directive requiring all member states of the European Union to enact
laws specifying that broadcasters must reserve, where practicable, a majority of
their transmission time (exclusive of news, sports, game shows and advertising)
for European works. The directive must be implemented by appropriate legislation
in each member country. Under the directive, member states remain free to
require broadcasters under their jurisdiction to comply with stricter rules.
Several countries (including France, Italy and Korea) also have quotas on the
theatrical exhibition of motion pictures.





27




ITEM
1. DESCRIPTION OF BUSINESS - continued




Effect
of Existing or Probable Governmental Regulations on the Business -
continued




In
addition, France requires that original French programming constitute a required
portion of all programming aired on French television. These quotas generally
apply only to television programming and not to theatrical exhibition of motion
pictures, but quotas on the theatrical exhibition of motion pictures could also
be enacted in the future. We cannot assure you that additional or more
restrictive theatrical or television quotas will not be enacted or that
countries with existing quotas will not more strictly enforce such quotas.
Additional or more restrictive quotas or more stringent enforcement of existing
quotas could materially and adversely affect our business by limiting our
ability to fully exploit our rights in motion pictures internationally and,
consequently, to assist or participate in the financing of these motion
pictures.




Privacy
Issues





Both
Congress and the Federal Trade Commission are considering regulating the extent
to which companies should be able to use and disclose information they obtain
online from consumers. If any regulations are enacted, internet companies may
find some marketing activities restricted. Also, the European Union has directed
its member nations to enact much more stringent privacy protection laws than are
generally found in the United States and has threatened to prohibit the export
of some personal data to United States companies if similar measures are not
adopted. Such a prohibition could limit the growth of foreign markets for United
States internet companies. The Department of Commerce is negotiating with the
Federal Trade Commission to provide exemptions from the European Union
regulations, but the outcome of these negotiations is uncertain.





Effects
of Government Regulations on Business Government Regulation and Legal
Uncertainties





In the
United States and most countries in which we plan to conduct our major
operations, we are not currently subject to direct regulation other than
pursuant to laws applicable to businesses generally. Adverse changes in the
legal or regulatory environment relating to the interactive online services,
venture formation and internet industry in the United States, Europe, Japan or
elsewhere could have a material adverse effect on our business, financial
condition and operating results. A number of legislative and regulatory
proposals from various international bodies and foreign and domestic governments
in the areas of telecommunication regulation, access charges, encryption
standards, content regulation, consumer protection, intellectual property,
privacy, electronic commerce, and taxation, among others, are now under
consideration. We are unable at this time to predict which, if any, of such
proposals may be adopted and, if adopted, whether such proposals would have an
adverse effect on our business, financial condition and operating results. As
internet commerce continues to grow, the risk that federal, state or foreign
agencies could adopt regulations covering issues such as user privacy, pricing,
content and quality of products and services, increases. It is possible that
legislation could expose companies involved in electronic commerce to liability,
which could limit the growth of electronic commerce generally. Legislation could
dampen the growth in internet usage and decrease its acceptance as a
communications and commercial medium. If enacted, these laws, rules or
regulations could limit the market for our services.




Research
and Development Activities





Our
research and development activities include implementation of our business
model, acquisition of scripts, development of scripts, and all other aspects of
the development process relating to the development, pre-production, production,
post-production, marketing and distribution of feature films. We estimate that
approximately forty per cent of management’s time has been spent conducting
research and development activities during the past two years. In addition, we
have been expanding our research and development activities to include
preparations for our studio project.





Costs
and Effects of Compliance with Environmental Laws





In
implementing our plans as a producer and distributor of feature films, it is
possible that during the physical production stage we may have to comply with
certain environmental laws, depending in part on where the productions are
filmed and what type of equipment, vehicles and props are utilized. The specific
costs associated to compliance with environmental laws are unknown at this time.
However, in the event we would be required to absorb additional costs on any
given film that was not anticipated, these costs could have a material adverse
effect on the budget of a film and the additional costs that might be incurred
in order to comply with environmental laws and regulations could force us to
alter or otherwise change the production schedule. This could cause a film to go
over budget, cause delays and disrupt the entire production process, resulting
in cost overruns that might be difficult to recoup once the film is
distributed.





28




ITEM
1. DESCRIPTION OF BUSINESS - continued




Employees





As of
December 31, 2007, we have four employees. Two of our staff members, one of whom
is an officer of our company, spend 100%% of their time on matters relating to
our company. The other 2 staff members spend anywhere from 10% to 50% of their
time on matters relating to our business. We also retain consultants and
independent contractors on a “as need” basis.





Risk
Factors





Ability
to Achieve Profitable Operations





Our
operations to date have been limited. Our focus has been on our Camelot Studio
Group division, which has limited our ability to fully implement our other major
divisions. The development and implementation of our business model is a long
term process. The normal fiscal cycle of a feature film does not typically
generate revenues for 18 to 24 months. Subsequent to that, the fiscal life cycle
of a feature film is close to 7 years initially, with affiliate, residual and
syndication revenues continuing for years. As of December 31, 2007, we have only
one project in production. Our first studio facility, Camelot Studios at ATEP,
may break ground in April 2009 with occupancy in early 2011. As a result of our
long sales cycles, it is difficult to determine with any certainty how our short
term financial picture will evolve. In the near term, we expect operating costs
to continue to exceed funds generated from operations. As a result, we expect to
continue to incur operating losses and while we have resources available to grow
our business in 2008, we may not have sufficient funds to grow our business in
the future. We can give no assurance that we will achieve profitability or be
capable of sustaining profitable operations. As a result, operations in the
future could require a significant increase in the use of working
capital.





To
successfully grow the individual divisions of the business, we must begin to
devote the time necessary to fully implement their respective business models,
decrease our cash burn rate over time, begin to generate revenues in order to
improve our cash position and establish ongoing revenues in each division, and
succeed in our ability to raise additional capital through a combination of
primarily public or private equity offering or strategic alliances. We also
depend on certain consultants and our executives, and the loss of any of those
consultants or executives, may harm our business.





We
have a limited operating history as a motion picture, television and digital
media company in which to evaluate our business





As
Camelot Entertainment Group, we have a limited operating history as a motion
picture, television and digital media company. To date, we have generated no
revenues and a limited operating history as a motion picture company upon which
an evaluation of our future success or failure can be made. Our primary focus
has been the development of Camelot Studios at ATEP and to a lesser scale
project development within Camelot Film and Media Group. As a result, many of
our planned divisions are not operational or have very limited operations as of
December 31, 2007. While current company assets and financial commitments are
suitable for the projected financial needs forecast during 2008, we do not know
at this time the outlook for 2009 and beyond. No assurances of any nature can be
made to investors that the company will be profitable. There can be no
assurances that our management will be successful in managing the Company as a
motion picture, television and digital media company.





We
have incurred significant and continuing losses and may not be able to generate
revenues to sustain our operations





We have
incurred net losses of approximately $2,103,235 and $2,348,352 respectively in
2007 and 2006, and have an accumulated deficit of $16,276,446 at December 31,
2007, with losses during the past two years primarily the result of our
financial commitment to the development of Camelot Studios at ATEP and the
development of projects for Camelot Film and Media Group.





We will
continue to have a high level of operating expenses and will be required to make
significant up-front expenditures in connection with the commencement of
income-generating activities (including, but not limited to, salaries of
executive, marketing and other personnel). We expect to incur additional losses
until such time as we are able to fully implement our new business model and
generate sufficient revenues to finance our operations and the costs of
expansion. There can be no assurance that the Company will be able to generate
such revenues and operate profitably.





We
will require additional funds to achieve our current business strategy and our
inability to obtain additional financing could cause us to cease our business
operations in the future if suitable funding is not secured





Even with
the proceeds from offerings and other resources in 2007, we will need to raise
additional funds through public or private debt or sale of equity to fully
achieve our business strategy. Such financing may not be available when needed.
Even if such financing is available, it may be on terms that are materially
adverse to your interests with respect to dilution of book value, dividend
preferences, liquidation preferences, or other terms.






29




ITEM
1. DESCRIPTION OF BUSINESS - continued




Risk
Factors - continued




Our
ability to grow our company through acquisitions, business combinations and
joint ventures, to maintain and expand our development, production and
distribution of motion pictures, television programming and digital media and to
fund our operating
expenses will depend upon our ability to obtain funds through equity financing,
debt financing (including credit facilities) or the sale or syndication of some
or all of our interests in certain projects or other assets. Our business plan
requires a substantial investment of capital. The production, acquisition and
distribution of motion pictures require a significant amount of capital. A
significant amount of time may elapse between our expenditure of funds and the
receipt of commercial revenues from our motion pictures, if any. This time lapse
requires us to fund a significant portion of our capital requirements from
private parties, institutions, and other sources. Although we intend to reduce
the risks of our production exposure through strict financial guidelines and
financial contributions from broadcasters, sub-distributors, tax shelters,
government and industry programs and studios, we cannot assure you that we will
be able to implement successfully these arrangements or that we will not be
subject to substantial financial risks relating to the production, acquisition,
completion and release of future motion pictures. If we increase our production
slate or our production budgets, we may be required to increase overhead, make
larger up-front payments to talent and consequently bear greater financial
risks. Any of the foregoing could have a material adverse effect on our
business, results of operations or financial condition.





If we are
unable to obtain financing in the future on reasonable terms, we could be forced
to delay, scale back or eliminate certain elements of our business model. In
addition, such inability to obtain financing in the future on reasonable terms
could have a material negative effect on our business, operating results, or
financial condition to such extent that could be forced to restructure, file for
bankruptcy, sell assets or cease operations, any of which could put our Company
and any investments into our Company at significant risk.





We
are subject to a working capital deficit, which means that our current assets at
December 31, 2007, were not sufficient to satisfy our current
liabilities





As of
December 31, 2007, we had a working capital deficit of $955,210, which means
that our current liabilities of $961,756 exceeded our current assets of $6,546
by that amount on December 31, 2007. Current assets are assets that are expected
to be converted to cash within one year and, therefore, may be used to pay
current liabilities as they become due. Our working capital deficit means that
our current assets on December 31, 2007, were not sufficient to satisfy all of
our current liabilities on that date. We will have to raise additional capital
or debt to fund the deficit.





If
we are unable to retain the services of our executive officers, Robert P. Atwell
and George Jackson, or if we are unable to successfully recruit qualified
managerial personnel and employees with experience in business and the motion
picture industry, we may not be able to continue our operations.





Our
success depends to a significant extent upon the continued service of our
executive officers, Robert P. Atwell, President and Chief Executive Officer, and
George Jackson, Secretary and Chief Financial Officer. Loss of the services of
any of our executive officers could have a material adverse effect on our
growth, revenues, and prospective business. We do maintain key-man insurance on
the lives of our executive officers.





In
addition, in order to successfully implement and manage our Camelot Film and
Media Group business plan, we will be dependent upon, among other things,
successfully recruiting highly skilled creative and production personnel,
including producers, executives, cinematographers, editors, costume designers,
set designers, sound technicians, lighting technicians, actors, sales and
marketing experts, and legal and accounting experts. With Camelot Studio Group,
we will need key executives, real estate, financial, studio operators, studio
staff and entitlement experts. For Camelot Production Services Group, we will
need experts in production, technology, post production, distribution,
accounting, legal, banking, event management, education, sales and marketing,
internet and merchandising. Although we expect to find qualified candidates to
fill these positions, competition is intense and they may be unwilling to work
for us under acceptable terms. This could delay production or reduce the quality
of our film projects, which would impair our ability to successfully implement
our business model.





Also,
many of these positions could require us to hire members of unions or guilds. As
a result, our ability to terminate unsatisfactory or non-performing workers
could be adversely affected by existing union or guild contracts and
regulations. This could cause delays in production of our film projects and
significantly increase costs.





There can
be no assurance that we will be able to find, attract and retain existing
employees or that we will be able to find, attract and retain qualified
personnel on acceptable terms.





Mr.
Atwell, our President, Chief Executive Officer and Chairman, and Tim Wilson, one
of our directors, own a controlling interest in our voting stock and as a result
stockholders will have a limited voice in our management





Mr.
Atwell, our President, Chief Executive Officer and Chairman, is the beneficial
owner of 26% of our issued and outstanding common shares and 49% of our Series A
Convertible Preferred Stock (“Series A”) and 70% of our Series B Convertible
Preferred Stock (“Series B”). Each share of Series A entitles the holder to 50
votes and each share of Series B entitles the holder to 1,000 votes. In the
aggregate, Mr. Atwell is entitled to cast 6,613,597,571 votes or 67.105% of the
votes in any vote by our stockholders. Mr. Wilson, an at-large director and
managing member of Scorpion Bay, LLC, is the beneficial owner of 21% of our
issued and outstanding common shares and 51% of our Series A Convertible
Preferred Stock and 30% of our Series B Convertible Preferred Stock. In the
aggregate, Mr. Wilson is entitled to cast 3,118,062,973 votes or 31.637% of the
votes in any vote by our stockholders. Together, they are entitled to cast
9,731,660,544 votes or 98.743% of the votes in any vote by our stockholders.
Thus, Mr. Atwell and Mr. Wilson will have the ability to control substantially
all matters submitted to our stockholders for approval, including:





30




ITEM
1. DESCRIPTION OF BUSINESS - continued
  Risk
Factors - continued


§
            election
      of our board of directors;§
            removal
      of any of our directors;§
            amendment
      of our certificate of incorporation or bylaws; and§
            adoption
      of measures that could delay or prevent a change in control or impede a
      merger, takeover or other business combination involving
    us.





As a
result of Atwell and Wilson’s ownership, and their respective positions as chief
executive officer and director, they are able to influence all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. In addition, sales of significant amounts of
shares held by our directors and executive officers, or the prospect of these
sales, could adversely affect the market price of our common stock. Management's
stock ownership may discourage a potential acquirer from making a tender offer
or otherwise attempting to obtain control of us, which in turn could reduce our
stock price or prevent our stockholders from realizing a premium over our stock
price.





It
is likely that additional shares of our stock will be issued in the normal
course of our business development, which will result in a dilutive effect on
our existing shareholders





We will
issue additional stock as required to raise additional working capital, meet
additional funding requirements, secure intellectual properties, undertake
company acquisitions, recruit and retain an effective management team,
compensate our officers and directors, engage industry consultants and for other
business development activities.





If
we fail to adequately manage our growth, we may not be successful in growing our
business and becoming profitable





We expect
our business and number of employees to grow over the next year. We expect that
our growth will place significant stress on our operation, management, employee
base and ability to meet capital requirements sufficient to support our growth
over the next 12 months. Any failure to address the needs of our growing
business successfully could have a negative impact on our chance of
success.





If we acquire or invest in other
businesses, we will face certain risks inherent in such
transactions





We may
acquire, make investments in, or enter into strategic alliances or joint
ventures with, companies engaged in businesses that are similar or complementary
to ours. If we make such acquisitions or investments or enter into strategic
alliances, we will face certain risks inherent in such transactions. For
example, we could face difficulties in managing and integrating newly acquired
operations. Additionally, such transactions would divert management resources
and may result in the loss of artists or songwriters from our rosters. We cannot
assure you that if we make any future acquisitions, investments, strategic
alliances or joint ventures that they will be completed in a timely manner, that
they will be structured or financed in a way that will enhance our
creditworthiness or that they will meet our strategic objectives or otherwise be
successful. Failure to effectively manage any of these transactions could result
in material increases in costs or reductions in expected revenues, or
both.





“Penny
Stock” rules may make buying or selling our common stock difficult





Trading
in our securities is subject to the “penny stock” rules. The SEC has adopted
regulations that generally define a penny stock to be any equity security that
has a market price of less than $5.00 per share, subject to certain exceptions.
These rules require that any broker-dealer who recommends our securities to
persons other than prior customers and accredited investors, must, prior to the
sale, make a special written suitability determination for the purchaser and
receive the purchaser’s written agreement to execute the transaction. Unless an
exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated with trading in the penny stock
market. In addition, broker-dealers must disclose commissions payable to both
the broker-dealer and the registered representative and current quotations for
the securities they offer. The additional burdens imposed upon broker- dealers
by such requirements may discourage broker-dealers from effecting transactions
in our securities, which could severely limit the market price and liquidity of
our securities. Broker- dealers who sell penny stocks to certain types of
investors are required to comply with the Commission’s regulations concerning
the transfer of penny stocks. These regulations require broker-dealers
to:





§
            Make
      a suitability determination prior to selling a penny stock to the
      purchaser;§
            Receive
      the purchaser’s written consent to the transaction; and§
            Provide
      certain written disclosures to the
purchaser.








31




ITEM
1. DESCRIPTION OF BUSINESS - continued
  Risks Associated with the
Motion Picture Production and Distribution Industry





Because
the movie industry is intensely competitive and we lack the name recognition and
resources of our competitors, we may never generate any revenues or become
profitable





The
motion picture industry is highly competitive. We believe that a motion
picture’s theatrical success is dependent upon general public acceptance,
marketing technology, advertising and the quality of the production. We intend
to produce motion picture productions that normally should compete with numerous
independent and foreign productions as well as productions produced and
distributed by a number of major domestic companies, many of which are units of
conglomerate corporations with assets and resources substantially greater than
ours. Some of the production and distribution companies that we will compete
with are The Weinstein Company, Jerry Bruckheimer Films, Miramax Films, Lions
Gate Entertainment Corp., Sony Pictures Entertainment, Inc., New Line Cinema, a
subsidiary of Time Warner, Universal Studios, 20th Century
Fox Film Corporation, a subsidiary of News Corp., Buena Vista Motion Pictures
Group, a collection of affiliated motion picture studios all subsidiaries of The
Walt Disney Company, Paramount Pictures Corporation, a subsidiary of Viacom, and
Troma Entertainment, Inc. Most of these competitors are significantly larger
than us, have a long-standing business.





Our
management believes that in recent years there has been an increase in
competition in virtually all facets of the motion picture industry. With
increased alternative distribution channels for many types of entertainment, the
motion picture business competes more intensely than previously with all other
types of entertainment activities as well as television. While increased use of
pay per view television, pay television channels, and home video products are
potentially beneficial, there is no guarantee that we will be able to
successfully penetrate these markets. Failure to penetrate these potential
distribution channels would have a material adverse impact on our results of
operations.





Since
our success depends on the commercial success of our motion pictures, which is
unpredictable and highly speculative, we may never generate any revenue or
become profitable





The
success of a single motion picture project is fraught with an unusually high
degree of uncertainty and risk. Similarly, the probability of successfully
completing a motion picture project is also laden with an unusually high degree
of uncertainty and risks. A studio or independent producer’s ability to finance
a project, execute a successful distribution strategy, obtain favorable press
and compete with an unknown quantity of competing releases are just some of the
factors that impact the commercial success or failure of a film project. Our
strategy involves producing a minimum of 12 motion pictures per year. While the
intent is to reduce production risk through this strategy, our plan has the
potential to compound risks germane to the industry.





Movie
producers are often involved in several projects at the same time and an active
film director is often presented with opportunities to direct many movies. In
addition, independent contractors needed to produce the film often have
commitments to more than one movie project. Because we may decide to replace key
members of our production team if they are unable to perform their duties within
our schedule, the marketing appeal of our film may be reduced.





If we do
not complete the film on schedule or within budget, our ability to generate
revenue may be diminished or delayed. Our success depends on our ability to
complete the film on schedule and within budget.





Each film we produce and distribute should appeal to a given segment of
society to achieve acceptance. Although our intent to target niche markets that
should require less than broad market acceptance to achieve commercial success,
there can be no assurance that this strategy will succeed.




Motion
picture production and distribution is highly speculative and inherently risky.
There can be no assurance of the economic success of any motion picture since
the revenues derived from the production and distribution of a motion picture
(which do not necessarily bear a direct correlation to the production or
distribution costs incurred) depend primarily upon its acceptance by the public,
which cannot be predicted. The commercial success of a motion picture also
depends upon the acceptance of competing films released into the marketplace at
or near the same time, the availability of alternative forms of entertainment
and leisure time activities, general economic conditions and other tangible and
intangible factors, all of which can change and cannot be predicted with
certainty. Further, the theatrical success of a motion picture is generally a
key factor in generating revenues from other distribution channels. There is a
substantial risk that some or all of our motion pictures will not be
commercially successful, resulting in costs not being recouped or anticipated
profits not being realized.





Theaters
are more likely to exhibit feature films with substantial studio marketing
budgets. Even if we are able to complete the films and obtain distribution, it
is unclear how much should be spent on marketing to promote each film by our
distributors.




All of
these factors cannot be predicted with certainty. In addition, motion picture
attendance is seasonal, with the greatest attendance typically occurring during
the summer and holidays. The release of a film during a period of relatively low
theater attendance is likely to affect the film’s box office receipts
adversely.




Relatively
few motion pictures return a profit to investors. There can be no assurance that
a motion picture will recoup its production costs. There is a very high degree
of risk that any motion picture we may produce will not return all or any
portion of our investment.






32


ITEM
1. DESCRIPTION OF BUSINESS - continued
  Risks
Associated with the Motion Picture Production and Distribution Industry -
continued




We
intend to distribute our films in foreign countries which may be unpredictable
and may have unstable and different governments and/or laws than the
U.S.





We plan
to license motion picture and television programming in foreign countries to
sub-distributors. If we are at all successful in this regard, a portion of our
revenues should be derived from foreign sources. Because of this, our business
is subject to certain risks inherent in international trade, many of which are
beyond our control. Such risks include, but are not limited to, changes in laws
and policies affecting trade, investment and taxes (including laws and policies
relating to the repatriation of funds and to withholding taxes), differing
degrees of protection for intellectual property, the instability of foreign
economies and governments and in some cases an adverse acceptance to a film may
occur, resulting in a demand to renegotiate the license agreement’s terms and
conditions. In addition, fluctuations in foreign exchange rates may affect our
results of operations.





Piracy
of the original motion pictures that we plan to produce may reduce our revenues
and potential earnings




According
to industry sources, piracy losses in the motion picture industry have increased
substantially, from an estimated $2.2 billion in 1997 to an estimated $6.1
billion in 2005. In certain regions such Asia, the former Soviet Union and South
America, motion picture piracy has been a major issue for some time. With the
proliferation of DVD format around the globe, along with other digital recording
and playback devices, losses from piracy have spread more rapidly in North
America and Europe. Piracy of original motion pictures we produce and distribute
may adversely impact the gross receipts received from the exploitation of these
films, which could have a material adverse effect on our business, results of
operations or financial condition.





Our
operating results will fluctuate





Like all
motion picture production companies, our revenues and results of operations
could be significantly dependent upon the timing of releases and the commercial
success of the motion pictures we distribute, none of which can be predicted
with certainty. Accordingly, our revenues and results of operations may
fluctuate significantly from period to period, and the results of any one period
may not be indicative of the results for any future periods.




In
accordance with generally accepted accounting principles and industry practice,
we intend to amortize film costs using the individual-film-forecast method under
which such costs are amortized for each film in the ratio that revenue earned in
the current period for such title bears to management's estimate of the total
revenues to be realized from all media and markets for such title. To comply
with this accounting principal, our management plans to regularly review, and
revise when necessary, our total revenue estimates on a title-by-title basis,
which may result in a change in the rate of amortization and/or a write-down of
the film asset to net realizable value. Results of operations in future years
should be dependent upon our amortization of film costs and may be significantly
affected by periodic adjustments in amortization rates. The likelihood of the
Company's reporting of losses is increased because the industry's accounting
method requires the immediate recognition of the entire loss in instances where
it is expected that a motion picture should not recover the Company's
investment.





Similarly,
should any of our films be profitable in a given period, we should have to
recognize that profit over the entire revenue stream expected to be generated by
the individual film.




Our
film production budgets may increase and film production spending may exceed
such budgets




Our
future film budgets may increase due to factors including, but not limited to,
(1) escalation in compensation rates of people required to work on our projects,
(2) number of personnel required to work on our projects, (3) equipment needs,
(4) the enhancement of existing or the development of new proprietary technology
and (5) the addition of facilities to accommodate the growth of a studio. Due to
production exigencies, which are often difficult to predict, it is not uncommon
for film production spending to exceed film production budgets, and our projects
may not be completed within the budgeted amounts. In addition, when production
of each film is completed, we may incur significant carrying costs associated
with transitioning personnel on creative and development teams from one project
to another. These carrying costs increase overall production budgets and could
have a material adverse effect on our results of operations and financial
condition.





Our
anticipated successive releases of films could place a significant strain on our
limited resources




We
anticipate establishing parallel creative teams so that we can develop more than
one film at a time. These teams are expected to work on future projects, as we
move towards producing multiple films per year. Due to the anticipated strain on
our personnel from the effort required for the release of an upcoming film and
the time required for creative development of future films, it is possible that
we would be unable to release twelve new films in the first year and in
subsequent years. We may be required to expand our employee base, increase
capital expenditures and procure additional resources and facilities in order to
accomplish the scheduled releases of our films. This growth and expansion may
place a significant strain on our resources. We cannot provide any assurances
that any future film will be released as targeted or that this strain on
resources will not have a material adverse effect on our business, financial
condition or results of operations. As we move towards achieving multiple films
a year, there will likely be additional demands placed on the availability of
key people. A lack of availability of key people may adversely impact the
success and timing of our future films.





33




ITEM
1. DESCRIPTION OF BUSINESS - continued
  Risks
Associated with the Motion Picture Production and Distribution Industry -
continued
  We may
implement a variety of new and upgraded operational and financial systems,
procedures and controls, including improvement and maintenance of our accounting
system, other internal management systems and backup systems. Our growth and
these diversification activities, along with the corresponding increase in the
number of our employees and our rapidly increasing costs, may result in
increased responsibility for our management team. We may need to improve our
operational, financial and management information systems, to hire, train,
motivate and manage our employees, and to provide adequate facilities and other
resources for them. We cannot provide any assurance we will be successful in
accomplishing all of these activities on a timely and cost-effective basis. Any
failure to accomplish one or more of these activities on a timely and
cost-effective basis would have a material adverse effect on our business,
financial condition and results of operations.





The
decisions regarding the timing of theatrical releases and related products, the
marketing and distribution strategy, and the extent of promotional support are
important factors in determining the success of our motion pictures and related
products. We may enter into agreements with third-parties to assist us in the
marketing and distribution of our films, and we may require the marketers and
distributors to consult with us with respect to all major marketing and
distribution decisions. Said agreements may or may not include: (1) the manner
in which distributors may distribute our films and related products; (2) the
number of theaters to which our films are distributed; (3) the specific timing
of release of our films and related products; or (4) the specific amount or
quality of marketing and promotional support of the films and related products
as well as the associated promotional and marketing budgets.




We
are smaller and less diversified than most of our competitors





Although
we are a small independent distributor and producer at this time, we expect to
constantly compete with major U.S. and international studios. Most of the major
U.S. studios are part of large diversified corporate groups with a variety of
other operations, including television networks and cable channels that can
provide both means of distributing their products and stable sources of earnings
that may allow them better to offset fluctuations in the financial performance
of their motion picture and television operations. In addition, the major
studios have more resources with which to compete for ideas, storylines and
scripts created by third parties as well as for actors, directors and other
personnel required for production. The resources of the major studios may also
give them an advantage in acquiring other businesses or assets, including film
libraries, that we might also be interested in acquiring. The foregoing could
have a material adverse effect on our business, results of operations and
financial condition.





The
motion picture industry is highly competitive and at times may create an
oversupply of motion pictures in the market





The
number of motion pictures released by our competitors, particularly the major
U.S. studios, may create an oversupply of product in the market, reduce our
share of box office receipts and make it more difficult for our films to succeed
commercially as we produce, market and distribute our films. Oversupply may
become most pronounced during peak release times, such as school holidays and
national holidays, when theater attendance is expected to be highest. For this
reason, and because of our more limited production and advertising budgets, we
plan to not release our films during peak release times, which may also reduce
our potential revenues for a particular release. Moreover, we cannot guarantee
that we can release all of our films when they are otherwise scheduled. In
addition to production or other delays that might cause us to alter our release
schedule, a change in the schedule of a major studio may force us to alter the
release date of a film because we cannot always compete with a major studio’s
larger promotion campaign. Any such change could adversely impact a film’s
financial performance. In addition, if we cannot change our schedule after such
a change by a major studio because we are too close to the release date, the
major studio’s release and its typically larger promotion budget may adversely
impact the financial performance of our film. The foregoing could have a
material adverse effect on our business, results of operations and financial
condition.





The
limited supply of motion picture screens compounds this product oversupply
problem. Currently, a substantial majority of the motion picture screens in the
U.S. typically are committed at any one time to only ten to 15 films distributed
nationally by major studio distributors. In addition, as a result of changes in
the theatrical exhibition industry, including reorganizations and consolidations
and the fact that major studio releases occupy more screens, the number of
screens available to us when we want to release a picture may decrease. If the
number of motion picture screens decreases, box office receipts, and the
correlating future revenue streams, such as from home video and pay and free
television, of our motion pictures may also decrease, which could have a
material adverse effect on our business, results of operations or financial
condition.





If
we are alleged to have infringed on the intellectual property or other rights of
third parties it could subject us to significant liability for damages and
invalidation of our proprietary rights





Our
business is highly dependent upon intellectual property, a field that has
encountered increasing litigation in recent years. If third parties allege that
we have infringed on their intellectual property rights, privacy rights or
publicity rights or have defamed them, we could become a party to litigation.
These claims and any resulting lawsuits could subject us to significant
liability for damages and invalidation of our proprietary rights and/or restrict
our ability to publish and distribute the infringing or defaming content. There
can be no assurance that we would prevail in any such litigation. If we were to
lose a litigation relating to intellectual property, we could be forced to pay
monetary damages and to cease the sale of certain products or the use of certain
technology. Any of the foregoing may adversely affect our business.





34




ITEM
1. DESCRIPTION OF BUSINESS - continued
  Risks Related to Our Common
Stock and Its Market





If
the ownership of our common stock continues to be somewhat concentrated in
shares owned by our management, and mainly Mr. Atwell and Mr. Wilson, it may
prevent you and other stockholders from influencing significant corporate
decisions and may result in conflicts of interest that could cause our stock
price to decline





As of
December 31, 2007, Mr. Atwell, our President, Chief Executive Officer and
Chairman, and his affiliates, and Mr. Wilson, one of our directors, and his
affiliates, beneficially own or control approximately 98.74% of the votes that
may be cast in any stockholder vote. Accordingly, Mr. Atwell, Mr. Wilson and
their affiliates will have sole control over the outcome of corporate actions
requiring stockholder approval, including the election of directors, any merger,
consolidation or sale of all or substantially all of our assets or any other
significant corporate transactions. This stockholder control may also delay or
prevent a change of control of us, even if such a change of control would
benefit our other stockholders. The concentration of stock ownership may
adversely affect the trading price of our common stock due to investors’
perception that conflicts of interest may exist or arise.





We
have not, and currently do not anticipate, paying dividends on our common
stock





We have
never paid any dividend on our common stock and do not plan to pay dividends on
our common stock for the foreseeable future. We currently intend to retain
future earnings, if any, to finance operations, capital expenditures and to
expand our business.





There
is a limited market for our common stock which makes it difficult for investors
to engage in transactions in our securities





Our
common stock is quoted on the OTCBB under the symbol “CMEG”. If public trading
of our common stock does not increase, a liquid market will not develop for our
common stock. The potential effects of this include difficulties for the holders
of our common shares to sell our common stock at prices they find attractive. If
liquidity in the market for our common stock does not increase, investors in our
company may never realize a profit on their investment.





Our stock is thinly traded, which
can lead to price volatility and difficulty liquidating any
investment in our
stock





The
trading volume of our stock has been low, which can cause the trading price of
our stock to change substantially in response to relatively small orders. In
addition, during the last two fiscal years and subsequent interim period, our
common stock has traded as low as $0.002 and as high as $0.16. Both volume and
price could also be subject to wide fluctuations in response to various factors,
many of which are beyond our control, including actual or anticipated variations
in quarterly and annual operating results and general market perception. An
absence of an active trading market could adversely affect our shareholders’
ability to sell our common stock in short time periods, or possibly at all. In
addition, we believe that factors such as changes in the overall economy or the
condition of the financial markets could cause the price of our common stock to
fluctuate substantially. These fluctuations may also cause short sellers to
enter the market from time to time in the belief that we will have poor results
in the future. We cannot predict the actions of market participants and,
therefore, can offer no assurances that the market for our stock will be stable
or appreciate over time.





A
sale of a substantial number of shares of our common stock may cause the price
of our common stock to decline





If our
shareholders sell substantial amounts of our common stock in the public market,
including shares issued upon the exercise of outstanding options or warrants,
the market price of our common stock could fall. These sales also may make it
more difficult for us to sell equity or equity-related securities in the future
at a time and price that we deem reasonable or appropriate.





Our
common stock is deemed to be “penny stock”, which may make it more difficult for
investors to sell their shares due to suitability requirements





Our
common stock is deemed to be “penny stock” as that term is defined in
Rule 3a51-1 promulgated under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). These requirements may reduce the potential market
for our common stock by reducing the number of potential investors. This may
make it more difficult for investors in our common stock to sell shares to third
parties or to otherwise dispose of them. This could cause our stock price to
decline. Penny stocks are stock:




§
            With
      a price of less than $5.00 per
share;





§
            That
      are not traded on a “recognized” national
  exchange;


§
              Whose
      prices are not quoted on the NASDAQ automated quotation system (NASDAQ
      listed stock must still have a price of not less than $5.00 per share);
      or


§
            In
      issuers with net tangible assets less than $2.0 million (if the issuer has
      been in continuous operation for at least three years) or $10.0
      million (if in continuous operation for less than three years), or with
      average revenues of less than $6.0 million for the last three
      years.





35




ITEM
1. DESCRIPTION OF BUSINESS - continued
  Risks Related to Our Common
Stock and Its Market -
continued




Broker/dealers
dealing in penny stocks are required to provide potential investors with a
document disclosing the risks of penny stocks. Moreover, broker/dealers are
required to determine whether an investment in a penny stock is a suitable
investment for a prospective investor. Many brokers have decided not to trade
“penny stocks” because of the requirements of the penny stock rules and, as a
result, the number of broker-dealers willing to act as market makers in such
securities is limited. In the event that we remain subject to the “penny stock
rules” for any significant period, there may develop an adverse impact on the
market, if any, for our securities. Because our securities are subject to the
“penny stock rules,” investors will find it more difficult to dispose of our
securities.




The
conversion of the promissory notes based on our 2006/2007 financing is based on
an average of our closing bid price of our intraday trading prices of our common
stock over a certain period of time prior to conversion and the decrease of the
intraday trading price will result in issuance of a significant increase of
shares resulting in dilution to our shareholders




The
conversion of the promissory notes in our 2006/2007 financing is based on the
applicable percentage of the average of the lowest three (3) trading prices for
the Common Stock during the twenty (20) trading day period prior to conversion.
The “Applicable Percentage” means 50%; provided, however, that the Applicable
Percentage shall be increased to (i) 55% in the event that a Registration
Statement is filed within thirty days of the closing and (ii) 60% in the event
that the Registration Statement becomes effective within one hundred and twenty
days. At present, the applicable percentage is 60%. The price of our common
shares may fluctuate and the lower intra-day trading price in the future, will
result in a conversion ratio resulting in issuance of a significant amount of
our common shares to the promissory note holders. This will result in our
present shareholders being diluted as the note holders convert.




Future
selling by stockholders may impact our stock value through the execution of
short sales which may decrease the value of our common stock




Short
sales are transactions in which a selling shareholder sells a security it does
not own. To complete the transaction, a selling shareholder must borrow the
security to make delivery to the buyer. The selling shareholder is then
obligated to replace the security borrowed by purchasing the security at the
market price at the time of replacement. The price at such time may be higher or
lower than the price at which the security was sold by the selling shareholder.
If the underlying security goes down in price between the time the selling
shareholder sells our security and buys it back, the selling shareholder will
realize a gain on the transaction. Conversely, if the underlying security goes
up in price during the period, the selling shareholder will realize a loss on
the transaction. The risk of such price increases is the principal risk of
engaging in short sales. The selling shareholders in this registration statement
could short the stock by borrowing and then selling our securities in the
market, and then converting the stock through either the Note or Warrants at a
discount to replace the security borrowed. Because the selling shareholders
control a large portion of our common stock, the selling shareholders could have
a large impact on the value of our stock if they were to engage in short selling
of our stock. Such short selling could impact the value of our stock in an
extreme and volatile manner to the detriment of other shareholders.





Shares eligible
for public sale in the future could decrease the price of our shares of common
stock and reduce our future ability to raise capital




Sales of
substantial amounts of shares of our common stock in the public market could
decrease the prevailing market price of our common stock. If this is the case,
investors in our shares of common stock may be forced to sell such shares at
prices below the price they paid for their shares, or in the case of the
Investors in the recent financing, prices below the price they converted their
notes and warrants into shares. In addition, a decreased market price may result
in potential future investors losing confidence in us and failing to provide
needed funding. This will have a negative effect on our ability to raise equity
capital in the future.





REPORTS
TO SECURITY HOLDERS





The
public may read and copy any materials filed with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may
also obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC. This information, once we
complete our filing, should be available at http://www.sec.gov. Links to such
information are expected to be available on our web site at
www.camelotfilms.com.







36





ITEM
2. DESCRIPTION OF PROPERTY





Our
corporate headquarters are located at 130 Vantis, Suite 140, Aliso Viejo,
California 92656. We occupy approximately 2,156 square feet of modern executive
office space provided to us by The Atwell Group, Inc., a privately-held company
owned by Robert P. Atwell, our Chief Executive Officer. The space is leased on
an annual basis. The current lease expires on December 31, 2009. We can be
reached by calling (949) 334-2950, faxing (949) 334-2951 or emailing info@camelotfilms.com.
We invite you to visit our website at www.camelotfilms.com
for information about our company, products and services.







ITEM
3. LEGAL PROCEEDINGS





As of the
date of this filing, management is not aware of any legal matters threatened or
pending against the Company that have not been previously disclosed in one or
more of the Company’s filings with the Securities and Exchange
Commission.







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





There
were no matters submitted to stockholders for voting during fiscal year
2007.







(Remainder
of Page Left Intentionally Blank)







































37





PART
II





ITEM
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS





Market
Information





Our
Company's common stock is quoted on the Over-the-Counter Bulletin Board (OTCBB)
under the symbol "CMEG" of the National Association of Securities Dealers, Inc.
(the "NASD.





Any
market price for shares of common stock of the Company is likely to be very
volatile, and numerous factors beyond the control of the Company may have a
significant effect. In addition, the over-the-counter stock markets generally
have experienced, and continue to experience, extreme price and volume
fluctuations that have often been unrelated to the operating performance of
companies listed on such exchanges.





These
broad market fluctuations, as well as general economic and political conditions,
may adversely affect the market price of the Company's common stock in any
market that may develop.





Sales of
"restricted securities" under Rule 144 may also have an adverse effect on any
market that may develop. See the caption "Sales of Unregistered
Securities".





Stock
Performance





Our
common stock is currently quoted on the OTCBB under the symbol “CMEG”. There is
a limited trading market for our common stock. The following table sets forth
the range of high and low bid quotations for each quarter within the last two
fiscal years. These quotations as reported by the OTCBB, Pink Sheets and
historical data as reported by AOL Finance reflect inter-dealer prices without
retail mark-up, mark-down, or commissions and may not necessarily represent
actual transactions.





Closing
      BidYEAR
      2007
            High
      Bid
            Low
      Bid1st
      Quarter Ended March 31
            $0.110
            $0.0512nd
      Quarter Ended June 30
            $0.100
            $0.0153rd
      Quarter Ended September 30
            $0.015
            $0.0024th
      Quarter Ended December 31
            $0.007
            $0.003YEAR
      2006
            High
      Bid
            Low
      Bid1st
      Quarter Ended March 31
            $0.130
            $0.0402nd
      Quarter Ended June 30
            $0.140
            $0.0843rd
      Quarter Ended September 30
            $0.160
            $0.0754th
      Quarter Ended December 31
            $0.129
            $0.060





As of
December 31, 2007 the bid share price of our Common Stock was $0.004 on the
OTCBB. As of December 31, 2006 the bid share price of our Common Stock was $.07
on the OTCBB. OTCBB quotations reflect inter-dealer prices, without retail
mark-up, mark-down, or commissions and may not represent actual
transactions.





The
decline in the market price of our stock over the past two years is due in part
to several key factors that have occurred, including the following:





·
            Management’s
      decision to devote considerable time and financial resources to the
      development of Camelot Studios at ATEP without being able to publicly
      announce progress on that project due to contractual restraints;
      and





·
            The
      liquidation of a former affiliate’s stock position between the third
      quarter of 2006 and the second quarter of 2007;
  and





·
            The
      conversion of notes held by the NIR note holders and the resulting
      immediate sale of those shares into the marketplace;
  and





·
            The
      lack of any significant news on the Company or any sustained public
      relations effort due in part to the inability to release news on the
      studio project.





38





ITEM
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS -
continued




Holders





As of
December 31, 2007, there were 224,506,332 shares of Common Stock outstanding. On
December 31, 2007, there were 112 holders of record of our Common Stock.
However, we estimate there are approximately 2,300 total stockholders of our
Common Stock including those held in street name, known as “CEDE”. On December
31, 2006, there were 106,655,743 shares of Common stock outstanding and 115
holders of record of our Common Stock.





Dividends





We have
never declared or paid cash dividends on our Common Stock. We currently intend
to retain cash earnings, if any, to support expansion, and do not anticipate
paying any cash dividends for the foreseeable future. Should we ever produce
sufficient earnings as a result of gains in securities of Concept Affiliates we
develop, our Board of Directors, after taking into account our earnings, capital
requirements, financial condition and other factors, has the discretion to
distribute such securities to our shareholders as property
dividends.





Sale
of Unregistered Securities





All
securities sold in the past three years have been reported in previous quarterly
filings on Form 10-QSB and annual filings on Form 10-KSB.





During
fiscal year 2007, the Company issued 186,683,922 total shares of common stock,
all of which were issued to third parties at or above the market price. Of these
shares, 38,000,000 shares, or 20.35%, were issued in connection with a proposed
$3,000,000 financing transaction with Nucore World Industries in Pasadena,
California. That transaction did not close, and 33,000,000 of those shares were
returned to the treasury and 5,000,000 of those shares have had an
administrative stop placed on them pending return of the certificate and
cancellation thereof. 35,600,000 shares, or 19.06%, were issued to Scorpion Bay,
LLC, for interest and services rendered to the Company, including services on
behalf of Camelot Studio Group. Scorpion Bay is managed by Tim Wilson, one of
our directors. In addition, 30,833,333 shares, or 16.51%, were issued to the
Company to be held for financing activities during 2007, including reserving
shares for note conversions in connection with the NIR financing agreements.
20,000,000 shares, or 10.71%, were issued to Jeff Zuckerman, one of our
directors and a member of Janez Development Group, a member of Camelot
Development Tustin; and 20,000,000 shares, or 10.71%, were issued to John
Kozmur, also a member of Janez Development Group. Both Zuckerman and Kozmur were
issued shares in connection with Camelot Studio Group activities. The four note
holders who provided financing to us during 2007 through the SB2 registration
(known as the “NIR” funding transaction) were issued an aggregate total of
13,270,750, or 7.1% of the total issued. Here is a summary of the total shares
issued by stockholder:





Stockholder
            Shares Issued
            Exemption
            Consideration
            Disposition/PriceNucore
      World Industries
            38,000,000
            144
            Funding
            Cancelled;
      StoppedScorpion
      Bay, LLC
            35,600,000
            144
            Interest;
      Services
            Issued/MarketCamelot
      Ent. Gp.
            30,833,333
            144
            Funding
            Held
      in ReserveJeff
      Zuckerman
            20,000,000
            144
            Services
            Issued/MarketJohn
      Kozmur
            20,000,000
            144
            Services
            Issued/MarketAJW
      Offshore
            8,505,250
            SB2
      Registration
            Funding
            Issued/MarketDolphin
      Communities
            5,000,000
            144
            Loans;
      Services
            Issued/MarketMichael
      Ellis
            4,792,369
            144
            Services
            Issued/MarketSusan
      Sanchez
            4,446,000
            S8/144
            Services
            Issued/MarketPatrick
      Winn
            3,768,000
            S8/144
            Services
            Issued/MarketAJW
      Qualified Partners
            3,455,879
            SB2
      Registration
            Funding
            Issued/MarketBastien
      and Associates
            2,937,267
            144
            Services
            Issued/MarketChris
      Flannery
            2,500,000
            S8
            Services
            Issued/MarketPetrucelli
      & Associates
            2,500,000
            S8
            Services
            Issued/MarketDouglas
      Warner
            1,250,000
            144
            Services
            Issued/MarketAJW
      Partners
            1,150,879
            SB2
      Registration
            Funding
            Issued/MarketLewis
      Consulting Group
            1,000,000
            144
            Services
            Issued/MarketThe
      Atwell Group
            401,957
            144
            Loans;
      Services
            Issued/MarketChris
      Davis Int’l
            238,413
            144
            Services
            Issued/MarketNew
      Millennium Capital
            158,742
            SB2
      Registration
            Funding
            Issued/MarketCraig
      Prater
            145,833
            144
            Services
            Issued/MarketTotal
            186,683,922






39




ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS - continued




Sale of Unregistered
Securities-
continued




Here is a
complete breakdown of all common shares issued in 2007 by effective
date:




Date
            Title
            Exemption
            Amount
            Name
            Type
            Consideration
            Price
            Note3/16/2007
            Common
            144
            5,000,000
            Nucore
      World Industries
            Funding
            Cash
            0
            Cancelled3/19/2007
            Common
            144
            33,000,000
            Nucore
      World Industries
            Funding
            Cash
            0
            Cancelled4/12/2007
            Common
            144
            1,500,000
            Scorpion
      Bay LLC
            Funding
            Cash
            .08
            Interest5/03/2007
            Common
            144
            401,957
            The
      Atwell Group
            Adj
      Ent
            Cash/Services
            .048
            Adjust
      Entry5/09/2007
            Common
            144
            30,833,333
            Camelot
      Entertainment
            Funding
            Cash
            .001
            Reserve5/11/2007
            Common
            144
            1,250,000
            Douglas
      Warner
            Services
            Consulting
            .04
            Contract6/08/2007
            Common
            144
            187,750
            AJW
      Offshore
            Funding
            Cash
            .017
            Conversion6/08/2007
            Common
            144
            37,500
            AJW
      Qualified Partners
            Funding
            Cash
            .017
            Conversion6/08/2007
            Common
            144
            21,750
            AJW
      Partners
            Funding
            Cash
            .017
            Conversion6/08/2007
            Common
            144
            3,750
            New
      Millennium Capital
            Funding
            Cash
            .017
            Conversion6/08/2007
            Common
            144
            4,500,000
            Scorpion
      Bay LLC
            Funding
            Cash
            .04
            Interest6/13/2007
            Common
            144
            187,750
            AJW
      Offshore
            Funding
            Cash
            .017
            Conversion6/13/2007
            Common
            144
            37,500
            AJW
      Qualified Partners
            Funding
            Cash
            .017
            Conversion6/13/2007
            Common
            144
            21,750
            AJW
      Partners
            Funding
            Cash
            .017
            Conversion6/13/2007
            Common
            144
            3,750
            New
      Millennium Capital
            Funding
            Cash
            .017
            Conversion6/18/2007
            Common
            144
            187,750
            AJW
      Offshore
            Funding
            Cash
            .02
            Conversion6/18/2007
            Common
            144
            37,500
            AJW
      Qualified Partners
            Funding
            Cash
            .02
            Conversion6/18/2007
            Common
            144
            21,750
            AJW
      Partners
            Funding
            Cash
            .02
            Conversion6/18/2007
            Common
            144
            3,750
            New
      Millennium Capital
            Funding
            Cash
            .02
            Conversion6/19/2007
            Common
            144
            187,750
            AJW
      Offshore
            Funding
            Cash
            .019
            Conversion6/19/2007
            Common
            144
            37,500
            AJW
      Qualified Partners
            Funding
            Cash
            .019
            Conversion6/19/2007
            Common
            144
            21,750
            AJW
      Partners
            Funding
            Cash
            .019
            Conversion6/19/2007
            Common
            144
            3,750
            New
      Millennium Capital
            Funding
            Cash
            .019
            Conversion6/19/2007
            Common
            144
            1,000,000
            Scorpion
      Bay, LLC.
            Funding
            Cash
            .0305
            Interest6/20/2007
            Common
            144
            187,750
            AJW
      Offshore
            Funding
            Cash
            .018
            Conversion6/20/2007
            Common
            144
            37,500
            AJW
      Qualified Partners
            Funding
            Cash
            .018
            Conversion6/20/2007
            Common
            144
            21,750
            AJW
      Partners
            Funding
            Cash
            .018
            Conversion6/20/2007
            Common
            144
            3,750
            New
      Millennium Capital
            Funding
            Cash
            .018
            Conversion6/25/2007
            Common
            144
            375,500
            AJW
      Offshore
            Funding
            Cash
            .012
            Conversion6/25/2007
            Common
            144
            75,000
            AJW
      Qualified Partners
            Funding
            Cash
            .012
            Conversion6/25/2007
            Common
            144
            43,500
            AJW
      Partners
            Funding
            Cash
            .012
            Conversion6/25/2007
            Common
            144
            6,000
            New
      Millennium Capital
            Funding
            Cash
            .012
            Conversion7/06/2007
            Common
            144
            375,500
            AJW
      Offshore
            Funding
            Cash
            .0066
            Conversion7/06/2007
            Common
            144
            75,000
            AJW
      Qualified Partners
            Funding
            Cash
            .0066
            Conversion7/06/2007
            Common
            144
            43,500
            AJW
      Partners
            Funding
            Cash
            .0066
            Conversion7/06/2007
            Common
            144
            6,000
            New
      Millennium Capital
            Funding
            Cash
            .0066
            Conversion7/11/2007
            Common
            144
            375,500
            AJW
      Offshore
            Funding
            Cash
            .0039
            Conversion7/11/2007
            Common
            144
            75,000
            AJW
      Qualified Partners
            Funding
            Cash
            .0039
            Conversion7/11/2007
            Common
            144
            43,500
            AJW
      Partners
            Funding
            Cash
            .0039
            Conversion7/11/2007
            Common
            144
            6,000
            New
      Millennium Capital
            Funding
            Cash
            .0039
            Conversion7/11/2007
            Common
            144
            208,409
            Bastien
      and Associates
            Services
            Consulting
            .0607
            Invoice7/13/2007
            Common
            144
            375,500
            AJW
      Offshore
            Funding
            Cash
            .0038
            Conversion7/13/2007
            Common
            144
            75,000
            AJW
      Qualified Partners
            Funding
            Cash
            .0038
            Conversion7/13/2007
            Common
            144
            43,500
            AJW
      Partners
            Funding
            Cash
            .0038
            Conversion7/13/2007
            Common
            144
            6,000
            New
      Millennium Capital
            Funding
            Cash
            .0038
            Conversion7/15/2007
            Common
            144
            1,000,000
            Scorpion
      Bay, LLC.
            Funding
            Cash
            .0055
            Interest7/20/2007
            Common
            144
            375,500
            AJW
      Offshore
            Funding
            Cash
            .0034
            Conversion7/20/2007
            Common
            144
            75,000
            AJW
      Qualified Partners
            Funding
            Cash
            .0034
            Conversion7/20/2007
            Common
            144
            43,500
            AJW
      Partners
            Funding
            Cash
            .0034
            Conversion7/20/2007
            Common
            144
            6,000
            New
      Millennium Capital
            Funding
            Cash
            .0034
            Conversion7/24/2007
            Common
            144
            375,500
            AJW
      Offshore
            Funding
            Cash
            .003
            Conversion









40




ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS - continued
  Sale of Unregistered
Securities-
continued


7/24/2007
            Common
            144
            75,000
            AJW
      Qualified Partners
            Funding
            Cash
            .003
            Conversion7/24/2007
            Common
            144
            43,500
            AJW
      Partners
            Funding
            Cash
            .003
            Conversion7/24/2007
            Common
            144
            6,000
            New
      Millennium Capital
            Funding
            Cash
            .003
            Conversion7/27/2007
            Common
            144
            375,500
            AJW
      Offshore
            Funding
            Cash
            .003
            Conversion7/27/2007
            Common
            144
            75,000
            AJW
      Qualified Partners
            Funding
            Cash
            .003
            Conversion7/27/2007
            Common
            144
            43,500
            AJW
      Partners
            Funding
            Cash
            .003
            Conversion7/27/2007
            Common
            144
            6,000
            New
      Millennium Capital
            Funding
            Cash
            .003
            Conversion8/01/2007
            Common
            144
            375,500
            AJW
      Offshore
            Funding
            Cash
            .0028
            Conversion8/01/2007
            Common
            144
            75,000
            AJW
      Qualified Partners
            Funding
            Cash
            .0028
            Conversion8/01/2007
            Common
            144
            43,500
            AJW
      Partners
            Funding
            Cash
            .0028
            Conversion8/01/2007
            Common
            144
            6,000
            New
      Millennium Capital
            Funding
            Cash
            .0028
            Conversion8/03/2007
            Common
            144
            375,500
            AJW
      Offshore
            Funding
            Cash
            .0024
            Conversion8/03/2007
            Common
            144
            75,000
            AJW
      Qualified Partners
            Funding
            Cash
            .0024
            Conversion8/03/2007
            Common
            144
            43,500
            AJW
      Partners
            Funding
            Cash
            .0024
            Conversion8/03/2007
            Common
            144
            6,000
            New
      Millennium Capital
            Funding
            Cash
            .0024
            Conversion8/07/2007
            Common
            144
            375,500
            AJW
      Offshore
            Funding
            Cash
            .0019
            Conversion8/07/2007
            Common
            144
            75,000
            AJW
      Qualified Partners
            Funding
            Cash
            .0019
            Conversion8/07/2007
            Common
            144
            43,500
            AJW
      Partners
            Funding
            Cash
            .0019
            Conversion8/07/2007
            Common
            144
            6,000
            New
      Millennium Capital
            Funding
            Cash
            .0019
            Conversion8/13/2007
            Common
            144
            375,500
            AJW
      Offshore
            Funding
            Cash
            .0016
            Conversion8/13/2007
            Common
            144
            75,000
            AJW
      Qualified Partners
            Funding
            Cash
            .0016
            Conversion8/13/2007
            Common
            144
            43,500
            AJW
      Partners
            Funding
            Cash
            .0016
            Conversion8/13/2007
            Common
            144
            6,000
            New
      Millennium Capital
            Funding
            Cash
            .0016
            Conversion8/16/2007
            Common
            144
            375,500
            AJW
      Offshore
            Funding
            Cash
            .0013
            Conversion8/16/2007
            Common
            144
            75,000
            AJW
      Qualified Partners
            Funding
            Cash
            .0013
            Conversion8/16/2007
            Common
            144
            43,500
            AJW
      Partners
            Funding
            Cash
            .0013
            Conversion8/16/2007
            Common
            144
            6,000
            New
      Millennium Capital
            Funding
            Cash
            .0013
            Conversion8/24/2007
            Common
            144
            375,500
            AJW
      Offshore
            Funding
            Cash
            .0013
            Conversion8/24/2007
            Common
            144
            75,000
            AJW
      Qualified Partners
            Funding
            Cash
            .0013
            Conversion8/24/2007
            Common
            144
            43,500
            AJW
      Partners
            Funding
            Cash
            .0013
            Conversion8/24/2007
            Common
            144
            6,000
            New
      Millennium Capital
            Funding
            Cash
            .0013
            Conversion8/24/2007
            Common
            144
            2,728,858
            Bastien
      and Associates
            Services
            Consulting
            .006
            Invoice8/24/2007
            Common
            144
            1,000,000
            Patrick
      Winn
            Services
            Administrative
            .006
            CSG8/24/2007
            Common
            144
            1,000,000
            Susan
      Sanchez
            Services
            Administrative
            .006
            CSG8/30/2007
            Common
            144
            375,500
            AJW
      Offshore
            Funding
            Cash
            .0013
            Conversion8/30/2007
            Common
            144
            75,000
            AJW
      Qualified Partners
            Funding
            Cash
            .0013
            Conversion8/30/2007
            Common
            144
            43,500
            AJW
      Partners
            Funding
            Cash
            .0013
            Conversion8/30/2007
            Common
            144
            6,000
            New
      Millennium Capital
            Funding
            Cash
            .0013
            Conversion9/10/2007
            Common
            144
            1,000,000
            Scorpion
      Bay, LLC.
            Funding
            Cash
            .003
            Interest9/11/2007
            Common
            144
            375,500
            AJW
      Offshore
            Funding
            Cash
            .0013
            Conversion9/11/2007
            Common
            144
            75,000
            AJW
      Qualified Partners
            Funding
            Cash
            .0013
            Conversion9/11/2007
            Common
            144
            43,500
            AJW
      Partners
            Funding
            Cash
            .0013
            Conversion9/11/2007
            Common
            144
            6,000
            New
      Millennium Capital
            Funding
            Cash
            .0013
            Conversion9/18/2007
            Common
            144
            375,500
            AJW
      Offshore
            Funding
            Cash
            .0015
            Conversion9/18/2007
            Common
            144
            75,000
            AJW
      Qualified Partners
            Funding
            Cash
            .0015
            Conversion9/18/2007
            Common
            144
            43,500
            AJW
      Partners
            Funding
            Cash
            .0015
            Conversion9/18/2007
            Common
            144
            6,000
            New
      Millennium Capital
            Funding
            Cash
            .0015
            Conversion9/19/2007
            Common
            144
            375,500
            AJW
      Offshore
            Funding
            Cash
            .0016
            Conversion9/19/2007
            Common
            144
            75,000
            AJW
      Qualified Partners
            Funding
            Cash
            .0016
            Conversion9/19/2007
            Common
            144
            43,500
            AJW
      Partners
            Funding
            Cash
            .0016
            Conversion9/19/2007
            Common
            144
            6,000
            New
      Millennium Capital
            Funding
            Cash
            .0016
            Conversion9/25/2007
            Common
            144
            375,500
            AJW
      Offshore
            Funding
            Cash
            .0018
            Conversion9/25/2007
            Common
            144
            75,000
            AJW
      Qualified Partners
            Funding
            Cash
            .0018
            Conversion9/25/2007
            Common
            144
            43,500
            AJW
      Partners
            Funding
            Cash
            .0018
            Conversion9/25/2007
            Common
            144
            6,000
            New
      Millennium Capital
            Funding
            Cash
            .0018
            Conversion9/25/2007
            Common
            144
            2,800,000
            Scorpion
      Bay, LLC.
            Funding
            Cash
            .00357
            Interest10/01/2007
            Common
            144
            375,500
            AJW
      Offshore
            Funding
            Cash
            .0018
            Conversion10/01/2007
            Common
            144
            75,000
            AJW
      Qualified Partners
            Funding
            Cash
            .0018
            Conversion10/01/2007
            Common
            144
            43,500
            AJW
      Partners
            Funding
            Cash
            .0018
            Conversion10/01/2007
            Common
            144
            6,000
            New
      Millennium Capital
            Funding
            Cash
            .0018
            Conversion10/05/2007
            Common
            144
            144,000
            AJW
      Offshore
            Funding
            Cash
            .00176
            Conversion10/05/2007
            Common
            144
            72,000
            AJW
      Qualified Partners
            Funding
            Cash
            .00176
            Conversion








41




ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS - continued
  Sale of Unregistered
Securities-
continued


10/05/2007
            Common
            144
            21,600
            AJW
      Partners
            Funding
            Cash
            .00176
            Conversion10/05/2007
            Common
            144
            2,400
            New
      Millennium Capital
            Funding
            Cash
            .00176
            Conversion10/10/2007
            Common
            144
            144,000
            AJW
      Offshore
            Funding
            Cash
            .00176
            Conversion10/10/2007
            Common
            144
            72,000
            AJW
      Qualified Partners
            Funding
            Cash
            .00176
            Conversion10/10/2007
            Common
            144
            21,600
            AJW
      Partners
            Funding
            Cash
            .00176
            Conversion10/10/2007
            Common
            144
            2,400
            New
      Millennium Capital
            Funding
            Cash
            .00176
            Conversion10/17/2007
            Common
            144
            144,000
            AJW
      Offshore
            Funding
            Cash
            .00176
            Conversion10/17/2007
            Common
            144
            72,000
            AJW
      Qualified Partners
            Funding
            Cash
            .00176
            Conversion10/17/2007
            Common
            144
            21,600
            AJW
      Partners
            Funding
            Cash
            .00176
            Conversion10/17/2007
            Common
            144
            2,400
            New
      Millennium Capital
            Funding
            Cash
            .00176
            Conversion10/23/2007
            Common
            144
            75,000
            AJW
      Qualified Partners
            Funding
            Cash
            .00172
            Conversion10/23/2007
            Common
            144
            22,000
            AJW
      Partners
            Funding
            Cash
            .00172
            Conversion10/23/2007
            Common
            144
            3,000
            New
      Millennium Capital
            Funding
            Cash
            .00172
            Conversion10/25/2007
            Common
            144
            75,000
            AJW
      Qualified Partners
            Funding
            Cash
            .00168
            Conversion10/25/2007
            Common
            144
            22,000
            AJW
      Partners
            Funding
            Cash
            .00168
            Conversion10/25/2007
            Common
            144
            3,000
            New
      Millennium Capital
            Funding
            Cash
            .00168
            Conversion10/25/2007
            Common
            144
            4,100,000
            Scorpion
      Bay, LLC.
            Funding
            Cash
            .00357
            Interest10/25/2007
            Common
            144
            5,000,000
            Scorpion
      Bay, LLC.
            Funding
            Cash
            .0033
            Interest10/25/2007
            Common
            144
            5,000,000
            Dolphin
      Communities
            Funding
            Cash
            .0033
            Interest10/25/2007
            Common
            S8
            2,768,000
            Patrick
      Winn
            Services
            Administrative
            .003
            CSG10/25/2007
            Common
            S8
            3,446,000
            Susan
      Sanchez
            Services
            Administrative
            .003
            CSG10/30/2007
            Common
            144
            75,000
            AJW
      Qualified Partners
            Funding
            Cash
            .00168
            Conversion10/30/2007
            Common
            144
            22,000
            AJW
      Partners
            Funding
            Cash
            .00168
            Conversion10/30/2007
            Common
            144
            3,000
            New
      Millennium Capital
            Funding
            Cash
            .00168
            Conversion11/02/2007
            Common
            144
            75,000
            AJW
      Qualified Partners
            Funding
            Cash
            .00168
            Conversion11/02/2007
            Common
            144
            22,000
            AJW
      Partners
            Funding
            Cash
            .00168
            Conversion11/02/2007
            Common
            144
            3,000
            New
      Millennium Capital
            Funding
            Cash
            .00168
            Conversion11/05/2007
            Common
            144
            75,000
            AJW
      Qualified Partners
            Funding
            Cash
            .00168
            Conversion11/05/2007
            Common
            144
            22,000
            AJW
      Partners
            Funding
            Cash
            .00168
            Conversion11/05/2007
            Common
            144
            3,000
            New
      Millennium Capital
            Funding
            Cash
            .00168
            Conversion11/07/2007
            Common
            144
            75,000
            AJW
      Qualified Partners
            Funding
            Cash
            .0017
            Conversion11/07/2007
            Common
            144
            22,000
            AJW
      Partners
            Funding
            Cash
            .0017
            Conversion11/07/2007
            Common
            144
            3,000
            New
      Millennium Capital
            Funding
            Cash
            .0017
            Conversion11/08/2007
            Common
            144
            77,379
            AJW
      Qualified Partners
            Funding
            Cash
            .0017
            Conversion11/08/2007
            Common
            144
            18,829
            AJW
      Partners
            Funding
            Cash
            .0017
            Conversion11/08/2007
            Common
            144
            3,792
            New
      Millennium Capital
            Funding
            Cash
            .0017
            Conversion11/12/2007
            Common
            144
            100,000
            AJW
      Qualified Partners
            Funding
            Cash
            .0017
            Conversion11/14/2007
            Common
            144
            100,000
            AJW
      Qualified Partners
            Funding
            Cash
            .0017
            Conversion11/20/2007
            Common
            144
            100,000
            AJW
      Qualified Partners
            Funding
            Cash
            .00176
            Conversion11/26/2007
            Common
            144
            100,000
            AJW
      Qualified Partners
            Funding
            Cash
            .00176
            Conversion11/27/2007
            Common
            144
            100,000
            AJW
      Qualified Partners
            Funding
            Cash
            .00176
            Conversion11/29/2007
            Common
            144
            100,000
            AJW
      Qualified Partners
            Funding
            Cash
            .0018
            Conversion12/06/2007
            Common
            144
            100,000
            AJW
      Qualified Partners
            Funding
            Cash
            .0018
            Conversion12/11/2007
            Common
            144
            100,000
            AJW
      Qualified Partners
            Funding
            Cash
            .0018
            Conversion12/13/2007
            Common
            144
            100,000
            AJW
      Qualified Partners
            Funding
            Cash
            .0018
            Conversion





42




ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS - continued
  Sale of Unregistered
Securities-
continued


12/13/2007
            Common
            S8
            2,500,000
            Petrucelli
      & Associates
            Services
            Legal
            .004
            CMEG12/13/2007
            Common
            S8
            2,500,000
            Chris
      Flannery
            Services
            Legal
            .004
            CMEG12/18/2007
            Common
            144
            100,000
            AJW
      Qualified Partners
            Funding
            Cash
            .005
            Conversion12/18/2007
            Common
            144
            20,000,000
            John
      Kozmur
            Services
            Contractual
            .007
            CSG12/18/2007
            Common
            144
            20,000,000
            Jeff
      Zuckerman
            Services
            Contractual
            .007
            CSG12/21/2007
            Common
            144
            57,742
            AJW
      Qualified Partners
            Funding
            Cash
            .002
            Conversion12/21/2007
            Common
            144
            42,258
            AJW
      Qualified Partners
            Funding
            Cash
            .002
            Conversion12/31/2007
            Common
            144
            4,700,000
            Scorpion
      Bay, LLC
            Services
            Consulting
            .00424
            Fee12/31/2007
            Common
            144
            10,000,000
            Scorpion
      Bay, LLC
            Services
            Consulting
            .0033
            Fee12/31/2007
            Common
            144
            4,792,369
            Michael
      Ellis
            Services
            Administrative
            .0045
            CSG12/31/2007
            Common
            144
            238,413
            Chris
      Davis Intl.
            Services
            Consulting
            .005
            CFG12/31/2007
            Common
            144
            145,833
            Craig
      Prater
            Services
            Consulting
            .005
            CEM12/31/2007
            Common
            144
            1,000,000
            Lewis
      Consulting Group
            Services
            Consulting
            .005
            CSG




Preferred
Stock




As of
December 31, 2007, we had two classes of preferred stock, Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock. There were a total of
28,152,047 total shares of preferred stock outstanding.





On
December 31, 2007, there were 8,650,957 shares outstanding of our $0.001 par
value Series B Convertible Preferred Stock. The Series B Preferred converts to
10 shares of common stock for every one share of Series B Preferred Stock. Each
share of Series B Preferred Stock is entitled to 1,000 votes. Series B Preferred
ranks superior to all other classes of stock.





On
December 31, 2007, there were 19,501,090 shares outstanding of our $0.001
par value Series A Convertible Preferred Stock. The Series A Preferred converts
to 4 shares of common stock for every one share of Series A Preferred Stock.
Each share of Series A Preferred Stock is entitled to 50 votes. Series A
Preferred ranks superior to our common stock and ranks junior to our Series B
Preferred Stock.





On
January 18, 2008, Camelot established a new class of preferred stock designated
as Series C Convertible Preferred Stock (“Series C Preferred Stock”). The Series
C Preferred Stock was established specifically for preferred shares to be issued
in conjunction with the Camelot Studio Investors LLC purchase of up to 30% of
Camelot Development Group from Camelot. There are 10,000,000 authorized shares
of the Series C Preferred Stock. As of December 31, 2007, no Series C Preferred
Stock had been issued. The Series C Preferred Stock ranks junior to the Series A
and Series B Preferred Stock, and ranks senior to the common stock. Holders of
Series C Preferred Stock are entitled to one vote for each Series C Preferred
Stock held. Each share of Series C preferred Stock converts into one share of
common.





Holders




As of
December 31, 2007, there were 28,152,047 shares of Preferred Stock outstanding.
On December 31, 2007, there were 2 holders of record of our Preferred
Stock.





2007
Preferred Stock Issuances





In fiscal
year 2007, we issued 19,202,047 shares of Preferred Stock. We issued 15,651,090
shares of Series A Convertible Preferred Stock and 3,550,957 shares of Series B
Convertible Preferred Stock.





Date
            Title
            Exemption
            Amount
            Name
            Type
            Consideration
            Price
            Note12/31/07
            Series
      A
            4.2
            10,000,000
            Scorpion
      Bay
            Services
            Consulting
            .001
            CSG12/31/07
            Series
      A
            4.2
            4,401,090
            The
      Atwell Group
            Services
            Administrative
            .001
            CMEG12/31/07
            Series
      B
            4.2
            2,750,000
            Scorpion
      Bay
            Services
            Consulting
            .001
            CSG12/31/07
            Series
      B
            4.2
            980,957
            The
      Atwell Group
            Services
            Administrative
            .001
            CMEG







(Remainder
of Page Left Intentionally Blank)







43





ITEM 6.  MANAGEMENT’S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION





The
matters discussed in this report contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which
are subject to the "safe harbor" created by those sections. These
forward-looking statements include but are not limited to statements concerning
our business outlook or future economic performance; anticipated profitability,
revenues, expenses or other financial items; and statements concerning
assumptions made or exceptions as to any future events, conditions, performance
or other matters which are "forward-looking statements" as that term is defined
under the Federal Securities Laws. All statements, other than historical
financial information, may be deemed to be forward-looking statements. The words
"believes", "plans", "anticipates", "expects", and similar expressions herein
are intended to identify forward-looking statements. Forward-looking statements
are subject to risks, uncertainties, and other factors, which would cause actual
results to differ materially from those stated in such statements.
Forward-looking statements include, but are not limited to, those discussed in
"Risk Factors" and elsewhere in this report, and the risks discussed in the
Company's other SEC filings.





INTRODUCTION




Management’s
discussion and analysis of results of operations and financial condition
(“MD&A”) is provided as a supplement to the accompanying financial
statements and notes to help provide an understanding of Camelot Entertainment
Group Inc.’s (“Camelot” or the “Company”) financial condition, cash flows and
results of operations. MD&A is organized as follows:





o
            Plan
      of Operation.  This section provides a brief description of
      Camelot’s plan of operation for fiscal year
  2008.





o
            Overview. This section
      provides a general description of our corporate structure and what the
      management will focus on in 2008.





o
            Cash requirements. This
      section provides a discussion of how long Camelot can satisfy its cash
      requirements and the need, if any, to raise additional funds in
      2008.





o
            Research and
      Development. This section discusses the research and development
      activities of Camelot.





o
            Equipment. This section
      looks at if there will be any major equipment purchases in
      2008.





o
            Change in Employees.
      This section discusses if there will be any significant change in the
      number of employees.





o
            Results
      of Operations. This section provides an analysis of Camelot’s results of
      operations for the two years ending December 31,
  2007.





o
            Liquidity and Capital
      Resources. This section provides an analysis of Camelot’s cash
      flows for the two years ended December 31, 2007, as well as a
      discussion of the Company’s outstanding debt and commitments that existed
      as of December 31, 2007. Included in the analysis of outstanding debt
      is a discussion of the amount of financial capacity available to fund the
      Company’s future commitments, as well as a discussion of other financing
      arrangements.





o
            Sources of Revenue.
      This section examines expected sources of
  revenues.





o
            Recent Financings. This
      section discusses financing transactions of Camelot during
      2007.





o
            Off-Balance
      Sheet Arrangements. This section discloses any off-balance sheet
      arrangements that have or are reasonably likely to have a current or
      future effect on Camelot’s financial
condition.





o
            Critical
      Accounting Estimates. This section identifies those accounting estimates
      that are considered important to the Company’s results of operations and
      financial condition, require significant judgment and require estimates on
      the part of management in
application.





o
            Critical
      Accounting Policies. This section identifies those accounting policies
      that are considered important to the Company’s results of operations and
      financial condition, require significant judgment and require estimates on
      the part of management in application. All of the Company’s significant
      accounting policies, including those considered to be critical accounting
      policies, are summarized in Note 1 to the accompanying financial
      statements.





o
            Caution
      Concerning Forward-Looking Statements. This section provides a description
      of the use of forward looking
      information appearing in this report, including in MD&A and the
      financial statements. Such information is based on management’s current
      expectations about future events, which are inherently susceptible to
      uncertainty and changes in circumstances. Refer “Risk Factors” in
      Part I of this report, for a discussion of the risk factors
      applicable to the Company.





44





ITEM
6.  MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - continued




Plan
of Operation





Overview





Camelot
Entertainment Group is working to become a fully integrated, broad based
entertainment company whose planned future global operations expect to encompass
motion picture production and distribution, television programming, production
and syndication, home video acquisition and distribution, digital media
production and distribution, development and operation of studio facilities,
development of new technologies, and distribution of filmed entertainment
worldwide. We are planning to become a global leader in the creation,
production, distribution, licensing and marketing of all form of creative
content and their related businesses across all current and emerging media and
platforms. If we are successful in implementing our business model, we could
lead the industry in every aspect from feature film, television and home
entertainment production and distribution to DVD, digital distribution,
licensing and entertainment related digital media.





Our
Company is divided up into three major divisions, Camelot Film and Media Group,
Camelot Studio Group and Camelot Production Services Group.





During
fiscal year 2008, the Company’s focus will continue to be on two specific areas:
the ongoing development of Camelot Studios at ATEP under our Camelot Studio
Group division and the emergence of Camelot Film and Media Group as it prepares
to unveil its Camelot Production Model (“CPM”). In order to implement our plans
to become a global media and entertainment company, it is critical that we build
a solid foundation to build upon, and that begins with making sure that each
division is carefully structured and that their respective business models are
implemented in accordance with those designs.





There are
five steps that comprise the backbone of our operating philosophy. Each step,
when implemented, secures the foundation for the next step. These five steps
are:





1.
            Education;
      which leads to





2.
            Infrastructure;
      which leads to





3.
            Utilization;
      which leads to





4.
            Opportunity;
      which leads to





5.
            Success





The
current center point of our overall structure is Camelot Studios at ATEP, which
is now in the middle of the entitlement process. This major studio complex,
which is part of the Advanced Technology and Education Park campus in Tustin,
California, will serve as the initial base of operations for our Camelot Studio
Group division. It will also serve as the template for other facilities both
domestically and internationally by way of its modern and technology-advanced
design and through its unique integration of students into the world of
professional filmmaking. Current plans estimate that Camelot Studios at ATEP
will break ground in April 2009, commence initial operations in late 2010 and
become fully operational in late 2011. Further details about the studio are
expected to be released during the second and/or third quarters of 2008. In
order to meet the above timetable, the entitlement process must be successfully
completed and the subsequent financing must be secured. Failure of either one of
these components could result in the project being delayed or shuttered, which
if occurred could have a material adverse affect on our Company.





Fiscal
year 2008 should also see the emergence of our production and distribution
division, Camelot Film and Media Group, and the proprietary Camelot Films “CPM”.
Designed to have mainstream appeal and franchise potential, the CPM provides for
the development, production, marketing and distribution of motion pictures by
combining the efficiencies realized by studios of the early 1900’s with the
artistic focus and diversity of today’s independent productions. Using this
approach, we believe the risk-reward relationship facing the typical film
project can be dramatically shifted. For example, whereas a typical film pushes
artists and directors to rush development and production in hopes of conserving
cash, the CPM extends the pre-production cycle substantially to reduce costs
while simultaneously increasing quality. Similarly, whereas many independent
films are limited by the types of post production technology used, due in part
to budget constraints, we intend to invest directly in top of the line
technology, spreading the costs over a targeted minimum number of original
motion pictures each year. One benchmark of the CPM is to develop the ability to
consistently produce films with the look, feel and artistic content of
multi-million dollar pictures, for a fraction of the cost.






45




ITEM
6.  MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - continued
  Plan
of Operation - continued




Within
our Camelot Film and Media Group division, Camelot Films plans to focus on high
quality, suspense, action, thriller,
comedy and dramatic commercial content. Camelot Features will continue to
develop its limited catalogue of literary properties and preparations to begin
pre-production on some of its projects as packaging is completed. Camelot
Television Group plan to continue to explore potential pilots and television
series to produce. Camelot Urban Entertainment is expected to complete its first
feature length documentary during 2008 and continue the development process on
several feature film properties currently being developed. Camelot Film and
Media Group plans to accelerate the activity in its Latin entertainment division
once it completes its search for an executive to lead that division. We also
plan to increase activity in our family division, Ferris Wheel Films. We have a
consulting agreement with Capital Arts Entertainment, which is part of a
contemplated acquisition plan that could result in the Capital Arts Management
team joining forces with the Company and heading up Camelot Film and Media
Group. Experts in efficient budget production, the management of Capital Arts
has over 250 film credits in production and distribution, and they have an
excellent industry reputation. More details concerning this potential
acquisition are expected to be released later this fiscal year. Camelot Gaming
and our Digital Media division should begin to see activity in 2008. We continue
to develop our distribution division, with three potential acquisitions being
discussed. If completed, these acquisitions would strengthen our ability to
distribute product both domestically and internationally. Further details on
these potential acquisitions should be available during the 3rd quarter
of 2008. We continued our consulting relationship with Chris Davis International
in 2007on international sales and we are currently exploring expansion of that
relationship during 2008.





Due to
our focus and the commitment of resources on the Camelot Studios at ATEP
project, we made the decision to slow down the progress of our other divisions
and concentrate on successfully completing the development and entitlement
process of our Camelot Studios at ATEP facility. With entitlements now
processing and with an experienced development team in place, we expect to be
able to refocus attention on Camelot Film and Media Group and Camelot Production
Services Group in 2008. Notwithstanding the foregoing, our priority in 2008 will
be as follows: first, Camelot Studio Group; second, Camelot Film and Media
Group; and third, Camelot Production Services Group.





In
addition, we are in the process of revamping our web site, www.camelotfilms.com.
Our new web site is expected to allow us to provide more detail on our
activities with regular updates. Our site plans to also be fully interactive and
hopefully will provide those accessing our site with the latest technical
innovations and industry wise links. Our site is expected to provide digital
downloading capability, previews, film clips, distance learning, IPTV channels,
blogs, user email, retail outlets, screenplay and film submissions, uploading
capability and consumer interactive sections, including a consumer film review
section where the public can submit their own personalized film, television and
digital media reviews in addition to reviews of the commercial products featured
in the film, television and digital media productions.





Cash
Requirements





With
current financial arrangements, we should be able to satisfy our operational
cash requirements for fiscal year 2008. Our current operational cash
requirements do not include any debt retirement, just basic operational
expenses. In order to meet our 2008 obligations, we entered into an agreement
with Camelot Studio Investors, LLC, whereby we are selling them up to thirty per
cent (30%) of our interest in the Camelot Studios at ATEP development for a
total purchase price of $3,000,000 on an as needed basis. In the event the full
purchase price is received, we will use part of the proceeds to retire and/or
pay down the debt known as the “NIR Financing”, which is described herein. We
will also use the proceeds to retire other debt, including debt to officers and
other accounts payable, and to provide an operating reserve for the Company,
which could satisfy a portion of our operational cash requirements for fiscal
year 2009 and/or provide a contingency for unforeseen expenditures in connection
with Camelot Studios at ATEP and Camelot Studio Group.





In
addition to the transaction with Camelot Studio Investors, LLC, we are also
exploring other financing options for Camelot Film and Media Group in 2008. Our
2008 funding requirements for Camelot Studio Group and the Camelot Studios at
ATEP project are being provided through the agreements between Camelot
Development Group, LLC and Camelot Development Tustin, LLC. Additional 2008,
working capital, if necessary, would be provided through agreements between
Camelot and our officers and directors, and possibly through additional new
agreements with Eagle and/or Scorpion Bay as discussed below.





Research
and Development





Our
research and development activities are expected to be performed under our
Camelot Production Services Group division, which includes Camelot Technology
Group, which plans to research new technologies for our industry.





Our
Camelot Film and Media Group division is in the process of developing several
literary properties that could become productions for us beginning in 2009. The
development process of feature films is a lengthy process and many of the
projects developed never are produced.





Equipment
Purchases





We are not expecting to purchase any
major pieces of equipment during 2008. The exception to this could be the
purchase of equipment and other physical assets by Camelot Films in the event
one or more of its film slates is funded during 2008.








46




ITEM
6.  MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - continued




Changes
in Employees





We are
not expecting a significant increase in the number of employees during 2008. If
any additions are made, they would probably occur during the fourth quarter of
2008, and would depend upon the status of Camelot Film and Media Group project
and slate financing.





Recent
Developments





Writers
Guild of America Collective Bargaining Agreement




On
November 5, 2007, the Writers Guild of America (East and West) (the
“Guild”) commenced a strike against film and television studios subsequent to
the expiration of the Guild’s collective bargaining agreement on
October 31, 2007. The Company’s Camelot Film and Media Group division and
certain of their suppliers retain the services of writers who are members of the
Guild. In February 2008, the Guild reached an agreement with the film and
television studios, thereby ending the strike. The strike caused delays in the
development of some feature films and hampered the development of new television
projects. Camelot did not experience any short-term or long-term reduction in
operating results that were attributable to these delays, and it does not
anticipate that the strike will have a significant long-term
impact.





SAG
and AFTRA Suspend Bargaining Agreement





The
Screen Actors Guild (“SAG”) and the American Federation of Television and Radio
Artists (“AFTRA”), the two major actors unions that represent actors in film,
television, stage and radio, will now negotiate studio contracts separately.
AFTRA voted on March 29, 2008 to suspend the guild's 27-year joint bargaining
agreement with the Screen Actors Guild, leaving the two unions to negotiate
separately on new contracts with the major studios.





This
action could undermine SAG's contract negotiations with the studios in its new
contract as AFTRA pursues its own agenda on behalf of its members, who work
mostly in television. The move ends a longstanding partnership between the two
unions, known as Phase One, under which they had jointly bargained film and
prime-time TV contracts for nearly three decades. AFTRA plans to negotiate a new
prime-time TV contract directly with the studios and independently from
SAG.





This move
by AFTRA introduces a new element of uncertainty in the television and movie
industry by raising the possibility of an actors walkout this summer, just as
some shows are returning to the air after a three-month absence and the movie
industry is trying to get back on its feet following the writers strike.
Hollywood's talent guilds, which represent writers, directors and actors, have
pushed to center stage in this year's contract negotiations the issue of how
their members are paid in the digital era. Now that directors and writers have
reached new three-year contracts with the studios, the industry had hoped the
actors could peacefully negotiate a new deal before their contract expires June
30, 2008.





Results
of Operations





We have a
limited history of operations as a film, television and digital media company.
We believe that due to the complex nature and long term cycle of our business
operations, period-to-period comparisons of our operating results are not
necessarily meaningful and should not be relied on as an indication of future
performance. However, it is still important that you review the audited
financial statements, the unaudited interim financial statements and the related
notes in addition to thoroughly reading our current plan of
operations.




Our
current cash requirements are provided principally through our agreement with
Camelot Studio Investors, LLC, whereby we are selling them up to thirty per cent
(30%) of our interest in the Camelot Studios at ATEP development for a total
purchase price of $3,000,000. In the event the full purchase price is received,
we will use part of the proceeds to retire and/or pay down the debt known as the
“NIR Financing”, which is described herein. We will also use the proceeds to
retire other debt, including debt to officers and other accounts payable, and to
provide an operating reserve for the Company, which could satisfy our
operational cash requirements for fiscal year 2009.





Our
historical cash requirements were provided principally through our financing
agreement with Eagle Consulting Group, Inc. (“Eagle”), a company owned by our
Chairman. We entered into an agreement with Eagle on March 28, 2003, to provide
operational funding for the Company. In exchange for twenty percent (20%)of the
Company’s outstanding common stock on a non-dilutive, continuing basis until the
Company could secure additional financing from another source, Eagle agreed to
provide funding for the Company’s annual audit, quarterly filings, accounts
payable and other ongoing expenses including office, phones, business
development, legal and accounting fees. During 2007, Eagle advanced Camelot
$235,125.  During
2006, Eagle advanced the Company a total, including interest, of $401,982, which
covered most of our operating expenses for 2006. The Eagle agreement was
completed as of December 31, 2007.





In
addition, during 2007 and 2006 we entered into various financing transactions
with Scorpion Bay, LLC, managed by Timothy Wilson, one of our directors, and The
Atwell Group, Inc., owned by our Chairman, Robert Atwell. The agreements are
discussed in more detail elsewhere in this report.





47




ITEM
6.  MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - continued




Results of Operations-
continued




Like all
motion picture, television and digital media production and distribution
companies, our expected future revenues and results of planned operations could
be significantly dependent upon many factors, including the ability of Camelot
to finance its projects, the progress made by Camelot in implementing its
business model, and if Camelot is in a position to do so, the timing of releases
and the commercial success of the motion pictures we plan to distribute in the
future, none of which can be predicted with any certainty. Accordingly, our
planned revenues and results of operations, if any, may fluctuate significantly
from period to period, and the results of any one period may not be indicative
of the results for any future periods. Similarly, the efficiencies we aim to
realize through our model may not materialize. Failure of the efficiencies to
materialize, along with other risks germane to the picture production, or if we
are unable to finance our films, may cause us to produce fewer films than our
plan calls for.





Liquidity
and Capital Resources





We have a
limited history of operations as a film, television and digital media production
and distribution company. We believe that, due to the complex nature of our
business model and the ensuing long term sales cycles, period-to-period
comparisons of our operating results are not necessarily meaningful and should
not be relied on as an indication of future performance.  Our current
liquidity and capital resources are provided principally through our current
agreements with Camelot Studio Investors, LLC, Scorpion Bay, LLC and The Atwell
Group, Inc., which are discussed below under Recent Financing. During 2007, we
also received funds through the NIR Financing, described as well in Recent
Financing.





Recent
Financing





Camelot
Studio Investors





In
January 2008, we agreed to sell up to 30% of our interest in Camelot Development
Group, LLC (“CDG”) to Camelot Studio Investors LLC (“CSI”) for up to $3,000,000
on an as needed basis. CDG, which is part of our Camelot Studio Group division,
is 50% joint venture partner with Janez Investments Tustin XI (“JIT”) in Camelot
Development Tustin, LLC (“CDT”). CDT is working with the South Orange County
Community College District (“SOCCCD”) to become the master developer for the
Advanced Technology and Education Park (“ATEP”) campus in Tustin, California,
which includes Camelot Studios at ATEP.





CSI
receives 100,000 shares of our $0.001 par value Series C Convertible Preferred
Stock for each one half of one per cent (.05%) of CDG purchased by CSI. The
managing member of CSI is Scorpion Bay, LLC (“Scorpion”), which is managed by
Timothy Wilson, one of our at-large directors. The proceeds from the sale will
be utilized to retire debt, pay operating expenses and provide a contingency
reserve for Camelot Studio Group and the Camelot Studios at ATEP
project.





NIR
Financing





On
December 27, 2006, we entered into a Securities Purchase Agreement with AJW
Capital Partners, LLC, AJW Offshore, Ltd., AJW Qualified Partners, LLC and New
Millennium Capital Partners II, LLC. Under the terms of the Securities Purchase
Agreement, the Investors purchased an aggregate of (i) $1,000,000 in Callable
Secured Convertible Notes (the “Notes”) and (ii) warrants to purchase 10,000,000
shares of our common stock (the “Warrants”). This transaction is referred to as
the “NIR Financing”.





Pursuant
to the Securities Purchase Agreement, the Investors will purchase the Notes and
Warrants in two tranches as set forth below:





1.
            At
      closing on December 27, 2006 (“Closing”), the Investors purchased Notes
      aggregating $600,000 and Warrants to purchase 10,000,000 shares of CMEG
      common stock;





2.
            Upon
      effectiveness of the Registration Statement, on June 5, 2007 the Investors
      purchased Notes aggregating
$400,000.





The Notes
carry an interest rate of 8% per annum and a maturity date of December 27, 2009.
The notes are convertible into CMEG common shares at the applicable percentage
of the average of the lowest three (3) trading prices for CMEG shares of common
stock during the twenty (20) trading day period prior to conversion. The
“Applicable Percentage” means 50%; provided, however, that the Applicable
Percentage shall be increased to (i) 55% in the event that a Registration
Statement is filed within thirty (30) days of the closing.





At our
option, we may prepay the Notes in the event that no event of default exists,
there are a sufficient number of shares available for conversion of the Notes
and the market price is at or below $.25 per share. In addition, in the event
that the average daily price of the common stock, as reported by the reporting
service, for each day of the month ending on any determination date is below
$.25, we may prepay a portion of the outstanding principal amount of the Notes
equal to 101% of the principal amount hereof divided by thirty-six (36) plus one
month's interest. Exercise of this option will stay all conversions for the
following month. The full principal amount of the Notes is due upon default
under the terms of Notes. In addition, we have granted the Investors a security
interest in substantially all of our assets and intellectual property as well as
registration rights.








48




ITEM
6.  MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - continued




NIR Financing-
continued




We
simultaneously issued to the Investors seven year warrants to purchase
10,000,000 shares of our common stock at an exercise price of
$0.15.





In
connection with the recent financing and pursuant to a Structuring Agreement, we
also issued to Lionheart Associates, LLC d/b/a Fairhills Capital (“Lionheart”)
warrants representing the right to purchase up to 582,609 shares of our common
stock under the same terms as the Warrants issued to the Investors.





The
Investors have contractually agreed to restrict their ability to convert the
Notes and exercise the Warrants and receive shares of our common stock such that
the number of shares of our common stock held by them and their affiliates after
such conversion or exercise does not exceed 4.99% of the then issued and
outstanding shares of CMEG’s common stock.





As a
result of our SB-2 Registration, a total of 13,228,492 shares of common stock
were registered. They were all converted at various prices during 2007. With the
changes in Rule 144 that became effective on February 15, 2008, additional
shares will now be converted under Rule 144 B (1). As of December 31, 2007, the
principal balance of the Notes was $943,732.





In the
event of full conversion of the aggregate principal amount of the Notes of
$943,732 as of December 31, 2007, we would have to issue a total of 449,396,190
shares of common stock. This amount is calculated as follows:





The
aggregate principal amount of the Notes is $943,732. The estimated conversion
price of the Notes is $0.0021 based on the following: $0.0035 was the average of
the lowest three (3) trading prices for our shares of common stock during the
twenty (20) trading days prior to December 31, 2007, less a 540% discount. Thus,
at a discounted price-per-share of $0.0021, 449,396,190 shares of the Company's
common stock would be issuable upon conversion of $943,732 into common shares of
the Company ("Conversion Shares"). However, due to contractual limitations, the
most that could be converted in any singular conversion is approximately
11,427,000 shares, or 4.99% of the outstanding. In addition, there are
contractual limitations that could be imposed by Camelot that would result in
the inability of the note holders to convert during any given 30 day
period.





The
following table shows the effect on the number of shares issuable upon full
conversion, in the event the common stock price declines by 25%, 50% and 75%
from its the most recent trading price.





Price
      Decreases By12/31/2007
            25%
            50%
            75%Average
      Common Stock Price (as defined above)
            $0.0035
            $0.002625
            $0.00175
            $0.000875Conversion
      Price (40% Discount)
            $0.0021
            $0.001575
            $0.00105
            $0.000525100%
      Conversion Shares
            449,396,190
            599,194,921
            898,792,381
            1,797,584,762





There is
no limit to the number of shares that we may be required to issue upon
conversion of the Notes as it is dependent upon our share price, which varies
from day to day. This could cause significant downward pressure on the price of
our common stock.





Scorpion
Bay Loans





On June
15, 2007, we entered into a loan agreement with Scorpion Bay, LLC (“Scorpion”),
whereby Scorpion loaned Camelot $300,000 in three tranches of $100,000 each on
June 15, July 15 and August 15 2007. Interest on the loan was in the form of
3,000,000 shares of our $0.001 par value common stock (“Shares”). The loan was
due and payable on November 15, 2007. The loan was secured with a blanket note
and second deed of trust on real property owned by Robert and Tamara Atwell.
Robert Atwell is the Chairman, President and CEO of Camelot (“Atwell”). In the
event the loan was not paid by the due date, the note could be extended by
Scorpion at a cost of 750,000 Shares for each 30 day extension. On or about
October 25, 2007, Scorpion agreed to release and/or transfer the security
interest provided by Atwell in reference to the $300,000 loan to the Company by
Scorpion on June 15, 2007 and the amount due to Scorpion was transferred to real
property owned by Atwell. As a result, Camelot will not incur any additional
interest charges and/or fees connected with the loan. Scorpion received a total
of 13,000,000 Shares (including 5,000,000 shares issued to Dolphin Communities)
in connection with the loan and events related thereto.





On
November 21, 2006, we entered into a loan agreement with Scorpion, whereby
Scorpion loaned Camelot $250,000. Interest was paid in the form of 500,000
Shares. As additional consideration, Scorpion received a total of 1,500,000
Shares. The loan was due and payable on March 22, 2007. The loan was secured
with a blanket note and second deed of trust on real property owned by Robert
and Tamara Atwell. In the event the loan was not paid by the due date, the note
could be extended by Scorpion at a cost of 1,500,000 Shares for the first 30 day
extension, 2,000,000 Shares for the second 30 day extension, 2,500,000 Shares
for the third 30 day extension and so forth. The note was paid in full on June
5, 2007. As a result, Scorpion received a total of 8,000,000 Shares in
connection with the loan and events related thereto.








49




ITEM
6.  MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - continued




Additional
Scorpion Bay Loan





On
November 23, 2007, Scorpion entered into a loan agreement with Love Bug
Management Corp. (“Love Bug”), an entity owned by Atwell, whereby Scorpion
loaned Love Bug $100,000. The proceeds were used for Atwell and Camelot
expenses. As a result of this loan, Atwell paid approximately $36,000 in direct
Camelot expenses. The loan was secured with a blanket note and second deed of
trust on real property owned by Robert and Tamara Atwell. Scorpion received
4,700,000 Shares in connection with the loan and events related
thereto.




Scorpion
Bay Services in Connection with Camelot Development Tustin, LLC
 
 On September 25, 2007, Camelot issued
Scorpion 2,800,000 shares for services in connection with Camelot Development
Tustin, LLC and the development of Camelot Studios at ATEP in conjunction with
Camelot Studio Group.
 
 On October 25, 2007, Camelot issued
Scorpion 4,100,000 shares for services in connection with Camelot Development
Tustin, LLC and the development of Camelot Studios at ATEP in conjunction with
Camelot Studio Group.
  The
Atwell Group





Throughout
2007, The Atwell Group, Inc. has paid for expenses on behalf of Camelot as
needed. With the occurrence of other financial resources becoming available, the
amount of resources committed by The Atwell Group has diminished when compared
to prior years. The Atwell Group, Inc. is owned by our Chairman, Robert
Atwell.





Private
Placements and Registrations





We are
also in the process of preparing a private placement memorandum and an SB-2
registration statement for the purpose of funding Camelot Films® initial slate
of pictures.   If the anticipated funding is successful, it is our goal to
have between ten and 12 motion pictures in various stages of development or
production within 12 to 24 months. In the event we are unable to complete the
funding, we could have to delay our slate until such time as the necessary
funding is acquired.





Like all
entertainment companies, our revenues and results of operations could be
significantly dependent upon the timing of releases and the commercial success
of the various projects we develop, none of which can be predicted with
certainty. Accordingly, our revenues and results of operations may fluctuate
significantly from period to period, and the results of any one period may not
be indicative of the results for any future periods. Similarly, the efficiencies
we aim to realize through our model may not materialize. Failure of the
efficiencies to materialize, along with other risks germane to the picture
production, may cause us to produce fewer projects than our plan calls
for.





Sources
of Revenue





Our
expected sources of revenue during 2008 and beyond are expected initially to be
derived from our Camelot Film and Media Group and Camelot Studio Group
divisions.





Camelot
Studio Group





With our
first studio facility “Camelot Studios at ATEP” currently in the entitlement
phase, major operational revenue from that facility is still three to four years
from materializing.  However, we plan to begin early operations near
the site as early as the fourth quarter of 2008, securing tenants and starting
the process of providing studio services in Orange County, California through
our studio operator. The master site, “Advanced Technology and Education Park”
(“ATEP”), is already active with the South Orange County Community College
District (“SOCCCD”) having commenced its initial educational programs at ATEP in
temporary buildings. As of December 31, 2007, there are approximately 400
students taking classes at ATEP. Once we begin to pre-market the site, we could
begin to see limited revenues materializing.





Camelot
Film and Media Group





In
addition to Camelot Studio Group, we expect to begin focusing during 2008 on
generating revenues from our Camelot Film and Media Group division, specifically
concentrating on two divisions within Camelot Film and Media Group, Camelot
Films® and Camelot Features.





We are
currently updating our business plan, the core of which is our film, television
and digital media business model. Upon completion of the business plan, we
expect to finalize a private placement and subsequent SB-2 Registration which
could provide the funding necessary to launch our first slate of films under the
Camelot Films banner. In addition, we will continue to develop and package
projects within our Camelot Features division, including those projects listed
earlier in this report. Our urban division, Camelot Urban Entertainment, plans
on completing its first feature length documentary later this year with an
expected release date of early 2009. Initial pre-sales could generate limited
revenues prior to its formal release.





Once our
films are funded and begin the production process, our distribution division
intends to engage international and domestic channels of distribution using a
variety of methods. If successful, these distribution outlets could generate
early limited revenues prior to the actual delivery of the films. The type of
film, subject matter and scale of the project will determine in most cases the
priority in which the following distribution methods are addressed:






50




ITEM
6.  MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - continued




Camelot Film and Media
Group-
continued




·
            Licensing
      of videocassettes and digital video discs
(DVDs)





·
            Pay-per-view
      cable and satellite licensing




·
            Pay
      television and internet licensing





·
            Broadcast
      television, cable and satellite
licensing





·
            Hotels,
      airlines and other non-theatrical
exhibitions





·
            Theatrical
      exhibition·
            Mobile
      and other forms of Digital Media·
            Syndicated
      television licensing·
            internet
      Protocol TV (IPTV)




Our
strategy of developing in-house distribution and marketing expertise, while
intended to increase the proportion of a given original motion picture’s revenue
we can retain, may actually have the effect of reducing the speed with which we
can obtain cash from any motion pictures we complete. This is due in part to the
way that many independent productions distribute their motion
pictures.





We
believe that many independent productions plan to engage sales agents to
distribute their motion pictures. These sales agents often license the
distribution rights to distributors on behalf of the production company, or
another party that owns the rights to the motion picture negative. In exchange
for these services, the agent normally receives a percentage of any licensing
fees generated by licensing the film to a distributor.





The
distributor’s licensing a film’s rights often has a fee set as a percentage of
gross revenue from the film. While a preset rate is used, the amount of this fee
is generally unknown at the time that the distribution agreement is entered
into, as there is no way to know with any degree of certainty how much revenue,
if any, will be generated by the film. However, in some cases the distributor
might pay a certain minimum amount to the production company, or rights owner,
upon delivery of a completed motion picture. This is sometimes referred to as a
minimum guarantee or simply as an advance. Such guarantees, when available,
reduce the perceived risks of parties financing original motion picture
productions. As a result, these advances can make it easier for producers to
obtain financing for a project.





Our
strategy does not involve working through sales agents, although if we are
unable to successfully market our films directly to distributors, we may have no
alternative but to pursue such channels. Under our strategy of marketing
directly to buyers and other distributors, we would still have the ability to
pursue and negotiate minimum guarantees and advances. However, in general we
believe that this would likely negatively impact the potential return we seek to
realize on our original motion picture productions. The result of this strategy
may be that the speed with which we convert film projects into cash inflows
could also be negatively impacted.





Expected
Significant Changes in the Number of Employees





According
to the Bureau of Labor Statistics, in 2007, the United States had about 367,900
wage and salary jobs in the motion picture production and distribution industry.
The majority of these jobs were in motion picture production and services,
including casting, acting, directing, editing, film processing, motion picture
and videotape reproduction, and equipment and wardrobe rental. Most motion
picture and distribution establishments employ fewer than 10
workers.





Many
additional individuals work in the motion picture production and distribution
industry on a freelance, contract, or part-time basis, but accurate statistics
on their numbers are not available. Many people in the film industry are
self-employed. They sell their services to anyone who needs them, often working
on productions for many different companies during the year. Competition for
these jobs is intense, and many people are unable to earn a living solely from
freelance work.





While
these factors appear to reinforce our belief that there is a large pool of
available resources to engage in the production of our original motion pictures,
there can be no guarantee that the resources will accept our terms or business
strategy. According to our planned business model, those that do are expected to
be engaged primarily as independent contractors. However, our plans also call
for substantially increasing the number of individuals we hire as salaried and
hourly employees.





None of
our executive officers or directors currently has a contracted compensation
package. Although we plan to enter into contracted compensation packages during
2008, we have not entered into any written employment agreements with our
executive officers as of the date of this filing.  However, our
executive officers do receive compensation. We also plan to hire a minimum of
four additional personnel engaged in marketing and distribution, operations and
general and administrative capacities. These planned changes in personnel alone
are significant. However, should we be required to engage a higher number of
production professionals as employees, instead of our current plans to engage
many production personnel as independent contractors, the increase in employees
would be even more significant.





51





ITEM
6.  MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - continued


General





Our
operations consist primarily of developing Camelot Studios at ATEP through our
Camelot Studio Group division and on a limited basis developing literary
properties which can be produced, distributed and marketed as original motion
pictures, television programming and digital media through our Camelot Film and
Media Group. These have inherent long-term sales cycles. As a result, we believe
that period-to-period comparisons of our operating results are not necessarily
meaningful and should not be relied on as an indication of future performance.
However, it is still important that you read the discussion in connection with
the audited financial statements, the unaudited interim financial and the
related notes included elsewhere in this annual report.





YEAR
ENDED DECEMBER 31, 2007 COMPARED TO YEAR ENDED DECEMBER 31, 2006




REVENUE




Cumulative
      During Development
            
            
            Year
      Ended December 31,Stage
            
            
            2007
            
            
            2006
            
            
            %
      ChangeNet
      Revenues
            
            $
            58,568
            
            
            $
            0
            
            
            $
            0
            
            
            
            (0%)





We did
not generate any revenue for the year ended December 31, 2007. Our focus has
been on our studio group’s development of our first studio facility project
currently known as “Camelot Studios at ATEP” in Tustin, California and on the
development of literary properties for eventual production and distribution
through our film and media group division. All of our other divisions, including
those that have limited operations and those that are being developed, have not
as yet generated any revenue. We do not expect to generate any significant
revenue from the studio facility for two to three years. Revenue from film and
media group operations should begin to materialize within the next 24 months,
depending upon availability of financing and other logistical factors, including
script development and staffing.




COST OF SERVICES





Cumulative
      During Development
            
            
            Year
      Ended December 31,Stage
            
            
            2007
            
            
            2006
            
            
            %
      ChangeCost
      of Services
            
            $
            95,700
            
            
            $
            0
            
            
            $
            0
            
            
            
            (0%)





Our cost
of services historically was comprised principally of consulting services
provided by contract individuals on behalf of our customer’s business model we
were structuring at that time. We provided no services that generated revenue
for the year ended December 31, 2007, and had no costs of services. To the
degree that we generate consulting revenue in future periods, consulting
services provided by officers during such periods are to be matched to revenue
associated with such services and recorded as costs of services. In future
periods, we expect to rely heavily on the ability to use exchanges of our equity
to key production and other personnel and contractors as a means of reducing the
cash required to complete original motion picture projects. Such reliance could
likely result in a lack of predictability and a great deal of volatility with
regard to our cost of sales and, therefore, our gross margin
percentage.





SALES
AND MARKETING EXPENSES





Cumulative
      During Development
            
            
            Year
      Ended December 31,Stage
            
            
            2007
            
            
            2006
            
            
            %
      ChangeSales
      & Marketing Expenses
            
            $
            53,959
            
            
            $
            0
            
            
            $
            0
            
            
            
            (0%)





Since
inception, sales and marketing expenses have consisted of advertising,
promotional materials and public relations expenses. There were no Sales &
Marketing expenses for 2007 or 2006. The total dollar amount of sales and
marketing expenses were extremely low in 2002 and there were none in 2003, 2004
or 2005. In future periods, we expect that nearly all of our sales and marketing
expenses should be related to the distribution and promotion of original motion
pictures, television programming and digital media we intend to produce.
Similarly, we anticipate that nearly all such expenses should require settlement
in cash.








52





ITEM 6.   MANAGEMENT’S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION - continued




RESEARCH AND DEVELOPMENT





Cumulative
      During Development
            
            
            Year
      Ended December 31,Stage
            
            
            2007
            
            
            2006
            
            
            %
      ChangeResearch
      & Development Expenses
            
            $
            252,550
            
            
            $
            0
            
            
            $
            0
            
            
            
            (0%)





Since
inception, research and development expenses have consisted primarily of costs
related to the acquisition, testing, design, development and enhancement of
certain technologies we held rights to and which we intended to use in the
future to meet our internal needs or the needs of ventures we might have
invested these technologies with. While the total dollar amount of research and
development expenses was zero during 2007 and there were none in 2006, 2005 or
2004.  Prior to 2004, 100% of our research and development expenses
required settlement in cash. Since inception, the majority, $252,550 or 82.07%
of our research and development expenses, has related to rights to technologies
we acquired in exchange for our common stock. In future quarters, we do not
anticipate entering into similar agreements to acquire
technologies.





GENERAL AND ADMINISTRATIVE





Cumulative
      During
              Development
            
            
            Year
      Ended December 31,Stage
            
            
            2007
            
            
            2006
            
            %
      ChangeGeneral
      & Administrative Expenses
            
            $
            12,011,651
            
            
            $
            1,864,178
            
            
            $
            1,554,907
            
            
            
            20%





The
Company has incurred $12,011,651 of general and administrative expenses since
its inception. General and Administrative expenses were $1,554,907 for the year
ended, December 31, 2006, compared to $1,864,178 for the year ended, December
31, 2007.




The
general and general administrative expenses for 2007 were comprised of
$450,000 of officer’s salaries and $713,032 of professional services and
$290,519 of professional fees (accounting, legal and other fees).
Additionally, $84,994 in expenses related to travel and industry trade shows,
including the Cannes Film Festival, was incurred during the second quarter of
2007. Other costs, $18,549 for marketing, seminars and trades, $18,667 telephone
costs, $87,374 rent, $48,647 for insurance (D&O, workers comp and business
liability), office staff payroll $91,227, bad debt $17,500 and $43,669 for other
administrative costs. These expenses were related to the pursuit of the
Company’s plan of developing Camelot Studios at ATEP and the development,
production and distribution of film, television and digital media
product.





General
and administrative expenses during 2006 consisted primarily of officer
compensation, professional services and stock options. The decrease in general
and administrative expenses for the year ended December 31, 2006, compared to
the year ended December 31, 2005, was large and due to preferred stock issued to
Robert Atwell resulting in expenses of over $3,300,000 in 2005. The primary
expense during the year ended December 31, 2006 was for Officers salaries,
Professional fees (legal and accounting), Professional services (film industry
consultants) and Eagle Consulting Group. These expenses amounted to $1,133,740
or 73% of all general and administrative expenses for the year the ended,
December 31, 2006.





Details
of expenses for calendar year ended, December 31, 2005: Professional Fees -
legal & accounting $72,798, Professional Services - film industry
consultants $213,371 and Eagle Consulting Group $127,713 (paid in stock).
Under an agreement Eagle Consulting Group (Robert Atwell) provided funds
necessary to pay all operating expenses (except those paid in stock) during the
year ended, December 31, 2005. Other general and administrative expenses
included advertising and marketing costs of $172,116 (related primarily to
Cannes Film Festival and other film industry trade shows) and the related travel
costs of $42,636. Costs related to film industry shows, advertising, public
relations, marketing and related travel costs were $214,752 or 20% of all
general and administrative expenses for the year ended, December 31, 2005.
Office rent and supplies, dues & subscriptions, stock transfer and
maintenance fees, utilities, and other expenses were $57,765, representing the
remaining operating expenses or 6% of all general and administrative expenses
for the year ended, December 31, 2005.








53





ITEM 6.   MANAGEMENT’S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION - continued




IMPAIRMENT OF LONG-LIVED ASSETS AND
IMPAIRMENT OF INVESTMENTS IN OTHER COMPANIES





Cumulative
      During Development
            
            
            Year
      Ended December 31,Stage
            
            
            2007
            
            
            2006
            
            
            %
      ChangeImpairment
      of Assets
            
            $
            2,402,338
            
            
            $
            0
            
            
            $
            0
            
            
            
            (0%)Impairment
      of Investments in Other Companies
            
            $
            710,868
            
            
            $
            0
            
            
            $
            0
            
            
            
            (0%)





Our
impairment policy requires management to review assets and investments for
impairment on an ongoing basis. In the case of investments in other companies,
this analysis, combined with our other accounting policies, is expected to have
a material impact on our results of operations in future periods. Our
accounting policies generally may require us to record services performed in
exchange for stock in early stage companies at a nominal value, since the stock
issued generally has no readily determinable value. However, when we used our
stock to effect investments in other companies, the bid price for our stock on
the date of issuance is used to value the transaction initially. Subsequently,
an impairment of this value may be required to reduce the carrying amount on our
books to reflect an impairment in value.





Our
financial results since inception are indicative of the extent to which
impairment of investments and assets can impact our operating results. Since
inception, impairment of investments in other companies accounts for $710,868,
or approximately 6% of our $11,824,859 net loss, whereas impairment of
long-lived assets has accounted for $2,402, 338, or approximately 20% of our net
loss since inception. Together, these two expense categories account for 26% of
our net loss from inception and through the year ended December 31,
2005.





An
impairment loss is recorded in the period in which we determine that the
carrying amount is not recoverable. This requires the Company to make long-term
forecasts of its future revenues and costs related to the assets subject to
review. These forecasts may require assumptions about demand for the Company's
products and services, future market conditions and technological developments
in order to support fair value and avoid impairment. Significant and
unanticipated changes to these assumptions could require a provision for
impairment in a future period.





INCOME
TAXES





There is
no current or deferred tax expense for the period from January 1, 2007 to
December 31, 2007 due to net losses from operations by the Company. As of
December 31, 2007 we had federal net operating loss carryforwards of over
$7,600,000, compared to operating loss carryforwards of over $5,500,000 as of
December 31, 2006. The operating loss carryforwards expire beginning in 2013 and
may be subject to significant limitations attributable to change in control
rules.





NET
LOSS




Cumulative
      During Development
            
            
            Year
      Ended December 31,Stage
            
            
            2007
            
            
            2006
            
            
            %
      ChangeNet
      income (loss)
            
            $
            (16,276,446
            )
            
            $
            (2,103,235
            )
            
            $
            (2,348,351
            )
            
            
            (10%)Net
      income (loss) per share
            
            
            
            
            
            $
            (0.02
            )
            
            $
            (0.02
            )Weighted
      average shares outstanding
            
            
            
            
            
            
            123,164,025
            
            
            
            94,012,109





The net
loss for 2007 was less than 2006 due to cost of stock issued during the
year.  General and Administrative expenses were more in 2007 due to
professional service fees charged for money raised for the company during the
year.





The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. The Company has had minimal revenues, has
experienced an accumulated deficit of $16,276,446 and has a stockholders’
deficit. These conditions, the loss of financial support from affiliates, and
the failure to secure a successful source of additional financial resources
raise substantial doubt about the Company’s ability to continue as a going
concern. The financial statements do not include any adjustments to reflect the
possible future effects on the classification of liabilities that may result
from the outcome of this uncertainty.





We have
incurred net losses from operations in each fiscal year since our inception. The
changes in components of our net loss are important. Impairment of assets
accounted for 0% of our net loss in 2003, 2004, 2005 and 2006, whereas
impairment of assets accounted for 40% of our net loss in 2002. We anticipate
that impairments should no longer play a major role in our operating results for
2007 as well as in future periods. Although none of our impairment losses have
consumed cash flow since inception, our ability to convert the assets, resources
and technology we acquired into gains, and ultimately positive cash flow, had
largely determined the viability or lack thereof of our business model.
Similarly, to the degree that we had to issue more shares to acquire assets and
resources that were later impaired and not readily recovered, such events were
dilutive to our existing shareholders. Going forward, impairments should
hopefully no longer be an issue.





54




ITEM 6.   MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -
continued




Off-Balance Sheet
Arrangements





We do not
have any off-balance sheet arrangements, financings, or other relationships with
entities or other persons, also known as “special purpose entities”
(SPEs).





Critical
Accounting Estimates





The
preparation of our financial statements in conformity with accounting principles
generally accepted in the United States of America requires our management to
make certain estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. As such, in accordance with the use of
accounting principles generally accepted in the United States of America, our
actual realized results may differ from management’s initial estimates as
reported. A summary of our significant accounting policies are detailed in the
notes to the financial statements which are an integral component of this
filing.




Management
evaluates the probability of the utilization of the deferred income tax asset
related to the net operating loss carryforward. The Company has estimated a
$7,600,000 deferred income tax asset related to net operating loss carryforward
and other book/tax differences at December 31, 2007. Management determined that
because the Company has yet to generate taxable income and that the generation
of taxable income in the short term is uncertain, it was appropriate to provide
a valuation allowance for the total deferred income tax asset, resulting in a
net deferred income tax asset of $0.




The
Company has acquired certain technology and licenses. Prior to December 31,
2004, the Company determined that the value of these acquired assets was
impaired and has provided an impairment allowance for the full purchase price of
these assets. The impairment amount of assets and investments in other companies
charged to operations in prior years was $3,113,000.





Critical
Accounting Policies





The
Company has defined a critical accounting policy as one that is both important
to the portrayal of the Company's financial condition and results of operations;
and requires the management of the Company to make difficult, subjective or
complex judgments. Estimates and assumptions about future events and their
effects cannot be perceived with certainty. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments. These estimates may change as new events occur, as more
experience is acquired, as additional information is obtained and as the
Company's operating environment changes.





We have
identified the policies below as critical to our business operations and the
understanding of our results of operations. The impact and any associated risks
related to these policies on our business operations is discussed throughout
Management's Discussion and Analysis of Financial Condition and Results of
Operations, where such policies affect our reported and expected financial
results. In the ordinary course of business, we have made a number of estimates
and assumptions relating to the reporting of results of operations and financial
condition in the preparation of our financial statements in conformity with
accounting principles generally accepted in the United States of America. Actual
results could differ significantly from those estimates under different
assumptions and conditions. We believe that the following discussion addresses
our most critical accounting policies, which are those that are most important
to the portrayal of our financial condition and results of operations and
require our most difficult, subjective, and complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain.





Acquired
Technology and Intangible Assets





Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"), establishes accounting and reporting standards for
recording, valuing and impairing goodwill and other intangible assets. The
adoption of SFAS 142 did not have an impact on the Company's financial condition
or results of operations for fiscal year 2004. However, as the Company's
business model is heavily dependent on acquiring intangible assets, this
pronouncement is expected to have a material impact on the Company's financial
condition and results of operations in future periods, should the Company
survive as an ongoing concern.





Deferred
Compensation





The
Company had in the past negotiated contracts to grant common stock in exchange
for future (prepaid) services with various other companies and individuals.
Where the other companies are independent or have minimal common stock ownership
in the Company, those prepaid expenses had been presented in the accompanying
balance sheet as an asset. Where the other companies or individuals have
significant stock ownership or are functioning as, or similar to, employees,
officers or directors, such prepaid services were presented on the balance sheet
as deferred compensation and a reduction to total equity.




It is
Company policy to expense those items which have been unused after the
contractual period or after one year, if not used. Other prepaid expenses where
services are being used are amortized over the life of the contract. As of
December 31, 2005, all deferred compensation had been expensed. As a result,
there were no deferred compensation issues in 2007 or in 2006.






55




ITEM 6.   MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -
continued




Going
Concern Uncertainties





The
accompanying financial statements have been prepared in conformity with
generally accepted accounting principles accepted in the United States, which
contemplate continuation of Camelot as a going concern. However, Camelot has
experienced recurring operating losses and negative cash flows from
operations.  This is due in part to Camelot’s focus on developing
Camelot Studios at ATEP, which has necessitated considerable monetary and time
commitments from Camelot in lieu of Camelot pursuing revenue generating
opportunities either through its Camelot Film and Media Group or Camelot
Production Services Group divisions. Camelot’s Board of Directors made the
decision to have Camelot focus on the studio project due to the long term
importance of the studio and the impact successful completion of that project
will have on Camelot Studio Group and Camelot overall. As a result, Camelot has
had to delay several revenue generating projects which it will implement once
the basic entitlement phase has been concluded for Camelot Studios at
ATEP.





Camelot’s
continued existence is dependent upon its ability to increase operating revenues
and/or obtain additional equity financing. As part of our ongoing efforts to
obtain additional financing, in January 2008 Camelot agreed to sell up to 30% of
its interest in Camelot Development Group, LLC (“CDG”) to Camelot Studio
Investors (“CSI”) for up to $3,000,000 on an as needed basis. Proceeds from the
sale will be used to retire debt, provide operating expenses for Camelot and
establish a reserve for contingency expenditures related to the Camelot Studios
at ATEP project and Camelot Studio Group.





On
December 27, 2006, we entered into a Securities Purchase Agreement with AJW
Capital Partners, LLC, AJW Offshore, Ltd., AJW Qualified Partners, LLC and New
Millennium Capital Partners II, LLC. Under the terms of the Securities Purchase
Agreement, the Investors purchased an aggregate of (i) $1,000,000 in Callable
Secured Convertible Notes (the “Notes”) and (ii) warrants to purchase 10,000,000
shares of our common stock (the “Warrants”). This transaction is referred to
also as the “NIR Funding”.





We
entered into an agreement with Eagle Consulting Group, Inc. (“Eagle”) on March
28, 2003, to provide operational funding for the Company, which expires on March
28, 2008. In exchange for twenty percent (20%)of the Company’s outstanding
common stock on a non-dilutive, continuing basis until the Company can secure
additional financing from another source, Eagle provided funding for the
Company’s annual audit, quarterly filings, accounts payable and other ongoing
expenses including office, phones, business development, legal and accounting
fees. On June 5, 2007, the Company completed its funding transaction with NIR
and its note holders, whereby the note holders have invested monies into the
Company, thereby ending the agreement with Eagle.





In
addition, during 2006 and 2007 we also reached agreement with Scorpion Bay, LLC
(“Scorpion”), to provide short term loans to Camelot on an as needed basis. To
date, all of these loans have been repaid. Further, The Atwell Group has
provided advances for certain Camelot expenses when necessary. It appears likely
that such funding and financial arrangements with CSI, Scorpion and our officers
and directors should continue to be enough to meet all of the Company's cash
requirements in 2008. However, the Company must find additional sources of
financing in order to remain a going concern in the future. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.





Significant
Accounting Practices




Beginning
January 1, 2004, we adopted new accounting rules which were effective January 1,
2001, which require, among other changes, that exploitation costs, including
advertising and marketing costs, be expensed as incurred. Theatrical print costs
are amortized over the periods of theatrical release of the respective
territories. Under accounting rules in effect for periods prior to January 1,
2001, such costs were capitalized as a part of film costs and amortized over the
life of the film using the individual-film-forecast method. The current practice
dramatically increases the likelihood of reporting losses upon a film’s
theatrical release, but should provide for increased returns when a film is
released in the ancillary markets of home video and television, when we incur a
much lower proportion of advertising costs. Additional provisions under the new
accounting rules include changes in revenue recognition and accounting for
development costs and overhead, and reduced amortization periods for film
costs.




Accounting for Motion Picture Costs





In
accordance with accounting principles generally accepted in the United States
and industry practice, we amortize the costs of production, including
capitalized interest and overhead, as well as participations and talent
residuals, for feature films using the individual-film-forecast method under
which such costs are amortized for each film in the ratio that revenue earned in
the current period for such title bears to management’s estimate of the total
revenues to be realized from all media and markets for such title. All
exploitation costs, including advertising and marketing costs, are expensed as
incurred. Theatrical print costs are amortized over the periods of theatrical
release of the respective territories.





56




ITEM 6.   MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -
continued




Significant Accounting
Practices-
continued




We plan
to regularly review, and revise when necessary, our total revenue estimates on a
title-by-title basis, which may result in a change in the rate of amortization
and/or a write-down of the film asset to estimated fair value. These revisions
can result in significant quarter-to-quarter and year-to-year fluctuations in
film write-downs and amortization. A typical film recognizes a substantial
portion of its ultimate revenues within the first two years of release. By then,
a film has been exploited in the domestic and international theatrical markets
and the domestic and international home video markets, as well as the domestic
and international pay television and pay-per-view markets. A similar portion of
the film’s capitalized costs should be expected to be amortized accordingly,
assuming the film or television program is profitable.




The
commercial potential of individual motion pictures varies dramatically, and is
not directly correlated with production or acquisition costs. Therefore, it is
difficult to predict or project a trend of our income or loss. However, the
likelihood that we report losses, particularly in the year of a motion picture’s
release, is increased by the industry’s method of accounting which requires the
immediate recognition of the entire loss (through increased amortization) in
instances where it is estimated the ultimate revenues of a motion picture could
not recover our capitalized costs. On the other hand, the profit of a profitable
motion picture must be deferred and recognized over the entire revenue stream
generated by that motion picture. This method of accounting may also result in
significant fluctuations in reported income or loss, particularly on a quarterly
basis, depending on our release schedule, the timing of advertising campaigns
and the relative performance of individual motion pictures.




Impairment of Long-Lived
Assets





We adhere
to the provisions of Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). The Company reviews the carrying value of its long-lived assets and
certain identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable through undiscounted net cash flows. Impairment is calculated based
on fair value of the asset, generally using net discounted cash flows. Any
long-lived assets to be disposed of are reported at the lower of the carrying
amount or fair value less estimated costs to sell.





Equity Investments





We are
accounting for any potential investment in other related entities in the future
in accordance with Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for
Investments in Common Stock.”In accordance with APB Opinion No. 18,
management plans to continually review its equity investments to determine if
any impairment has occurred. If, in management’s judgment, an investment has
sustained an other-than-temporary decline in its value, the investment is
written down to its fair value by a charge to earnings. Such determination is
dependent on the specific facts and circumstances, including the financial
condition of the investee, subscriber demand and growth, demand for advertising
time and space, the intent and ability to retain the investment, and general
economic conditions in the areas in which the investee operates.




Derivative
Instruments





In June
1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging
Activities,” as amended by Statement of Financial Accounting Standards No. 137,
“Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of Financial Accounting Standards Board No. 133,” and by
Statement of Financial Accounting Standards No. 138, “Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an Amendment of
Financial Accounting Standards Board Statement No. 133,” which is effective for
all quarters of fiscal years beginning after June 15, 2000. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. We adopted Statement of Financial Accounting Standards No.
133 beginning January 1, 2004. The adoption of Statement of Financial Accounting
Standards No. 133 did materially impact our results of operations with our
convertible notes payable entered into in December 2006.




New Accounting Pronouncements





The
companies that were previously subject to the requirements of Statement of
Financial Accounting Standards No. 53 are following the guidance in American
Institute of Certified Public Accountants Statement of Position 00-2, “Accounting by Producers or
Distributors of Films,”issued in June 2000.





Statement
of Position 00-2 establishes new accounting and reporting standards for all
producers and distributors that own or hold the rights to distribute or exploit
films. Statement of Position 00-2 provides that the cumulative effect of changes
in accounting principles caused by its adoption should be included in the
determination of net income in conformity with Accounting Principles Board
Opinion No. 20, “Accounting
Changes.”





We
adopted the Statement of Position on January 1, 2004. The new rules also require
that advertising costs be expensed as incurred as opposed to the old rules which
generally allowed advertising costs to be capitalized as part of film costs and
amortized using the individual-film-forecast method. Due to the significant
advertising costs incurred in the early stages of a film’s release, we
anticipate that the new rules could significantly impact our results of
operations for the foreseeable future.





57




ITEM 6.   MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -
continued
  Significant Accounting
Practices-
continued
  Accounting
for Films





In June
2000, the Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position 00-2 “Accounting by
Producers or Distributors of Films” (“SoP 00-2”). SoP 00-2 establishes new
accounting standards for producers or distributors of films, including changes
in revenue recognition, capitalization and amortization of costs of acquiring
films and accounting for exploitation costs, including advertising and marketing
expenses. We elected adoption of SoP 00-2 effective as of April 1,
2004.




The
principal changes as a result of applying SoP 00-2 are as follows:





Advertising
and marketing costs, which were previously capitalized to investment in films on
the balance sheet and amortized using the individual film forecast method, are
now expensed the first time the advertising takes place.





We
capitalize costs of production, including financing costs, to investment in
motion pictures. These costs are amortized to direct operating expenses in
accordance with SoP 00-2. These costs are stated at the lower of unamortized
motion picture costs or fair value (net present value). These costs for an
individual motion picture or television program are amortized in the proportion
that current period actual revenues bear to management’s estimates of the total
revenue expected to be received from such motion picture over a period not to
exceed ten years from the date of delivery.





Management
plans to regularly review, and revise when necessary, its total revenue
estimates, which may result in a change in the rate of amortization and/or
write-down of all or a portion of the unamortized costs of the motion picture to
its fair value. No assurance can be given that unfavorable changes to revenue
estimates will not occur, which may result in significant write-downs affecting
our results of operations and financial condition.





Revenue Recognition





Revenue
from the sale or licensing of motion pictures is recognized upon meeting all
recognition requirements of SoP 00-2. Revenue from the theatrical release of
motion pictures is recognized at the time of exhibition based on the company’s
participation in box office receipts. Revenue from the sale of DVDs in the
retail market, net of an allowance for estimated returns, is recognized on the
latter of shipment to the customer or “street date” (when it is available for
sale by the customer). Under revenue sharing arrangements, rental revenue is
recognized when we are entitled to receipts and such receipts are
determinable.





Revenues
from television licensing are recognized when the motion picture is available to
the licensee for telecast. For television licenses that include separate
availability “windows” during the license period, revenue is allocated over the
“windows.” Revenue from sales of international territories are recognized when
the feature film is available to the distributor for exploitation and no
conditions for delivery exist, which under most sales contracts requires that
full payment has been received from the distributor.





For
contracts that provide for rights to exploit a program on multiple media (i.e.
theatrical, video, television) with a fee for a single motion picture where the
contract specifies the permissible timing of release to various media, the fee
is allocated to the various media based on management’s assessment of the
relative fair value of the rights to exploit each media and is recognized as the
program is released to each media. For multiple-title contracts with a fee, the
fee is allocated on a title-by-title basis, based on management’s assessment of
the relative fair value of each title. Cash payments received are recorded as
deferred revenue until all the conditions of revenue recognition have been
met.





Income Taxes





The
Company recognizes future income tax assets and liabilities for the expected
future income tax consequences of transactions that have been included in the
financial statements or income tax returns. Future income taxes are provided for
using the liability method. Under the liability method, future income taxes are
recognized for all significant temporary differences between the tax and
financial statement bases of assets and liabilities.





Capital
Structure




The
Company has adopted Statement of Financial Accounting Standards No. 129,
"Disclosure of Information about Capital Structure" ("SFAS 129"), which requires
companies to disclose all relevant information regarding their capital
structure.





On
December 31, 2007, there were 8,650,957 shares outstanding of our $0.001 par
value Series B Convertible Preferred Stock. The Series B Preferred converts to
10 shares of common stock for every one share of Series B Preferred Stock. Each
share of Series B Preferred Stock is entitled to 1,000 votes. Series B Preferred
ranks superior to all other classes of stock.





On
December 31, 2007, there were 19,501,090 shares outstanding of our $0.001
par value Series A Convertible Preferred Stock. The Series A Preferred converts
to four shares of common stock for every one share of Series A Preferred Stock.
Each share of Series A Preferred Stock is entitled to 50 votes. Series A
Preferred ranks superior to our common stock and ranks junior to our Series B
Preferred Stock.





58




ITEM 6.   MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -
continued
  Significant Accounting
Practices-
continued
  On
October 25, 2007, the Company entered into a Share Issuance Agreement (“SIA”)
with Zuckerman, Kocmur and Scorpion (“JJT”). According to the terms and
conditions of the SIA, as additional consideration for Janez becoming a joint
venture partner with CDG, and in consideration for additional business
development and consulting efforts provided by JJT, JJT received 80,000,000
shares of our common stock. 20,000,000 shares were issued to Zuckerman,
20,000,000 shares were issued to Kocmur, these shares were valued at the market
price at the date of issue $0.006 and recorded as professional services in the
amount of $240,000. The 40,000,000 shares were issued to Scorpion in Preferred
Series A and B stock were recorded at the market price at the date of issue and
recorded as professional services in the amount of $307,276.   In
addition, Zuckerman, Wilson and Joseph Petrucelli were nominated to serve on our
Board of Directors. The parties also agreed on a common stock structure which
provides JTT and Robert P. Atwell, our Chairman (“Atwell”) with anti-dilution
protection. Further, the SIA directs the Company to seek stockholder approval to
increase the authorized shares of the common stock to 400,000,000 and increase
the Board of Directors from five to seven members.





The
Company issued no shares in 2002 due to conversion, exercises or contingent
issuances. In 2003, the Company issued 20,000,000 shares due to the conversion
of notes payable retiring principal and accrued interest totaling $224,296. We
reached an agreement with Eagle Consulting Group, Inc. on March 28, 2003 to
provide operational funding for Camelot. In exchange for twenty percent (20%)of
the Company’s outstanding common stock on an anti-dilutive, continuing basis
until Camelot could secure additional financing from another source, Eagle
agreed to provide funding for Camelot’s annual audit, quarterly filings,
accounts payable and other ongoing expenses including office, phones, business
development, legal and accounting fees. In 2004, Eagle advanced $127,341 and in
2005 Eagle advanced $125,288. In accordance with the anti-dilutive provision,
the amount of stock due Eagle is calculated on a quarterly basis. This
anti-dilution provision to the agreement could have a material adverse effect on
our shareholders as it might continue for a substantial period of time and as a
result the dilutive effect to the shareholders cannot be fully determined until
the funding from Eagle ceases.





On
January 5, 2005, the Company designated two classes of preferred stock, Class A
Convertible Preferred Stock and Class B Convertible Preferred Stock. Both
classes have a par value of $.001 and 10,000,000 shares authorized. The Series A
is reserved for employees, consultants and other professionals retained by the
Company and the Series B is reserved for the Board of Directors. On June 30,
2005, the Company issued 5,100,000 shares of each Class A Convertible and Class
B Convertible Preferred Stock to Robert Atwell. The Company recorded expense of
$3,366,000 in connection with the Preferred Stock issuances.







ITEM 7. FINANCIAL STATEMENTS





We are
filing the following reports, financial statements and notes to financial
statements with this Annual Report. These reports may be found following Part
III of this Annual Report.







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





On
January 28, 2008, the Company engaged McKennon, Wilson & Morgan, LLP as its
Certifying Accountant for 2007 year end. The Company has no consulting
arrangements or other services that are performed by McKennon, Wilson &
Morgan, LLP.




On
January 28, 2008, the Company dismissed Malone & Bailey, CPA’s as its
Certifying Accountant for 2007 year-end audit. The Company had no disagreements
or other issues with Malone & Bailey. The audit committee felt it was better
to have the auditor located in the same region as the Company. Malone &
Bailey is located in Houston, Texas. McKennon, Wilson & Morgan, LLP is
located in Irvine, California.  During 2007, quarterly reviews were
performed by Malone & Bailey, CPA’s. The Company had no consulting
arrangements or other services that are performed by Malone-Bailey, CPA’s or by
Epstein, Weber & Conover and/or Moss/Adams, CPA’s.





On
January 29, 2007, the company engaged Malone & Bailey, CPA’s as its
Certifying Accountant for 2006 year-end audit. The Company had no consulting
arrangements or other services that are performed by Malone & Bailey,
CPA’s.





On
January 28, 2007, the Company was informed in writing that Epstein, Weber &
Conover, P.L.C. had been acquired by Moss/Adams, CPA’s and would no longer be
able to perform our audits as of January 12, 2007. During 2006, quarterly
reviews were performed by Epstein, Weber & Conover. The Company had no
consulting arrangements or other services that are performed by Malone-Bailey,
CPA’s or by Epstein, Weber & Conover and/or Moss/Adams, CPA’s.





On March
16, 2004, the Company engaged Epstein, Weber & Conover, P.L.C., Certified
Public Accountants of Scottsdale, Arizona as its new Certifying Accountant. The
Company did not have any consulting arrangements with Epstein, Weber &
Conover, P.L.C., Certified Public Accountants prior to their
appointment.




On March
15, 2004, we terminated the services of James C. Marshall, C.P.A., P.C.,
(“Marshall”) and dismissed them as the Certifying Accountant of the Company upon
the recommendation of the Company’s audit committee. Marshall was engaged by the
Company on March 9, 2003 and subsequently reviewed the Company’s quarterly
filings through September 30, 2003. The Company had no disagreements with James
C. Marshall, CPA, P.C. during 2003.




59





ITEM
8A. CONTROL AND PROCEDURES





We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.





Evaluation
of Disclosure Controls and Procedures




The
Company, under the supervision and with the participation of its management,
including the Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the design and operation of the Company’s “disclosure controls
and procedures” (as such term is defined in Rule 13a-15(e) under the
Exchange Act) as of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the Company’s disclosure controls and procedures are effective to
ensure that information required to be disclosed in reports filed or submitted
by the Company under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms and that
information required to be disclosed by the Company is accumulated and
communicated to the Company’s management to allow timely decisions regarding the
required disclosure.




Changes
in Internal Control Over Financial Reporting




To the
best of our knowledge and belief, there has been no change in our internal
controls over financial reporting during the year ended December 31, 2007 that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reports.




Management’s Report on Internal
Control Over Financial Reporting
 
 Camelot’s
management team is responsible for establishing and maintaining adequate
internal control over financial reporting (as such term is defined in
Rule 13a-15(f) under the Exchange Act). Camelot’s internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of Camelot;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
Camelot are being made only in accordance with authorizations of management and
directors of Camelot; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the Company’s assets that could have a material effect on the financial
statements.
 
 Internal
control over financial reporting is designed to provide reasonable assurance to
Camelot’s management and board of directors regarding the preparation of
reliable financial statements for external purposes in accordance with generally
accepted accounting principles. Internal control over financial reporting
includes self-monitoring mechanisms and actions taken to correct deficiencies as
they are identified. Because of the inherent limitations in any internal
control, no matter how well designed, misstatements may occur and not be
prevented or detected. Accordingly, even effective internal control over
financial reporting can provide only reasonable assurance with respect to
financial statement preparation. Further, the evaluation of the effectiveness of
internal control over financial reporting was made as of a specific date, and
continued effectiveness in future periods is subject to the risks that controls
may become inadequate because of changes in conditions or that the degree of
compliance with the policies and procedures may decline.
 
 Management
conducted an evaluation of the effectiveness of the Company’s system of internal
control over financial reporting as of December 31, 2007 based on the framework
set forth in various internal control procedure guidelines readily available to
Camelot’s management, including the specified criteria defined in the applicable
rules under the Exchange Act. Based on its evaluation, management concluded
that, as of December 31, 2007, Camelot’s internal control over financial
reporting is effective based on the specified criteria.




Code of
Ethics





We have
adopted a Code of Business Conduct that applies to all our directors, officers
(including our principal executive officer and principal financial officer) and
employees. The Code of Business Conduct can be found on our website at www.camelotfilms.com.
We plan to also post on this section of our website any amendment to the Code of
Business Conduct, as well as any waivers that are required to be disclosed in
accordance with Securities and Exchange Commission or market
regulations.




60





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 and ages of the current directors and
executive officers of the Company as of December 31, 2007, the principal offices
and positions with the Company held by each person and the date such person
became a director or executive officer of the Company. Each serves until the
next annual meeting of stockholders.





Name
            
            Age
            
            Position
            
            Date
      of AppointmentRobert
      P. Atwell
            
            54
            
            President,
      Chief Executive Officer, Chairman
            
            March
      19, 2003George
      Jackson
            
            47
            
            Secretary,
      Chief Financial Officer, Director
            
            April
      1, 2005Joe
      Petrucelli
            
            41
            
            Director
            
            February
      19, 2008Tim
      Wilson
            
            59
            
            Director
            
            February
      19, 2008Jeff
      Zuckerman
            
            38
            
            Director
            
            February
      19, 2008




Robert P.
Atwell, 54, Chairman, President and Chief Executive Officer, has been President
of the Company since March 19, 2003. Mr. Atwell founded Camelot Films in 1978.
Mr. Atwell is also the President of The Atwell Group, Inc. a position he has
held since 1978. The Atwell Group was formed to consolidate operations of
various companies controlled by Mr. Atwell. The Atwell Group specializes in
taking on and implementing assignments for a variety of agencies and
corporations including general business consulting, corporate restructuring,
mergers and acquisitions, corporate investigations and securities
administration. Mr. Atwell also serves as Chairman and is on the board of Eagle
Consulting Group, Inc. and The Corporate Solution, Inc.





George
Jackson, 47, was appointed Chief Financial Officer and joined the Board of
Directors on April 1, 2005. Mr. Jackson has been a Certified Public Accountant
since 1984. He worked with the public accounting firm of KPMG. While at KPMG he
worked as a consultant and auditor on many film companies including: Carolco
Films, New World Pictures and others. He was the co-founder, CEO & CFO of
several fitness centers  from 1985 to 1999. He was responsible for
managing companies with over $20 million in revenue, 540 employees in the United
States and Asia, raising over $10 million in capital and managing the accounting
departments and preparing financial statements for shareholders in the U.S. and
Asia. He sold all his fitness center assets to Bally Total Fitness in early
2000, netting a return to shareholders of over 45% on an annual basis. From 2000
to present he has developed more fitness centers in Asia and been a director to
several fitness companies. Mr. Jackson graduated from the University of Southern
California with a B.S. in Accounting in 1982.





Joe
Petrucelli, 41, at-large Director, earned his Juris Doctor at California Western
School of Law in San Diego and his LL.M. in taxation at the University of San
Diego School of Law. Mr. Petrucelli was admitted to the State Bar of California
in June 1997. Since joining the bar, Mr. Petrucelli has provided legal
counseling to individuals, start-up companies and emerging companies from a
number of countries on a wide variety of tax and business issues including the
use of international private annuities as estate planning devices, strategies
for the use of ESOPs in corporate financing and as an exit strategy for
shareholders, securities law compliance with respect to both international and
domestic issuers of securities, shareholders’ rights in closely held
corporations, and corporate finance.





Currently,
Mr. Petrucelli’s practice concentrates on providing a full range of services in
the areas of tax planning, the use of captive insurance companies as risk
management tools, tax compliance, integrated estate planning and family wealth
preservation and corporate law (including LLCs) and he is often consulted by
other professionals in the area of private annuities, charitable tax issues,
complex tax matters, and complex business matters. He has also been U.S. tax
counsel for Anglo Irish Trust, Ltd. (Isle of Man), which is part of the $8
billion Anglo Irish Bank Group. In addition to being recognized as an expert in
a number of areas of taxation, Mr. Petrucelli routinely acts as corporate and
family general counsel to a number of corporations, family foundations and
wealthy families including acting as general counsel for two publicly traded
corporations—Sky440, Inc., and Camelot Entertainment Group, Inc.





In
addition to his law practice, Mr. Petrucelli remains active in the community
having acted as an adjunct professor of federal income tax and business law at
California State University San Marcos, acting as a guest lecturer at Point Loma
Nazarene University in San Diego, and as an invited lecturer in the areas of tax
and estate planning topics before various bar associations, including the San
Diego County Bar Association and the La Jolla Bar Association as well as to the
faculty and staff of the California State University System among
others.





61




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




Tim
Wilson, 59, at-large Director, began his professional career in 1968 as a
journalist.  He was nominated for a Pulitzer Prize in photojournalism in
1975, and named in “Who’s Who in America” in 1976.   His work has been
published in Time and Newsweek Magazines among others as well as in every major
daily newspaper in the country.





In 1977
Mr. Wilson started a career in the real estate industry and has owned brokerage,
mortgage, property management, investment and development companies ever
since.  He currently operates 14 different companies that broker, manage,
finance and develop real estate.





Mr.
Wilson has been involved in the land development industry for more than 30 years
and has a clear understanding of the risks inherent in obtaining entitlement
approvals as well as the commitments necessary to achieve those objectives.
 During the last three decades, Mr. Wilson has been directly involved in
more than $3 billion worth of real estate developments either as an owner, a
broker or a financier.




Mr.
Wilson has also owned several other successful businesses in marine contracting,
consulting, high tech and finance.  In addition, he has taught stock,
options, futures and currency trading to interested students worldwide, using
technical and fundamental analysis.  Mr. Wilson is also a member of the
Keiretsu Forum, an angel network of several hundred accredited investors that
finance and mentor early stage companies from all different types of industries,
including high tech, low tech and real estate. Mr. Wilson’s education was
completed at Mesa Junior College, San Diego State University and University of
California at San Diego.




Jeff
Zuckerman, 38, at-large Director,is Vice President of
Janez Development and oversees Janez Group's acquisitions and capital raising
activities. Mr. Zuckerman has more than twelve years experience in multifamily,
office, industrial and retail property types.





Prior to
joining Janez, Mr. Zuckerman was responsible for sourcing and structuring real
estate investment transactions at AEW Capital Management LP, an international
real estate advisor to pension funds and other institutions. Jeff's transactions
focused on multiple property types in geographic markets across the United
States.  Earlier in his career he handled acquisition transactions with GMS
Realty, a West Coast real estate investment and management company.




During
his real estate tenure, Mr. Zuckerman has acquired investment properties
totaling more than five million square feet and valued at more than $550
million. Investments were made on behalf of entities such as Morgan Stanley Real
Estate Investment Fund II, Lucent Master Pension Trust, United Technologies
Inc., and JP Morgan/Chase Long Term Investment Trust. In addition, Mr. Zuckerman
has extensive industry experience in capital markets, portfolio/asset management
and leasing.




Mr.
Zuckerman is a graduate of Syracuse University in New York and has earned a
Masters of Business Administration, with a concentration in Finance, from
Rutgers University School of Management. He is a member of the National
Association of Industrial and Office Parks (NAIOP) and holds a California real
estate license.





Subsequent
Events:





On
February 19, 2008, Joe Petrucelli, Tim Wilson and Jeff Zuckerman were appointed
to the Board of Directors to replace Mike Ellis, Jane Olmstead and Rounsvelle
Schaum, former directors of the Company.





Audit
Committee





We have
had an audit committee since inception. Our current audit committee is comprised
of George Jackson, Tim Wilson and Joe Petrucelli. Of our three audit committee
members, Tim Wilson and Joe Petrucelli are classified as independent directors.
George Jackson is our audit committee financial expert that meets the definition
of an "audit committee
financial expert,"as that term is defined by SEC regulations, and
further, two of our three audit committee members are independent, as defined by
applicable regulations.





Significant
Employees





We rely
on our Board of Directors, Executive Officers, and all of our employees to
further the development of our business.







Family
Relationships





There are
no family relationships.





Involvement
in Certain Legal Procedures





None.





62





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




Section
16(a) Beneficial Ownership Reporting Compliance





Section
16(a) of the Securities Exchange Act of 1934 requires the Company's directors
and executive officers, and persons who beneficially own more than ten percent
of a registered class of our equity securities (referred to as "reporting
persons"), 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. Reporting persons are required by Commission regulations to
furnish us with copies of all Section 16(a) forms they file. To the Company's
knowledge, all Section 16(a) filing requirements applicable to its directors,
executive officers and greater than ten percent beneficial owners during such
period were satisfied.





ITEM
10. EXECUTIVE COMPENSATION





None of
our executive officers or directors currently has a contracted compensation
package. Although we plan to enter into contracted compensation packages during
the second quarter of 2008, we have not entered into any written employment
agreements with our executive officers as of the date of this
filing.  Our President and CEO earned $250,000 as a base salary in
2007. Our CFO earned $100,000 as a base salary in 2007.  As of
December 31, 2007 the CEO and CFO had not received these amounts and they are
recorded as related party accounts payable on the balance sheet. Our COO, who is
no longer with the Company, earned a prorated base salary of $140,000 in 2007
prior to leaving Camelot on August 31, 2007. In addition to the base salary,
additional consideration is due and will be determined by the Board of Directors
in 2008. The additional consideration will be added to the compensation packages
for 2008, which are expected to increase.





The
following table summarizes all compensation paid to our President and Chief
Financial Officer for services rendered in all capacities to the Company during
each of the fiscal years ended December 31, 2007 and 2006.





Name
      and Principal Position
            
            
            Year
            
            
            Salary
              ($)
            
            
            Bonus
              ($)
            
            
            Stock
      Awards
              ($)
            
            
            Option
      Awards
              ($)
            
            
            Non-Equity
      Incentive Plan Compensation ($)
            
            
            Non-Qualified
      Deferred Compensation Earnings
              ($)
            
            
            All
      Other Compensation
              ($)
            
            Totals
              ($)Robert
      P. Atwell,(1)
              President,
      Chief
            
            
            2007
            
            $
            250,000
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            $
            250,000Executive
      Officer
            
            
            2006
            
            $
            250,000
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            $
            250,000George
      Jackson, (2)
              Secretary,
      Chief
            
            
            2007
            
            $
            100,000
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            $
            100,000Financial
      Officer
            
            
            2006
            
            $
            100,000
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            $
            100,000Michael
      Ellis, (3)
              Chief
      Operating
            
            
            2007
            
            $
            70,000
            
            
            0
            
            
            70,000
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            $
            140,000Officer
            
            
            2006
            
            $
            200,000
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            $
            200,000





Stock
Option Plan





Our Board
of Directors adopted the 2007 Stock Plan on October 1, 2007 (“Plan”). Under the
Plan, stock options may be granted to eligible participants in the form of
Incentive Stock Options (ISOs) under the Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), or options which do not qualify as ISOs
(non-Qualify Stock Options or "NQSOs"). In addition, the Plan permits several
types of grants, including outright grants of common stock (“Awards”), direct
purchase rights (“Purchase Rights”) and other stock rights as determined by the
board. The aggregate number of shares which may be issued under the Plan is
Twenty Million (20,000,000), subject to certain allowed
adjustments.





Under the
Plan, outstanding options must be exercised within 10 years from the date of
grant and no later than three months after termination of employment or service
as a director, except that any optionee who is unable to continue employment or
service as a director due to total and permanent disability may exercise such
options within one year of termination and the options of an optionee who is
employed or disabled and who dies must be exercised within one year after the
date of death.





63




ITEM
10. EXECUTIVE COMPENSATION - continued




The Plan
should require that the exercise prices of options granted must be at least
equal to the fair market value of a share of common stock on the date of grant,
provided that for incentive options if an employee owns more than 10% of the
Company's outstanding common stock then the exercise price of an incentive
option must be at least 110% of the fair market value of a share of the
Company's common stock on the date of grant, and the maximum term of such option
may be no longer than five years. The aggregate fair market value of common
stock, determined at the time the option is granted, for which incentive stock
options become exercisable by an employee during any calendar year, is to be
limited to an amount to be determined by our Board of Directors.





The Plan
is to be administered by the Company's Board of Directors, or a committee
thereof, which determines the terms of options granted, including the exercise
price, the number of shares of common stock subject to the option, and the terms
and conditions of exercise. No option granted under the Plan is transferable by
the optionee other than by will or the laws of descent and distribution, and
each option is exercisable during the lifetime of the optionee only by such
optionee.





Compensation
of Directors




It is our
current policy not to pay cash compensation to directors for solely being a
director. We are considering a stock package for members of our Board of
Directors and Advisory Board members.





During
2007 and 2006, independent directors were not compensated; however, officers
that were also directors were compensated as described in the Summary
Compensation Table. In addition, Tim Wilson, one of our Directors, provided
consulting services to us and received stock for those services and will
continue to receive stock for his services. Mr. Wilson, as managing member of
Scorpion Bay, LLC, and as a member of Janez Investments Tustin, also received
common and preferred stock in connection with activities of Camelot Studio Group
and Camelot Studios at ATEP.







ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS





The
following table sets forth as of December 31, 2007, certain information, based
on information obtained from the persons named below, with respect to the
beneficial ownership of the common stock by each person known by us to own
beneficially 5% or more of the common stock.





As of
December 31, 2007, there were 224,506,332 outstanding shares held by 112
shareholders of record. For the purposes of this Item 11, any stockholders
beneficially owning 5% or more of the Company's common stock are listed
below.





Name
      of Beneficial
              Owner
            Shares
      Beneficially
              Owned
            PercentThe
      Atwell Group, Inc. (1)
              130
      Vantis, Suite 140
              Aliso
      Viejo, CA 92656
            57,586,071
            26%Scorpion
      Bay, LLC (2)
              130
      Vantis, Suite 140
              Aliso
      Viejo, CA 92656
            48,062,973
            21%Jeff
      Zuckerman (3)
              130
      Vantis, Suite 140
              Aliso
      Viejo, CA 92656
            20,586,000
            9%John
      Kocmur (4)
              12526
      High Bluff Drive. Suite 190
              San
      Diego, CA 92130
            20,000,000
            9%TOTAL
      5% Stockholders as a Group
            146,235,044
            65%(1)
      Includes all shares owned and or under the control of Beneficial Owner.
      Robert P. Atwell is the owner of The Atwell Group,
    Inc.(2)
      Includes all shares owned and or under the control of Beneficial Owner.
      Timothy Wilson is the owner of Scorpion Bay, LLC.(3)
      Includes all shares owned and or under the control of Beneficial
      Owner.(4)
      Includes all shares owned and or under the control of Beneficial
      Owner.







64





ITEM 11. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS - continued




The
number of shares of common stock owned are those "beneficially owned" as
determined under the rules of the Securities and Exchange Commission, including
any shares of common stock as to which a person has sole or shared voting or
investment power and any shares of common stock which the person has the right
to acquire within 60 days through the exercise of any option, warrant or right.
All shares are held beneficially and of record and each record shareholder has
sole voting and investment power.





Securities
Ownership of Management





Common
Stock





The
following table sets forth as of December 31, 2007, certain information, based
on information obtained from the persons named below, with respect to the
securities ownership of the common stock by Management. Management owns 59%, or
132,544,999 shares, of the Company’s common stock.





Name
      of Beneficial Owner
            Shares
      Beneficially Owned
            Percent
      (6)Robert
      P. Atwell (1)
              Chairman,
      President, CEO
              130
      Vantis, Suite 140
              Aliso
      Viejo, CA 92656
            57,586,071
            26%Timothy
      Wilson (2)
              Director
              130
      Vantis, Suite 140
              Aliso
      Viejo, CA 92656
            48,062,973
            21%Jeff
      Zuckerman (3)
              Director
              130
      Vantis, Suite 140
              Aliso
      Viejo, CA 92656
            20,586,000
            9%George
      Jackson (4)
              Secretary,
      CFO
              130
      Vantis, Suite 140
              Aliso
      Viejo, CA 92656
            3,559,955
            2%Joseph
      Petrucelli (5)
              130
      Vantis, Suite 140
              Aliso
      Viejo, CA 92656
              Director
            2,750,000
            1%Totals:
            132,544,999
            59%Note
      (1): Includes direct and indirect affiliate
    ownership.Note
      (2): Includes direct and indirect affiliate
    ownership.Note
      (3): Includes direct and indirect affiliate
    ownership.Note
      (4): Includes direct and indirect affiliate
    ownership.Note
      (5): Includes direct and indirect affiliate
    ownership.Note
      (6): Based on 229,506,332 shares outstanding as of
      12/31/07.





The
number of shares of common stock owned are those "beneficially owned" as
determined under the rules of the Securities and Exchange Commission, including
any shares of common stock as to which a person has sole or shared voting or
investment power and any shares of common stock which the person has the right
to acquire within 60 days through the exercise of any option, warrant or
right.





No
officer, director or security holder listed above owns any common stock
warrants, options or rights not listed herein.





All
shares are held beneficially and of record and each record shareholder has sole
voting and investment power. The address at which each Executive Officer and
Director can be reached is the Company's headquarters.





Preferred
Stock





The
following table sets forth as of December 31, 2007, certain information, based
on information obtained from the persons named below, with respect to the
securities ownership of preferred stock by Management. Management owns 100%, or
28,152,047 shares, of the Company’s preferred stock.





As of
December 31, 2007, we had two classes of preferred stock, Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock.





65





ITEM 11. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS - continued




Preferred Stock-
continued




On
December 31, 2007, there were 8,650,957 shares outstanding of our $0.001 par
value Series B Convertible Preferred Stock. The Series B Preferred converts to
10 shares of common stock for every one share of Series B Preferred Stock. Each
share of Series B Preferred Stock is entitled to 1,000 votes. Series B Preferred
ranks superior to all other classes of stock.





On
December 31, 2007, there were 19,501,090 shares outstanding of our $0.001
par value Series A Convertible Preferred Stock. The Series A Preferred converts
to 4 shares of common stock for every one share of Series A Preferred Stock.
Each share of Series A Preferred Stock is entitled to 50 votes. Series A
Preferred ranks superior to our common stock and ranks junior to our Series B
Preferred Stock.





Name
      of Beneficial Owner
            Series
      A Preferred
              Shares
      Beneficially Owned
            PercentRobert
      P. Atwell (1)
              Chairman,
      President, CEO
              130
      Vantis, Suite 140
              Aliso
      Viejo, CA 92656
            9,501,090
            49%Timothy
      Wilson (2)
              Director
              130
      Vantis, Suite 140
              Aliso
      Viejo, CA 92656
            10,000,000
            51%Totals:
            19,501,090
            100%Note
      (1): Includes shares held directly and indirectly. Converts to 38,004,360
      common shares. Equals 475,054,500 votes.Note
      (2): Includes shares held directly and indirectly. Converts to 40,000,000
      common shares. Equals 500,000,000 votes.






Name
      of Beneficial Owner
            Series
      B Preferred
              Shares
      Beneficially Owned
            PercentRobert
      P. Atwell (1)
              Chairman,
      President, CEO
              130
      Vantis, Suite 140
              Aliso
      Viejo, CA 92656
            6,080,957
            70%Timothy
      Wilson (2)
              Director
              130
      Vantis, Suite 140
              Aliso
      Viejo, CA 92656
            2,570,000
            30%Totals:
            8,650,957
            100%Note
      (1): Includes shares held directly and indirectly. Converts to 60,809,570
      common shares. Equals 6,080,957,000 votes.Note
      (2): Includes shares held directly and indirectly. Converts to 45,000,000
      common shares. Equals 2,570,000,000 votes.







66


ITEM 11. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS - continued


Preferred Stock-
continued




Voting
Rights of Management and Beneficial Owners of 5% or More of the Common
Stock





The
following table shows the total voting rights of management and beneficial
owners of 5% or more of common stock on items that are presented to stockholders
at annual and special meetings of the stockholders which require stockholder
approval.





Name
      of Beneficial Owner (1)
            Total
      Votes
            PercentRobert
      P. Atwell
              Chairman,
      President, CEO
              130
      Vantis, Suite 140
              Aliso
      Viejo, CA 92656
            6,613,597,571
            67.105%Timothy
      Wilson
              Director
              130
      Vantis, Suite 140
              Aliso
      Viejo, CA 92656
            3,118,062,973
            31.637%Jeff
      Zuckerman
              Director
              130
      Vantis, Suite 140
              Aliso
      Viejo, CA 92656
            20,586,000
            00.208%John
      Kocmur
              12526
      High Bluff Drive. Suite 190
              San
      Diego, CA 92130
            20,000,000
            00.202%George
      Jackson
              Secretary,
      CFO
              130
      Vantis, Suite 140
              Aliso
      Viejo, CA 92656
            3,559,955
            00.036%Joseph
      Petrucelli
              130
      Vantis, Suite 140
              Aliso
      Viejo, CA 92656
              Director
            2,750,000
            00.027%All
      Other Common Stockholders (2)
            76,961,333
            00.785%Totals:
            9,855,517,832
            100%Note
      (1): Includes direct and indirect affiliate
    ownership.Note
      (2): As of 12/31/07, there were 224,506,332 common shares outstanding.
      Management and 5% Beneficial Owners owned 152,544,999 common
      shares.





Involvement
in Certain Legal Proceedings





None of
our management is involved in any type of legal proceedings.





ITEM
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS




The
following transactions are for year ended December 31, 2007. All transactions
are incorporated by reference and can be found through our previous
filings:





Except as
indicated below, and for the periods indicated, there were no material
transactions, or series of similar transactions, since the beginning of the
Company’s last fiscal year, January 1, 2007, or any currently proposed
transactions, or series of similar transactions, to which we were or are a
party, in which the amount involved exceeds $100,000, and in which any director
or executive officer, or any security holder who is known by us to own of record
or beneficially more than 5% of any class of our common stock, or any member of
the immediate family of any of the foregoing persons, has an
interest.





Camelot
Studio Group





Camelot
Studio Group (“CSG”), one of our major divisions, is in the process of
developing its first major studio facility, currently known as Camelot Studios
at ATEP, as part of the Advanced Technology and Education Park (“ATEP”) in
Tustin, California. As part of that process, CSG formed Camelot Development
Group, LLC (“CDG”) which is a 50% joint venture partner with Janez Investments
XI Tustin, LLC (“JIT”) in Camelot Development Tustin, LLC (“CDT”). CDT is
negotiating with the South Orange County Community College District (“SOCCCD”)
to be the master developer for the ATEP project, including Camelot Studios at
ATEP. To date, the Company has invested approximately $2,600,000 in the Camelot
Studios at ATEP project since the Company began the process of locating CSG’s
first studio facility at the Tustin site in September 2005.





During
the first quarter of 2008, CDG agreed to enter into an agreement with Camelot
Studio Investors, LLC (“CSI”), whereby CSI would purchase 30% of CDG for
$3,000,000. As part of that transaction, Pacific Surf Partners, LP (“PSP”) would
receive 20% of CDG.





Timothy
Wilson (“Wilson”), one of our directors and a major stockholder of the Company,
is the managing member of Scorpion Bay, LLC (“Scorpion”), which owns 50% of JIT.
Wilson is also the managing member of CSI and PSP.





Jeff
Zuckerman (“Zuckerman”), also one of our directors and a significant stockholder
of the Company, is Senior Vice-President of Janez Group (“Janez”), which is a
50% owner of JIT.





John
Kocmur (“Kocmur”), a 5% or more beneficial owner of our common stock, is
President of Janez.


67




ITEM
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -
continued




Share
Issuance Agreement





On October 25, 2007, the Company
entered into a Share Issuance Agreement (“SIA”) with Zuckerman, Kocmur and
Scorpion (“JJT”). According to the terms and conditions of the SIA, as
additional consideration for Janez becoming a joint venture partner with CDG,
and in consideration for additional business development and consulting efforts
provided by JJT, JJT received 80,000,000 shares of our common stock. 20,000,000
shares were issued to Zuckerman, 20,000,000 shares were issued to Kocmur and
40,000,000 shares were issued to Scorpion. In addition, Zuckerman, Wilson and
Joseph Petrucelli were nominated to serve on our Board of Directors. The parties
also agreed on a common stock structure which provides JTT and Robert P. Atwell,
our Chairman (“Atwell”) with anti-dilution protection. Further, the SIA directs
the Company to seek stockholder approval to increase the authorized shares of
the common stock to 400,000,000 and increase the Board of Directors from five to
seven members.





Eagle
Consulting Group





We
entered into an agreement with Eagle Consulting Group, Inc. (“Eagle”) on March
28, 2003, to provide operational funding for the Company, which expires on March
28, 2008. Atwell is the Chairman of Eagle. Eagle is now part of The Atwell
Group, owned by Atwell. In exchange for twenty percent (20%)of the Company’s
outstanding common stock on a non-dilutive, continuing basis until the Company
can secure additional financing from another source, Eagle has agreed to provide
funding for the Company’s annual audit, quarterly filings, accounts payable and
other ongoing expenses including office, phones, business development, legal and
accounting fees. In addition, Eagle received an option to receive 2,000,000
cashless options to purchase common shares at $0.03 per share. For each one
dollar ($1) increase in the price of the Company’s stock, Eagle shall be
entitled to receive an additional two million options throughout the term of the
agreement. In addition, the Company shall have the first right of refusal to
purchase the options from Eagle for the current market value once Eagle notifies
the Company that it intends to exercise the options. In the event the Company
elects not to exercise this first right of refusal, and subject to applicable
laws, Eagle shall be entitled to exercise the sale of shares or options
immediately thereafter. As of December 31, 2007, Eagle has not exercised its
right to receive the options and therefore no options have been
granted.





On June
5, 2007, the Company completed its funding transaction with NIR and its note
holders, whereby the note holders have invested monies into the Company, thereby
ending the agreement with Eagle. The total stock to be issued in connection with
the NIR funding has yet to be determined as the note holders have not yet
completed their conversions. Upon completion of the NIR conversions, the total
amount of additional stock due Eagle under the terms of the agreement shall be
determined and issued to Eagle with an effective date of June 5, 2007, the date
the funding agreement with NIR was completed.





For 2007,
Eagle has advanced to the Company a total, including interest, of $170,747,
which covered part of our operating expenses for 2007, including general and
administrative costs, costs for screenplays and prepaid exhibitor’s space. We
have not issued Eagle any shares of common stock for repayment of expenses
advanced on behalf of the Company.





For 2006,
Eagle advanced to the Company a total, including interest, of $429,182, which
covered all of our operating expenses for 2006, including general and
administrative costs, costs for screenplays and prepaid exhibitor’s space. We
issued Eagle 2,427,101 shares of common stock for repayment of expenses advanced
on behalf of the Company. The stock issued was valued at the weighted average
price per share. Eagle received an additional 1,270,722 shares of common stock
for continuing to finance our operations under the agreement described
above.





The
Atwell Group





We
utilize office space provided by The Atwell Group, Inc., a privately-held
company owned by Mr. Atwell, our President, Chief Executive Officer and
Chairman. The space is leased on an annual basis for $72,000 per year. The
current lease expires on December 31, 2009. In addition, The Atwell Group, The
Corporate Solution and Love Bug Management Corp., all of which are owned by Mr.
Atwell, paid expenses on behalf of Camelot during 2007. Further, Mr. Atwell and
his wife, Tamara Atwell, were guarantors on various financial transactions
involving Camelot during 2007.





Scorpion
Bay





Scorpion
Bay LLC, Pacific Surf Partners, Camelot Studio Investors LLC (“Scorpion”), which
are managed or co-managed by Timothy Wilson, one of our directors, were involved
in various business and financial transactions involving Camelot during 2007.
These transactions have been discussed throughout this report.








68





ITEM
13. EXHIBITS AND REPORTS ON FORM 8-K LIST OF EXHIBITS ATTACHED OR INCORPORATED
BY REFERENCE PURSUANT TO ITEM 601 OF REGULATION S-B.





Where so
indicated by footnote, exhibits, which were previously filed, are incorporated
by reference. For exhibits incorporated by reference, the location of the
exhibit in the previous filing is indicated in parentheses.


Exhibit No.
              
              Title
      of Document
              
              Location3.1.1
              
              Certificate
      of Incorporation
              
              Incorporated
      by reference as Exhibit 2.1 to Form 10-KSB filed April 17,
      20013.1.2
              
              Amended
      Certificate of Incorporation
              
              Incorporated
      by reference to Form 8-K filed June 29, 20043.2
              
              By-laws
              
              Incorporated
      by reference as Exhibit 2.1 to Form 10-KSB filed April 17,
      20014.1
              
              Entry
      Into a Material Definitive Agreement with New Millennium Capital Partners
      II LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and AJW Partners,
      LLC
              
              Incorporated
      by reference to Form 8-K filed on January 4, 20074.2
              
              Form
      of Stock Purchase Warrant issued to New Millennium Capital Partners II,
      LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and AJW Partners,
      LLC
              
              Incorporated
      by reference as Exhibit 4.3 to Form 8-K filed on January 4,
      20074.3
              
              Registration
      Rights Agreement dated December 27, 2006 by and among New Millennium
      Capital Partners II, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd.
      and AJW Partners, LLC
              
              Incorporated
      by reference as Exhibit 4.4 to Form 8-K filed on January 4,
      20074.4
              
              Security
      Agreement dated December 27, 2006 by and among the Company and New
      Millennium Capital Partners II, LLC, AJW Qualified Partners, LLC, AJW
      Offshore, Ltd. and AJW Partners, LLC
              
              Incorporated
      by reference as Exhibit 4.5 to Form 8-K filed on January 4,
      20074.5
              
              Intellectual
      Property Security Agreement dated December 27, 2006 by and among the
      Company and New Millennium Capital Partners II, LLC, AJW Qualified
      Partners, LLC, AJW Offshore, Ltd. and AJW Partners,
    LLC
              
              Incorporated
      by reference as Exhibit 4.6 to Form 8-K filed on January 4,
      20074.6
              
              Structuring
      Agreement with Lionheart
              
              Incorporated
      by reference as Exhibit 4.7 to Form 8-K filed on January 4,
      20074.7
              
              Change
      in Registrant’s Certifying Accountant
              
              Incorporated
      by reference to Form 8-K filed on January 31,
20074.8
              
              Change
      in Registrant’s Certifying Accountant
              
              Incorporated
      by reference to Form 8-K/A-1 filed on January 31,
    20074.9
              
              Entry
      Into a Material Definitive Agreement with New Millennium Capital Partners
      II LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and AJW Partners,
      LLC
              
              Incorporated
      by reference to Amendment No. 1 to Form 8-K filed on January 31,
      20074.10
              
              Securities
      Purchase Agreement dated December 27, 2006, by and among the Company and
      New Millennium Capital Partners II, LLC, AJW Qualified Partners, LLC, AJW
      Offshore, Ltd. and AJW Partners, LLC
              
              Incorporated
      by reference as Exhibit 4.1 to Form 8-K filed on February 1,
      20074.11
              
              Form
      of Callable Convertible Secured Note by and among New Millennium Capital
      Partners II, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and AJW
      Partners, LLC
              
              Incorporated
      by reference as Exhibit 4.2 to Form 8-K filed on February 1,
      20074.12
              
              Entry
      Into a Material Definitive Agreement
              
              Incorporated
      by reference to Amendment No. 2 to Form 8-K filed on February 2,
      20074.13
              
              Stock
      Purchase Warrant issued to Lionheart Associates LLC d/b/a Fairhills
      Capital
              
              Incorporated
      by reference as Exhibit 4.8 to Form 8-K filed on February 2,
      20074.14
              
              SB-2
      Registration
              
              Incorporated
      by reference to SB-2 Registration Statement Form SB-2 filed on February 2,
      20074.15
              
              SB-2
      Registration
              
              Incorporated
      by reference to SB-2 Registration Statement Form SB-2/A filed on May 11,
      20074.16
              
              SB-2
      Registration
              
              Incorporated
      by reference to SB-2 Registration Statement Form SB-2/2A filed on May 31,
      20074.17
              
              Departure
      of Directors
              
              Incorporated
      by reference to Form 8-K filed on July 31, 20074.18
              
              Departure
      of Directors
              
              Incorporated
      by reference to Form 8-K filed on August 31, 20074.19
              
              S-8
      Registration
              
              Incorporated
      by reference to Form S-8 filed on October 19,
20074.20
              
              2007
      Stock Option Plan
              
              Incorporated
      by reference as Exhibit 4.1 to Form S-8 filed on October 19,
      2007
 
 69




ITEM
13. EXHIBITS AND REPORTS ON FORM 8-K LIST OF EXHIBITS ATTACHED OR INCORPORATED
BY REFERENCE PURSUANT TO ITEM 601 OF REGULATION S-B. - continued




4.20
            
            2007
      Stock Option Plan
            
            Incorporated
      by reference as Exhibit 4.1 to Form S-8 filed on October 19,
      20074.21
            
            Changes
      in Registrant’s Certifying Accountant
            
            Incorporated
      by reference to Form 8-K filed on February 1,
20084.22
            
            Changes
      in Registrant’s Certifying Accountant
            
            Incorporated
      by reference to Form 8-K/A filed on February 7,
  20084.23
            
            Appointment
      of Directors
            
            Incorporated
      by reference to form 8-K filed on February 19,
  200831.1
            
            Certification of Chief Executive Officer pursuant
      to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200231.2
            
            Certification of Chief Financial Officer pursuant
      to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.1
            
            Certification of Chief Executive Officer pursuant
      to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.2
            
            Certification of Chief Financial Officer pursuant
      to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002







ITEM
14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.





Our
current auditors for December 31, 2007 are McKennon, Wilson & Morgan,
LLP.  During the first three quarters of 2007, Malone & Bailey PLC
were our auditors. Our auditors for December 31, 2006 were Malone & Bailey,
CPA’s. During the first three quarters of 2006, Epstein, Weber & Conover,
PLC were our auditors. That firm was acquired by Moss/Adams, CPA’s at the end of
2006.




Epstein,
Weber & Conover, PLC had been the Company’s independent auditor since March
of 2004. James C. Marshall C.P.A., P.C., was the Company's independent auditor
for the three quarters ended September 30, 2003.




The
Principal Accountants performed the services listed below and were paid the fees
listed below:





Audit
Fees





To date,
McKennon, Wilson & Morgan, LLP charged $25,000 for the year ended December
31, 2007 audit.




Malone-Bailey charged
$1,500 for reviw of the 10KSB and the
year ended December 31, 2007
audit.





Malone-Bailey
charged $1,000 for documents related to the year ended December 31, 2007
audit.





Malone-Bailey
charged $24,037 for review of the quarterly statements during fiscal year
2007.





Malone-Bailey
charged $5,175 for review of the SB-2 and SB-2A during fiscal year
2007.





Malone-Bailey
charged $1,500 for review of the S-8 during fiscal year 2007.





Malone-Bailey
charged $22,000 for the year ended December 31, 2006 audit.





EWC
charged $ 6,920 for review of the quarterly statements during fiscal year
2006.





EWC
charged approximately $14,500 for the year ended December 31, 2005 for
professional services rendered in connection with the Company’s annual financial
statements and review of the financial statements included in the Company’s 2005
Quarterly Reports on Form 10-QSB.





(Remainder
of Page Left Intentionally Blank)

















70





CAMELOT
ENTERTAINMENT GROUP, INC.
 
 
 Financial
Statements as of
 December
31, 2007
 And
Independent Auditors’ Report
 
 
 CAMELOT
ENTERTAINMENT GROUP, INC.
 
  INDEX
TO FINANCIAL STATEMENTS
 
 REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - McKennon, Wilson
      & Morgan LLP
              F-2REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - Malone & Bailey,
      P.C.
              F-3BALANCE
      SHEETS AS OF DECEMBER 31, 2007 and 2006
              F-4STATEMENTS
      OF OPERATIONS FOR 2007, 2006 AND FOR INCEPTION TO DECEMBER 31,
      2007
              F-5STATEMENTS
      OF STOCKHOLDERS' DEFICIT FOR INCEPTION TO DECEMBER 31,
      2007
              F-6
      - F-7STATEMENTS
      OF CASH FLOWS FOR 2007, 2006 AND FOR INCEPTION TO DECEMBER 31,
      2007
              F-8NOTES
      TO FINANCIAL STATEMENTS
              F-9
      TO F-17
   F-1
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and Stockholders
 Camelot
Entertainment Group, Inc.
 (A
Development Stage Company)
  We have
audited the accompanying balance sheet of Camelot Entertainment Group, Inc. as
of December 31, 2007 and the related statements of operations, shareholders’
deficit, and cash flows for the year then ended. The financial statements for
the period April 21, 1999 (inception) through December 31, 2006, were audited by
other auditors whose reports expressed unqualified opinions on those
statements. 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 audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. Our audit included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides 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 Camelot Entertainment Group, Inc.
as of December 31, 2007 and the related statements of operations, shareholders’
deficit, and cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
 
 The
accompanying financial statements have been prepared assuming that Camelot
Entertainment Group, Inc. will continue as a going concern. As discussed in Note
2 to the financial statements, Camelot Entertainment Group, Inc. suffered losses
from operations and has a working capital deficiency, which raises substantial
doubt about its ability to continue as a going concern. Management’s plans
regarding those matters also are described in Note 2. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
  
 /s/
McKennon Wilson & Morgan LLP
  Irvine,
California
 April 15,
2008




F-2




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors
 Camelot
Entertainment Group, Inc.
 (A
Development Stage Company)
 Irvine,
CA
 
 We have
audited the accompanying balance sheet of Camelot Entertainment Group, Inc. as
of December 31, 2006 and the related statements of operations, shareholders'
deficit, and cash flows for the period from April 21, 1999 (Inception) through
December 31, 2006. The financial statements for the period April 21, 1999
(inception) through December 31, 2005, were audited by other auditors whose
reports expressed unqualified opinions on those statements. The financial
statements for the period April 21, 1999 (inception) through December 31, 2005,
include total revenues and net loss of $58,568 and $11,824,859, respectively.
Our opinion on the statements of operations, stockholders' equity (deficit), and
cash flows for the period April 21, 1999 (inception) through December 31, 2005,
insofar as it relates to amounts for prior periods through December 31, 2005, is
based solely on the report of other auditors.  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 audit..
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides 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 Camelot Entertainment Group, Inc.
for the periods described in conformity with accounting principles generally
accepted in the United States of America.
 
 The
accompanying financial statements have been prepared assuming that Camelot
Entertainment Group, Inc. will continue as a going concern. As discussed in Note
2 to the financial statements, Camelot Entertainment Group, Inc. suffered losses
from operations and has a working capital deficiency, which raises substantial
doubt about its ability to continue as a going concern. Management's plans
regarding those matters also are described in Note 2. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
 
 Malone&
Bailey, P.C.
 www.malone−bailey.com
 Houston,
TX
 April 16,
2007




F-3


Camelot
      Entertainment Group, Inc.(A
      Development Stage Company)Balance
      SheetsDecember
      31,
              
              
              December
      31,2007
              
              
              2006ASSETSCurrent
      assets:Cash
              
              $
              122
              
              
              $
              435,533Prepaid
      expenses
              
              
              6,424
              
              
              
              6,424Total
      current assets
              
              
              6,546
              
              
              
              441,957School
      district deposit
              
              
              50,000
              
              
              
              -Deferred
      financing costs
              
              
              54,984
              
              
              
              74,744Loan
      receivable
              
              
              -
              
              
              
              17,500Scripts
      costs
              
              
              79,700
              
              
              
              75,800Deposit
              
              
              -
              
              
              
              10,000Total
      other assets
              
              
              184,684
              
              
              
              178,044Total
      assets
              
              $
              191,230
              
              
              $
              620,001LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      liabilities:Accounts
      payable and accrued liabilities
              
              $
              176,999
              
              
              $
              140,625Accrued
      expenses to related parties
              
              
              350,000
              
              
              
              -Note
      payable to related party (Notes 4 and 6)
              
              
              300,000
              
              
              
              250,000Stockholder
      advances
              
              
              134,757
              
              
              
              186,000Total
      current liabilities
              
              
              961,756
              
              
              
              576,625Long-term
      liabilities (Notes 4 and 8)Derivative
      liabilities - Series A and B convertible preferred stock conversion
      feature
              
              
              726,223
              
              
              
              -Secured
      convertible notes payable, net of discount $647,762 and
      $598,497
              
              
              295,970
              
              
              
              1,521Derivative
      liability - conversion feature
              
              
              542,661
              
              
              
              538,890Derivative
      liabilities - warrants
              
              
              50,759
              
              
              
              698,390Total
      long-term liabilities
              
              
              1,615,613
              
              
              
              1,238,801Total
      liabilities
              
              
              2,577,369
              
              
              
              1,815,426Series
      A and B convertible preferred stock (Note 8)
              
              
              28,152
              
              
              
              -Stockholders'
      deficit:Common
      stock; par value $.001 per share; authorized300,000,000
      shares; 255,339,665 and 106,655,743 sharesissued
      and 224,506,332 and 106,655,743 shares outstanding,
      respectively
              
              
              224,506
              
              
              
              106,656Series A
      convertible preferred stock; par value $.001 per shareauthorized
      25,000,000 shares, 19,501,090 and 5,100,000 issued and
      outstanding, respectively
              
              
              -
              
              
              
              5,100Series B
      convertible preferred stock; par value $.001 per shareauthorized
      10,000,000 shares, 8,650,957 and 5,100,000 issued and outstanding,
      respectively
              
              
              -
              
              
              
              5,100Subscription
      receivable
              
              
              -
              
              
              
              (258,072
              )Additional
      paid-in capital
              
              
              13,637,649
              
              
              
              13,119,002Deficit
      accumulated during the development stage
              
              
              (16,276,446
              )
              
              
              (14,173,211
              )Total
      stockholders' deficit
              
              
              (2,414,291
              )
              
              
              (1,195,425
              )Total
      liabilities and stockholders' deficit
              
              $
              191,230
              
              
              $
              620,001The
      accompanying notes are an integral part of these financial
      statements.


F-4
 
 Camelot
      Entertainment Group, Inc.(A
      Development Stage Company)Statements
      of OperationsFromInception
      onApril
      21, 1999For
      the Year Ended,
                  
                  
                  For
      the Year Ended,
                  
                  
                  throughDecember
      31,
                  
                  
                  December
      31,
                  
                  
                  December
      31,2007
                  
                  
                  2006
                  
                  
                  2007Revenue
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  58,568Operating
      expenses:Costs
      of services
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  95,700Sales
      and marketing
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  53,959Research and
      development
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  252,550General and
      administrative
                  
                  
                  1,864,178
                  
                  
                  
                  1,554,907
                  
                  
                  
                  12,011,651Impairment
      of assets
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,402,338Impairment
      of investments in other companies
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  710,868Total
      expenses
                  
                  
                  1,864,178
                  
                  
                  
                  1,554,907
                  
                  
                  
                  15,527,066Operating
      loss
                  
                  
                  (1,864,178
                  )
                  
                  
                  (1,554,907
                  )
                  
                  
                  (15,468,498
                  )Other
      income (expense):Interest
      expense
                  
                  
                  (717,537
                  )
                  
                  
                  (822,925
                  )
                  
                  
                  (1,549,756
                  )Gain
      on derivative liabilities
                  
                  
                  478,480
                  
                  
                  
                  29,480
                  
                  
                  
                  486,308Gain
      on extinguishment of debt
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  255,500Total
      other income (expense)
                  
                  
                  (239,057
                  )
                  
                  
                  (793,445
                  )
                  
                  
                  (807,948
                  )Net
      loss
                  
                  $
                  (2,103,235
                  )
                  
                  $
                  (2,348,352
                  )
                  
                  $
                  (16,276,446
                  )Basic
      and diluted loss per common share
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.02
                  )Weighted
      average number ofshares
      outstanding
                  
                  
                  123,164,025
                  
                  
                  
                  94,012,109The
      accompanying notes are an integral part of these financial
      statements.
   
 F-5
 Camelot
      Entertainment Group, Inc.(A
      Development Stage Company)Statements
      of Stockholders' DeficitDeficitAccumulatedAdditional
                
                
                During
      the
                
                
                
                
                
                TotalCommon
      Stock
                
                
                Preferred
      Stock
                
                
                Paid-In
                
                
                Development
                
                
                Subscription
                
                
                Stockholders'Shares
                
                
                Amount
                
                
                Shares
                
                
                Amount
                
                
                Capital
                
                
                Stage
                
                
                Receivable
                
                
                DeficitBalance
      at January 1, 2004
                
                
                33,856,433
                
                
                $
                33,857
                
                
                
                -
                
                
                $
                -
                
                
                $
                5,464,539
                
                
                $
                (6,059,442
                )
                
                $
                -
                
                
                $
                (561,046
                )Shares
      issued for services
                
                
                100,000
                
                
                
                100
                
                
                
                -
                
                
                
                -
                
                
                
                2,900
                
                
                
                -
                
                
                
                -
                
                
                
                3,000Shares
      issued for financing
                
                
                6,791,287
                
                
                
                6,791
                
                
                
                -
                
                
                
                -
                
                
                
                196,948
                
                
                
                -
                
                
                
                -
                
                
                
                203,739Subscriptions
      receivable for financing agreement
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                
                
                
                
                -
                
                
                
                (116,069
                )
                
                
                (116,069
                )Share
      issued for services
                
                
                24,009,000
                
                
                
                24,009
                
                
                
                -
                
                
                
                -
                
                
                
                1,085,500
                
                
                
                -
                
                
                
                
                
                
                
                1,109,509Share
      issued for financing
                
                
                7,604,562
                
                
                
                7,605
                
                
                
                -
                
                
                
                -
                
                
                
                221,460
                
                
                
                -
                
                
                
                (316,003
                )
                
                
                (86,938
                )Advances
      offset sub accounts receivable
                
                
                
                
                
                
                
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                174,000
                
                
                
                174,000Shares
      issued for debt
                
                
                1,000,000
                
                
                
                1,000
                
                
                
                -
                
                
                
                -
                
                
                
                39,000
                
                
                
                -
                
                
                
                -
                
                
                
                40,000Shares
      issued for amount due
                
                
                1,589,927
                
                
                
                1,590
                
                
                
                -
                
                
                
                -
                
                
                
                47,000
                
                
                
                -
                
                
                
                -
                
                
                
                48,590Value
      of option exercised
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                351,000
                
                
                
                -
                
                
                
                -
                
                
                
                351,000Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,265,278
                )
                
                
                -
                
                
                
                (1,265,278
                )Balance
      at December 31, 2004
                
                
                74,951,209
                
                
                
                74,952
                
                
                
                -
                
                
                
                -
                
                
                
                7,408,347
                
                
                
                (7,324,720
                )
                
                
                (258,072
                )
                
                
                (99,493
                )Shares
      issued for consulting services
                
                
                4,000,000
                
                
                
                4,000
                
                
                
                -
                
                
                
                -
                
                
                
                216,000
                
                
                
                -
                
                
                
                -
                
                
                
                220,000Shares
      issued for officers' salaries
                
                
                2,276,033
                
                
                
                2,276
                
                
                
                -
                
                
                
                -
                
                
                
                187,568
                
                
                
                -
                
                
                
                -
                
                
                
                189,844Shares
      issued to Eagle for expenses paid
                
                
                1,848,723
                
                
                
                1,848
                
                
                
                -
                
                
                
                -
                
                
                
                79,078
                
                
                
                -
                
                
                
                -
                
                
                
                80,926Shares
      issued for consulting services
                
                
                233,547
                
                
                
                233
                
                
                
                -
                
                
                
                -
                
                
                
                9,767
                
                
                
                -
                
                
                
                -
                
                
                
                10,000Shares
      issued for officers' salaries
                
                
                3,538,263
                
                
                
                3,538
                
                
                
                -
                
                
                
                -
                
                
                
                171,462
                
                
                
                -
                
                
                
                -
                
                
                
                175,000Shares
      issued to Eagle for expenses paid
                
                
                1,452,662
                
                
                
                1,453
                
                
                
                -
                
                
                
                -
                
                
                
                118,219
                
                
                
                -
                
                
                
                -
                
                
                
                119,672Shares
      issued to Eagle, 20% of shares issued
                
                
                1,762,271
                
                
                
                1,762
                
                
                
                -
                
                
                
                -
                
                
                
                120,991
                
                
                
                -
                
                
                
                -
                
                
                
                122,753Shares
      issued for shareholder loans
                
                
                3,586,881
                
                
                
                3,587
                
                
                
                -
                
                
                
                -
                
                
                
                256,354
                
                
                
                -
                
                
                
                -
                
                
                
                259,941Class
      A Preferred Stock issued
                
                
                -
                
                
                
                -
                
                
                
                5,100,000
                
                
                
                5,100
                
                
                
                555,900
                
                
                
                -
                
                
                
                -
                
                
                
                561,000Class
      B Preferred Stock issued
                
                
                -
                
                
                
                -
                
                
                
                5,100,000
                
                
                
                5,100
                
                
                
                2,799,900
                
                
                
                -
                
                
                
                -
                
                
                
                2,805,000Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (4,500,139
                )
                
                
                -
                
                
                
                (4,500,139
                )Balance
      at December 31, 2005
                
                
                93,649,589
                
                
                
                93,649
                
                
                
                10,200,000
                
                
                
                10,200
                
                
                
                11,923,586
                
                
                
                (11,824,859
                )
                
                
                (258,072
                )
                
                
                (55,496
                )Shares
      issued for officers' salaries
                
                
                5,191,538
                
                
                
                5,192
                
                
                
                -
                
                
                
                -
                
                
                
                464,808
                
                
                
                -
                
                
                
                -
                
                
                
                470,000Shares
      issued for consulting services
                
                
                2,009,787
                
                
                
                2,010
                
                
                
                -
                
                
                
                -
                
                
                
                179,078
                
                
                
                -
                
                
                
                -
                
                
                
                181,088Shares
      issued to Eagle for expenses paid
                
                
                1,201,329
                
                
                
                1,201
                
                
                
                -
                
                
                
                -
                
                
                
                113,120
                
                
                
                -
                
                
                
                -
                
                
                
                114,321Shares
      issued to Eagle for expenses paid
                
                
                1,270,772
                
                
                
                1,271
                
                
                
                -
                
                
                
                -
                
                
                
                116,911
                
                
                
                -
                
                
                
                -
                
                
                
                118,182Shares
      issued to Eagle, 20% of shares issued
                
                
                1,832,728
                
                
                
                1,833
                
                
                
                -
                
                
                
                -
                
                
                
                168,611
                
                
                
                -
                
                
                
                -
                
                
                
                170,444Shares
      issued to Scorpion Bay LLC
                
                
                1,500,000
                
                
                
                1,500
                
                
                
                -
                
                
                
                -
                
                
                
                133,650
                
                
                
                -
                
                
                
                -
                
                
                
                135,150Imputed
      interest on shareholder loan
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                19,238
                
                
                
                
                
                
                
                -
                
                
                
                19,238Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (2,348,352
                )
                
                
                -
                
                
                
                (2,348,352
                )
 
 F-6
 Statements
of Stockholders' Deficit - continued
 Balance
      at Dec 31, 2006
                
                
                106,655,743
                
                
                
                106,656
                
                
                
                10,200,000
                
                
                
                10,200
                
                
                
                13,119,002
                
                
                
                (14,173,211
                )
                
                
                (258,072
                )
                
                
                (1,195,425
                )Shares
      issued to Nucore
                
                
                5,000,000
                
                
                
                5,000
                
                
                
                -
                
                
                
                -
                
                
                
                495,000
                
                
                
                -
                
                
                
                (500,000
                )
                
                
                -Shares
      issued for interest on note payable - Scorpion
                
                
                7,000,000
                
                
                
                7,000
                
                
                
                -
                
                
                
                -
                
                
                
                332,000
                
                
                
                -
                
                
                
                -
                
                
                
                339,000Shares
      issued for expenses paid - Atwell
                
                
                401,957
                
                
                
                402
                
                
                
                -
                
                
                
                -
                
                
                
                15,676
                
                
                
                -
                
                
                
                -
                
                
                
                16,078Shares
      issued for services
                
                
                1,250,000
                
                
                
                1,250
                
                
                
                -
                
                
                
                -
                
                
                
                48,750
                
                
                
                -
                
                
                
                -
                
                
                
                50,000Shares
      issued for conversion of notes payable - NIR
                
                
                1,250,750
                
                
                
                1,251
                
                
                
                -
                
                
                
                -
                
                
                
                28,173
                
                
                
                -
                
                
                
                -
                
                
                
                29,424Derivatives
      liability relieved by conversions of note payable
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                48,399
                
                
                
                -
                
                
                
                -
                
                
                
                48,399Imputed
      interest on shareholders loans
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,246
                
                
                
                -
                
                
                
                -
                
                
                
                2,246Shares
      issued for services - Bastien & Associates
                
                
                208,409
                
                
                
                208
                
                
                
                -
                
                
                
                -
                
                
                
                1,875
                
                
                
                -
                
                
                
                -
                
                
                
                2,083Shares
      issued for services - Bastien & Associates
                
                
                2,728,858
                
                
                
                2,729
                
                
                
                -
                
                
                
                -
                
                
                
                19,647
                
                
                
                -
                
                
                
                -
                
                
                
                22,376Shares
      issued for conversion of notes payable - NIR
                
                
                9,000,000
                
                
                
                9,000
                
                
                
                -
                
                
                
                -
                
                
                
                3,755
                
                
                
                -
                
                
                
                -
                
                
                
                12,755Shares
      issued for interest on notes payable - Scorpion Bay LLC
                
                
                1,000,000
                
                
                
                1,000
                
                
                
                -
                
                
                
                -
                
                
                
                2,100
                
                
                
                -
                
                
                
                -
                
                
                
                3,100Shares
      issued for interest on notes payable - Scorpion Bay LLC
                
                
                1,000,000
                
                
                
                1,000
                
                
                
                -
                
                
                
                -
                
                
                
                4,500
                
                
                
                -
                
                
                
                -
                
                
                
                5,500Shares
      issued to Scorpion Bay LLC
                
                
                2,800,000
                
                
                
                2,800
                
                
                
                -
                
                
                
                -
                
                
                
                7,000
                
                
                
                -
                
                
                
                -
                
                
                
                9,800Shares
      issued for services -  Patrick Winn
                
                
                1,000,000
                
                
                
                1,000
                
                
                
                -
                
                
                
                -
                
                
                
                2,800
                
                
                
                -
                
                
                
                -
                
                
                
                3,800Shares
      issued for services -  Susan Sanchez
                
                
                1,000,000
                
                
                
                1,000
                
                
                
                -
                
                
                
                -
                
                
                
                2,800
                
                
                
                -
                
                
                
                -
                
                
                
                3,800Cancelled
      subscription receivable
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (258,072
                )
                
                
                -
                
                
                
                258,072
                
                
                
                -Shares
      issued to Scorpion Bay, LLC
                
                
                9,100,000
                
                
                
                9,100
                
                
                
                -
                
                
                
                -
                
                
                
                22,037
                
                
                
                -
                
                
                
                -
                
                
                
                31,137Shares
      issued for Services - Patrick Winn
                
                
                2,768,000
                
                
                
                2,768
                
                
                
                -
                
                
                
                -
                
                
                
                6,366
                
                
                
                -
                
                
                
                -
                
                
                
                9,134Shares
      issued for Services - Susan Sanchez
                
                
                3,446,000
                
                
                
                3,446
                
                
                
                -
                
                
                
                -
                
                
                
                7,926
                
                
                
                -
                
                
                
                -
                
                
                
                11,372Preferred
      Stock - Series A
                
                
                -
                
                
                
                -
                
                
                
                14,401,090
                
                
                
                14,401
                
                
                
                175,693
                
                
                
                -
                
                
                
                -
                
                
                
                190,094Shares
      issued to Dolpin Communities - Interest
                
                
                5,000,000
                
                
                
                5,000
                
                
                
                -
                
                
                
                -
                
                
                
                3,772
                
                
                
                -
                
                
                
                -
                
                
                
                8,772Preferred
      Stock - Series B
                
                
                -
                
                
                
                -
                
                
                
                3,550,957
                
                
                
                3,551
                
                
                
                113,631
                
                
                
                -
                
                
                
                -
                
                
                
                117,182Shares
      issued for conversion of notes payable - NIR
                
                
                3,020,000
                
                
                
                3,020
                
                
                
                -
                
                
                
                -
                
                
                
                2,515
                
                
                
                -
                
                
                
                -
                
                
                
                5,535Shares
      issued for legal services - Chris Flannery
                
                
                2,500,000
                
                
                
                2,500
                
                
                
                -
                
                
                
                -
                
                
                
                7,500
                
                
                
                -
                
                
                
                -
                
                
                
                10,000Shares
      issued to John Kozmur - investment
                
                
                20,000,000
                
                
                
                20,000
                
                
                
                -
                
                
                
                -
                
                
                
                40,000
                
                
                
                -
                
                
                
                -
                
                
                
                60,000Shares
      issued to Jeff Zuckerman - investment
                
                
                20,000,000
                
                
                
                20,000
                
                
                
                -
                
                
                
                -
                
                
                
                40,000
                
                
                
                -
                
                
                
                -
                
                
                
                60,000Shares
      issued to Joseph Petrucelli - legal services
                
                
                2,500,000
                
                
                
                2,500
                
                
                
                -
                
                
                
                -
                
                
                
                7,500
                
                
                
                -
                
                
                
                -
                
                
                
                10,000Shares
      issued to Chris Davis - services
                
                
                238,413
                
                
                
                238
                
                
                
                -
                
                
                
                -
                
                
                
                954
                
                
                
                -
                
                
                
                -
                
                
                
                1,192Shares
      issued to Michael Ellis - services
                
                
                4,792,369
                
                
                
                4,792
                
                
                
                -
                
                
                
                -
                
                
                
                65,208
                
                
                
                -
                
                
                
                -
                
                
                
                70,000Shares
      issued to Lewis Consulting - services
                
                
                1,000,000
                
                
                
                1,000
                
                
                
                -
                
                
                
                -
                
                
                
                4,000
                
                
                
                -
                
                
                
                -
                
                
                
                5,000Shares
      issued to Craig Prater - services
                
                
                145,833
                
                
                
                146
                
                
                
                -
                
                
                
                -
                
                
                
                583
                
                
                
                -
                
                
                
                -
                
                
                
                729Shares
      issued to Scorpion Bay, LLC
                
                
                14,700,000
                
                
                
                14,700
                
                
                
                -
                
                
                
                -
                
                
                
                38,228
                
                
                
                -
                
                
                
                -
                
                
                
                52,928Cancelled
      subscription receivable to Nucore
                
                
                (5,000,000
                )
                
                
                (5,000
                )
                
                
                -
                
                
                
                -
                
                
                
                (495,000
                )
                
                
                -
                
                
                
                500,000
                
                
                
                -Derivative
      liability - Preferred Stock Series A & B
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (28,152
                )
                
                
                (278,915
                )
                
                
                -
                
                
                
                -
                
                
                
                (307,067
                )Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (2,103,235
                )
                
                
                -
                
                
                
                (2,103,235
                )Balance
      at December 31, 2007
                
                
                224,506,332
                
                
                $
                224,506
                
                
                
                28,152,047
                
                
                $
                -
                
                
                $
                13,637,649
                
                
                $
                (16,276,446
                )
                
                $
                -
                
                
                $
                (2,414,291
                )The
      accompanying notes are an integral part of these financial
      statements.
  
 F-7
 
  CAMELOT
      ENTERTAINMENT GROUP, INC.(A
      Development Stage Company)Statement's
      of Cash FlowsFromInception
      onApril
      21, 1999For
      Year Ended
                  
                  
                  throughDecember
      31,
                  
                  
                  December
      31,
                  
                  
                  December
      31,2007
                  
                  
                  2006
                  
                  
                  2007OPERATING
      ACTIVITIESNet
      loss for the period
                  
                  $
                  (2,103,235
                  )
                  
                  $
                  (2,348,352
                  )
                  
                  $
                  (16,276,446
                  )Adjustments
      to reconcile net loss to cash used in operating
activities:Amortization
      of deferred financing costs and discounts on notes payable
                  
                  
                  294,447
                  
                  
                  
                  1,777
                  
                  
                  
                  296,224Imputed
      interest on related party advances
                  
                  
                  2,246
                  
                  
                  
                  19,238
                  
                  
                  
                  21,484Loss
      or (Gain) on derivative liabilities
                  
                  
                  (478,480
                  )
                  
                  
                  637,281
                  
                  
                  
                  158,801Common
      Stock issued for interest expenses
                  
                  
                  430,309
                  
                  
                  
                  135,150
                  
                  
                  
                  565,459Common
      stock issued per dilution agreement
                  
                  
                  -
                  
                  
                  
                  170,444
                  
                  
                  
                  368,508Value
      of options expensed
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  351,000Gain
      on extinguishment of debt
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (255,500
                  )Depreciation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,997Amortization
      of deferred compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,538,927Stock
      issued for services
                  
                  
                  657,494
                  
                  
                  
                  651,088
                  
                  
                  
                  3,191,429Common
      stock issued for expense reimbursement
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  22,000Common
      stock issued for technology
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  19,167Impairment
      of investments in other companies
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  710,868Impairment
      of assets
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,628,360Prepaid
      services expensed
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  530,000Expenses
      paid through notes payable proceeds
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  66,489Loss
      on disposal of property and equipment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,854Preferred
      stock issued to shareholder
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,366,000Impairment
      of note receivable
                  
                  
                  17,500
                  
                  
                  
                  -
                  
                  
                  
                  17,500Change
      in assets and liabilities:(increase)
      decrease in prepaids and other current assets
                  
                  
                  -
                  
                  
                  
                  (15,108
                  )
                  
                  
                  (24,358
                  )Increase
      (decrease) in accounts payable and accrued liabilities
                  
                  
                  36,374
                  
                  
                  
                  173,287
                  
                  
                  
                  384,140Increase
      (decrease) in due to officers
                  
                  
                  350,000
                  
                  
                  
                  -
                  
                  
                  
                  350,000Cash
      used in operating activities
                  
                  
                  (793,345
                  )
                  
                  
                  (575,195
                  )
                  
                  
                  (1,960,097
                  )Cash
      flows from investing activities:Purchase
      of fixed assets
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (6,689
                  )Purchase
      of scripts and deposits
                  
                  
                  (43,900
                  )
                  
                  
                  (67,000
                  )
                  
                  
                  (129,700
                  )Cash
      used in investing activities
                  
                  
                  (43,900
                  )
                  
                  
                  (67,000
                  )
                  
                  
                  (136,389
                  )Cash
      flows from financing activities:Contributed
      capital
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  25,500Proceeds
      from related party note payable
                  
                  
                  300,000
                  
                  
                  
                  429,182
                  
                  
                  
                  1,316,613Payments
      on related party debt
                  
                  
                  -
                  
                  
                  
                  (125,000
                  )
                  
                  
                  (125,000
                  )Payment
      on notes payable
                  
                  
                  (250,000
                  )
                  
                  
                  (4,477
                  )
                  
                  
                  (254,477
                  )Proceeds
      from note payable
                  
                  
                  400,000
                  
                  
                  
                  850,000
                  
                  
                  
                  1,255,998Deferred
      financing costs
                  
                  
                  (13,000
                  )
                  
                  
                  (75,000
                  )
                  
                  
                  (88,000
                  )Advances
      from stockholder
                  
                  
                  235,125
                  
                  
                  
                  -
                  
                  
                  
                  235,125Payments
      on stockholder advances
                  
                  
                  (270,291
                  )
                  
                  
                  -
                  
                  
                  
                  (270,291
                  )Cash
      provided by financing activities
                  
                  
                  401,834
                  
                  
                  
                  1,074,705
                  
                  
                  
                  2,095,468Increase
      (decrease) in cash
                  
                  
                  (435,411
                  )
                  
                  
                  432,510
                  
                  
                  
                  (1,018
                  )Cash
      at beginning of period
                  
                  
                  435,533
                  
                  
                  
                  3,023
                  
                  
                  
                  1,140Cash
      at the end of the period
                  
                  $
                  122
                  
                  
                  $
                  435,533
                  
                  
                  $
                  122Supplemental
      cash flow information:Non-cash
      investing and financing transactions:Stock
      issued for related party liabilities
                  
                  
                  16,078
                  
                  
                  
                  232,503
                  
                  
                  
                  248,581Creation
      of additional debt discount
                  
                  
                  320,315
                  
                  
                  
                  600,000
                  
                  
                  
                  920,315Stock
      issued for debt conversion
                  
                  
                  56,448
                  
                  
                  
                  -
                  
                  
                  
                  56,448Derivative
      liability relieved by conversion of debt
                  
                  
                  48,399
                  
                  
                  
                  -
                  
                  
                  
                  48,399The
      accompanying notes are an integral part of these financial
      statements.


F-8
 
 CAMELOT
ENTERTAINMENT GROUP, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO FINANCIAL STATEMENTS


1.
              BASIS
      OF PRESENTATION AND SIGNIFICANT ACCOUNTING
  POLICIES
  Organization and
Business:
 
 Camelot
Entertainment Group, Inc. (the “Company” or “Camelot”), a Delaware corporation,
is a development stage film, television, digital media and entertainment
company. The Company classifies its businesses into the following three major
divisions:
 
 ·
                Camelot
      Film and Media Group, consisting principally of feature film, television,
      home video, and digital media production and
  distribution;
 
 ·
                Camelot
      Studio Group, consisting principally of site acquisition, design,
      development and operation of Camelot Studio locations domestically and
      internationally;
 
 ·
                Camelot
      Production Services Group, consisting principally of consulting,
      education, finance, production support and technology
      services.
 At
December 31, 2007, the Company had a total of four employees
and eight consultants who provide services to the Company on an as needed
basis. The Company also retains independent contractors on a project by project
basis.
  Camelot’s
activities since March 31, 2003 have consisted of developing and implementing
its business plan, securing operating capital, building a management team,
acquiring and developing literary properties for its Camelot Film and Media
Group division, structuring its Camelot Studio Group division and embarking on
its first studio project “Camelot Studios at ATEP”, obtaining and processing
intellectual property rights, and entering into various ventures, consulting
agreements and alliances with affiliates and third-party
providers.  Camelot has substantially relied on funding provided by
its Chairman, Robert P. Atwell, and his affiliated companies, including The
Atwell Group, Inc. and Eagle Consulting Group, Inc.; funding provided by one of
its present directors, Timothy Wilson, and his affiliated companies, including
Scorpion Bay, LLC; funding provided by the “NIR SB-2 Transactions”, including
the affiliated note holders; and funding provided by other directors,
consultants and stockholders.
  The
Company’s activities prior to becoming Camelot in 2003, going back to inception,
consisted of raising capital, recruiting a management team and entering into
ventures and alliances with affiliates. The Company, prior to Camelot,
substantially relied on issuing stock to officers, directors, professional
service providers and other parties in exchange for services and
technology.
  Basis of
Presentation:
  Camelot
is considered to be a development stage enterprise as defined in Statement of
Financial Accounting Standards (“SFAS”) No. 7, “Accounting and Reporting by
Development Stage Enterprises.” Consequently, Camelot has presented these
financial statements in accordance with that Statement, including losses
incurred from April 21, 1999 (Inception) to December 31, 2007. However, the
Company has only presented the period from January 1, 2004 forward due to
changes in intended operations. In addition, the accompanying financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. All material inter-company accounts and transactions have been
eliminated.
  Summary of Significant
Accounting Policies:
  Cash and Cash
Equivalents - Camelot considers all investment instruments purchased with
maturities of three months or less to be cash equivalents
  Script Costs -
Camelot capitalizes costs it incurs to buy or develop scripts that will later be
used in the production of films according to the guidelines in Statement of
Position (“SOP”) SOP 00-2. Camelot will begin amortization of capitalized film
costs when a film is released and it begins to recognize revenue from the
film.
  Investments -
Investments in corporate entities with less than a 20% voting interest are
generally accounted for under the cost method. The cost method is also used to
account for investments that are not in-substance common stock. The Company uses
the equity method to account for investments in common stock or in-substance
common stock of corporate entities, including limited liability corporations
that do not maintain specific ownership accounts, in which it has a voting
interest of 20% to 50% or in which it otherwise has the ability to exercise
significant influence. Under the equity method, the investment is originally
recorded at cost and adjusted to recognize the Company's share of net earnings
or losses of the investee, limited to the extent of the Company's investment in
and advances to the investee and financial guarantees on behalf of the investee
that create additional basis.
  F-9
 
 CAMELOT
ENTERTAINMENT GROUP, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO FINANCIAL STATEMENTS
  1.
              BASIS
      OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES –
      continued
  The
Company regularly monitors and evaluates the realizable value of its
investments. If events and circumstances indicate that a decline in the value of
these assets has occurred and is other-than-temporary, the Company records a
charge to investment income. As of December 31, 2007, the Company carrying value
of its investment in Camelot Development Group, LLC was zero.
  Income Taxes -
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Due to historical net losses, a
valuation allowance has been established to offset the deferred tax
assets.
  In July
2006, the Financial Accounting and Standards Board (FASB) issued Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes— an interpretation of FASB
Statement No. 109 ("FIN 48")”. FIN 48 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise's financial statements in accordance
with SFAS No. 109, Accounting for Income Taxes. FIN 48 describes a recognition
threshold and measurement attribute for the recognition and measurement of tax
positions taken or expected to be taken in a tax return and also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The cumulative effect of adopting FIN 48 is
required to be reported as an adjustment to the opening balance of retained
earnings (or other appropriate components of equity) for that fiscal year,
presented separately. The adoption of FIN 48 did not have a material impact to
the Company’s financial statements.
  Fair Value of Financial
Instruments- Financial instruments consist primarily of obligations
under accounts payable and accrued expenses and notes payable. The carrying
amounts of accounts payable and accrued expenses approximate fair value because
of the short maturity of those instruments. The carrying value of notes payable
approximate fair value because they contain market value interest rates and have
specified repayment terms. Camelot has applied certain assumptions in estimating
these fair values. The use of different assumptions or methodologies may have a
material effect on the estimates of fair values.
  The
Company evaluates its convertible debt, including invalid issuances of
convertible preferred stock classified as debt, warrants or other contracts to
determine if those contracts or embedded components of those contracts qualify
as derivatives to be separately accounted for under SFAS 133 "Accounting for
Derivative Instruments and Hedging Activities" (“SFAS 133”) and related
interpretations including Emerging Issues Task Force (“EITF”) 00-19 "Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock" (“EITF 00-19”).  The result of this accounting
treatment is that the fair value of the embedded derivative is marked-to-market
each reporting date and recorded as a liability.  In the event that the
fair value is recorded as a liability, the change in fair value is recorded in
the statement of operations as other income or expense. Upon conversion or
exercise of a derivative instrument, the instrument is marked to fair value at
the conversion date and then that fair value is reclassified to
equity.
  In
circumstances where the embedded conversion feature in a convertible instrument
is required to be bifurcated  and there are also  other  embedded
derivative elements in the convertible  instrument  that are required
to be bifurcated, the bifurcated derivative instruments are accounted for as a
single, compound derivative instrument.
  The
classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is re-assessed at the end of
each reporting period.  Equity instruments that are initially classified as
equity that become subject to reclassification under SFAS 133 are reclassified
to liability at the fair value of the instrument on the reclassification date.
 Derivative instrument liabilities are classified in the balance sheet as
current or non-current based on whether or not net-cash settlement of the
derivative instrument is expected within 12 months of the balance sheet
date.
  Use of Estimates-
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and 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 those estimates.
  Stock Based
Compensation - Prior to December 31, 2005, Camelot accounted for stock
based compensation under SFAS No. 123 “Accounting for Stock-Based Compensation”
as permitted under this standard; compensation cost was recognized using the
intrinsic value method described in Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees”. Effective December 15, 2005, Camelot
adopted SFAS No. 123 (Revised 2004), “Share-Based Payment”, and applied the
provisions of the Securities and Exchange Commission Staff Accounting Bulletin
No. 107 using the modified-prospective transition method. Camelot had not issued
any options to employees or consultants at below market prices
in  prior periods thus; there was no impact of adopting the new
standard.
 F-10
 
 CAMELOT
ENTERTAINMENT GROUP, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO FINANCIAL STATEMENTS
  1.
                BASIS
      OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES –
      continued
  Impairment of Long-lived
Assets - Impairment of long-lived assets is assessed by the Company
whenever there is an indication that the carrying amount of the asset may not be
recoverable. Recoverability of these assets is determined by comparing the
forecasted undiscounted cash flows generated by those assets to the assets’ net
carrying value. The amount of impairment loss, if any, is measured as the
difference between the net book value of the assets and the estimated fair value
of the related assets.
 
 Loss Per Common Share- The Company has adopted SFAS No. 128, “Earnings per Share”. Basic EPS
differs from primary EPS calculation in that basic EPS does not include any
potentially dilutive securities. Diluted EPS must be disclosed regardless of the
dilutive impact to basic EPS. As of December 31, 2007, the Company excluded
common stock equivalents for 10,582,609 warrants, 449,396,190 in convertible
notes payable and 169,513,930 in Series A and B convertible preferred stock
because their effect would have been antidilutive.
 
 Equity Instruments Issued
with Registration Rights Agreement - The Company accounts for
registration rights agreement penalties as contingent liabilities, applying the
accounting guidance of FASB No. 5. This accounting is consistent with views
established by the Emerging Issues Task Force (“EITF”) and FASB Staff
Positions FSP EITF 00-19-2 “Accounting for Registration Payment Arrangements”,
which was issued December 21, 2006. Accordingly, the Company recognizes the
damages when it becomes probable that they will be incurred and amounts are
reasonably estimable. As of December 31, 2007, the Company does not believe
damages related to these rights are probable, and thus, an accrual has not been
recorded.
 
 Recent Accounting
Pronouncements - In September 2006, the FASB issued SFAS No. 157, “Fair
Value Measurements” ("SFAS 157"). SFAS No. 157 provides a common definition of
fair value and establishes a framework to make the measurement of fair value in
generally accepted accounting principles more consistent and comparable. SFAS
157 also requires expanded disclosures to provide information about the extent
to which fair value is used to measure assets and liabilities, the methods and
assumptions used to measure fair value, and the effect of fair value measures on
earnings. SFAS 157 is effective for fiscal years beginning after November 15,
2007, although early adoption is permitted. The Company is currently assessing
the potential effect, if any, of SFAS 157 on its financial
statements.
 
 In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities — Including an amendment of FASB
Statement No. 115 ("SFAS 159")”. SFAS 159 permits an entity to elect fair value
as the initial and subsequent measurement attribute for many financial assets
and liabilities. Entities electing the fair value option would be required to
recognize changes in fair value in earnings. Entities electing the fair value
option are required to distinguish, on the face of the statement of financial
position, the fair value of assets and liabilities for which the fair value
option has been elected and similar assets and liabilities measured using
another measurement attribute. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. The adjustment to reflect the difference between the
fair value and the carrying amount would be accounted for as a cumulative-effect
adjustment to retained earnings as of the date of initial adoption. The Company
is currently evaluating the impact, if any, of SFAS 159 on its financial
statements.
 
 In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations ("SFAS
141(R)"), which replaces FAS 141. SFAS 141(R) establishes principles and
requirements for how an acquirer in a business combination recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any controlling interest; recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase;
and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. FAS 141(R) is to be applied prospectively to business
combinations.
  In
December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51”. (“SFAS 160”)
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. The guidance will
become effective for the fiscal year beginning after December 15, 2008. The
Company is currently evaluating the impact, if any, of SFAS 160 on its financial
statements.
  2.
              GOING
      CONCERN
  The
accompanying financial statements have been prepared assuming that Camelot will
continue as a going concern. Camelot is a development-stage company, at December
31, 2007 a negative working capital of $955,210 and has accumulated a deficit
from Inception of $16,276,445. These conditions, the loss of financial support
from affiliates, and the failure to secure a successful source of additional
financial resources raise substantial doubt about Camelot’s ability to continue
as a going concern.
  Management’s
plans with respect to the current situation consist of restructuring its debt
and seeking additional financial resources from its existing investors or
others. However, instability in the stock price may make it difficult to find
parties willing to accept restricted shares of common stock in exchange for
services required to execute its business plan and generate revenues sufficient
to meet its anticipated cost structure. There are no assurances that such
resources would be made available to Camelot, or that they would be on
financially viable terms.  The financial statements do not include any
adjustments to reflect the possible future effects on the classification of
liabilities that may result from the outcome of this uncertainty.
  F-11
 CAMELOT
ENTERTAINMENT GROUP, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO FINANCIAL STATEMENTS
 
 3.
              INVESTMENT
 
 On
November 5, 2007, Camelot Development Group, LLC (“CDG”), which on that date was
owned 100% by Camelot, entered into an Operating Agreement known as Camelot
Development Tustin (“CDT”) with Janez Investments XI Tustin, LLC (“Janez”), for
the purpose of master developing the Advanced Technology and Education Park
(“ATEP”) in Tustin, California and the subsequent acquisition of real property
through a ground lease with the South Orange County Community College District
(“SOCCCD”) in order to develop and build Camelot’s first major studio complex
which is planned to be located at ATEP campus (“Project”). Under the terms of
the Operating Agreement, Camelot has been credited with an initial investment of
$1,500,000 into the Project, representing previous expenditures made by Camelot.
Janez will contribute cash to CDT in the sum of $1,500,000 as and when necessary
to pay for predevelopment costs or acquisition expenses as set forth in the
Business Plan for the Project. In addition, Camelot will be responsible for
one half of future expenditures once Janez $1,500,000 contribution has been
extinguished.
 
 The
Company accounts for the investment under the equity method of
accounting.  The Company did not record an initial investment in CDG
as no identifiable intangible assets were transferred and there were
no ascertainable values. In addition, the Company and Janez will be paid
for their services from CDG.  Total losses by CDG during the period
ended December 31, 2007 were $274,720 of which $137,360 was attributable to the
Company. Since the Company has no value ascribed to its investment, Camelot did
not record the losses on the accompanying financial statements. As of
December 31, 2007, CDG did not have any significant assets or
liabilities.
 
 In
January 2008, we agreed to sell up to 30% of our interest in CDG to Camelot
Studio Investors, LLC (“CSI”) for up to $3,000,000 on an as needed
basis.  In addition, CSI receives 100,000 shares of our $0.001 par
value Series C Convertible Preferred Stock for each one half of one per cent
(.05%) of CDG purchased by CSI. The managing member of CSI is Scorpion, which is
managed by Timothy Wilson, one of our at-large directors. The proceeds from the
sale will be utilized to retire debt and to fund operations. To date, proceeds
of $200,000 have been received.
 
 4.
              NOTES
      PAYABLE
 
 Convertible
Notes Payable
 
 On
December 27, 2006, Camelot issued a callable secured convertible note payable
for $1,000,000 to various holders. Camelot received the proceeds in two
tranches: $600,000 gross proceeds were received in December 2006 and $400,000 in
gross proceeds was received in June 2007 when the required registration
statement was deemed effective. The note payable provided for annual interest at
8%, was secured by all of the assets of the Company, and matures on April 27,
2009. The principal and accrued interest of the note is convertible into
Camelot’s common stock at a variable conversion price which is 50% of the
average market price of the common stock of the lowest three trading days prior
to the date of conversion. In addition, these notes have registration rights
agreements which call for liquidated damages in the event an effective
registration statement is not filed within a timely basis. In addition, the
holders of these notes and the placement agent were issued seven year warrants
to purchase 10,582,609 common shares at an exercise price of $0.15 per share.
The warrants were issued in connection with the first tranche
received.
 
 At
Camelot’s option, we may prepay the notes in the event that no event of default
exists, there are a sufficient number of shares available for conversion of the
notes and the market price is at or below $0.25 per share. In addition, in the
event that the average daily price of the common stock, as reported by the
reporting service, for each day of the month ending on any determination date is
below $0.25, we may prepay a portion of the outstanding principal amount of the
notes equal to 101% of the principal amount hereof divided by thirty-six (36)
plus one month's interest. Exercise of this option will stay all conversions for
the following month. The full principal amount of the notes is due upon default
under the terms of notes.
 
 Camelot
evaluated the convertible notes and warrants under SFAS 133 and ETIF 00-19 and
determined that the Convertible notes contained compound embedded derivative
liabilities. The warrants were also determined to be liabilities under SFAS 133
and EITF 00-19. Camelot determined that the compound embedded conversion
features required bifurcation from the note instrument and required an estimate
of its fair market value. Camelot hired an independent valuation expert to
determine the fair market value of both the compound embedded derivative and the
warrants. The fair market value of the compound embedded derivative was
estimated using a lattice model incorporating weighted average probability cash
flow. The fair market value of the warrants was estimated using the Black
Scholes model.
 
 On
December 27, 2006, the fair market value of the compound embedded derivative was
estimated to be $567,999 and the fair market value of the warrants was estimated
to be $698,762. The face amount of the notes payable was discounted down to
zero. The discount is being amortized over the life of the notes using the
effective interest method. Due to the excess fair value of the compound embedded
derivative and warrants over the proceeds of $666,761, Camelot recorded an
immediate charge to interest expense.
  F-12
 
 CAMELOT
ENTERTAINMENT GROUP, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO FINANCIAL STATEMENTS
 
 4.
              NOTES
      PAYABLE – continued
 On June
5, 2007, the additional $400,000 in proceeds was received by the
Company.  On June 5, 2007, the fair market value of the compound
embedded derivative was estimated to be $320,315. The face amount of the
convertible notes payable was discounted to $79,685. The discount is being
amortized over the life of the notes using the effective interest
method.
 
 As of
December 31, 2007, Camelot estimated the fair value of the derivatives
liabilities to be a total of $593,420 resulting in gain on derivative liability
presented in the statement of operations of $925,788.  In addition,
Camelot amortized $294,447 of the discount on the convertible note payable to
interest expense. As of December 31, 2007, the principal balance of the notes
was $943,732.
 
 At
December 31, 2007, the fair market value of the compound embedded derivative was
estimated using a lattice model incorporating weighted average probability cash
flow. The valuation was calculated using a lattice model with the following
assumptions: the stock price would increase in the short term at the cost of
equity with a 150% volatility, there was a 95% probability the Company would not
be in default of its registration requirements, assuming an event of default
occurring 5% of the time increasing .10% per month, reset events projected to
occur 5% of the time at an exercise price of $0.004, the holder would
automatically convert at a stock price of $0.20 if the registration was
effective and the Company was not in default, the Company would trigger
redemption of the note when available at a stock price of $0.10 or higher,
alternative financing would be initially available to redeem the note 0% of the
time and increase monthly by 10% to a maximum of 75% and the trading volume
would increase at 1% per month. At December 31, 2007, the fair market value of
the warrants was estimated using Black Scholes with the major assumptions of (1)
calculated volatility of 200%; (2) expected term of 6 years; (3) risk free rate
of 3.45% and (4) expected dividends of zero.
 
 At
December 31, 2006, Camelot estimated the fair value of the derivative
liabilities to be a total of $1,237,280 resulting in a gain on derivative
liability presented in the statement of operations of $29,480. In addition,
Camelot amortized $1,521 of the discount on the convertible note payable to
interest expense.
 
 During
the year ended December 31, 2007, the holders converted $56,448 resulting in the
issuance of 13,770,750 shares of common stock. Upon conversion, the Company
reclassified approximately $48,399 of the compound derivative to additional
paid-in capital.
 
 In the
event of full conversion of the aggregate principal amount of the notes of
$943,732 as of December 31, 2007, we would have to issue a total of 449,396,190
shares of common stock. However, due to contractual limitations, the most that
could be converted in any singular conversion is approximately 11,202,000
shares, or 4.99% of the outstanding. In addition, there are contractual
limitations that could be imposed by Camelot that would result in the inability
of the note holders to convert during any given 30 day period. There is no limit
to the number of shares that Camelot may be required to issue upon conversion of
the notes as it is dependent upon Camelot’s share price, which varies from day
to day. This could cause significant downward pressure on the price of Camelot’s
common stock.
 
 In
connection with the convertible note, Camelot recorded $88,000 in deferred
financing costs related to cost of securing the debt. The deferred financing
cost will be amortized over the life of the notes payable. During the years
ended December 31, 2007 and 2006, the Company amortized $32,760 and $256 of the
deferred financing costs to interest expense, respectively.
 
 Scorpion
Bay, LLC
 
 On June
15, 2007, we entered into a loan agreement with Scorpion Bay, LLC (“Scorpion”),
whereby Scorpion loaned Camelot $300,000 in three tranches of $100,000 each on
June 15, July 15 and August 15, 2007. Interest on the loan was payable in
3,000,000 shares of Camelot’s common stock. The shares were issuable in
1,000,000 share increments at each tranche. Camelot valued the common stock with
an average price per share of $0.016 totaling $47,600 based upon the fair market
value of the shares at each tranche. The loan was due and payable on November
15, 2007. The loan was secured with a blanket note and second deed of trust on
real property owned by Robert and Tamara Atwell (“Atwell”). In the event the
loan was not paid by the due date, the note could be extended for a period of 30
days at Scorpion’s option for 750,000 shares of common stock. On or about
October 25, 2007, Scorpion transferred the note to the real property held by
Atwell. In turn, Atwell assumed the $300,000 note with the Company. (see Note 6)
In connection with this transfer, Scorpion and a related entity of theirs
received a total of 13,000,000 shares of common stock. The Company valued
the common shares at $39,000, or $0.003 per share, based upon the market price
at the time.
 
 On
November 21, 2006, Camelot entered into a loan agreement with Scorpion, whereby
Scorpion loaned Camelot $250,000 due on March 22, 2007. Interest was payable in
the form of 500,000 common shares. Scorpion received a total of 1,500,000 shares
upon issuance of the loan with a fair market value of $135,150 which was
recorded as interest expense during the year ended December 31, 2006. The loan
was secured with a blanket note and second deed of trust on real property owned
by Robert and Tamara Atwell. In the event the loan was not paid by the due date,
the note could be extended by Scorpion at a cost of 1,500,000 common shares for
the first 30 day extension, 2,000,000 common shares for the second 30 day
extension, 2,500,000 common shares for the third 30 day extension and so forth.
The note was paid in full on June 5, 2007. Due to the extensions, Scorpion
received a total of 6,000,000 shares during the year ended December 31, 2007,
with an average price per share of $0.049, in the amount of $294,000 and
recorded as interest expense.
   F-13
 CAMELOT
ENTERTAINMENT GROUP, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO FINANCIAL STATEMENTS
  4.
                NOTES
      PAYABLE – continued
  On
November 23, 2007, Scorpion entered into a loan agreement with Love Bug
Management Corp. (“Love Bug”), an entity owned by Atwell, whereby Scorpion
loaned Love Bug $100,000. The proceeds were used for Atwell and Camelot
expenses. As a result of this loan, Atwell paid approximately $36,000 in direct
Camelot expenses, which have been included in the amounts payable to Atwell at
December 31, 2007. The loan was secured with a blanket note and second deed of
trust on real property owned by Robert and Tamara Atwell and was not guaranteed
by Camelot. Scorpion received 4,700,000 shares of the Company’s common stock in
connection with the loan and events related thereto. The Company valued the
shares at $19,928 based on $0.004, market price on the date of
issue.
 
 5.
              INCOME
      TAXES
  At
December 31, 2007, Camelot had federal net operating loss carryforwards of
approximately $7,613,235 that expire from 2013 to 2025 and state net operating
loss carryforwards of approximately $2,521 that expire from 2005 to 2009. The
tax effect of the net operating loss carry forward is $1,367,634.  During
the year ended December 31, 2007, the valuation allowance increased by
$745,671.  Because of the current uncertainty of realizing the benefits of
the tax net operating loss carryforwards, a valuation allowance has been
established. The full realization of the tax benefit associated with the
carryforward depends predominantly upon the Company's ability to generate
taxable income during the carryforward period.
 
 6.
              RELATED PARTY
      TRANSACTIONS
 
 Accrued
Salaries
 
 At
December 31, 2007, the Company has accrued $350,000 in compensation to its
current officers.  The amount due to officers include: Robert Atwell,
$250,000 and George Jackson, $100,000. During the year ended December 31, 2007,
a former officer and director received 4,792,369 shares of common stock valued
at $70,000 based prorating the annual salary on a monthly basis and issuing
shares based on the average close price for each month as determined by the
Company’s closing market price of their common stock.
 
 During
the year ended December 31, 2006, the Company accrued $470,000 in compensation
to its officers. The officers accepted their payment in 5,191,538 shares of
common stock valued at $470,000, determined by prorating their annual salary on
a monthly basis and issuing shares based on the average close price for each
month as determined by the Company’s closing market price of their common stock.
On December 31, 2006, the Company issued stock to two officers, Robert Atwell
and George Jackson in full payment for their accrued salaries. Michael Ellis,
the Company’s former COO, received $120,000 in cash and $120,000 in common
stock.
 
 Eagle
Consulting Group and The Atwell Group
 
 We
entered into an agreement with Eagle Consulting Group, Inc. (“Eagle”) on March
28, 2003, to provide operational funding for the Company, which expires on March
28, 2008. Robert Atwell is the Chairman of Eagle. Eagle is now part of The
Atwell Group, owned by Atwell. In exchange for twenty percent (20%)of the
Company’s outstanding common stock on a non-dilutive, continuing basis until the
Company can secure additional financing from another source, Eagle has agreed to
provide funding for the Company’s annual audit, quarterly filings, accounts
payable and other ongoing expenses including office, phones, business
development, legal and accounting fees.
 
 In
addition, Eagle received an option to receive 2,000,000 cashless options to
purchase common shares at $0.03 per share for a period of five years expiring
March 2008. For each one dollar ($1) increase in the price of the Company’s
stock, Eagle shall be entitled to receive an additional two million options
throughout the term of the agreement. In addition, the Company shall have the
first right of refusal to purchase the options from Eagle for the current market
value once Eagle notifies the Company that it intends to exercise the options.
In the event the Company elects not to exercise this first right of refusal, and
subject to applicable laws, Eagle shall be entitled to exercise the sale of
shares or options immediately thereafter. As of December 31, 2007, Eagle has not
exercised the options.
 
 During
the year ended December 31, 2007, the Company recorded $235,125 in advances by
an affiliate owned by the CEO, on behalf of the Company, compared to $429,182
for year ended December 31, 2006.  During 2007, Camelot paid $270,290
of these amounts due and issued 401,957 shares with a market value of $16,078,
leaving a shareholders balance owing at $134,757 at December 31,
2007.  Imputed interest recorded during the year ended December 31,
2007 related to the advances by the affiliate was $2,246.
 
 During
2006, Camelot paid $125,000 of these amounts back in cash and issued 1,270,772
shares with a market value of $118,181, leaving a balance owing to the Company
of $186,000. The affiliate received another 1,201,329 shares of common stock for
repayment of $114,321 in expense advances on behalf of the Company. The stock
issued was valued at the weighted average price per share for the
year.
   F-14
 CAMELOT
ENTERTAINMENT GROUP, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO FINANCIAL STATEMENTS
 6.
                RELATED PARTY
      TRANSACTIONS –
continued
 On
December 29, 2006, the Company issued 2,761,455 restricted shares to Robert
Atwell, CEO for salary, 1,104,583 restricted shares to George Jackson, CFO for
salary and 1,325,500 restricted shares to Michael Ellis for services. Robert
Atwell was also issued 1,201,329 restricted shares as repayment for company
expenses paid on personal credit cards, 1,270,772 shares for cash advanced to
the Company for general and administrative expenses. An additional, 1,832,728
shares were issued to Robert Atwell per agreement to continue to personally
finance the Company during 2006.
  In
October 2007, the $300,000 note payable due to the Scorpion was transferred to
the property owned by the Atwell’s, see Note 4. In connection with this
transfer, the note is now due to Atwell. The original terms of the note are
still in force, however, it is currently due on demand.
 See Note
7 and 8 for an additional related party transactions with
Atwell.
  Scorpion
Bay, LLC
 
 Timothy
Wilson (“Wilson”), one of our directors and a major stockholder of the Company,
is the managing member of Scorpion Bay, LLC (“Scorpion”), which owns 50% of JIT.
Wilson is also the managing member of CSI and PSP. See Notes 3, 4, 8 and
10 for discussion of transactions with Scorpion.
 
 7.
              COMMITMENTS
  The
Atwell Group has an office usage agreement with the Company to provide office
space. During the year ended December 31, 2007, the Company paid $87,374 under
this agreement which is included in rent expense.  The current
agreement is for a period of two years with monthly payments ranging from $6,000
to $6,108. Minimum annual payments under this contract as of December 31, 2007,
for the years ended December 31, 2008 and 2009 are $72,000 and $73,296,
respectively.
 
 8.
              STOCKHOLDERS'
      DEFICIT
 
 Preferred
Stock
 
 On
January 5, 2005, Camelot established a Series A and Series B Convertible
Preferred Class of stock, with the Series A Convertible Preferred stock reserved
for employees, consultants and other professionals retained by the Company, and
with the Series B Convertible Preferred stock reserved for the Board of
Directors. See Note 10, for subsequent authorization of a Series C Convertible
Preferred.
 
 On
December 31, 2007, there were 8,650,957 shares outstanding of our $0.001 par
value Series B Convertible Preferred Stock. The Series B Preferred converts to
10 shares of common stock for every one share of Series B Preferred Stock. Each
share of Series B Preferred Stock is entitled to 1,000 votes. Series B Preferred
ranks superior to all other classes of stock. Upon a merger of consolidation
into another entity the Series B Preferred converts at a rate of 100 common
shares for one share of Series A Preferred.
 
 On
December 31, 2007, there were 19,501,090 shares outstanding of our $0.001 par
value Series A Convertible Preferred Stock. The Series A Preferred converts to
four shares of common stock for every one share of Series A Preferred Stock.
Each share of Series A Preferred Stock is entitled to 50 votes. Series A
Preferred ranks superior to our common stock and ranks junior to our Series B
Preferred Stock. Upon a merger of consolidation into another entity the Series A
Preferred converts at a rate of 50 common shares for one share of Series A
Preferred.
  Share
Issuance Agreement
 
 On
October 25, 2007, the Company entered into a Share Issuance Agreement (“SIA”)
with Zuckerman, Kocmur and Scorpion (“JJT”). According to the terms and
conditions of the SIA, as additional consideration for Janez becoming a joint
venture partner with CDG, and in consideration for additional business
development and consulting efforts provided by JJT, JJT received 80,000,000
shares of our common stock. 20,000,000 shares were issued to Zuckerman,
20,000,000 shares were issued to Kocmur, these shares were valued at the market
price at the date of issue $0.003 and recorded as professional services in the
amount of $120,000. The 40,000,000 shares were issued to Scorpion in form of
10,000,000 Series A Convertible Preferred stock which were recorded at the
market price of the underlying common stock at the date of issue and recorded as
professional services in the amount of $132,001.  In addition around
the same time, the Company issued 2,570,000 shares of Series B Convertible
Preferred stock valued at $84,809 based on the market price of the underlying
common stock at the date of issue. In addition, Zuckerman, Wilson and Joseph
Petrucelli were nominated to serve on our Board of Directors. The parties also
agreed on a common stock structure which provides JTT and Robert P. Atwell, our
Chairman (“Atwell”) with anti-dilution protection. Further, the SIA directs the
Company to seek stockholder approval to increase the authorized shares of the
common stock to 400,000,000 and increase the Board of Directors from five to
seven members.
 
 In
connection with the anti-dilution protection the Company issued Atwell 4,401,090
shares of Series A Convertible Preferred stock, and 980,957 shares of Series B
Convertible Preferred stock valued at $58,093 and $32,373, respectively based
upon the market price of the underlying common stock at the time of
issuance.
 
 At the
time of issuance of the Series A and B Convertible Preferred stock, the Company
did not have enough authorized shares on a fully diluted basis due to the
conversion feature of the convertible notes, which caused the Series A and B
Convertible Preferred stock to be tainted, and more akin to debt. In addition,
management determined that the Series A and B Convertible Preferred
contained compound embedded derivative liabilities under SFAS 133 and EITF
00-19, because of the classification of these securities as
liabilities. The Company determined that the compound embedded conversion
features required bifurcation from the remaining Series A and B Convertible
Preferred and required an estimate of its fair market value. The fair
market value of the compound embedded derivative was estimated using a lattice
model incorporating weighted average probability cash flow.
  F-15
 CAMELOT
ENTERTAINMENT GROUP, INC. (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO FINANCIAL STATEMENTS
  8.
                STOCKHOLDERS
      DEFICIT – continued
  On
October 25, 2007, the fair market value of the compound embedded derivative
associated with the Series A Convertible Preferred stock was estimated to be
$381,876 and resulted in the Series A Convertible Preferred stock being
discounted to its par value. Due to the excess fair value of the compound
embedded derivative over the proceeds of $206,183, the Company recorded an
immediate charge to derivative gain (loss).
 
 On
October 25, 2007, the fair market value of the compound embedded derivative
associated with the Series B Convertible Preferred stock was estimated to be
$103,222 and resulted in the Series B Convertible Preferred stock being
discounted to $13,960.
 
 As of
December 31, 2007, Camelot estimated the fair value of the derivatives
liabilities to be a total of $726,223 resulting in loss on derivative liability
presented in the statement of operations of $241,125. At December 31, 2007, the
fair market value of the compound embedded derivative related to the Series A
and B Convertible Preferred stock was estimated using a lattice model
incorporating weighted average probability cash flow. The valuation was
calculated using a lattice model with the following assumptions: the stock price
would increase in the short term at the cost of equity with a 150% volatility
and there was a 100% probability the Company would not be in default of its
registration requirements as there were none.
 
 Subscription
Receivable
 
 During
2006, the Company entered into a proposed $3,000,000 financing transaction with
Nucore World Industries. In connection with the transaction, the Company issued
38,000,000 shares of common stock of which 5,000,000 was issued to Nucore World
Industries and 33,000,000 remained in treasury. During 2007, the transaction did
not close, and 33,000,000 shares were cancelled and 5,000,000 of those shares
have had an administrative stop placed on them pending return of the certificate
and cancellation thereof.
 
 Common
Stock Issued for Services
 
 In May
2007, the Company issued 1,250,000 common shares to a consultant for
administrative services performed. The shares were valued at the fair market
value on the date of issuance at $0.04, totaling $50,000.
 
 In August
2007, the Company issued 2,937,267 common shares for architecture services
performed. The shares were valued at the fair market value on the date of
issuance at $0.006, totaling $18,457.
 
 In August
2007, the Company issued 1,000,000 common shares to a consultant for
administrative services performed. The shares were valued at the fair market
value on the date of issuance at $0.004, totaling $3,800.
 
 In
September 2007, the Company issued 1,000,000 common shares to a consultant for
administrative services performed. The shares were valued at the fair market
value on the date of issuance at $0.004, totaling $3,800.
  In
September and October 2007, the Company issued a total of  6,900,000 common
shares to Scorpion Bay, LLC for services related to the Camelot Studio project.
The shares were valued at the fair market value on the date of issuance at
$0.004, totaling $25,272.
  In
October 2007, the Company issued 3,446,000 common shares to a consultant for
administrative services performed for the Company; the shares were issued at
market price of $0.0033, totaling $11,372.
 
 In
October 2007, the Company issued 2,768,000 common shares to a consultant for
administrative services performed for the Company; the shares were issued at
market price of $0.0033, totaling $9,134.
 
 In
December 2007, two individuals each received 2,500,000 common shares for legal
services provided. The shares were issued at the market price of $0.004,
totaling an aggregate of $20,000.
 
 In
December 2007, the Company issued 1,000,000 common shares to a consultant for
consulting services related to the Camelot Studio project, shares were issued at
the market price of $0.005, total amount of $5,000.
  In
December 2007, the Company issued 10,000,000 common shares to Scorpion Bay, LLC,
a related party, for consulting services related to the Camelot Studio project,
shares were issued at the market price of $0.003, total amount of
$33,000.
  Prior
Year Issuances
 
 During
the year ended December 31, 2006, there were 13,006,154 common shares were
issued 9,496,369 (73%) were issued to officers and affiliates; 2,009,785 (15%)
for professional services, 1,500,000 (12%) to Scorpion Bay, LLC for
interest expense on note payable.
 
 As of
December 31, 2005, there were 93,649,589 shares of common stock outstanding.
During the year ended, December 31, 2005 there were 18,698,380 common shares
issued, the majority of which, 15,111,499 shares (81 %) were issued to officers,
staff and affiliates. Shares were issued for officers salaries 5,814,296 (31%),
shares were issued to Eagle Consulting for expenses and in accordance with
funding agreement 4,997,656 (27%), and shares were issued to officers, staff and
consultants 4,233,547 (23%). The remaining shares were issued for repayment of
shareholders loans 3,586,881 (19%).
 
 F-16
 CAMELOT ENTERTAINMENT GROUP,
INC. (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO FINANCIAL STATEMENTS
 8.
                  STOCKHOLDERS
      DEFICIT – continued
  As of
December 31, 2004, there were 74,951,209 shares of common stock outstanding.
During the year ended December 31, 2004 there were 41,094,776 common shares
issued, the majority of which, 38,794,776 shares (94%), were issued to officers,
staff and affiliates. 24,298,049 shares (59%) were issued to officers and staff
and 14,496,727 shares (35%) were issued to an affiliate. The remaining 2,300,000
shares (6%) were issued for legal services (550,000 shares), the VedaLabs, Inc.
settlement (1,000,000 shares) and the agreement with Corporate Awareness
Professionals, Inc. (750,000 shares).
 
 9.
              GENERAL AND
      ADMINISTRATIVE EXPENSES
 
 The
Company has incurred $12,011,651 of general and administrative expenses since
its inception. General and Administrative expenses were $1,864,178 for the year
ended, December 31, 2007, compared to $1,554,907 for the year ended, December
31, 2006.
 
 The
general and general administrative expenses for 2007 were comprised of $450,000
of officer’s salaries and $713,032 of professional services and $290,519 of
professional fees (accounting, legal and other fees). Additionally, $84,994 in
expenses related to travel and industry trade shows, including the Cannes Film
Festival, was incurred during the second quarter of 2007. Other costs, $18,549
for marketing, seminars and trades, $18,667 telephone costs, $87,374 rent,
$48,647 for insurance (D&O, workers comp and business liability), office
staff payroll $91,227, bad debt $17,500 and $43,669 for other administrative
costs. These expenses were related to the pursuit of the Company’s plan of
developing Camelot Studios at ATEP and the development, production and
distribution of film, television and digital media product.
  Most of
these expenses were related to the pursuit of the Company’s plan to develop the
Camelot Studio project.
 
 10.
              SUBSEQUENT
      EVENTS
  See Note
3, for discussion of subsequent event related to the sale of a portion of the
Company’s interest in CDG.
 
 On
January 8, 2008, Camelot established a Series C Convertible Preferred Class of
stock of which 10,000,000 shares were authorized. The Series C Convertible
Preferred converts to one share of common stock for every one share of Series C
Convertible Preferred Stock. Each share of Series C Preferred Stock is entitled
to one vote. The Company’s Series A and B are superior to the Series C
Convertible Preferred. To date no Series C Convertible Preferred shares have
been issued. Because
the authorized common shares are potentially unavailable, any issuance of the
Series C Convertible Preferred shares will tainted until such time the Company
obtains shareholder approval.
  In
January 2008, the Company issued 1,250,000 shares of Series A Convertible
Preferred stock to Scorpion for services performed in connection with the
Camelot Studio project valued at $25,000 based on the fair market value on the
date of issuance.  Upon issuance the fair market value of the compound
embedded derivative associated with the Series A Convertible Preferred stock was
estimated to be $49,124 and resulted in the Series A Convertible Preferred stock
being discounted to its par value. Due to the excess fair value of the compound
embedded derivative over the proceeds of $25,374, the Company recorded an
immediate charge to derivative gain (loss).
  On
February 18, 2008, the Company’s board of directors increased the authorized
shares of common stock to 500,000,000.
  Subsequent
to December 31, 2007, the Company issued 9,500,000 shares of its $0.001 par
value common stock to the note holders in connection the callable secured
convertible notes in satisfaction of approximately
$19,000 in notes payable.
 
 On
February 25, 2008, the Company issued 1,000,000 shares of its $0.001 par value
common stock to Schubert Flint Public Affairs for consulting services rendered
to the Company in connection with Camelot Studio Group. The shares were valued
at $0.005 per share.


F-17
  SIGNATURES
 
 In
accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report on Form 10-KSB, dated April 15, 2008, to
be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 CAMELOT
ENTERTAINMENT GROUP, INC.
 (Registrant)
 
 
 /s/ 
Robert P. Atwell
 Robert P.
Atwell
 Chief
Executive Officer
   /s/  George
Jackson   George
Jackson
 Chief
Financial Officer
   /s/  Joe
Petrucelli   Joe
Petrucelli
 Director
   /s/  Tim
Wilson   Tim
Wilson
 Director
 
  /s/  Jeff
Zuckerman   Jeff
Zuckerman
 Director
  S-1